UBS Group AG
Annual Report 2017
Contents
Letter to shareholders
2
5 Our key figures
8 Our Board of Directors
10 Our Group Executive Board
12 Our evolution
14 Our external reporting approach
1. Operating environment
and strategy
18 Current market climate and industry trends
21 Regulation and supervision
23 Regulatory and legal developments
27 Significant accounting and financial
reporting changes in 2018
30 Our strategy
32 Measurement of performance
34 Global Wealth Management
36 Personal & Corporate Banking
38 Asset Management
Investment Bank
40
42 Corporate Center
45 Risk factors
2.
Financial
and operating performance
58 Critical accounting estimates and judgments
59 Group performance
73 Wealth Management
77 Wealth Management Americas
83 Personal & Corporate Banking
87 Asset Management
Investment Bank
92
98 Corporate Center
3.
Risk, treasury and
capital management
113 Risk management and control
167 Treasury management
183 Capital management
4.
Corporate governance, responsibility and
compensation
206 Corporate governance
238 UBS and Society
252 Our employees
258 Compensation
5.
Financial
statements
303 Consolidated financial statements
455 Standalone financial statements
6.
Significant regulated subsidiary and sub-group
information
476
Financial and regulatory key figures for our significant
regulated subsidiaries and sub-groups
Appendix
478 Abbreviations frequently used in our financial reports
480
481 Cautionary statement
Information sources
Annual Report 2017
Letter to shareholders
Dear shareholders,
For our shareholder letter this year, we have chosen a format
that answers a series of questions that we are regularly asked by
different stakeholders of the bank.
What are the financial highlights of the past year?
2017 was an excellent year for us, with profit before tax up
29% to CHF 5.3 billion. We also delivered on our CHF 2.1 billion
net savings program. That said, at UBS performance is not just
judged by annual financial results. One of our firm's three
Principles – along with Client Focus and Excellence – is
Sustainable Performance, which we define as focusing on the
long term and providing consistent returns to our stakeholders.
Why was your net profit attributable to shareholders far
lower in 2017 than it was in 2016?
Like many of our peers, we were affected by a net write-down
of our US deferred tax assets, due to the new US tax law. We
had been able to write up these deferred tax assets in the past
few years, as a result of our strong profitability in the US, and
they remain in place for future utilization. The write-down in
2017 had no impact on our fully applied CET1 capital and does
not affect our ability to return capital. Excluding the effects of
these US tax law changes, net profit was CHF 4 billion, up 22%.
Is UBS's capital position still a competitive advantage?
Yes, definitely. Capital strength continues to be a key pillar of
our strategy. Our fully applied CET1 ratios are comfortably above
the 2020 requirements. Since 2012, we've substantially reduced
risk and balance sheet exposures, while increasing our total loss-
absorbing capacity by around CHF 50 billion to almost CHF 80
billion. Our progress and overall resilience is reflected in our
valuation compared to peers, our credit ratings and, most
importantly, the trust our clients place in us. At the same time,
the greater visibility on future capital requirements provided by
the Basel Committee at the end of 2017 enabled us to update
our capital returns policy and plan more meaningfully for the
future.
What are the details of your updated capital returns policy?
Our aim is to further increase returns to shareholders while
building on our strong capital position. Going forward, our
priority is to pay an ordinary dividend, growing at mid-to-high
considering
single-digit percentage per
supplementary returns, most likely in the form of share
buybacks. For 2017, we intend to propose a dividend to UBS
Group AG shareholders, for approval at our May 3rd Annual
General Meeting (AGM), of CHF 0.65 per share, an 8% increase
on the prior year. We'll also initiate a share repurchase program
of up to CHF 2 billion over three years, including up to CHF 550
million in 2018.
annum, while
2
Did the UBS share price develop as you thought it would
in 2017?
While we don't set specific absolute targets for our share price,
our aim is that the unique value of our franchise – which is more
than the sum of its parts – is properly reflected. A good measure
is our valuation on a relative basis. From that perspective –
looking at the ratio of our share price to our tangible book value
– we've been trading at a ratio above one for the past six years
and remain in a strong position compared to many peers.
Relative share price performance is influenced by a number of
factors including business models and geographic exposure. In
2017, peers with greater overall US presence and less influenced
by low and negative interest rates in Europe and Switzerland
were operating in a much more favorable macroeconomic
setting. Combined with the changing regulatory environment in
the US, this is reflected in relative transatlantic share price
performance. Looking ahead, we've set ambitious return and
efficiency targets for the next three years to drive further
valuation growth.
is
right
competitive
Your strategy has remained the same for quite a while – is
it time to change it?
While we continuously adjust and improve to adapt to a
changing environment, our strategic focus on global wealth
management and universal banking in Switzerland enhanced by
Investment Bank and Asset
focused and
Management businesses
for UBS. Sustainable
performance is only possible with a long-term strategy. We're
the clear
in
Switzerland, with the most sophisticated capabilities. The global
wealth management market is forecast to grow at twice GDP
and as the firm with the most diversified geographic footprint,
we are in the best position to benefit from this development.
Now that we have more regulatory clarity on future capital and
liquidity requirements, we are sharpening our focus on growth
across our businesses and making further investments to
continue increasing returns to shareholders.
in global wealth management and
leader
Are your other businesses less important given your focus
on wealth management?
No, the UBS franchise is unique and not just about wealth
management. Our diversified business model also benefits from
Personal & Corporate Banking, the Investment Bank and Asset
Management. All are successful businesses in their own right.
Together, they make a significant contribution to earnings,
diversify revenues and generate high-quality returns. Without
them, our Global Wealth Management business would not be
what it is today, nor could it deliver on its aspirations. And our
Swiss roots and UBS brand continue to be a huge advantage –
both in our home market and in growth regions such as Asia
Pacific.
Axel A. Weber Chairman of the Board of Directors and Sergio P. Ermotti Group Chief Executive Officer
Where do you expect to grow and invest going forward?
From a geographic standpoint, we have a clear ambition to
grow in the Americas and to reinforce our leadership in our
home market Switzerland. And we are big believers in the Asia
Pacific opportunity, especially China, where wealth creation
continues to accelerate and we are in a very strong competitive
position. In the Europe, Middle East and Africa region, we want
to leverage our capabilities to grow our share in a market that is
more and more likely to consolidate. To shape our digital future,
we intend to keep investing at least 10% of the Group's
revenues in technology, adding around CHF 1 billion in tech
spend over the next three years. We'll focus these investments
on enhancing and differentiating the client experience and
product excellence UBS offers, while also accelerating
effectiveness and efficiency.
Is your workforce prepared for these technology
investments, which may automate many of their current
tasks?
That's an existential question all companies are faced with when
considering the fourth industrial revolution. On one hand,
automation will be necessary, as from a demographic point of
view more people will be retiring than entering the workforce.
On the other hand, however, it's not just about technology, but
about how we'll work in the future. Companies that have
succeeded in the past can't be complacent – they'll need to help
their staff adapt. One way we do that at UBS is by providing
learning and development opportunities to our employees. In
2017, they participated in approximately 765,500 training
activities. And our own UBS University offers more than 2,400 e-
learning and classroom-based trainings. It's our responsibility,
but also that of our employees, to invest in their capabilities so
that they stay agile and flexible.
3
Annual Report 2017
Letter to shareholders
Why have you not announced a new cost savings program?
We're no longer in restructuring mode, so efficiency has moved
from being a program to how we run the bank day to day. And
the fact that we just completed a cost savings program
delivering CHF 2.1 billion in net savings does not mean efficiency
is no longer on the agenda. We've set quite demanding internal
targets for our business divisions and Corporate Center to drive
positive operating leverage – so to increase revenues while
reducing costs. We've also said that we're targeting a
cost/income ratio of below 75% for the Group. What we've
refrained from doing, however, is to go public with a big,
aggregated savings number to be achieved in a number of years.
While such an approach may attract headlines and please some
in the analyst community, it can lead to behavior that runs
contrary to our long-term approach and, for example, jeopardize
client service and risk management, ultimately undermining
sustainable performance.
shareholders and employees are
Who does UBS create value for?
Clients,
the primary
stakeholders we create value for. Our role as a bank is to finance
economic growth by facilitating investment and credit. And we
support people and businesses with the financial services they
need to reach their goals. As a firm, we contribute by directly
employing over 60,000 people, by consuming products and
services and by paying taxes.
How else does UBS create positive value for society?
We are strongly committed to being – and remaining – a leader
in the field of sustainability. Our cross-divisional organization
UBS and Society focuses the firm on this direction. It covers our
activities and capabilities related to sustainable investing and
philanthropy with clients, our environmental and human rights
policies governing client and supplier
relationships, our
environmental footprint and our community investments. And,
we're happy to report that we're being recognized for our work
across these areas. Among others, the Dow Jones Sustainability
Indices, which are the most widely respected sustainability
ratings, confirmed UBS as the industry leader for the third year
running in 2017.
How do you make sure your corporate culture supports
long-term value creation?
Over the past six years we've brought a more traditional banking
mentality to UBS, really focused on our clients, sustainable
performance and excellence in everything we do. We've
incentivized behaviors that underline the importance not only of
what is achieved, but also how it's achieved. And we've set
targets
the
opportunities ahead, we'll continue to do just that.
success. To capture
that drive
long-term
Thank you for your ongoing support. We look forward to your
feedback and also to welcoming you at our AGM on 3 May
2018 in Basel.
Is UBS paying taxes again in Switzerland?
Yes, we're actually a top taxpayer in the country. UBS's
corporate tax payments over the last 20 years add up to around
CHF 13 billion, including CHF 3.5 billion post-crisis. But being a
good corporate citizen is about far more than just paying taxes.
It also means acting responsibly, and our stakeholders expect
nothing less.
9 March 2018
Yours sincerely,
Axel A. Weber
Chairman of the
Board of Directors
Sergio P. Ermotti
Group Chief Executive Officer
4
Our 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
PProfitability
Return on tangible equity (%)
Cost / income ratio (%)
GGrowth
Net profit growth (%)
Net new money growth for combined wealth management businesses (%)3
RResources
Common equity tier 1 capital ratio (fully applied, %)4
Common equity tier 1 leverage ratio (fully applied, %)4
Going concern leverage ratio (fully applied, %)5
As of or for the year ended
331.12.17
31.12.16
31.12.15
229,067
223,800
55,268
11,053
00.27
22.4
881.5
((67.1)
2.1
113.8
33.7
44.7
28,320
24,230
4,090
3,204
0.84
6.9
85.4
(48.3)
2.1
13.8
3.5
4.6
30,605
25,116
5,489
6,203
1.64
13.7
81.8
79.0
2.2
14.5
3.3
11.8
14.4
22.0
112.6
33.3
5.9
13.2
3.2
Additional information
PProfitability
Return on equity (%)
Return on risk-weighted assets, gross (%)6
Return on leverage ratio denominator, gross (%)6
RResources
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
Gone concern loss-absorbing capacity ratio (fully applied, %)5
Leverage ratio denominator (fully applied)4
Going concern leverage ratio (phase-in, %)5
Gone concern leverage ratio (fully applied, %)5
Liquidity coverage ratio (%)7
OOther
Invested assets (CHF billion)8,9
Personnel (full-time equivalents)
Market capitalization10
Total book value per share (CHF)10
Tangible book value per share (CHF)10
11 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 2 Refer to the “Measurement of performance” section
of this report for the definitions of our key performance indicators. 3 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet
and capital optimization program. 4 Based on the Swiss systemically relevant bank (SRB) framework. Refer to the “Capital management” section of this report for more information. 5 Based on the revised Swiss
SRB framework that became effective on 1 July 2016. Refer to the “Capital management” section of this report for more information. 6 Calculated as operating income before credit loss / average fully applied
risk-weighted assets and average fully applied leverage ratio denominator, respectively. 7 Refer to the “Balance sheet, liquidity and funding management” section of this report for more information. 8 Includes
invested assets for Personal & Corporate Banking. 9 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12
billion and CHF 11 billion, respectively. 10 Refer to “UBS shares” in the “Capital management” section of this report for more information.
935,016
53,621
30,693
37,788
222,677
16.8
17.9
24.7
13.2
870,470
6.4
3.4
132
9915,642
551,214
332,671
335,494
2237,494
114.9
117.6
221.7
115.3
8886,116
55.8
44.1
1143
942,819
55,313
30,044
40,378
207,530
19.0
2,678
60,099
75,147
14.75
13.00
2,810
59,387
61,420
14.44
12.68
33,179
661,253
669,125
113.76
112.04
897,607
124
Events subsequent to the publication of the unaudited fourth quarter 2017 report
The 2017 results and the balance sheet as of 31 December 2017 differ from those presented in the unaudited fourth quarter
2017 report published on 22 January 2018 as a result of events adjusted for after the balance sheet date. Provisions for litigation,
regulatory and similar matters increased, which reduced 2017 operating profit before tax by CHF 141 million, 2017 net profit
attributable to shareholders by CHF 112 million, and both basic and diluted earnings per share by CHF 0.03.
5
Annual Report 2017
Terms used in this report, unless the context requires otherwise
“UBS,” “UBS Group,” “UBS Group AG consolidated,”
“Group,” “the Group,” “we,” “us” and “our”
UBS Group AG and its consolidated subsidiaries
“UBS AG consolidated”
UBS AG and its consolidated subsidiaries
“UBS Group AG” and “UBS Group AG standalone”
UBS Group AG on a standalone basis
“UBS AG” and “UBS AG standalone”
UBS AG on a standalone basis
“UBS Switzerland AG”
“UBS 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
6
Corporate information
UBS Group AG is incorporated and domiciled in Switzerland and operates
under art. 620ff. of the Swiss Code of Obligations as an Aktiengesellschaft, a
corporation limited by shares. Its registered office is at Bahnhofstrasse 45,
CH-8001 Zurich, Switzerland, phone +41-44-234 11 11, and its corporate
identification number is CHE-395.345.924. UBS Group AG was incorporated
on 10 June 2014 and was established in 2014 as the holding company of the
UBS Group. UBS Group AG shares are listed on the SIX Swiss Exchange and
on the New York Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107).
UBS Group AG owns 100% of the outstanding shares of UBS AG.
Contacts
Switchboards
For all general inquiries.
www.ubs.com/contact
Zurich +41-44-234 1111
London +44-20-7568 0000
New York +1-212-821 3000
Hong Kong +852-2971 8888
Investor Relations
UBS’s Investor Relations team supports
institutional, professional and retail investors
from our offices in Zurich, London, New York
and Krakow.
UBS Group AG, Investor Relations
P.O. Box, CH-8098 Zurich, Switzerland
www.ubs.com/investors
Hotline Zurich +41-44-234 4100
Hotline New York +1-212-882 5734
Media Relations
UBS’s Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.
www.ubs.com/media
Zurich +41-44-234 8500
mediarelations@ubs.com
London +44-20-7567 4714
ubs-media-relations@ubs.com
New York +1-212-882 5857
mediarelations-ny@ubs.com
Hong Kong +852-2971 8200
sh-mediarelations-ap@ubs.com
Office of the Group Company Secretary
The Group Company Secretary receives
inquiries on compensation and related
issues addressed to members of the
Board of Directors.
UBS Group AG, Office of the
Group Company Secretary
P.O. Box, CH-8098 Zurich, Switzerland
sh-company-secretary@ubs.com
Hotline +41-44-235 6652
Fax +41-44-235 8220
Shareholder Services
UBS’s Shareholder Services team, a unit
of the Group Company Secretary office, is
responsible for the registration of
UBS Group AG registered shares.
UBS Group AG, Shareholder Services
P.O. Box, CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Hotline +41-44-235 6652
Fax +41-44-235 8220
US Transfer Agent
For global registered share-related
inquiries in the US.
Computershare Trust Company NA
P.O. Box 30170
College Station
TX 77842-3170, USA
Shareholder online inquiries:
https://www-us.computershare.com/
investor/Contact
Shareholder website:
www.computershare.com/investor
Calls from the US +1-866-305-9566
Calls from outside
the US +1-781-575-2623
TDD for hearing impaired
+1-800-231-5469
TDD foreign shareholders
+1-201-680-6610
Corporate calendar UBS Group AG
Imprint
Publication of the first quarter 2018 report:
Annual General Meeting 2018:
Monday, 23 April 2018
Thursday, 3 May 2018
Publication of the second quarter 2018 report: Tuesday, 24 July 2018
Publication of the third quarter 2018 report:
Tuesday, 23 October 2018
Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com
Language: English / German | SAP-No. 80531E
© UBS 2018. 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 2017
Our Board of Directors
Axel A. Weber
Chairman of the Board(cid:124)of(cid:124)Directors / Chairperson of the Corporate Culture
and(cid:124)Responsibility Committee / Chairperson 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
Ann F. Godbehere
Chairperson of the Compensation Committee / member
of the Audit Committee
William G. Parrett
Chairperson of the Audit Committee / member of(cid:124)the(cid:124)
Compensation Committee / member of the Corporate Culture
and Responsibility(cid:124)Committee
Robert W. Scully
Member of the Risk Committee
Beatrice Weder di(cid:124)Mauro
Member of the Audit Committee / member of the Corporate Culture and
Responsibility Committee
8
David Sidwell
Senior Independent Director / Chairperson of the Risk Committee /
member of the Governance and Nominating Committee
Reto Francioni
Member of the Compensation Committee / member of the
Corporate Culture and Responsibility Committee / member
of the Risk(cid:124)Committee
Isabelle Romy
Member of the Audit Committee / member of the
Governance(cid:124)and Nominating Committee
Julie G. Richardson
Member of the Risk Committee
Dieter Wemmer
Member of the Risk Committee
The Board of Directors (BoD) of UBS Group AG, under the
leadership of the Chairman, consists of six to twelve members as
per our Articles of Association. The BoD decides on the strategy of
the Group upon recommendation of the Group Chief Executive
Officer (Group CEO) and is responsible for the overall direction,
supervision and control of the Group and its management as well as
laws, rules and
for supervising compliance with applicable
regulations. The BoD exercises oversight over UBS Group AG and its
subsidiaries and is responsible for establishing a clear Group
governance framework to provide effective steering and supervision
of the Group, taking into account the material risks to which UBS
Group AG and its subsidiaries are exposed. The BoD has ultimate
responsibility for the success of the Group and for delivering
sustainable shareholder value within a framework of prudent and
effective controls, approves all financial statements for issue and
appoints and removes all Group Executive Board (GEB) members.
9
Annual Report 2017
Our Group Executive Board
Sergio P. Ermotti
Group Chief Executive Offi cer
Martin Blessing
co-President Global Wealth Management
Kirt Gardner
Group Chief Financial Offi cer
Sabine Keller-Busse
Group Chief Operating Offi cer
Tom Naratil
co-President Global Wealth Management and President UBS Americas
Andrea Orcel
President Investment Bank
10
Christian Bluhm
Group Chief Risk Offi cer
Markus U. Diethelm
Group General Counsel
Ulrich Körner
President Asset Management and President UBS Europe,
Middle East and Africa
Axel P. Lehmann
President Personal & Corporate Banking and President UBS Switzerland
Kathryn Shih
President UBS Asia Pacifi c
UBS Group AG operates under a strict dual board structure, as
mandated by Swiss banking law, and therefore the BoD
delegates the management of the business to the GEB. Under
the leadership of the Group CEO, the GEB has executive
management responsibility for the steering of the Group and its
business. It assumes overall responsibility for developing the
Group and business division strategies and the implementation
of approved strategies.
→ Refer to “Board of Directors” and “Group Executive Board” in
the “Corporate governance” section of this report or to
www.ubs.com/bod and www.ubs.com/geb for the full
biographies of our BoD and GEB members
11
Annual Report 2017
Our evolution
UBS has played a pivotal role in the development and growth of
Swiss banking. Since the firm’s origins in the mid-19th century,
UBS has evolved to become a global financial services firm that
houses the world’s largest wealth manager, the number one
bank in Switzerland, a specialized and successful investment
bank and one of the world’s largest asset managers.
The scope and international reach of UBS today were largely
shaped in the second half of the 20th century. In 1998, two of
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 successful
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
management, a successful global investment bank and a top-tier
global asset manager, while remaining an important commercial
and retail bank in their home market of Switzerland.
Union Bank of Switzerland, the largest Swiss bank of its time,
pursued these goals primarily through organic growth. In
contrast, SBC, then the third-largest Swiss bank, grew mainly
through a
strategic partnerships and
acquisitions, including O’Connor in 1992, Brinson Partners in
1994, and S.G. Warburg, the historical pillar of UBS’s Investment
Bank, in 1995.
combination of
In 2000, UBS acquired PaineWebber, a US brokerage and
asset management firm whose roots went back to 1879,
establishing the firm as a significant player in the US. Over the
last half century, UBS has largely organically built a strong
presence in the Asia Pacific region, where it is the leading wealth
manager and a top-tier investment bank.
During the financial crisis of 2008, UBS incurred significant
losses. In 2011, we initiated a strategic transformation of our
firm toward a business model that focused on our core
businesses of wealth management and personal and corporate
banking in Switzerland.
We sought to revert to our roots, emphasizing a client-centric
model that required less risk-taking and capital, and have
successfully completed this transformation. Our Pillars, Principles
and Behaviors, launched in 2014, are the foundation for our
corporate strategy, identity and culture.
→ Refer to www.ubs.com/history for more information
In 2014, we began adapting our legal entity structure to
improve the resolvability of the Group in response to too big to
fail (TBTF) requirements in Switzerland and recovery and resolution
regulation in other countries in which the Group operates. In
December 2014, UBS Group AG became the holding company
of the Group. In 2015, we transferred our Personal & Corporate
Banking and Wealth Management businesses booked
in
Switzerland from UBS AG to the newly established UBS
Switzerland AG and we implemented a more self-sufficient
business and operating model for UBS Limited. In 2016, we
designated UBS Americas Holding LLC as our intermediate
holding company for our US subsidiaries and we merged our
Wealth Management subsidiaries in various European countries
into UBS Europe SE. Additionally, we transferred the majority of
Asset Management’s operating subsidiaries to UBS Asset
Management AG. UBS Business Solutions AG, a direct subsidiary
of UBS Group AG, was established in 2015 and acts as the
Group service company. The chart on the next page provides an
overview of the principal legal entities and structure of UBS as of
31 December 2017.
12
(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:69)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70)
(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:19)(cid:18)(cid:18)(cid:7)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)
(cid:19)(cid:18)(cid:18)(cid:7)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:35)(cid:41)
(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:42)(cid:81)(cid:78)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:46)(cid:46)(cid:37)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:46)(cid:75)(cid:79)(cid:75)(cid:86)(cid:71)(cid:70)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)
(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:35)(cid:41)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:2)(cid:53)(cid:39)
(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)
(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)
(cid:80)(cid:81)(cid:80)(cid:15)(cid:55)(cid:53)
(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85) (cid:20)(cid:14)(cid:22)
(cid:19)(cid:18)(cid:18)(cid:7)
(cid:19)(cid:18)(cid:18)(cid:7)
(cid:21)(cid:18)(cid:7)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)
(cid:53)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:55)(cid:53)(cid:2)
(cid:46)(cid:46)(cid:37)
(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:19)(cid:18)(cid:18)(cid:7)
(cid:19)(cid:18)(cid:18)(cid:7)
(cid:25)(cid:18)(cid:7)
(cid:19)(cid:18)(cid:18)(cid:7)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:2)
(cid:55)(cid:53)(cid:35)
(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)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:53)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)
(cid:46)(cid:46)(cid:37)
(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)
(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:55)(cid:53)
(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85) (cid:21)(cid:14)(cid:22)
(cid:55)(cid:36)(cid:53)(cid:2)
(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)
(cid:53)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)
(cid:35)(cid:41)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)
(cid:40)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:10)(cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)(cid:11)
(cid:35)(cid:41) (cid:19)
(cid:19)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:40)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:10)(cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)(cid:11)(cid:2)(cid:35)(cid:41)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:85)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:15)(cid:67)(cid:68)(cid:85)(cid:81)(cid:84)(cid:68)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:86)(cid:75)(cid:71)(cid:84)(cid:2)(cid:19)(cid:2)(cid:10)(cid:35)(cid:54)(cid:19)(cid:11)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(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:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:15)(cid:67)(cid:68)(cid:85)(cid:81)(cid:84)(cid:68)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:67)(cid:82)(cid:67)(cid:69)(cid:75)(cid:86)(cid:91)(cid:2)(cid:10)(cid:54)(cid:46)(cid:35)(cid:37)(cid:11)(cid:15)(cid:71)(cid:78)(cid:75)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:85)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:87)(cid:80)(cid:85)(cid:71)(cid:69)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:14)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:73)(cid:87)(cid:67)(cid:84)(cid:67)(cid:80)(cid:86)(cid:71)(cid:71)(cid:70)(cid:2)(cid:68)(cid:91)(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:16)(cid:2)(cid:2)(cid:2)(cid:2)
(cid:20)(cid:2)(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:55)(cid:53)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:73)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)(cid:74)(cid:71)(cid:78)(cid:70)(cid:2)(cid:71)(cid:75)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(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:41)(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:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)(cid:2)(cid:35)(cid:41)(cid:2)(cid:81)(cid:84)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:35)(cid:41)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:21)(cid:2)(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:55)(cid:53)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:73)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)(cid:74)(cid:71)(cid:78)(cid:70)(cid:2)(cid:71)(cid:75)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)
(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)(cid:2)(cid:2)(cid:2)(cid:2)(cid:22)(cid:2)(cid:52)(cid:71)(cid:72)(cid:71)(cid:84)(cid:2)(cid:86)(cid:81)(cid:2)(cid:112)(cid:48)(cid:81)(cid:86)(cid:71)(cid:2)(cid:20)(cid:26)(cid:2)(cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:71)(cid:85)(cid:86)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:113)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:112)(cid:37)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:113)(cid:2)(cid:85)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)
(cid:75)(cid:80)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:55)(cid:36)(cid:53)(cid:111)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:14)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(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:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:68)(cid:15)(cid:73)(cid:84)(cid:81)(cid:87)(cid:82)(cid:85)(cid:16)
(cid:42)(cid:81)(cid:78)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:80)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:68)(cid:15)(cid:73)(cid:84)(cid:81)(cid:87)(cid:82)(cid:85)(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:70)(cid:75)(cid:85)(cid:69)(cid:78)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(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:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:83)(cid:87)(cid:67)(cid:84)(cid:86)(cid:71)(cid:84)(cid:78)(cid:91)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)
Changes in 2017
In 2017, we transferred shared services functions in Switzerland
and the UK from UBS AG to UBS Business Solutions AG, which is
our Group service company and a wholly owned subsidiary of
UBS Group AG. We also completed the transfer of shared
services functions in the US to our US service company, UBS
Business Solutions US LLC, a wholly owned subsidiary of UBS
Americas Holding LLC.
proposed amendments to Swiss tax law in order to reduce the
additional tax burden on debt issuances by bank top holding
companies. Should such changes become effective, we expect
loss-absorbing AT1 capital instruments and TLAC-eligible senior
unsecured debt to be issued directly out of UBS Group AG. At
that point, we also expect to substitute UBS Group AG as issuer
of outstanding capital and debt instruments issued by UBS
Group Funding (Switzerland) AG.
We established UBS Group Funding (Switzerland) AG in 2016
as a wholly owned direct subsidiary of UBS Group AG to issue
loss-absorbing additional tier 1 (AT1) capital instruments and
total loss-absorbing capacity (TLAC)-eligible senior unsecured
debt, which are guaranteed by UBS Group AG. In the first half
of 2017, we transferred our then outstanding TLAC-eligible
senior unsecured debt to UBS Group Funding (Switzerland) AG
as
loss-absorbing AT1 capital
instruments issued by UBS Group AG may in the future also be
transferred to UBS Group Funding (Switzerland) AG, subject to
further regulatory review. The Swiss Federal Council has
issuer. Outstanding
the
Further legal structure changes
We continue to consider further changes to the Group’s legal
structure in response to regulatory requirements and other
external developments, including the anticipated exit of the UK
from the EU. Such changes may include further consolidation of
operating subsidiaries in the EU and adjustments to the booking
entity or location of products and services.
→ Refer to the “Risk factors” section of this report for more
information
13
Annual Report 2017
Our external reporting approach
General requirements
Our Annual Report 2017, Form 20-F and additional
year-end disclosures
Our external reporting requirements and the scope of our
external reports are defined by general accounting law and
principles, relevant stock and debt listing rules, specific legal and
regulatory requirements, as well as by our own financial
reporting policies.
We have to prepare and publish consolidated financial
statements in accordance with International Financial Reporting
Standards (IFRS) on a half-yearly basis, in line with the
requirements of SIX Swiss Exchange and New York Stock
Exchange, where our shares are listed. However, we also publish
our results on a quarterly basis in order to provide shareholders
law.
with more
Additionally, statutory financial statements for UBS Group AG
are prepared annually as the basis for our Swiss tax return, the
appropriation of retained earnings and a potential distribution of
dividends, subject to shareholder approval at the Annual General
Meeting. Management’s discussion and analysis
(MD&A)
complements our IFRS financial statements.
frequent disclosures
required by
than
The Basel III capital adequacy framework requires us to
publish a range of Pillar 3 disclosures, mainly covering risk,
capital, leverage, liquidity and remuneration. These Pillar 3
disclosures are supplemented by specific additional requirements
of the Swiss Financial Market Supervisory Authority (FINMA) and
voluntary disclosures on our part. We are also required to
information for our significant
disclose certain regulatory
regulated subsidiaries and sub-groups, i.e., UBS AG standalone,
UBS Switzerland AG standalone and UBS Limited standalone, as
well as UBS Americas Holding LLC consolidated.
In preparing these disclosures, we consistently apply our
financial disclosure principles, such as
transparency and
relevance to our stakeholders. We also continuously seek to
improve our disclosures by benchmarking them against best
practice examples.
→ Refer to “Information policy” in the “Corporate governance”
section of this report for more information
information
is available on
Our year-end 2017 financial
www.ubs.com/investors and includes:
– the Annual Report 2017 – Group;
– the Annual Report 2017 – combined, containing information
for UBS Group AG and UBS AG that is the basis for our US
Securities and Exchange Commission (SEC) Form 20-F filing;
– Auszug aus dem Geschäftsbericht, the German translation of
selected sections of our Annual Report 2017 – Group;
– 31 December 2017 Pillar 3 report – Group and significant
regulated subsidiaries and sub-groups; and
– legal entity disclosures,
financial
statements for UBS AG and UBS Switzerland AG, as well as
selected
for our
regulatory
significant regulated subsidiaries and sub-groups.
including standalone
financial and
information
In addition, other
legal entity-specific disclosures
in
accordance with article 89 of the European Union Capital
Requirements Directive IV (CRD IV) are provided under “EU CRD
IV disclosures” at www.ubs.com/investors. Information as of
31 December 2017 will be published by the end of 2018.
Information for UBS Group Funding (Switzerland) AG is available
under “Other subsidiaries” at www.ubs.com/investors.
Furthermore, we have published a consolidated Global
Reporting Initiative (GRI) Document, providing comprehensive
disclosures on environmental, social and governance (ESG)
factors and
the disclosures on non-financial
information required by German law implementing the EU
Directive 2014/95 (CSR-Richtlinie-Umsetzungsgesetz / CSR-RUG).
The GRI Document is available under “Annual reporting” at
www.ubs.com/investors.
including
As financial information for UBS AG consolidated does not
differ materially from UBS Group AG consolidated, the MD&A
included in the Annual Report 2017 – combined is generally
provided on a UBS Group AG consolidated basis. In addition, we
provide in the combined report UBS AG consolidated financial
statements in accordance with IFRS, information with respect to
UBS AG consolidated’s risk profile and Swiss systemically
relevant bank capital and
for UBS AG
consolidated.
leverage
ratios
Beginning with the Annual Report 2017, we will include in
our Form 20-F filing, and publish on our website, Extensible
Business Reporting Language (XBRL) interactive financial data, as
required for non-US private issuers that prepare financial
statements in accordance with IFRS.
→ Refer to “Annual reporting,” “Pillar 3 disclosures,” “Holding
company and significant regulated subsidiaries and sub-groups”
and “SEC filings” at www.ubs.com/investors, where the
documents mentioned above are available
14
Overview of our external reporting documents
The table below provides an overview of our external reporting
documents that are published on our Investor Relations website
to comply with applicable legal and regulatory reporting
requirements for UBS Group AG and UBS AG as well as for our
significant regulated subsidiaries and sub-groups, as defined by
FINMA. Specific local regulatory reporting requirements and
related documents of UBS Limited and UBS Americas Holding
LLC are not reflected in this overview.
All of our reports are available on www.ubs.com/investors
Reporting level
UBS Group AG
Type of information2
UBS AG1
UBS Switzerland AG
UBS Limited
UBS Americas Holding LLC
Management’s
discussion and
analysis
Financial
statements
Supplemental
SEC
disclosures
Basel III Pillar 3
disclosures
Financial
statements
Supplemental
SEC
disclosures
Selected
financial and
regulatory
information
Basel III Pillar 3
disclosures
Financial
statements
Basel III Pillar 3
disclosures
Selected
financial and
regulatory
information
Report name – Available on www.ubs.com/investors under: – Language
Annual Report 2017 – Group – Annual reporting – English
Annual Report 2017 – combined – Annual reporting – English
2017 SEC Form 20-F – UBS Group AG and UBS AG – SEC filings – English
Auszug aus dem Geschäftsbericht – Annual reporting – German
3
31 December 2017 Pillar 3 report – Group and significant regulated subsidiaries and sub-groups – Pillar 3 disclosures – English
Standalone legal entity and sub-group reports – Holding company and significant regulated subsidiaries and sub-groups 4 – English
1 Information for UBS AG consolidated does not differ materially from UBS Group AG on a consolidated basis. Information provided in management’s discussion and analysis applies for both UBS Group AG consolidated
and UBS AG consolidated, except for certain disclosures in the “Risk, treasury and capital management” section, where information for UBS AG consolidated is separately provided. 2 Refer to the respective sections
of our reports for more information on the basis of preparation and applicable requirements. 3 Includes the German translation of the following sections of our Annual Report 2017 – Group: “Group performance,”
IFRS-required disclosures in “Risk, treasury and capital management,” “Corporate governance” and “Compensation.” 4 Standalone legal entity reports for UBS Group AG, UBS AG and UBS Switzerland AG are available
from 9 March 2018. The UBS Limited Annual Report 2017 will be available at www.ubs.com/investors by the end of April 2018. There is no requirement to externally publish an annual report for UBS Americas Holding
LLC. Information for other subsidiaries is available under “Other subsidiaries” at www.ubs.com/investors.
Consolidated
Standalone
15
Operating
environment and
strategy
Management report
Signposts
Throughout the Annual Report 2017, the Audited | signpost that is displayed at the beginning of a section, table or chart indicates that those items have been
audited. A triangle symbol – (cid:3) – indicates the end of the signpost.
Operating environment and strategy
Current market climate and industry trends
Current market climate and industry trends
Global economic developments in 2017
In 2017, the world economy grew at the fastest rate since 2011:
global GDP expanded 3.9%, from a rate of 3.2% in 2016, with
each member of the G20 seeing economic growth – the first
time since 2010.
Economic activity increased worldwide amid a recovery in
Chinese property construction, Russia and Brazil emerging from
multi-year recessions and renewed US energy sector investment
in response to higher oil prices.
Equity markets responded, aided by higher corporate
earnings growth and low real interest rates. Global equities rose
by more than 20%, with emerging market stocks outperforming
their developed market peers. European markets lagged in local
currency terms, in part due to the euro’s strength. The year was
also notable for a lack of equity market volatility: at no point did
global equities register a greater than 2.0% decline from their
prior highs.
Government bond yields generally remained stable in spite of
accelerating global growth. Rising US interest rates primarily
affected short-dated US dollar-denominated bonds, resulting in
the flattest US government bond yield curve in more than a
decade. Euro- and Swiss franc-denominated bonds were largely
unaffected by US rate moves.
The US dollar depreciated by around 10% on a trade-
weighted basis, losing ground against most other global
currencies. The euro strengthened significantly to rank as the
best-performing major currency, as markets began pricing in
reduced monetary stimulus from the European Central Bank.
US growth accelerated, as widely expected, thanks to robust
consumption, energy investment and export growth. Reduced
government expenditure proved to be the only significant drag.
Despite three rate hikes from the US Federal Reserve Board,
financial conditions eased throughout the year.
Eurozone growth accelerated to its fastest pace since 2007.
Improved business sentiment spurred capital expenditure and
private consumption remained robust alongside declining
unemployment. UK growth slowed but proved more resilient to
uncertainty from the UK’s withdrawal from the EU than initially
expected, with investment accelerating and exports benefiting
from a weak British pound.
Switzerland’s headline growth was disappointing, but
fundamentals remained sound. Business confidence surveys rose
to multi-year highs, the Swiss franc depreciated relative to the
euro and falling unemployment benefited consumption.
Japan prospered, with improved trade performance helping
drive the fastest pace of economic expansion since 2013. Higher
rates of inflation suggest that the country’s multi-year monetary
stimulus program may be beginning to bear results.
In emerging markets, China’s reported growth accelerated
for the first time since 2010. This was largely driven by the
country’s property sector, which increased import demand and
helped other economies in the region. Brazil emerged from a
deep two-year recession, with falling inflation contributing to a
significant improvement in private consumption. Russia also
returned to growth after two years of contraction, driven by a
recovery in energy prices, good domestic demand and lower
interest rates. The economies of South Korea, Taiwan and
Indonesia all grew, while India and Mexico were the only large
emerging markets to decelerate. South Africa saw faster growth,
although it remains at a low level.
Economic and market outlook for 2018
We forecast little change in the economic outlook. We expect
growth of 4.1% in 2018, similar to the healthy 3.9% global
GDP growth rate recorded last year. Slight slowdowns in Europe
and China should be offset by higher growth in the US, India
and Brazil.
US economic activity should be buoyed by the passage of
corporate tax cuts, which should boost consumption and
corporate earnings in 2018. European growth should remain
above its long-term trend rate, broadly similar to 2017, although
uncertainties over the UK’s withdrawal from the EU could weigh
on the UK’s growth. A weaker Swiss franc bodes well for
Switzerland, where exports also stand to benefit from a solid
global growth outlook. Cooling property construction will likely
decelerate China’s growth rate, but resilient consumption and
exports should prevent too sharp of a slowdown.
The primary risks to the outlook relate to uncertainty over
the impact of central banks’ withdrawal of quantitative easing,
the threat of greater protectionism in US trade policy, a more
rapid increase in inflation rates that might lead to faster-than-
expected interest rate hikes, a continued increase in energy
prices and geopolitical instability, in particular in relation to the
Middle East and North Korea. China’s management of its rising
debt levels and economic transition remains an important
medium-term factor.
18
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Industry trends
Trends by UBS business divisions
Global Wealth Management
Industry estimates suggest that global private wealth will grow
by 6% per annum until 2021, with the higher wealth segments
expected to grow at over 10% per annum during the same
period. From a geographical perspective, the strongest growth is
expected to come from Asia Pacific, with estimated annual
market growth of 9.9%, according to the Boston Consulting
Group Global Wealth Report 2017. Developed markets are
expected to grow in line with or below the global growth rate
(e.g., 5.6% per annum for North America and 3.5% per annum
for Western Europe). We expect this growth profile to be
favorable for our strategy of focusing on the largest and fastest-
growing markets, which informed our early push to build up our
capabilities in Asia and the ultra high net worth segments. We
are the largest foreign wealth management firm by assets under
management in key Asia Pacific markets as a result of our early
entry into the region. We are also well positioned in the ultra
high net worth segment, where we leverage the capabilities of
our wealth management business and the Investment Bank as
well as Asset Management.
Personal & Corporate Banking
Our home market, Switzerland, is an attractive market for
personal and corporate banking. Switzerland is one of the
wealthiest countries in the world, with average net wealth per
person of approximately CHF 185,000 according
to our
research. However, sustained negative interest rates in Swiss
francs have put pressure on banks’ net interest income. From a
corporate banking perspective, Switzerland is home to a
significant number of large multinational corporations and
exporters that have performed well despite pressure related to
the strength of the Swiss franc in recent years. UBS has built a
leading position with personal as well as corporate and
institutional clients in Switzerland. Our objective from here is to
strengthen that position through comprehensive digitalization
efforts aiming to deliver a superior client experience.
Asset Management
is forecast to grow by
industry
The asset management
approximately USD 20 trillion over the next four years, primarily
driven by increases in private provision for retirement and wealth
accumulation in emerging middle classes. The biggest growth is
expected to come from passive assets and customized solutions,
with only moderate growth in actively managed strategies. Due
to our diversified offering, ranging from our passive and
differentiated traditional active investment strategies to our
industry-leading alternative capabilities, we believe that we are
well positioned to benefit from this trend. With a view toward
further strengthening our position in the market, we continue to
expand initiatives in line with our clients’ needs, such as our
Platform Services offering, sustainable and impact investing, and
our extensive offering in China.
(i.e., custodians, buy-side
Investment Bank
The shift in global revenue pools from investment banks to other
firms,
capital markets players
information providers and exchanges) observed in recent years is
expected to ease. Specifically, an external survey forecasts that
investment banks’ market share will stabilize at about 34% of
global industry revenues in 2020, corresponding to USD 249
billion, i.e., a 2% compound annual growth rate from 2016
through 2020. M&A will likely be a material revenue driver for
investment banks as a consequence of the Tax Cuts and Jobs
Act signed in December 2017, which may cause corporations to
is well
allocate capital to deal-making. We believe UBS
positioned to capture the value generated from this expected
increase in activity due to its client-centric business model
and global M&A infrastructure.
Wealth transfers
Demographic and socioeconomic developments continue to
generate shifts in wealth among age and gender groups. As a
result, the client base of the wealth management industry is
becoming increasingly diverse. The industry is therefore likely to
adapt its services and offerings to meet the specific needs and
expectations of growing client groups. UBS strives to become
the preferred wealth manager of these clients through its active
segment management strategy. This includes bespoke product
offerings, such as UBS Unique, which focuses on improving
female client satisfaction. Additionally, we offer wealth planning
expertise that is supported by dedicated intergenerational
wealth transfer services for all segments, such as Great Wealth
for ultra high net worth clients.
19
Operating environment and strategy
Current market climate and industry trends
Retirement funding
Over recent years, the pension industry has faced two key
challenges: fundamental demographic shifts, such as aging
populations, and lower expected returns.
Beyond structural answers to these challenges, such as the
progressive shift from defined benefit to defined contribution
pensions, we believe pension funds are reassessing their asset
allocation approach. Indeed, many pension funds are now
allocating a higher share of their portfolios to alternative
investments such as private equity, hedge funds, real estate and
infrastructure in a search for higher-yielding exposures.
We see this development as positive for UBS as these funds
will likely need further support to define their investment
strategy and target portfolio allocation. In addition, our private
banking and wealth management clients are expected to need
further financial and retirement planning advice, which we are
able to provide holistically through our wealth planning services.
Digitalization
Technology is transforming the way banks operate and is
expected to remain the key change driver for the financial
industry in the years to come. While IT spend used to be
considered a means to make banks more efficient, it has now
become an imperative to stay relevant in the face of competition
from other banks as well as non-traditional financial services
providers.
Banks are increasingly leveraging digital technology to
provide a more compelling client experience. Additionally, client
advisors benefit from integrated IT solutions that reduce the
time required for administrative tasks and increase capacity for
value-adding activities for clients and for UBS.
that
We believe
technology-driven changes
in bank
operations will allow efficiency gains through automation.
Technologies such as artificial intelligence and robotics can be
used to automate selected back- and middle-office processes,
thus reducing error rates and increasing efficiency.
seeking exposure to regions with attractive growth profiles, such
as Asia and emerging markets, through local acquisitions. Lastly,
the
increased focus on core capabilities or geographical
footprints and the ongoing simplification of operating models to
decrease operational and compliance risks should also lead to
asset sales.
New competitors
Our competitive environment is also evolving. In addition to our
traditional competitors in the asset-gathering businesses, new
entrants, including fintechs and other companies targeting
selected components of
the value chain, present new
competitive challenges. A fundamental unbundling of the value
chain and client relationships, ultimately resulting
in the
disintermediation of banks by fintechs or other competitors, has
not yet materialized. Over the longer term, we believe the entry
of large platform companies into the financial services industry
could result in a significant competitive threat due to their
strong franchise and access to a large base of clients and client
data.
to
increase
Regulation
The flow of new regulations has been gradually slowing and
there has been initial movement to reduce some of the regulatory
burdens, primarily in the US. Nevertheless, a number of post-
financial crisis reforms, such as the Basel III finalization, are
expected
risk-weighted assets.
to continue
Instruments
Additionally, the revised Markets
Directive (MiFID II) will have an impact on the way we do
business. The investor protection component of MiFID II requires
us to review suitability and appropriateness and enhance
transparency toward clients with extended disclosures, e.g., on
costs and charges, and reporting. The market structure
component of MiFID II will lead to increased pre- and post-trade
transparency requirements across a broad range of asset classes,
including derivatives and bonds, in addition to enhanced record-
keeping and transaction reporting obligations.
in Financial
Consolidation
We expect further consolidation in the financial services industry.
In many regions and business areas, there are many small players
and, as a result, the search for scale and cost efficiencies will be
a key M&A driver in such markets. Additionally, many banks are
Over the past years, we have adapted our business model and
believe that we are well positioned to operate efficiently while
absorbing upcoming changes to the regulatory environment.
→ Refer to the “Regulatory and legal developments” and “Capital
management” sections of this report for more information
20
Regulation and supervision
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
The Swiss Financial Market Supervisory Authority (FINMA) is UBS’s
home country regulator and consolidated supervisor. As a financial
services provider with an international footprint, we are also
regulated and supervised by the relevant authorities in each of the
jurisdictions where we conduct business, including the US, the UK
and other member states of the EU. Through UBS AG and UBS
Switzerland AG, which are licensed as banks in Switzerland, we may
engage in a full range of financial services activities in Switzerland
and abroad, including personal banking, commercial banking,
investment banking and asset management.
As we are a designated global systemically important bank
(G-SIB) and a systemically relevant bank (SRB) in Switzerland, we
are subject to more rigorous regulatory requirements and
supervision than most other Swiss banks. Since the financial
crisis of 2008, regulation of financial services firms has been
undergoing significant changes globally. These changes, which
continue to require significant resources to implement, have had
a material effect on how we conduct our business and have led
to increased costs.
→ Refer to the “Our evolution” section of this report for more
information
→ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
Regulation and supervision in Switzerland
Supervision
UBS Group AG and its subsidiaries are subject to consolidated
supervision by FINMA under the Swiss Federal Law on Banks and
Savings Banks (Swiss Banking Act) and the related ordinances
that impose, among other requirements, minimum standards for
capital, liquidity, risk concentration and organizational structure.
FINMA fulfills its statutory supervisory responsibilities through
licensing, regulation, monitoring and enforcement. FINMA is
responsible for prudential supervision and mandates audit firms
to perform on its behalf a regulatory audit and certain other
supervisory tasks.
Liquidity and capital adequacy
As an internationally active Swiss SRB, we are subject to capital
and total loss-absorbing capacity requirements, which are based
on both risk-weighted assets and leverage ratio denominator
and are among the most stringent in the world. We are also
required to maintain a minimum liquidity coverage ratio of high-
quality liquid assets to estimated stressed short-term net cash
outflows. Following the postponed implementation of the net
stable funding ratio requirements and subject to finalization of
the rules, we will be required to maintain a minimum net stable
funding ratio.
→ Refer to the “Capital management” section of this report for
more information on the Swiss SRB framework and the Swiss
too big to fail requirements
→ Refer to the “Treasury management” section of this report for
more information on liquidity coverage ratio requirements
Resolution planning and resolvability
The Swiss Banking Act and related ordinances provide FINMA
with additional powers to intervene in order to prevent a failure
or resolve a failing financial institution, including UBS Group AG,
UBS AG and UBS Switzerland AG. These measures may be
triggered when certain thresholds are breached and permit the
exercise of considerable discretion by FINMA in determining
whether, when or in what manner to exercise such powers. In
case of a possible insolvency, FINMA may impose more onerous
requirements on us, including restrictions on the payment of
dividends and interest as well as measures to alter our legal
structure (e.g., to separate lines of business into dedicated
entities, with limitations on our intra-Group funding and certain
guarantees) or to reduce business risk in some manner. The
Swiss Banking Act provides FINMA with the ability to extinguish
or convert to common equity the liabilities of the Group in
connection with its resolution.
Furthermore, Swiss too big to fail provisions require Swiss
SRBs, including UBS, to put in place a viable emergency plan to
preserve the operation of systemically important functions in
case of a failure of the institution. In response to these
requirements in Switzerland, as well as to similar requirements in
other jurisdictions, UBS has developed comprehensive recovery
plans that provide the tools to manage a severe loss event. UBS
also provides relevant authorities with resolution plans for
restructuring or winding down certain businesses in the event
the firm could not be stabilized. Alongside these measures, we
have invested significantly in structural, financial and operational
ring-fencing measures to improve the Group’s resolvability.
Regulation and supervision outside Switzerland
Regulation and supervision in the US
In the US, UBS is subject to regulation and supervision by the
Board of Governors of the Federal Reserve System (Federal
Reserve Board) under a number of laws. UBS Group AG and UBS
AG are both subject to the Bank Holding Company Act as
foreign banking organizations, under which the Federal Reserve
Board has supervisory authority over our US operations.
Furthermore, our US operations are subject to oversight by the
Supervision
Federal Reserve Board’s
Coordinating Committee, which coordinates supervision of large
or complex financial institutions.
Institution
Large
21
Operating environment and strategy
Regulation and supervision
In addition to being a financial holding company under the
Bank Holding Company Act, UBS AG maintains several branches
and representative offices in the US, which are authorized and
supervised by the Office of the Comptroller of the Currency. UBS
AG is currently registered as a swap dealer with the Commodity
Futures Trading Commission (CFTC), and we expect it will
register as a security-based swap dealer with the Securities and
Exchange Commission (SEC) when such registration is required.
the
UBS Americas Holding LLC,
intermediate holding
company for our non-branch operations in the US as required
under the Dodd-Frank Act, is subject to requirements established
by the Federal Reserve Board related to risk-based capital,
liquidity, the Comprehensive Capital Analysis and Review (CCAR)
stress testing and capital planning process, resolution planning
and governance. Beginning in 2018, the Federal Reserve Board
will publish its CCAR assessment for UBS Americas Holding LLC
and other large foreign banking organizations subject to CCAR.
UBS Bank USA, a Federal Deposit Insurance Corporation
(FDIC)-insured depository institution subsidiary, is licensed and
regulated by state regulators in Utah and the FDIC.
UBS Financial Services Inc., UBS Securities LLC and several
other US subsidiaries are subject to regulation by a number of
different government agencies and self-regulatory organizations,
including the SEC, the Financial Industry Regulatory Authority,
the CFTC, the Municipal Securities Rulemaking Board and
national securities exchanges, depending on the nature of their
business.
Regulation and supervision in the UK
Our regulated operations in the UK are mainly subject to the
authority of the Prudential Regulation Authority (PRA), which is
part of the Bank of England, and the Financial Conduct
Authority (FCA). We are also subject to the rules of the London
Stock Exchange and other securities and commodities exchanges
of which UBS AG and UBS Limited are members.
UBS Limited is a private limited company incorporated in the
UK and is authorized by the PRA and regulated by the PRA and
the FCA to conduct a broad range of banking and investment
businesses.
UBS AG maintains a UK-registered branch in London that
serves as a global booking center for our Investment Bank.
In addition, our regulated subsidiaries in the UK that provide
asset management services are authorized and regulated mainly
by the FCA, with one entity being also subject to the authority
of the PRA.
Financial services regulation in the UK is currently conducted
in accordance with EU directives covering, among other topics,
compliance with certain capital and
liquidity adequacy
standards, client protection requirements and business conduct
principles. This may be subject to change depending on how the
relationship between the UK and the EU evolves as a result of
the UK’s decision to leave the EU.
22
supervised
Bundesanstalt
the
(Federal
Regulation and supervision in Germany
UBS Europe SE, headquartered in Frankfurt, Germany, is
prudentially
für
by
Finanzdienstleistungsaufsicht
Financial Supervisory
Authority – BaFin) and subject to EU and German laws and
regulations. In addition to Germany, UBS Europe SE has
branches in Austria, Denmark, Italy, Luxembourg, Spain and
Sweden and it is subject to conduct supervision by local
authorities in all of these countries. An additional branch in the
Netherlands is currently being wound down.
Anti-money laundering and anti-corruption
to
relating
focus of government policy
Combating money laundering and terrorist financing has been a
financial
major
institutions in recent years. The US Bank Secrecy Act and other
laws and regulations applicable to UBS require the maintenance
of effective policies, procedures and controls to detect, prevent
and report money laundering and terrorist financing, and to
verify the identity of our clients. Failure to maintain and
implement adequate programs to prevent money laundering
and terrorist financing could result in significant legal and
reputation risk.
Additionally, we are subject to laws and regulations in
jurisdictions in which we operate prohibiting corrupt or illegal
payments to government officials and others, including the US
Foreign Corrupt Practices Act and the UK Bribery Act. We
maintain policies, procedures and internal controls intended to
comply with these laws and regulations.
Data protection
We are subject to laws and regulations concerning the use and
protection of customer, employee, and other personal and
confidential information, including provisions under Swiss law,
the EU General Data Protection Regulation (GDPR), which
provides significant new data protection, and laws of other
jurisdictions.
If implemented as proposed, we will become subject to the
revised Swiss data protection law (Swiss Federal Act on Data
improve data protection for
Protection), which seeks to
individuals by, among other measures, enhancing
the
transparency and accountability rules applicable to companies
processing data. This change in the law would align Swiss data
regulation with revised European legislation, including the EU
GDPR, and is intended to ensure the equivalence necessary for
the continued cross-border transmission of data. We expect the
revised law to take effect in 2019.
→ Refer to the “Risk factors” section of this report for more
information on regulatory change
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Regulatory and legal developments
Significant tax law changes enacted in the US
In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed
into law. The act includes a reduction in the federal corporate
tax rate to 21% from 35%. The rate reduction resulted in a
CHF 2.9 billion net write-down in the Group’s deferred tax
assets (DTAs) in the fourth quarter of 2017. The net decrease in
DTAs had a negligible impact on our fully applied CET1 capital.
The TCJA also introduced a new minimum tax regime,
referred to as the base erosion and anti-abuse tax (BEAT), which
targets US businesses benefiting from deductible payments
made to non-US related parties. The BEAT rate, which is 6% for
banks in 2018, increasing to 11% in 2019 and to 13.5% in
2026, applies if BEAT, calculated on a modified taxable income
base, is higher than the regular federal corporate tax in a given
year. We currently expect that BEAT could increase our current
tax expense by up to CHF 60 million in 2018. We are
considering options to mitigate its effects and awaiting guidance
from the US Department of Treasury on key aspects of the new
tax law. Additionally, the enactment of the TCJA, and the
narrowing of the window between the end of the forecast
period and the expiry of our US net operating losses, may lead
us to review our approach to periodically remeasuring our US
DTAs and the timing for recognizing deferred tax in our income
statement. For 2018, we currently forecast a full-year tax rate of
approximately 25%,
including the effects of BEAT, and
excluding the effects from any periodic remeasurement of DTAs
and any change in the manner in which we remeasure DTAs.
→ Refer to the “Group performance” section and “Note 8 Income
taxes” in the “Consolidated financial statements” section of this
report for more information
US Department of Labor fiduciary rule becomes effective
Following various delays, the US Department of Labor (DOL)
fiduciary rule became effective on 9 June 2017. Since then, UBS
has been operating under the rule, which expands the
circumstances that cause a person to become a fiduciary subject
to the Employee Retirement Income Security Act of 1974 (ERISA)
in relation to corporate and individual retirement plans. Under
ERISA, UBS is required to adhere to strict standards of prudence
and loyalty when dealing with affected retirement accounts and
is prohibited from entering into transactions where there is a
conflict of interest unless an exemption applies. Exemptions
applicable to our wealth management business in the US under
the rule require compliance with impartial conduct principles.
Moreover, the exemptions require compliance with significant
additional technical conditions. In November 2017, the DOL
extended the transition period and delayed the applicability of
these technical conditions to 1 July 2019 while it continues to
consider potential changes to the exemptions. Absent further
changes to the rule, we would be required to make significant
investments in order to comply with these technical conditions.
Swiss corporate tax reform
Following the rejection of the Swiss corporate tax reform by
popular referendum in February 2017, the Swiss Federal Council
consulted on a revised proposal from September to December
2017. The new proposal has been modified in response to the
referendum outcome, while maintaining the overall objective of
the original reform proposals, seeking to align the respective
cantonal corporate tax regimes with international standards by,
among other things, eliminating reduced holding company tax
rates and other privileges. The final proposal by the Federal
Council is expected to be submitted to the Swiss Parliament in
spring 2018. The effect of the proposed reform on UBS will
depend on the final federal legislation and the subsequent
cantonal implementation.
23
and businesses, which may include a reduction in commission
rates and trading margins. We continue to assess the effect on
our businesses, in particular the requirement to price research
and execution services separately, and whether these changes
affect the timing of recognition of certain fee income.
Developments related to LIBOR benchmarks and other
benchmarks and reference rates
Efforts to transition from the London Interbank Offered Rate
(LIBOR) benchmarks to alternative benchmark rates are under
way in several jurisdictions. The UK Financial Conduct Authority
announced in July 2017 that it will not intervene beyond 2021
to sustain LIBOR and urged users to plan the transition to
alternative reference rates. In April 2017, the Working Group on
the Sterling
Sterling Risk-Free Reference Rates selected
Overnight Index Average as the recommended British pound
risk-free rate. In the US, the Alternative Reference Rates
Committee has recommended a broad Treasuries repo financing
rate as the new US dollar secured risk-free rate, which is
expected to be available in 2018. The Federal Reserve Bank of
New York has launched a consultation on the construction of
this and two other Treasury repurchase agreement-derived rates.
The European Central Bank (ECB) has also recently announced
its decision to develop, before 2020, a euro unsecured overnight
interest rate based on transaction data already reported to the
ECB by banks.
From 1 January 2018, the EU Benchmarks Regulation (EBR)
became fully applicable. The EBR regulates the administration of,
contribution to and usage of benchmarks falling within the
scope of the regulation. The regulation covers benchmarks on
interest rates, currencies, securities, commodities and indices as
well as on other reference prices.
UBS has significant contractual rights and obligations
referenced to LIBOR and other benchmark rates. Discontinuance
of, or changes to, benchmark rates as a result of these
developments or other initiatives or investigations, as well as
uncertainty about the timing and manner of implementation of
such changes or discontinuance, may require adjustments to
agreements that are referenced to current benchmarked rates by
us, our clients and other market participants as well as to our
systems and processes.
Operating environment and strategy
Regulatory and legal developments
Financial services regulation
(OTC) derivative
Implementation of margin requirements for non-cleared OTC
derivatives
The G20 commitments on derivatives call for adoption of
initial and variation margin for
mandatory exchange of
non-cleared over-the-counter
transactions
(margin rules). Margin rules for the largest counterparties have
been in effect in major jurisdictions since early 2017, with phase-
in periods, by counterparty size, lasting through 2020. In
September 2018, initial margin requirements will apply to the
next group of counterparties (phase 3) in the US, the EU,
Switzerland, Japan and other major jurisdictions in Asia Pacific.
These requirements, along with differences in the timing of
implementation across jurisdictions, will likely continue to
require ongoing operational effort by us and our clients.
II, among other things,
Developments related to the implementation of MiFID II / MiFIR
In the EU, the revised Markets in Financial Instruments Directive
and the associated Regulation (MiFID II / MiFIR) took effect on
3 January 2018. MiFID
introduces
substantial new regulation of exchanges and trading venues,
transparency
including new pre-trade
requirements, a ban on the practice of using commission on
transactions to compensate for research services and substantial
new conduct requirements for financial services firms when
dealing with clients.
and post-trade
In December 2017,
the European Commission made
equivalence determinations for trading venues in Switzerland,
the US, Australia and Hong Kong. The equivalence decisions
were necessary to permit EU-domiciled institutions and clients to
continue to execute transactions on non-EU-domiciled trading
venues. The Swiss equivalence decision is limited to one year and
is linked to the progress of negotiations on the future
establishment of an EU-Swiss
institutional agreement.
Compliance with the new requirements has required significant
investment and changes to operations for us, our clients and
other financial services firms. Given the scale of the change and,
in some cases, the short time between finalization of
requirements and the effective date, we expect that the changes
introduced by MiFID II will result in changes to relevant markets
24
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
In November 2017, the Financial Stability Board opened
consultations on bail-in execution and on funding in resolution.
The consultation on bail-in proposes principles to make
resolution strategies operational, including disclosures on the
instruments and liabilities within the scope of bail-in, the
valuation process, governance issues and market and creditor
communications. The consultation on funding in resolution
proposes guidelines to support the monitoring, reporting and
estimation of funding needs in resolution and to facilitate
execution of the funding strategy.
Changes to the Swiss prudential regulatory framework
Regulators made further changes to strengthen the Swiss
prudential regulatory framework and to align it with Basel IIII
rules. Based on the biennial review of systemically important
banks (SIBs) concluded in June 2017, the Swiss Federal
Department of Finance (FDF) initiated a consultation in February
2018, proposing the introduction of gone concern requirements
for domestically focused SIBs. These requirements would be
conceptually similar to those in effect since July 2016 for the
two largest Swiss banks, including UBS. However, they would be
limited to 40% of the going concern capital requirements,
would be phased in over seven years and could be met by a
cantonal guarantee or similar mechanism.
In February 2018, the Swiss Federal Council proposed
amendments to the participation relief provisions under current
Swiss tax law that, if enacted, would reduce the additional tax
burden on debt issuances by bank top holding companies. The
proposed tax law changes would permit SIBs, such as UBS, to
issue debt directly from their holding companies, as
is
contemplated under the international capital framework and the
Swiss Capital Adequacy Ordinance, without incurring significant
corporate tax disadvantages, as is the case today under Swiss tax
law. As a next step, the proposal will be subject to debate in the
Swiss Parliament.
Developments related to recovery and resolution
A number of developments have further shaped the regulatory
framework on recovery and resolution for banks.
In Switzerland, FINMA published a partial revision of its
Banking Insolvency Ordinance, which became effective on
1 April 2017. The amendments require banks to include a
contractual acknowledgment of FINMA’s ability to temporarily
postpone the exercise of remedies against banks in financial
contracts that are subject to foreign laws or foreign places of
jurisdiction. Such postponement is intended to ensure the
continuation of
relationships without
contractual
interruption
in crisis situations. According to the revised
ordinance, contracts entered into by non-Swiss entities within a
group will only be subject to the rule if the respective financial
contract was guaranteed or otherwise secured by a bank or
securities dealer domiciled in Switzerland. In addition, FINMA
has granted exceptions for contracts with individuals and
extended the implementation period to April 2018 for contracts
with banks and securities dealers, and to October 2018 for
contracts with other counterparties.
key
In November 2017, similar rules on resolution stays were
published In the United States by the Office of the Comptroller
of the Currency. The rules address concerns relating to the
exercise of default rights in financial contracts that could
interfere with the orderly resolution of systematically important
financial institutions.
In the UK, in July 2017, the Bank of England (BoE) consulted
on its policy for setting minimum requirements for own funds
and eligible liabilities (MREL) within groups. It proposes to
require internal MREL at between 75% and 90% of the Pillar 1
external MREL requirement, which will be phased in between
1 January 2019 and 1 January 2022. The BoE also proposes to
take into account the equivalent requirements used in other
jurisdictions, which could result in a required internal MREL level
at the higher end of the range. We expect that UBS Limited will
be subject to these requirements. In addition, firms would need
to hold loss-absorbing capacity for operational continuity for
each provider of critical services within the group calibrated at
25% of total operating costs. This proposal could apply to a
number of UBS entities in different jurisdictions that provide
services to UBS Limited and is expected to take effect on
1 January 2019. The exact impact of these changes can only be
determined once the BoE finalizes its policy.
25
Finalization of the Basel III capital framework
In December 2017, the BCBS announced the finalization of the
Basel III reforms. The most significant changes include:
– placing floors on certain model inputs under the internal
ratings-based (IRB) approach to calculate credit risk risk-
weighted assets (RWA);
– requiring the use of standardized approaches for calculation
of credit valuation adjustment and for operational risk RWA;
– placing an aggregate output floor on the Group RWA equal
to 72.5% of the RWA calculated using a revised standardized
approach; and
– revising the leverage ratio denominator (LRD) calculation and
for global
surcharge
leverage
ratio
introducing a
systematically important banks.
The revised standards will take effect from 1 January 2022,
with a phase-in period of five years for the aggregate output
floor.
We currently estimate that the introduction of the revised Basel III
framework will likely lead to a net increase in RWA of around
CHF 35 billion, before taking into account mitigation actions. These
estimates are based on our current understanding of the relevant
standards and may change as a result of new or changed regulatory
interpretations, implementation of the Basel III standards into
national law, changes in business growth, market conditions and
other factors. We will update our common equity tier 1 (CET1) ratio
guidance when further details on the implementation of the final
Basel III standards become available.
In addition, over the next three years, as a result of other known
regulatory changes and estimated business growth, we estimate our
RWA may increase by around CHF 40 billion and our LRD may rise
by around CHF 85 billion. Actual increases may vary depending on
growth opportunities, market conditions and mitigation actions. As
a consequence, and based on the estimates above, we may build
approximately CHF 4 billion of additional fully applied CET1 capital
over the next three years, subject to market conditions, as well as
RWA and LRD development.
→ Refer to the “Capital management” section of this report for
more information on the current Swiss SRB capital framework
→ Refer to the “Risk factors” section of this report for more
information on regulatory change
Operating environment and strategy
Regulatory and legal developments
Separately, Switzerland has been moving ahead with the
implementation of existing Basel Committee on Banking
Supervision (BCBS) standards. In October 2017, FINMA issued a
consultation on the implementation of changes to Basel III rules,
covering interest rate risk in the banking book, disclosure
requirements, credit risk and eligible capital. These changes are
expected to take effect on 1 January 2019. Also, the Swiss
Federal Council adopted revisions to the Capital Adequacy
Ordinance that will introduce a more restrictive treatment of risk
concentrations. From 1 January 2019, risk concentration limits
for exposures with global systemically important banks will be
lowered and calculated on the basis of tier 1 capital, excess
capital will no longer be able to be used to compensate for
exposures above the limit and the standardized approach for
calculation of exposures will be required. In addition, direct and
indirect exposures will need to be aggregated at counterparty
level.
include
introducing a target
Swiss Federal Council proposes changes to the depositor
protection scheme
In February 2017, the Swiss Federal Council proposed changes
to the Swiss depositor protection scheme. The proposed
level for depositor
changes
protection, set at 1.6% of the value of the protected deposits in
the Swiss financial system, using the current cap of CHF 6 billion
as a floor, and significantly shortening the time within which
payments to depositors must be made in the event of a bank
the current
insolvency. These changes would
requirement that each bank has to hold 50% of its commitment
to the depositor protection scheme as high-quality liquid assets
with a requirement to pledge collateral equal to 50% of its
commitment. The Federal Council also intends to issue new rules
for banks to segregate custody assets from own assets through
the entire domestic custody chain. The proposed changes may
require UBS to make adjustments to operational processes and
funding. The FDF is expected to issue a draft consultation by the
end of August 2018.
replace
26
Significant accounting and financial reporting
changes in 2018
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
IFRS 9, Financial Instruments
We adopted IFRS 9, Financial Instruments from 1 January 2018.
IFRS 9 imposes expected credit loss (ECL) requirements that
change the accounting and reporting for the majority of our
credit exposures. Additionally,
introduces new
classification and measurement guidelines that require a
consideration of the contractual cash flow characteristics of
financial assets and the associated business models under which
we operate, and eliminate, among other things, the previous
accounting and reporting treatment of investments classified as
available for sale and held to maturity.
IFRS 9
We also early adopted the Amendment to
IFRS 9,
Prepayment Features with Negative Compensation, which
allows us to continue to apply amortized cost accounting to
Swiss private mortgages and corporate loans that provide for
two-way compensation if a prepayment occurs. We did not
adopt the optional IFRS 9 hedge accounting requirements
pending completion of the International Accounting Standards
Board’s (IASB) project on macro hedge accounting strategies.
this amount
We will recognize the estimated pre-tax transition impact
from adopting IFRS 9 of approximately CHF 0.7 billion, as well
as a tax credit of CHF 0.1 billion, as a CHF 0.6 billion reduction
in our IFRS consolidated equity as of 1 January 2018, which
will be reflected in our first quarter 2018 report. Approximately
to mark-to-market
half of
adjustments on certain loans and securities that no longer
qualify for amortized cost accounting due to their cash flow
characteristics or underlying business model. These instruments
will now be measured at fair value through profit or loss under
IFRS 9. The remainder of the reduction results from recognizing
ECL, primarily on financial assets measured at amortized cost,
financial guarantees and loan commitments.
is attributable
Our fully applied common equity tier 1 (CET1) capital is
expected to be reduced by approximately CHF 0.3 billion as of
1 January 2018, predominantly due to the reclassification of
certain loans and securities from amortized cost to fair value
through profit or loss, with no material impact on our capital
ratios.
→ Refer to “Note 1c International Financial Reporting Standards
and Interpretations to be adopted in 2018 and later and other
changes” in the “Consolidated financial statements” section of
this report for more information
Transition
IFRS 9 is a key strategic initiative for UBS and has been
implemented under the joint sponsorship of the Group Chief
Financial Officer and the Group Chief Risk Officer. As part of our
implementation program, we have performed an assessment of
the population of financial
impacted by the
classification and measurement requirements of IFRS 9 and
instruments
developed an
calculation of the ECL allowance.
impairment methodology
to support
the
Our ECL calculation, including the processes to derive
information, and the related
appropriate forward-looking
reporting processes and controls have been tested through
parallel runs.
Detailed transition disclosures, including a full reconciliation
on the changes arising from adopting IFRS 9, will be provided in
our first quarter 2018 report.
Classification
IFRS 9 requires all financial assets, except equity instruments, to
be classified at amortized cost, at fair value through other
comprehensive income (OCI) or at fair value through profit or
loss, based on the business model for managing the respective
assets and their contractual cash flow characteristics.
the
Expected credit losses
IFRS 9 introduces a forward-looking ECL approach, which is
intended to result in an earlier recognition of credit losses
compared with the incurred-loss impairment approach for
financial instruments under IAS 39, Financial Instruments:
Recognition and Measurement and
loss-provisioning
approach for financial guarantees and loan commitments under
IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
The new impairment model applies to financial assets measured
at amortized cost, investments in debt instruments measured at
fair value through OCI, lease receivables, loan commitments and
financial guarantee contracts that are not measured at fair value
through profit or loss. The majority of the ECL calculated as of
the transition date relates to our private and commercial
mortgage portfolio in Switzerland within our Personal &
Corporate Banking division. Under IFRS 9, a maximum 12-month
ECL must be recognized from initial recognition on in-scope
instruments, referred to as instruments within stage 1. Lifetime
ECL must be recognized if a significant increase in credit risk
(SICR) arises after the instrument was originally recognized,
referred to as instruments in stage 2, or if the instrument is
credit impaired, referred to as instruments in stage 3.
Measurement of expected credit losses
The methodology we apply to calculate an individual probability-
weighted unbiased ECL in line with IFRS 9 is aligned with the
complexity, structure and risk profile of relevant portfolios and is
mainly based on a combination of the following principal
factors: probability of default (PD), loss given default (LGD),
exposure at default (EAD) and discounting to the reporting date,
with
respective parameters generally determined on a
transaction basis.
27
Operating environment and strategy
Significant accounting and financial reporting changes in 2018
PDs and LGDs used in the IFRS 9 ECL calculation are point in
time (PIT) based. To derive the PIT-based parameters, we
leverage our existing Pillar 1 internal ratings-based (IRB) models
and Pillar 2 stress loss models. We make certain necessary
adjustments
to
information, which
incorporate
includes gross domestic product forecasts, interest and foreign
exchange rates, unemployment rates, real estate price indices
and other relevant risk parameters. In addition, the prudential
adjustments from Basel III, such as downturn LGD assumptions
and floors, are removed.
to account
forward-looking economic
for current conditions and
We have selected a range of scenarios (upside, baseline, mild
downside, and downside) to capture material non-linearity and
asymmetries between different possible
forward-looking
scenarios and associated credit losses, and we apply scenario
weights to reflect the likelihood of their occurrence. We have
aligned our baseline scenario selection with the baseline used for
business planning purposes.
For ECL calculation purposes, we consider the maximum
contractual period over which we are exposed to credit risk,
taking into account the respective counterparty’s contractual
extension, termination and prepayment options. For certain
credit card facilities without a defined contractual end date,
which are callable on demand and where the drawn and
undrawn portions are managed as one unit, the period over
which UBS is exposed to credit risk exceeds the contractual
notice period and therefore this longer period is used within the
ECL calculation.
Determination of a significant increase in credit risk
Qualitative and quantitative criteria are used to determine
whether the credit risk on an instrument has significantly
increased from the date of initial recognition, with the primary
assessment based on a comparison of the annualized forward-
looking and scenario-weighted
lifetime PIT-based PDs at
inception of the instrument, and at the reporting date. This
assessment is made at an individual financial asset level, with
specific criteria and thresholds applied based on the applicable
portfolio. Qualitative
factors are additionally considered,
including internal indicators of credit risk such as days-past-due
information, external market indicators of credit risk and general
economic conditions. We generally consider that an SICR occurs
no later than when the asset is 30 days past due.
Lombard loans, securities financing transactions and certain
other asset-based lending transactions that are subject to daily
risk management and monitoring processes with strict
margining
the SICR
determination process given the transactions are closed out
immediately if margin calls are not satisfied, whereupon they
move directly from stage 1 into stage 3 as defaulted positions.
requirements are not
subject
to
28
Governance
The incorporation of forward-looking information in the ECL
calculation and
the definition and assessment of what
constitutes an SICR are inherently subjective and involve the use
of significant judgment. Therefore, we have developed a front-
to-back governance framework over the ECL calculation process
jointly owned by the Group Chief Financial Officer and the
Group Chief Risk Officer and have designed controls to be in
compliance with the requirements of the Sarbanes-Oxley Act.
the
Our economists, risk methodology personnel and credit risk
forward-looking
in developing
officers are
involved
macroeconomic assumptions used
in the ECL calculation.
Assumptions and scenarios are validated and approved through
a scenario committee and an operating committee, which have
been established as part of a new governance process. This
process also facilitates a consistent use of forward-looking
information throughout UBS, including in our business planning
process. New models have been approved as part of our existing
model validation and oversight processes. Governance has also
specifically been established around the SICR decision process
given management judgment is required. We test ECL and SICR
inputs in a controlled environment and determine sensitivities
with a risk simulation engine.
Group regulatory capital and IFRS 9
The table on the next page sets out key differences in the scope
and factors applied in determining expected losses (EL) under
the current Basel III advanced internal ratings-based approach
and those used in determining ECL for IFRS 9 purposes.
→ Refer to “Credit risk models” in the “Risk management and
control” section of this report for more information
for
following
In March 2017, the Basel Committee on Banking Supervision
(BCBS) finalized guidance on an interim approach for the
regulatory treatment of accounting provisions and defined
the
transitional arrangements,
standards
introduction of IFRS 9. The BCBS confirmed that for an interim
period the current treatment of accounting provisions, under
both the standardized approach and the IRB approach, should
continue to be applied until the longer-term treatment is
confirmed. The BCBS recommended that jurisdictions issue
guidance to categorize new accounting provisions as general
provisions or specific provisions for regulatory purposes.
Additionally,
transitional
arrangements to spread the adoption impacts over time, using
either a static or a dynamic approach, including limiting the
transition period to a maximum of five years. The consultation
period on the related FINMA guidance ended on 31 January
2018. It includes the option of phasing the initial effect of
adopting the new accounting provisions into regulatory capital,
using a static approach. The final guidance is expected to be
published during 2018 with an effective date of 1 January 2019.
jurisdictions may
implement
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Comparison of IFRS 9 ECL with Basel III EL
BBasel III (advanced internal ratings-based approach)
IIFRS 9
SScope
The Basel III advanced internal ratings-based (A-IRB) approach applies to
most credit risk exposures. It includes transactions measured at amortized
cost, at fair value through profit or loss and at fair value through OCI,
including loan commitments and financial guarantees.
The IFRS 9 expected credit loss calculation mainly applies to financial
assets measured at amortized cost and debt instruments measured at fair
value through OCI, as well as loan commitments and financial guarantee
contracts not at fair value through profit or loss.
112-month versus lifetime
expected loss
The Basel III A-IRB approach takes into account expected losses resulting
from expected default events occurring within the next 12 months.
EExposure at default
(EAD)
EAD is the amount we expect a counterparty to owe us at the time of a
possible default. For banking products, the EAD equals the book value as
of the reporting date, whereas for traded products, such as securities
financing transactions, the EAD is modeled. The EAD is expected to
remain constant over the 12-month period. For loan commitments, a
credit conversion factor is applied to model expected future drawdowns
over the 12-month period, irrespective of the actual maturity of a
particular transaction. The credit conversion factor includes downturn
adjustments.
In the absence of an SICR event, a maximum 12-month ECL is recognized
to reflect lifetime cash shortfalls that will result if a default event occurs in
the 12 months after the reporting date (or a shorter period if the expected
lifetime is less). Once an SICR event has occurred, a lifetime ECL is
recognized considering expected default events over the life of the
transaction.
EAD is generally calculated on the basis of the cash flows that are
expected to be outstanding at the individual points in time during the life
of the transaction, discounted to the reporting date using the effective
interest rate. For loan commitments, a credit conversion factor is applied
to model expected future drawdowns over the life of the transaction
without including downturn assumptions. In both cases the time period is
capped at 12 months, unless an SICR has occurred.
PProbability of default
(PD)
PD estimates are determined on a through the cycle (TTC) basis. They
represent historical average PDs, taking into account observed losses over
a prolonged historical period, and are therefore less sensitive to
movements in the underlying economy.
PD estimates will be determined on a PIT basis, based on current
conditions and incorporating forecasts for future economic conditions at
the reporting date.
LLoss given default
(LGD)
LGD includes prudential adjustments, such as downturn LGD assumptions
and floors. Similar to PD, LGD is determined on a TTC basis.
UUse 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
determined on the basis of a PIT approach.
Multiple forward-looking scenarios have to be taken into account to
determine a probability-weighted ECL.
IFRS 9 and our significant regulated subsidiaries and sub-groups
FINMA’s plan to implement ECL under Swiss GAAP has been
deferred. We will continue to apply the incurred loss model in
the UBS AG standalone and UBS Switzerland AG standalone
financial statements, which are prepared in accordance with
Swiss GAAP (FINMA Circular 2015 / 1 and the Banking
Ordinance).
UBS Limited prepares standalone financial statements in
accordance with IFRS, and adopted IFRS 9 on 1 January 2018.
UBS Americas Holding LLC expects to early adopt Accounting
Standards Update (ASU) 2016-13, Measurement of Credit Losses
on Financial Instruments on 1 January 2020 for its consolidated
financial statements to align with the mandatory effective date
for some of its subsidiaries.
IFRS 15, Revenue from Contracts with Customers
We adopted IFRS 15, Revenue from Contracts with Customers
from 1 January 2018. The new standard will affect when certain
revenue can be recognized, with some performance-based fees
in Asset Management and research revenues in the Investment
Bank deferred until it is certain that the fee has been earned. In
addition, IFRS 15 requires a change to the presentation of
certain revenues and expenses in the income statement, with
enhanced disclosures. The cumulative effect of initially applying
the standard will be recognized as an adjustment to our IFRS
consolidated equity as of 1 January 2018 and, as permitted by
the standard, we will not restate prior-period information. The
transition effect will not be material and we also do not expect a
material effect on the Group’s annual revenues and expenses
going forward.
Potential change of functional and presentation currency
In light of cumulative changes in our legal structure, business
activities and evolving changes to our structural currency
management strategy, we anticipate that during the second half
of 2018 we may conclude under IAS 21, The Effects of Changes
in Foreign Exchange Rates, that the functional currency of UBS
Group AG and UBS AG’s Head Office in Switzerland will change
from Swiss francs to US dollars, and the functional currency of
UBS AG’s London Branch operations will change from British
pounds to US dollars, where such changes would be made on a
prospective basis. If such determinations are made, we would
also expect to change the presentation currency of UBS Group
AG’s consolidated and UBS AG’s consolidated
financial
statements from Swiss francs to US dollars, with prior periods
restated. Assets, liabilities and total equity would be converted
to US dollars at historic closing rates prevailing on the respective
balance sheet dates. No material changes are expected to our
capital ratios nor are material changes expected to our other key
performance indicators.
29
Operating environment and strategy
Our strategy
Our strategy
Who we are
Our priorities
is centered on our
The world’s largest and only truly global wealth manager
Our strategy
leading Global Wealth
Management business and our premier universal bank in
Switzerland, which are enhanced by Asset Management and the
Investment Bank. We focus on businesses that have a strong
competitive position in their targeted markets, are capital
efficient and have an attractive long-term structural growth or
profitability outlook. We are the world’s largest and only truly
global wealth manager. We have a strong presence in the
largest market, the United States, and a leading position in the
fastest-growing regions, including Asia Pacific and the other
emerging markets. Our wealth management business benefits
from significant scale in an industry with attractive growth
prospects and increasingly high barriers to entry, and from its
leading position across the attractive high net worth and ultra
high net worth client segments. We are the preeminent
universal bank in Switzerland, the only country where we
operate in all of our business lines: wealth management,
personal & corporate banking, asset management and
investment banking. Our leading position in our home market is
central to UBS’s global brand and profit stability. The partnership
between our wealth management business and our other
business divisions is a key differentiating factor and a source of
competitive advantage.
Strong capital position and capital-efficient business model
Capital strength is the foundation of our strategy and provides
another competitive advantage. We are well positioned to meet
the fully applied Swiss too big to fail capital and total loss-
absorbing capacity requirements when they become effective on
1 January 2020. Our capital-accretive and capital-efficient
business model helps us adapt to changes in regulatory
requirements, while pursuing growth opportunities without the
need for significant earnings retention. We believe that our
business model can generate an adjusted return on tangible
equity (excluding deferred tax expense / benefit and deferred tax
assets) of around 15% in normal market conditions.
We have an attractive and flexible capital returns policy
Our earnings capacity and capital efficiency support our
objective to deliver sustainable and increasing capital returns to
our shareholders. We aim to increase our ordinary dividend per
share at a mid-to-high single-digit percent per annum. We may
also return excess capital, after accruals for ordinary dividends,
most likely in the form of share repurchases, after considering
our outlook and subject to regulatory approval.
1. Drive profitable growth in Global Wealth Management
In Global Wealth Management, we target 10–15% adjusted
profit before tax growth annually over the cycle, while growing
net new money at 2–4% per annum and aiming to operate
within an adjusted cost / income ratio range of 65–75%. The
creation of the integrated business division on 1 February 2018
aims to further enhance the client experience and our product
offering in line with an increasingly global client base. We expect
to more effectively capture the purchasing power of Global
Wealth Management’s CHF 2.3 trillion invested asset base and
generate greater synergies across technology, innovation and
other areas of investment. Regional variations in the client
service model will be maintained, while middle- and back-office
functions will be more closely aligned and integrated.
2. Maintain focused leadership and grow profits in Asset
Management, Investment Bank and Personal & Corporate
Banking
Our strength in Global Wealth Management also relies on the
stand alone strength of our other businesses. Together, they
make a significant contribution to earnings, diversify revenues
and generate high-quality returns.
3. Enhance diversification by capturing superior growth in Asia
Pacific and the Americas, leverage our Europe, Middle East and
Africa capabilities and reinforce our leadership position in
Switzerland
From a geographic standpoint, we aim to grow in the Americas
and to reinforce leadership in our home market in Switzerland.
In Europe, Middle East and Africa, we want to leverage our
capabilities to grow our market share during likely consolidation.
Asia Pacific, and particularly China, presents a significant growth
opportunity, given the economic expansion and rate of increase
in the number of billionaires. UBS’s competitive position in Asia
Pacific is strong and we are well positioned to capture
opportunities in the region across our businesses.
4. Invest in technology with a focus on superior client
experience, product capabilities, efficiency and effectiveness
We will continue to invest in technology to drive growth, better
serve our clients and improve efficiency and effectiveness. We
intend to secure our position as a leader in the digital age by
maintaining expenditure on technology of at least 10% of the
Group’s revenues for the foreseeable future.
30
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Performance targets and capital guidance 2018–2020
The table below shows our performance targets and capital
guidance for the Group and the business divisions for the 2018–
2020 period. The targets and guidance reflect what we believe
can be achieved in normal market conditions.
All targets are measured on an annual basis, except our
adjusted profit before tax growth targets for Global Wealth
Management and Asset Management, which represent the
average annual growth we aim to deliver over the cycle.
→ Refer to the “Group performance” section of this report for
more information on adjusted results and adjusting items
→ Refer to the “Measurement of performance” section of this
report for more information on key performance indicators
→ Refer to the “Risk factors” section of this report for more
information on factors that may affect our ability to deliver on
our strategy
CCost / income ratio1
PProfitability and growth1
CCapital and resource guidance
GGroup
<75%
~15% RoTE excluding DTAs2
~13% common equity tier 1 capital ratio3
~3.7% common equity tier 1 leverage ratio3
GGlobal Wealth Management
65–75%
10–15% pre-tax profit growth4
PPersonal & Corporate Banking
50–60%
2–4% net new money growth
1–4% net new business volume
(personal banking)
150–165 bps net interest margin
AAsset Management
60–70%
~10% pre-tax profit growth4, 5
3–5% net new money growth,
excluding money market flows
IInvestment Bank
70–80%
>15% RoAE6
RWA and LRD around one-third of the Group total7
11 Annual targets; cost / income ratio, pre-tax profit growth and return targets are on an adjusted basis. 2 Return on tangible equity (RoTE) excluding deferred tax expense / benefit and deferred tax assets (DTAs);
calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax expense / benefit, such as the net write-down due to the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017,
divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as fully applied CET1 capital. 3 Based on fully applied CET1 capital. 4 Over the cycle. 5 Excluding the impact
of business exits. 6 Return on attributed equity. 7 Including risk-weighted assets (RWA) and leverage ratio denominator (LRD) directly associated with activity that Corporate Center – Group ALM manages
centrally on the Investment Bank’s behalf; proportion may fluctuate around this level due to factors such as equity market levels and FX rates.
31
Operating environment and strategy
Measurement of performance
Measurement of performance
Performance measures
Key performance indicators
The Group and business divisions are managed on the basis of a
key performance indicator (KPI) framework, which identifies
profit and growth financial measures, in the context of sound
risk and capital management objectives. When determining
variable compensation, both Group and business division KPIs
are taken into account.
We review the KPI framework on a regular basis, considering
our strategy and the market environment in which we operate.
KPIs are disclosed in our quarterly and annual reporting to
allow comparison of our performance over the reporting
periods. For certain KPIs we have performance targets in place,
which are defined in order to measure our performance against
our strategy. Our KPIs are designed to be assessed on an over-
the-cycle basis and are subject to seasonal patterns.
→ Refer to the “Our strategy” section of this report for more
information on performance targets
Changes to our key performance indicators in 2018
We reviewed our performance targets and KPI framework in
January 2018, taking into account the developments in the
regulatory environment and the achievement of our CHF 2.1
billion net cost reduction target by the fourth quarter of 2017.
We will introduce “Common equity tier 1 leverage ratio (%)” as
a KPI for the Group alongside the existing “Going concern
leverage ratio (%)” KPI. The existing “Return on tangible equity
(RoTE) (%)” KPI will be complemented by “RoTE excluding
deferred tax assets (RoTE ex DTAs) (%).”
“Gross margin on invested assets (bps)” for the Group,
Wealth Management and Asset Management will be removed
from the KPI framework as this will no longer be used as a
strategic steering metric. Cost control will remain in focus
through the cost / income ratio, which remains a KPI and
performance target for the Group and all business divisions.
From 1 February 2018, performance targets and KPIs for
Wealth Management and Wealth Management Americas were
merged and are reported for the Global Wealth Management
business.
32
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
2017 Group and business division key performance indicators
p
u
o
r
G
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
KKey performance indicators
DDefinition
NNet profit growth (%)
PPre-tax profit growth (%)1
CCost / income ratio (%)
RReturn on tangible equity (RoTE) (%)2
RReturn on attributed equity (RoAE) (%)2
GGoing concern leverage ratio (%)3
CCommon equity tier 1 capital ratio (%)3
NNet new money growth (%)
GGross margin on invested assets (bps)2, 4
NNet margin on invested assets (bps)2
NNet 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
Total going concern capital / leverage ratio denominator as of
period end
Common equity tier 1 capital / risk-weighted assets as of period
end
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
NNet interest margin (%)
Net interest income (annualized as applicable) / average loans
t
n
e
m
e
g
a
n
a
M
h
t
l
a
e
W
t
n
e
m
e
g
a
n
a
M
s
a
c
i
r
e
m
A
h
t
l
a
e
W
&
l
a
n
o
s
r
e
P
e
t
a
r
o
p
r
o
C
i
g
n
k
n
a
B
t
n
e
m
e
g
a
n
a
M
t
e
s
s
A
t
n
e
m
t
s
e
v
n
I
k
n
a
B
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
CCost reduction4
11 Excluding the impact of business exits, for Asset Management only. 2 Denominator based on a five-point average of quarter-end values with the beginning and end values weighted with a factor of 0.5 for the
full-year calculations and based on a simple average for the quarterly calculations. 3 Based on fully applied CET1 capital. 4 Removed from the key performance indicator framework in 2018.
Net exit rate cost reduction
(cid:3)
New key performance indicators in 2018
Key performance indicators
Definition
Return on tangible equity excluding deferred
tax assets (RoTE ex DTAs) (%)1, 2
Adjusted net profit attributable to shareholders before amortization and
impairment of goodwill and intangible assets and before deferred tax expense /
benefit (annualized as applicable) / average equity attributable to shareholders
less average goodwill and intangible assets and less average deferred tax
assets that do not qualify as fully applied CET1 capital
p
u
o
r
G
(cid:3)
h
t
l
a
e
W
l
a
b
o
G
l
t
n
e
m
e
g
a
n
a
M
&
l
a
n
o
s
r
e
P
e
t
a
r
o
p
r
o
C
i
g
n
k
n
a
B
t
n
e
m
e
g
a
n
a
M
t
e
s
s
A
t
n
e
m
t
s
e
v
n
I
k
n
a
B
Common equity tier 1 leverage ratio (%)3
1 Excluding deferred tax expense / benefit such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017. 2 Denominator based on a five-point average of quarter-end values
with the beginning and end values weighted with a factor of 0.5 for the full-year calculations and based on a simple average for the quarterly calculations. 3 Based on fully applied CET1 capital.
Common equity tier 1 capital / leverage ratio denominator as of period end
(cid:3)
33
Operating environment and strategy
Global Wealth Management
Global Wealth Management
Integration of our wealth management businesses
On 1 February 2018, Wealth Management and Wealth
Management Americas were combined into the unified business
division Global Wealth Management. The creation of the
integrated business division aims to further enhance our superior
client experience and product offering in line with an increasingly
global client base. Global Wealth Management provides our
clients with broader access to more diversified global products and
services and an integrated multi-shore offering. Our clients benefit
from the scale and insights of a truly global business, while we
retain the distinct client service models that we believe are best
suited to each of the regions in which we operate. We believe
that our platform, combined with a global suite of products and
services, bolsters our ability to attract the strongest investment
talent, both inside and outside of UBS, to best serve our clients.
We want to leverage our scale to generate greater synergies
through joint investments in technology, new products, new
business lines and our people.
Business
Global Wealth Management provides comprehensive advice and
tailored financial services to wealthy private clients around the
world. Our clients benefit from the full spectrum of resources that
a global firm can offer, including investment management, wealth
planning, banking and lending, and corporate financial advice.
Our model gives clients access to a wide range of products from
the world’s leading third-party institutions that complement our
own offerings.
Strategy and clients
We are the global leader in wealth management for private
clients, particularly in the ultra high net worth and high net
worth segments.
We seek to capitalize on our market-leading position in the
ultra high net worth business and to increase our market share
considerably in this segment. We also invest significantly in
growing our high net worth and core affluent businesses.
Wealth planning,
investment management and portfolio
construction are at the heart of our offering. We aspire to provide
our clients with a wider selection of discretionary and advisory
services, helping them to more effectively achieve their goals. This
in turn would further increase our mandate penetration and
contribute to higher recurring revenues. Where possible, our
integrated client service model allows us to bundle capabilities
across the Group to identify investment opportunities in varying
market conditions and create solutions that suit individual client
needs. For example, ultra high net worth clients benefit from
tailored institutional coverage and global execution provided by
dedicated specialist teams from Global Wealth Management and
the Investment Bank through the Global Family Office Group.
We continue to invest in our digital capabilities to offer clients
a combination of market-leading investment advice tailored to
their personal goals and innovative digital service solutions.
We have unique scale and a global footprint with booking
centers across the globe. These give us a strong local presence
allowing us to serve our clients and book their assets in multiple
locations, according to client preferences.
In Asia Pacific, we have further strengthened our position as
the largest wealth manager. Capturing growth opportunities in
China is central to our strategy. We have accelerated our growth
and expanded our business across the region, with a particular
focus on Hong Kong and Singapore, as well as onshore markets,
for example, Japan, China and Taiwan.
The Americas region covers both North America and Latin
America. In North America, we continue to execute on our
distinct opportunity to “feel small and play big” by combining
the agility of a boutique firm with all of the capabilities of a
premier, truly global wealth manager. We continue to execute
on our operating model to move decision-making closer to
clients, better leverage global capabilities and invest in next-
generation technology. We expect these efforts to enable us to
achieve higher levels of client satisfaction, strengthen our client
relationships, increase productivity of our financial advisors and
support the organic growth of our franchise. In Latin America,
we continue to leverage our global booking model capabilities.
We regularly assess our local presence to ensure proximity to our
clients in key markets and to make sure we meet our clients’
needs for global diversification and local offerings. In 2017, we
enhanced our presence in Brazil with the acquisition of
Consenso Investimentos, the country’s largest independent
multi-family office. This transaction demonstrates our long-
standing strategic priority to grow in this key market.
In Europe, Middle East and Africa, our Western Europe
business has a long-established local presence in all major
markets. In 2017, and early 2018, we announced the acquisition
of businesses in Europe that are complementary to our strategy.
The acquisition will enable us to grow our presence in Europe
and further build our position as a key wealth manager for
Nordic clients in Europe. In line with our strategy to focus on our
main markets, we sold our domestic wealth management
operations in the Netherlands in August 2017. Outside Western
Europe, we focus on key emerging markets, for example, Russia,
Turkey and Israel.
34
In Switzerland, we collaborate closely with our colleagues in
Personal & Corporate Banking, Asset Management and the
Investment Bank. This creates opportunities to expand our
business through client referrals and generates efficiencies by
enabling us to use UBS’s extensive branch network.
We evaluate our performance against key performance
indicators and our respective targets.
→ Refer to the “Our strategy” section of this report for
information on our performance targets
→ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Products and services
Our approach to clients focuses on understanding their financial
objectives and providing solutions tailored to their individual
needs. Clients benefit from a comprehensive set of capabilities
and expertise, including wealth planning, investing, lending,
protection, philanthropy and corporate and banking services.
Investment management is a core component of this value
proposition.
strategists, and
Investment Office
Our global Chief
(CIO) draws on
investment
approximately 200 analysts,
professionals present in 10 key financial hubs globally and
leverages access to buy-side partners and client networks.
Seeking to add alpha to our clients’ portfolios, the CIO provides
clear, independent investment views, known as the UBS House
View.
The UBS House View identifies and communicates investment
opportunities and market risks to help protect and grow our
clients’ wealth over generations. We apply it to our clients’
portfolios and asset allocations, and it underpins the investment
strategies for our flagship discretionary mandates. The strategic
asset allocation is an essential part of our disciplined style of
managing our clients’ wealth and strives to ensure that our
clients remain on course to meet their financial goals over the
long term. It is complemented by our tactical asset allocation,
which uses our global expertise to help our clients navigate
markets tactically and ultimately improve the risk and return
trade-off potential of their portfolios.
Our Investment Platforms and Solutions (IPS) unit provides
clients with portfolio-based investment advice and solutions in
line with their overall investment goals. Clients can choose to
delegate their investment decisions to our team of investment
experts through a discretionary mandate. Those who wish to be
more actively involved in their investment activities can choose
to receive recommendations on an advisory basis. IPS seeks to
ensure our solutions are in step with market conditions by
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
aligning our discretionary and advisory offerings with the UBS
House View. Clients can invest in a full range of financial
instruments, from single securities across asset classes to
investment
structured products and alternative
investments. Additionally, we offer our clients advice on
structured lending and corporate finance.
funds,
We continue to develop innovative solutions to help our
clients address the challenges of an increasingly complex
financial world and to respond to their evolving needs. We have
expanded our discretionary mandate solutions to meet specific
client needs and preferences. We are also strongly committed to
broadening our sustainable and impact investment offering. For
example, in 2017, we offered our clients access to the Rise Fund,
a private equity impact investment vehicle that aims to achieve
measurable, positive social and environmental outcomes
combined with competitive financial returns.
→ Refer to the “UBS and Society” section of this report for more
information on sustainable investing products and services
Organizational structure
We are organized along regional lines, with our business areas
being the Americas, including the US, Canada and Latin
America; Europe, Middle East and Africa; Asia Pacific;
Switzerland; and the business area for our global ultra high net
worth clients.
We are governed by executive,
risk and operating
committees. In the US and Puerto Rico, we operate primarily
through UBS Financial Services Inc. and UBS Financial Services
Incorporated of Puerto Rico. Our banking services in the US
include those conducted through UBS Bank USA, a Federal
Deposit Insurance Corporation-insured depository institution
subsidiary, and branches of UBS AG. Canadian wealth
management and banking operations are conducted through
UBS Bank (Canada). Outside North America and Puerto Rico, we
mainly operate through UBS Switzerland AG and UBS AG
branches. In Europe, we further operate through UBS Europe SE.
We have a presence in more than 40 countries.
Competitors
Our main competitors include the private banking operations of
BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, HSBC,
JPMorgan Chase, Julius Baer, and the large US-based wirehouses
Morgan Stanley, Bank of America Merrill Lynch and Wells Fargo,
in addition to the banks and independent financial advisors in
each market we operate.
35
Operating environment and strategy
Personal & Corporate Banking
Personal & Corporate Banking
serve Swiss-based corporate clients operating globally. We also
assist our Swiss-based corporate clients with sustainability
measures, such as the energy check-up offered by the Energy
Agency of the Swiss Private Sector (EnAW), that contribute
toward enhancing energy efficiency, thereby reducing operating
costs.
Our clients value their relationship with us and our efforts to
provide them with superior service. In 2017, for the sixth
consecutive year, the international finance magazine Euromoney
recognizing our
named UBS Best Bank
experience, client centricity, focus on innovation, and the quality
of our employees. Additionally, and for the seventh consecutive
year, UBS was rated Best Domestic Cash Manager Switzerland
based on a survey of cash managers and chief financial officers.
in Switzerland,
Continuous employee development, including client advisor
certification, is a crucial element of our divisional strategy, as this
is our key to providing superior client service.
Moreover, we continuously strive to simplify structures and
improve client experience without
in order to
processes
compromising our risk standards.
We evaluate our performance against key performance
indicators and our respective targets.
→ Refer to the “Our strategy” section of this report for more
information on our performance targets
→ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
→ Refer to the “UBS and Society” section of this report for more
information on sustainable investing products and services
Products and services
Our private clients have access to a comprehensive life cycle-
based offering and convenient digital banking, targeting the
specific needs of day-to-day banking, retirement and investment
goals, and real estate transactions.
Our corporate and institutional clients benefit from our
financing and investment solutions, notably regarding access to
equity and debt capital markets, syndicated and structured
credit, private placements, leasing and traditional financing. Our
transaction banking offers solutions for payment and cash
management services, trade and export finance, receivable
finance, as well as global custody solutions to institutional
clients.
Business
As the leading personal & corporate banking business in
Switzerland, we provide comprehensive financial products and
in
services to private, corporate and
Switzerland. We are among the leading players in the private
and corporate
in Switzerland, with a well-
collateralized and conservatively managed lending portfolio.
institutional clients
loan market
Our business is central to UBS’s universal bank delivery model
in Switzerland. We work with the Group’s wealth management,
investment bank and asset management businesses to help our
clients receive the best products and solutions for their specific
financial needs. We are also an important source of growth for
these business divisions through client referrals. In addition, we
manage a substantial part of UBS’s Swiss infrastructure and
banking products platform, both of which are leveraged across
the Group.
Our distribution model is based on a multi-channel strategy.
With a steadily rising number of users and client interactions for
our digital banking offering, we continue to strengthen our
position as the leading multi-channel bank in Switzerland.
Strategy and clients
Our strategy focuses on promoting profitable growth while
continuously improving our banking services for clients within
Switzerland. To achieve this, we have launched Client Experience
2020, our strategic digitalization program, which aims to
strengthen our position as the leading universal bank in
Switzerland and enhance our digital leadership position.
In the personal banking business, we aspire to be the bank of
choice for private clients in Switzerland. Currently, we serve one
in three Swiss households through our branch network,
customer service centers and digital banking services. We
continue to pursue our strategy of moderately and selectively
growing our business in high-quality loans and endeavor to
expand our multi-channel offering.
In the corporate and institutional business, we want to be our
clients’ main bank. We aim to continuously improve our
profitability and capital efficiency, striving to expand our market
share in Switzerland, centered on cash flow-based lending and
our strategic advisory and trading business. Additionally, we are
selectively expanding our offering at our international hubs to
36
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
In 2017, we implemented a number of product and service
Organizational structure
innovations:
– Remote Expert: a videoconferencing tool that allows clients to
interact with our product specialists in areas such as trade
finance or cash management.
– Improvements to the UBS account opening app: clients can
now open an account via smartphone using video
identification and use paperless signing with a qualified
electronic signature for various services, including credit card
applications.
– Liquidity Cockpit: a product that uses specific business
Our divisional business is organized into Personal Banking and
Corporate & Institutional Clients, and is the core of Region
Switzerland, which in addition contains Wealth Management
Investment Bank Switzerland and Asset
Switzerland, the
Management Switzerland. The Swiss network includes around
280 branches, covering 10 geographical regions.
We are governed by executive, risk and operating committees
and operate mainly through UBS Switzerland AG.
software to help small businesses manage their liquidity.
Competitors
– KeyPort: a
connectivity
solution with multi-banking
functionality for our midsize and larger corporate clients.
– UBS Atrium: a platform that intermediates between Swiss
institutional investors looking to invest in mortgages and
owners of investment properties seeking mortgage financing.
We collaborate closely with the Investment Bank to offer
capital market and
foreign exchange products, hedging
strategies and trading capabilities, as well as corporate finance
advice. Working with Asset Management, we also provide fund
and portfolio management solutions.
In the Swiss retail business, our competitors include Credit
Suisse, PostFinance, Raiffeisen, the cantonal banks and other
regional and local Swiss banks.
In the Swiss corporate and institutional business, our main
competitors are Credit Suisse, the cantonal banks and globally
active foreign banks in Switzerland.
37
Operating environment and strategy
Asset Management
Asset Management
Business
Asset Management is a large-scale and diversified asset manager,
with an onshore presence in 23 countries. We offer investment
capabilities and investment styles across all major traditional and
alternative asset classes, as well as platform solutions and advisory
support, to institutions, wholesale intermediaries and wealth
management clients around the world.
Strategy and clients
We aim to drive profitable and sustainable growth in key
markets in Europe, Switzerland, the Americas and Asia Pacific,
including China, where we continue to expand our long-
standing presence. In 2017, Asset Management was granted a
Private Fund Management license in China, allowing us to
develop and offer onshore investment products for Chinese
institutional and high net worth investors, through our wholly
foreign-owned enterprise UBS Asset Management (Shanghai)
Limited.
To achieve our goals, we seek to strengthen our institutional
business and to accelerate the growth of our wholesale
business. Collaboration with UBS’s wealth management business
to provide best-in-class products and services to meet private
clients’ needs continues to be a core component of our strategy.
We have defined our strategic growth and efficiency priorities
with an overarching goal to deliver holistic investment and
platform solutions to our clients, by leveraging our global reach
and investment expertise.
leverage our best
To enable us to better
investment
processes, tools and systems to generate alpha and offer holistic
solutions for clients, we brought together our Equities, Fixed
Income, Solutions and single-manager hedge fund capabilities in
2017 to create an integrated business area named Investments.
We also combined our Global Real Estate, Infrastructure and
Private Equity businesses to form a new business area named
Real Estate & Private Markets.
We continue
to develop our well-established passive
capabilities, including indexed strategies and exchange-traded
funds (ETFs), where we are building on our strong position in
Asia Pacific, Europe and Switzerland.
We are committed to integrating sustainability into our active
investment capabilities, as part of our ambition to become a
leading provider of sustainable solutions for sophisticated clients.
We continue to enhance our proprietary sustainability database
and toolset and have built a dedicated sustainability research
team to work with our investment teams across asset classes.
38
To capture opportunities presented by the evolving needs of
wholesale clients, we are focused on building strategic
partnerships and expanding our platforms and advisory support
capabilities. With this in mind, in late 2017, we brought
together our three Platform Services businesses – Fondcenter,
Fund Management Services and UBS Partner – under unified
leadership within Client Coverage to best capture the growth
opportunities globally and to facilitate closer collaboration across
these capabilities.
To support our efforts to increase our operational efficiency,
we continue to invest in our operating platform and simplify our
organization. Notable developments in this regard are the
establishment of a dedicated middle-office services function and
in
the sale of our
Luxembourg and Switzerland to Northern Trust in 2017.
fund administration servicing units
We evaluate our performance against key performance
indicators and our respective targets.
→ Refer to the “Our strategy” section of this report for
information on our performance targets
→ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
→ Refer to the “UBS and Society” section of this report for more
information on sustainable investing products and services
Products and services
We offer clients a wide range of investment products and
services in different asset classes, which can be delivered,
directly or through third-party banks and distributors, in the
form of segregated, pooled or advisory mandates as well as
registered investment funds in various jurisdictions.
Our traditional and alternative capabilities include:
– Equities – global, regional and thematic strategies, as well as
high alpha, growth and quantitative styles.
– Fixed Income – global, regional and local market-based
single-sector, multi-sector and extended-sector strategies,
such as high-yield and emerging market debt, as well as
unconstrained and currency strategies.
– O’Connor – a global, single-manager hedge fund platform,
offering both multi-strategy and standalone capabilities.
– Real Estate & Private Markets – global and regional real estate
equity and debt strategies; direct infrastructure investment in
core infrastructure assets globally; and multi-manager real
estate, infrastructure and private equity strategies in broadly
diversified fund-of-funds portfolios.
– Passive and Alternative Beta – indexed, alternative beta and
rules-based
income,
strategies across equities,
commodities, real estate and alternatives, with mainstream to
highly customized benchmarks and various structures
including ETFs, pooled funds, structured funds and mandates.
fixed
– Sustainable & Impact Investing – to meet investors’ financial
and sustainability goals, we offer a wide range of sustainable
and impact investing strategies across asset classes, from
environmental, social and corporate governance integration
to impact investing including investment themes such as
social
renewable energy, environmental
integration,
and
health
demographics.
stewardship,
efficiency
resource
care,
In addition, our Solutions business offers:
– Global and regional asset allocation and currency investment
strategies across the risk
including
balanced, growth, income, risk-managed, and unconstrained
strategies.
/ return spectrum,
– Customized multi-asset solutions, advisory and fiduciary
services, including risk-managed and structured strategies,
pension risk management and outsourced Chief Investment
Office services.
– Multi-manager hedge fund solutions and advisory services,
and manager selection for traditional asset classes.
Our Platform Services business offers:
– Fondcenter: our leading fund platform in Europe and
Switzerland connecting distribution partners with fund
providers.
– Fund Management Services: offering fund management
company, white-labeling and representative services.
– UBS Partner: our innovative modular platform providing
banks with powerful tools and analytics to support their
advisory offering and enable them to significantly enhance
their end clients’ experience.
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Organizational structure
Our business is organized by the products and services we offer,
our business areas being: Client Coverage, Investments, Real
Estate & Private Markets, Products & Solutions and the Chief
Operating Officer area. Our business is driven out of eight main
hubs: Chicago, Hong Kong, London, New York, Singapore,
Sydney, Tokyo and Zurich. We are governed by executive, risk
and operating committees.
Competitors
Our main competitors include global firms with wide-ranging
capabilities and distribution channels, such as Amundi,
BlackRock, Deutsche Asset Management, Goldman Sachs Asset
Management, Invesco, J.P. Morgan Asset Management, Morgan
Investment Management and Schroders. Other
Stanley
competitors include firms with a specific market or asset class
focus.
39
Operating environment and strategy
Investment Bank
Investment Bank
Business
The Investment Bank provides investment advice, financial
solutions and capital markets access in over 35 countries, with
principal offices in all major financial centers. We serve
corporate, institutional and wealth management clients across
the globe and partner with our wealth management, personal
and corporate banking and asset management businesses.
The business division is organized into Corporate Client
Solutions and Investor Client Services, which also includes UBS
Securities Research. Our specialist teams work closely together,
complementing our global product offering with their regional
expertise. This enables us to understand our clients and provide
services tailored to their investment and financing needs.
Strategy and clients
We aspire to provide best-in-class services and solutions to our
corporate, institutional and wealth management clients, through
an integrated, solutions-led approach, driven by our intellectual
capital and leveraging our award-winning electronic platforms.
With our client-centric business model, we partner with our
wealth management, personal and corporate banking and asset
management businesses, and we believe we are well positioned
to provide our clients with market insight, global coverage of
markets and products, and execution services.
Our focus remains on our traditional strengths in our
advisory, capital markets, equities and foreign exchange
businesses, complemented by a rates and credit platform, to
deliver attractive and sustainable risk-adjusted returns. Using our
powerful research and technology capabilities, we develop
integrated solutions to support our clients as they adapt to
evolving market structures, driven by changes to the regulatory,
technological, economic and competitive landscape.
We continue to invest in talent and technology and to
strengthen our operational risk framework. We continue to
develop and foster a shared culture across the Investment Bank.
In 2017, implementation of our technology plan remained
critical in making our platform for clients more effective and
simplifying our processes.
40
We operate a tightly controlled balance sheet, risk-weighted
assets and leverage ratio denominator allocation process to
support our goal of earning attractive returns on allocated
capital. We evaluate our performance against key performance
indicators and our respective targets.
→ Refer to the “Our strategy” section of this report for more
information on our performance targets and expectations
→ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Products and services
Corporate Client Solutions
In Corporate Client Solutions, we advise our clients on strategic
business opportunities and help them raise capital to fund their
activities. Together with Investor Client Services, we offer a full-
includes the distribution and risk
service solution, which
financing
management of capital markets products and
solutions. The main business lines are:
– Advisory consults clients on matters such as mergers and
acquisitions, spin-offs, exchange offers, leveraged buyouts,
joint ventures, exclusive sales,
takeover
defense and corporate broking.
restructurings,
– Equity Capital Markets offers comprehensive equity capital-
raising services, as well as related derivative products. This
includes managing
initial public offerings and private
placements, as well as equity-linked transactions and other
strategic equities solutions.
– Debt Capital Markets provides financing advice and helps
clients raise various types of debt capital, as well as hedge the
resulting exposures.
– Financing Solutions provides customized solutions across
asset classes via a wide range of financing capabilities,
including structured, real estate and special situations
financing.
– Risk Management includes corporate lending and associated
hedging activities.
Investor Client Services
In Investor Client Services, we enable our clients to buy and sell
securities on capital markets across the globe and to manage
their risks and liquidity. The businesses are:
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Equities
As one of the world’s largest equities houses and leading equity
market participants in the primary and secondary markets, we
distribute, structure, execute, finance and clear equity cash and
derivative products. The main business lines are:
– Cash offers trade execution and clearing for single stocks and
portfolios through both traditional and electronic channels,
along with investment advisory and consultancy services.
– Derivatives enables clients to manage risk and meet funding
requirements through a wide range of listed and over-the-
counter equity derivative
instruments. We create and
distribute structured products and notes, enabling our clients
to optimize their investment returns.
– Financing Services provides our hedge fund and institutional
integrated platform for financing
clients with a fully
transactions, which includes prime brokerage. In addition, we
execute and clear exchange-traded equity derivatives in more
than 45 markets globally.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit provides execution services
and solutions with an emphasis on electronic trading and
maintains high levels of balance sheet velocity. The main
business lines are:
– Foreign Exchange helps our clients manage their currency
exposures and is recognized as one of the leading foreign
exchange market-makers as well as the market leader in
precious metals.
– Rates and Credit encompasses sales, trading and market-
making in a selected range of rates and credit products. In
addition, we work closely with Corporate Client Solutions,
providing support to our debt capital markets businesses and
tailoring customized financing solutions for our clients.
UBS IB Research
In UBS IB Research, we offer clients key insights on securities in
major financial markets around the globe. Together with UBS
Evidence Lab, UBS research analysts refine investor questions
into testable propositions and apply various primary research
methods, such as quantitative market research, digital footprint
analysis, geospatial analysis or data science. In 2017, UBS was
named Institutional
Investor magazine’s Top Global Equity
Research Firm of the Year. The recognition of this award
positions us well under the new Markets in Financial Instruments
Directive II (MiFID II) environment, where we continue to focus
on our clients’ needs with a differentiated approach to question-
driven, evidence-based research.
Organizational structure
Our business is organized along the products and services
described above and has a global reach.
We are governed by executive, risk and operating committees
and operate through UBS AG branches and other subsidiaries of
UBS Group. Securities activities in the US are conducted mainly
through UBS Securities LLC, a registered broker-dealer. In the
UK, Investment Bank activities are conducted mainly out of UBS
AG London Branch and UBS Limited.
Competitors
Our main competitors are the major global investment banks,
including Bank of America Merrill Lynch, Barclays, Citigroup,
Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase
and Morgan Stanley.
41
Corporate Center – Services
Corporate Center – Services consists of the Group Chief
Operating Officer area
(Group Corporate Services, Group
Human Resources, Group Operations, Group Sourcing and
Group Technology), Group Finance (excluding Group ALM),
Group Legal, Group Risk Control, Group Communications &
Branding, Group Regulatory & Governance, and UBS and
Society.
The functions within Corporate Center – Services partner with
business divisions and other Corporate Center units through a
service-based operating model, managing services from a
quality, risk and cost perspective in order to achieve operational
and financial efficiencies. Corporate Center – Services allocates
the majority of its operating expenses to the business divisions
and other Corporate Center units. As part of the annual
business planning cycle, Corporate Center – Services agrees with
the business divisions and other Corporate Center units on
projected cost allocations for services provided, depending on
expected capital and service consumption levels as well as the
nature of the service performed. Since 2017, Corporate Center –
Services allocates expenses based on actual costs incurred using
service-based billing, providing cost transparency and enabling
cost management. In 2015 and 2016, where costs incurred were
different from those expected, Corporate Center – Services
recognized over- and under-recoveries.
Operating expenses remaining in Corporate Center – Services
after allocations relate mainly to Group governance and other
corporate activities, certain strategic and regulatory projects and
certain retained restructuring expenses.
Operating environment and strategy
Corporate Center
Corporate Center
Corporate Center provides services to the Group through the
reporting units Corporate Center – Services and Group Asset
and Liability Management (Group ALM). Corporate Center also
includes the Non-core and Legacy Portfolio unit.
Priorities and initiatives
Our Corporate Center functions strive to provide best-in-class
services to the Group based on commercially sound service
transparency on both
including
management principles,
qualitative and quantitative components of the services offered.
Specifically in the areas of finance, risk management and
control, and legal, we aim to provide high-quality advice and
solutions, while optimizing resources and mitigating risk. In
other areas such as compliance, human resources, information
technology, operations and marketing and communications, we
align services based on demand and delivery of defined
strategies. Moreover, we continue to focus on achieving greater
effectiveness and efficiency through the strategic levers of
workforce and footprint, organization and process optimization
and technology.
All Corporate Center functions are represented in onshore,
nearshore and offshore locations that allow us to tap into larger
talent pools and realize efficiencies by reducing our footprint in
high-cost real estate locations. As of 31 December 2017, 36%
of Corporate Center employees and contractors were in offshore
or nearshore locations compared with 18% as of 31 December
2013.
We seek to increase value by leveraging common capabilities
and creating centralized functions. In 2017, we successfully
completed the transfer of substantially all shared services
functions to our separate Group service companies, which, in
addition to meeting regulatory requirements, allows us to
further strengthen our approach to service management while
remaining efficient in the way we operate. In our technology
landscape, we continue to upgrade our infrastructure, simplify
our portfolio of applications and deliver digital innovation, such
as artificial intelligence.
→ Refer to the “Our strategy” section of this report for more
information
→ Refer to the “Our evolution” section of this report for more
information
42
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Roles and responsibilities within Corporate Center – Services
HHead of Group
functions
GGroup Chief
Financial Officer1
RResponsibilities
–
–
–
Is responsible for ensuring transparency in, and the assessment of, the financial performance of the Group and business divisions, and for the Group’s financial
accounting, controlling, forecasting, planning and reporting processes
Is responsible for treasury and capital management, including management and control of funding and liquidity risk with independent oversight from the
Group Chief Risk Officer, and for UBS’s regulatory capital ratios
Ensures asset and liability management by balancing consumption of the Group’s financial resources through consolidation and management of the Group’s
structural risks, enabling sustainable earnings generation
– Manages and controls the Group’s tax affairs
– Manages the divisional and Group financial control functions
– Makes proposals to the Board of Directors (BoD) regarding the accounting standards adopted by the Group, and defines financial reporting and disclosure
standards, after consultation with the Audit Committee of the BoD
Provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act of 2002, together with the Group Chief Executive Officer (CEO)
–
– Coordinates the working relationship with external auditors under the supervision of the Audit Committee of the BoD
Supports the CEO in strategy development and key strategic topics
–
–
Provides advice on financial aspects of strategic projects and transactions
– Manages relations with investors and analysts, in coordination with the CEO
GGroup Chief
Operating Officer
–
Provides quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Center
functions
– Delivers a wide range of operational services across all business divisions and regions
–
Efficiently supplies real estate infrastructure and general administrative services, directs and controls all supply and demand management activities, supports
the Group with its third-party sourcing strategies and takes responsibility for the Group’s nearshore, offshore, outsourcing and supplier-related processes
Formulates and agrees Group-wide operating strategies, objectives, and financial and execution plans for the Group Chief Operating Officer function in support
of each business division and the Group functions
–
– Delivers cross-divisional operational initiatives to enhance the Group’s operating platform
– Defines and executes a human resources strategy aligned with UBS’s objectives and positions the Group as an employer of choice
–
Ensures cost-efficient operational and advisory human resources services to employees as well as strategic advice to managers and executives, supporting them
to attract, engage, develop and retain talent
GGroup Chief Risk
Officer
– Manages the divisional, regional and firm-wide risk control functions and monitors and challenges the Group’s risk-taking activities
– Develops the Group’s risk appetite framework and its risk principles
− In accordance with the risk appetite framework approved by the BoD, is responsible for:
(i) implementing appropriate independent control frameworks for the Group’s credit, market, treasury, country, compliance and operational risks
(ii) developing and implementing the frameworks for risk measurement, aggregation, portfolio controls and for risk reporting
(iii) authorizing transactions, positions, exposures, portfolio limits, and credit risk provisions and allowances in accordance with the risk control authorities
delegated to this role
− Maintains a control framework to ensure that UBS meets relevant regulatory and professional standards in the conduct of its business
GGroup General
Counsel
– Manages the Group’s legal affairs and is responsible for ensuring effective and timely assessment of legal matters impacting the Group or its business and for
providing the legal advice required by the Group
– Manages and reports all litigation and other significant contentious matters, including all legal proceedings, that involve UBS
– Manages and supervises the legal function of the Group
GGroup Head
Communications
& Branding
– Manages UBS’s corporate and brand communication to its stakeholders in alignment with the Group’s overall strategy
– Develops UBS’s communications strategy, content and positioning with the primary purpose to build and protect the Group’s reputation and brand
– Manages and coordinates Group-wide marketing communications activities, including partnership marketing and sponsorship measures
–
Provides shared service delivery of Group-wide communication channels
GGroup Head
Regulatory &
Governance
– Develops a coherent and effective governmental policy and regulatory strategy and coordinates key external relationships
– Manages the Strategic Regulatory Initiatives portfolio and oversees the planning and execution of relevant initiatives
–
Establishes global and local recovery and resolution planning and develops key resolvability improvement measures
– Designs the Group’s legal entity structure and further develops coherent corporate governance standards
– Governs the Group’s investigation portfolio and performs important investigations
HHead UBS and
Society
Is UBS’s senior-level representative for sustainability issues
–
– Manages UBS and Society, which covers all of UBS’s activities related to sustainable investing, philanthropy, environmental and human rights policies
governing client and supplier relationships, its environmental footprint, as well as community investment
– Develops the UBS and Society strategy and ensures its execution across divisions and regions through chairmanship of the UBS and Society Operating
Committee
1 Relates to responsibilities for both Corporate Center – Services and Corporate Center – Group ALM.
43
include managing the Group’s HQLA and long-term debt
portfolios. The net positive or negative income generated
through these activities is allocated to the business divisions and
other Corporate Center units based on their consumption of the
underlying risks. This consumption is determined by various
liquidity and funding models and, to reduce volatility, is
allocated using stable, internal benchmark rates rather than
actual income earned by Group ALM. Net positive or negative
income not arising as a result of business division consumption is
retained by Group ALM.
As part of its risk management activities, Group ALM enters
into derivative hedges to manage the economic and the interest
rate risk of the different portfolios. The results of certain
hedging activities, including any non-economic volatility caused
by the applicable accounting treatment, are retained by Group
ALM.
Corporate Center – Non-core and Legacy Portfolio
Non-core and Legacy Portfolio manages legacy positions from
businesses exited by the Investment Bank, and is overseen by a
committee chaired by the Group Chief Risk Officer.
Non-core and Legacy Portfolio pursues a primarily passive
wind-down strategy, focusing on a disciplined reduction of risk-
weighted assets, leverage ratio denominator and costs. Positions
are managed and exited over time with the objective of
maximizing shareholder value. Non-core and Legacy Portfolio
also includes positions relating to legal matters arising from
businesses that were transferred to it at the time of its
formation.
→ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
Operating environment and strategy
Corporate Center
Corporate Center – Group ALM
Group ALM manages the structural risks of our balance sheet,
including interest rate risk in the banking book, currency risk and
collateral risk, as well as the risks associated with the Group’s
liquidity and funding portfolios. Group ALM also seeks to
optimize the Group’s financial performance by matching assets
and liabilities within the context of the Group’s liquidity, funding
and capital targets and constraints. Group ALM serves all
business divisions and other Corporate Center units through
three main risk management areas, and its risk management is
fully integrated into the Group’s risk governance framework.
Business
division-aligned
risk management
activities
performed on behalf of business divisions and other Corporate
Center units include managing the interest rate risk in the
banking book on behalf of Global Wealth Management and
Personal & Corporate Banking, high-quality liquid asset (HQLA)
portfolios on behalf of specific business divisions as well as risk
management of credit, debit and funding valuation adjustments
for our over-the-counter derivatives portfolio. Net income
generated by these activities is fully allocated to the associated
business divisions and Corporate Center units.
Capital investment and issuance activities consist of managing
the Group’s equity and capital
instruments as well as
instruments that contribute to our total loss-absorbing capacity
(TLAC). Revenues from investing the Group’s equity and the
incremental expenses of issuing capital and TLAC instruments at
the UBS Group AG level relative to issuing senior debt out of
operating subsidiaries are fully allocated to the business divisions
and other Corporate Center units based on their attributed
portion of the Group’s equity.
Group structural risk management activities are performed to
meet overall Group-wide risk management objectives. They
44
Risk factors
Certain risks, including those described below, may affect our
ability to execute our strategy or our business activities, financial
condition, results of operations and prospects. Because a broad-
based international financial services firm such as UBS is
inherently exposed to multiple risks, many of which become
apparent only with the benefit of hindsight, risks of which we
are not presently aware or which we currently do not consider
to be material could also adversely affect us. The order of
presentation of the risk factors below does not indicate the
likelihood of their occurrence or the potential magnitude of their
consequences.
Market conditions and fluctuations may have a
detrimental effect on our profitability, capital strength,
liquidity and funding position
Low and negative interest rates in Switzerland and the eurozone
have negatively affected our net interest income: A continuing
low or negative interest rate environment may further erode
interest margins and adversely affect the net interest income
generated by our Personal & Corporate Banking and Global
Wealth Management businesses. Our performance is also
affected by the cost of maintaining the high-quality liquid assets
(HQLA) required to cover regulatory outflow assumptions
embedded in the liquidity coverage ratio (LCR).
The Swiss National Bank permits Swiss banks to make
deposits up to a threshold at zero interest. Any reduction in or
limitations on the use of this exemption from the otherwise
applicable negative interest rates could exacerbate the effect of
negative interest rates in Switzerland. Low and negative interest
rates may also affect customer behavior and hence our overall
balance sheet structure. Mitigating actions that we have taken,
or may take in the future, such as the introduction of selective
deposit fees or minimum lending rates, have resulted and may
further result in the loss of customer deposits, a key source of
our funding, net new money outflows and / or a declining
market share in our domestic lending business.
Our equity and capital are also affected by changes in interest
rates. In particular, the calculation of our Swiss pension plan net
defined benefit assets and liabilities is sensitive to the discount
rate applied. Any further reduction in interest rates may lower
the discount rates and result in pension plan deficits due to the
long duration of corresponding liabilities. This would lead to a
corresponding reduction in our equity and fully applied common
equity tier 1 (CET1) capital.
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
We are subject to risk from currency fluctuations: We prepare
our consolidated financial statements in Swiss francs. However,
a substantial portion of our assets, liabilities, invested assets,
revenues and expenses, equity of foreign operations and risk-
weighted assets (RWA) are denominated in US dollars, euros,
British pounds and in other foreign currencies. Accordingly,
changes in foreign exchange rates may adversely affect our
profits, balance sheet, including deferred tax assets, and capital,
leverage and liquidity ratios. In particular, the portion of our
operating income denominated in non-Swiss franc currencies is
greater than the portion of operating expenses denominated in
non-Swiss franc currencies. Therefore, the appreciation of the
Swiss franc against other currencies generally has an adverse
effect on our profits, in the absence of any mitigating actions.
In order to hedge our CET1 capital ratio, CET1 capital needs
to have foreign currency exposure, leading to currency sensitivity
of CET1 capital. As a consequence, it is not possible to
simultaneously fully hedge both the amount of capital and the
capital ratio. As the proportion of RWA denominated in non-
Swiss franc currencies outweighs the capital in these currencies,
a significant appreciation of the Swiss franc against these
currencies could benefit our capital ratios, while a significant
depreciation of the Swiss franc against these currencies could
adversely affect our capital ratios.
→ Refer to the “Current market climate and industry trends”
section of this report for more information
Substantial changes in the regulation of our businesses
may adversely affect our business and our ability to
execute our strategic plans
the 2007–2009
Fundamental changes in the laws and regulations affecting
financial institutions can have a material and adverse effect on
our business. Following
financial crisis,
regulators and legislators have adopted a wide range of changes
to the laws, regulations and supervisory frameworks applicable
to banks intended to address the perceived causes of the crisis
and to limit the systemic risks posed by major financial
institutions. These changes have caused us to make significant
changes in our businesses and strategy and to move significant
operations into subsidiaries to improve our resolvability or meet
regulatory requirements, resulting in substantial implementation
costs, increased our capital and funding costs and reduced
operational flexibility. Although many of the regulatory changes
have been completed, a number of these changes are being
phased in over time or require further rulemaking or guidance
for
still under
consideration. There remains significant uncertainty regarding a
number of the measures referred to above.
implementation. Certain
changes are
45
our subsidiaries must comply with minimum capital, liquidity and
similar requirements and as a result UBS Group AG and UBS AG
have contributed a significant portion of their capital and
provide substantial liquidity to them. These funds are available to
meet funding and collateral needs in the relevant jurisdictions,
but are generally not readily available for use by the Group as a
whole.
Banking structure and activity limitations: We have made
significant changes in our legal and operational structure to
meet legal and regulatory requirements and expectations. For
example, we have transferred all of our US subsidiaries under a
US intermediate holding company to meet US regulatory
requirements and substantially all the operations of Personal &
Corporate Banking and Wealth Management booked
in
Switzerland to UBS Switzerland AG to improve our resolvability.
These changes, particularly the transfer of operations to
subsidiaries, such as our US intermediate holding company and
UBS Switzerland AG, require significant time and resources to
implement and create operational, capital, liquidity, funding and
tax inefficiencies. In addition, they may increase our aggregate
credit exposure to counterparties as they transact with multiple
entities within the UBS Group. Our operations in subsidiaries are
subject to local capital, liquidity, stable funding, capital planning
and stress testing requirements. These requirements have
resulted in increased capital and liquidity requirements in
affected subsidiaries, which limit our operational flexibility and
negatively affect our ability to benefit from synergies between
business units and to distribute earnings to the Group.
In
the US, we have
incurred substantial costs
for
implementing our compliance and monitoring framework in
connection with the Volcker Rule under the Dodd-Frank Act. We
have also been required to modify our business activities both
inside and outside the US to conform to the Volcker Rule’s
activity limitations. The Volcker Rule may also have a substantial
impact on market liquidity and the economics of market-making
activities. We may incur additional costs in the short term if
aspects of the Volcker Rule are repealed or modified. We may
become subject to other similar regulations substantively limiting
the types of activities in which we may engage or the way we
conduct our operations. If adopted as proposed, the rule on
single counterparty risk proposed by the US Federal Reserve
Board may affect how we conduct our operations in the US,
including our use of other financial firms for payments and
securities clearing services and as transactional counterparties.
Operating environment and strategy
Risk factors
Notwithstanding attempts by regulators to align their efforts,
the measures adopted or proposed differ significantly across the
major jurisdictions, making it increasingly difficult to manage a
global institution like UBS. Swiss regulatory changes with regard
to such matters as capital and liquidity have often proceeded
more quickly than those in other major jurisdictions, and the
requirements for Swiss major international banks are among the
strictest of the major financial centers. This could put Swiss
banks such as UBS at a disadvantage when they compete with
peer financial institutions subject to more lenient regulation or
with unregulated non-bank competitors.
Higher capital and total loss-absorbing capacity requirements
increase our costs: As an internationally active Swiss systemically
relevant bank (SRB), we are subject to capital and total loss-
absorbing capacity (TLAC) requirements that are among the
most stringent in the world. New Swiss SRB capital requirements
impose significantly higher requirements based on RWA and a
significantly higher leverage ratio requirement. In addition, we
are required to maintain minimum levels of TLAC measured
based on both our RWA and the leverage ratio denominator.
from changes
in
methodology, add-ons in the calculation of RWA and other
changes in 2018 and 2019. Changes to international capital
standards for banks recently adopted by the Basel Committee on
Banking Supervision are expected to further increase our RWA
when the standards are scheduled to become effective in 2022.
We also expect that we will incur significant costs to implement
the proposed changes.
in our RWA
We expect
increases
Liquidity and funding: The requirements to maintain an LCR
of HQLA to estimated stressed short-term net cash outflows, the
proposed requirement to maintain a net stable funding ratio
(NSFR), and other similar liquidity and funding requirements we
are subject to, oblige us to maintain high levels of overall
liquidity, limit our efforts to optimize interest income and
expense, make certain lines of business less attractive and
reduce our overall ability to generate profits. Both the LCR and
NSFR requirements are intended to ensure that we are not overly
reliant on short-term funding and that we have sufficient long-
term funding for illiquid assets, and the relevant calculations
make assumptions about the relative likelihood and amount of
outflows of funding and available sources of additional funding
in market- and firm-specific stress situations. There can be no
assurance that in an actual stress situation our funding outflows
would not exceed the assumed amounts. Moreover, many of
46
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
Resolvability and resolution and recovery planning: Under the
Swiss too big to fail (TBTF) framework, we are required to put in
place viable emergency plans to preserve the operation of
systemically important functions in the event of a failure.
Moreover, under the Swiss TBTF framework and similar
regulations in the US, the UK, the EU and other jurisdictions in
which we operate, we are required to prepare credible recovery
and resolution plans detailing the measures that would be taken
to recover in the event of a significant adverse event or to wind
down the Group or the operations in a host country through
resolution or insolvency proceedings. We have made changes to
the legal structure of the Group to improve the viability of our
recovery and resolution plans and may be required in the future
to make further changes to our legal structure, operations, or
liquidity and funding plans to enable our recovery and resolution
plans to meet regulatory expectations. If a recovery or resolution
plan that we are required to produce in a jurisdiction is
determined by the relevant authority to be inadequate or not
credible, relevant regulation may permit the authority to place
limitations on the scope or size of our business in that
jurisdiction, oblige us to hold higher amounts of capital or
liquidity, or to change our legal structure or business in order to
remove the relevant impediments to resolution.
The Swiss Banking Act and implementing ordinances provide
FINMA with significant powers to intervene in order to prevent a
failure of, or to resolve, a failing financial institution. FINMA has
considerable discretion in determining whether, when, or in
what manner to exercise such powers. In case of a threatened
insolvency, FINMA may impose more onerous requirements on
us, including restrictions on the payment of dividends and
interest. FINMA could also require us, directly or indirectly, for
example, to alter our legal structure, including by separating
lines of business into dedicated entities, with limitations on intra-
Group funding and certain guarantees, or to further reduce
business risk levels in some manner. FINMA also has the ability
to write down or convert into common equity the capital
instruments and other liabilities of UBS Group AG, UBS AG and
UBS Switzerland AG in connection with a resolution. Refer to “If
we experience financial difficulties, FINMA has the power to
open resolution or liquidation proceedings or impose protective
measures in relation to UBS Group AG, UBS AG or UBS
Switzerland AG, and such proceedings or measures may have a
material adverse effect on our shareholders and creditors”
below.
Substantial changes in market regulation have affected and
will continue to affect how we conduct our business: The revised
Markets in Financial Instruments Directive and the associated
Regulation (MiFID II / MiFIR) took effect on 3 January 2018.
MiFID II, among other things, introduces substantial new
regulation of exchanges and trading venues, including new pre-
trade and post-trade transparency requirements, a ban on the
practice of using commissions on transactions to compensate for
research services and substantial new conduct requirements for
clients.
financial
Implementation by the G20 countries of the commitment to
dealing with
firms when
services
require all standardized over-the-counter
(OTC) derivative
contracts to be traded on exchanges or trading facilities and
cleared through central counterparties has had and will continue
to have a significant effect on our OTC derivatives business,
which is conducted primarily in the Investment Bank. These
market changes are likely to reduce the revenue potential of
certain lines of business for market participants generally, and
we may be adversely affected. For example, we expect that, as a
rule, the shift of OTC derivatives trading to a central clearing
model will tend to reduce profit margins in these products and
the changes introduced by MiFID II may result in a reduction in
commission rates and trading margins. Also, these laws may
have a material impact on the market infrastructure that we use,
available platforms, collateral management and the way we
interact with clients, and may cause us to incur material
implementation costs. Margin requirements for non-cleared OTC
derivatives have required significant changes to collateral
agreements with counterparties and our clients’ operational
implementation of these
processes.
changes is ongoing, while rulemaking and implementation are
delayed in others. This may result in market dislocation,
disruption of cross-border trading, and concentration of
counterparty trading. It also affects our ability to implement the
required changes and may limit our ability to transact with
clients.
jurisdictions
In some
Some of the regulations applicable to UBS AG as a registered
swap dealer with the Commodity Futures Trading Commission
(CFTC) in the US, and certain regulations that will be applicable
when UBS AG registers as a security-based swap dealer with the
SEC, apply to UBS AG globally, including those relating to swap
data reporting, record-keeping, compliance and supervision. As
a result, in some cases US rules will likely duplicate or conflict
with legal requirements applicable to us elsewhere, including in
Switzerland, and may place us at a competitive disadvantage to
firms that are not required to register in the US with the SEC or
CFTC.
In many instances, we provide services on a cross-border
basis, and we are therefore sensitive to barriers restricting
market access for third-country firms. In particular, efforts in the
EU to harmonize the regime for third-country firms to access the
European market may have the effect of creating new barriers
that adversely affect our ability to conduct business in these
jurisdictions from Switzerland.
In addition, a number of
jurisdictions are increasingly regulating cross-border activities
based on determinations of equivalence of home country
regulation, substituted compliance or similar principles of
comity. A negative determination could limit our access to the
market in those jurisdictions and may negatively influence our
ability to act as a global firm. In addition, as such determinations
are typically applied on a jurisdictional level rather than on an
entity level, we will generally need to rely on jurisdictions’
willingness to collaborate.
→ Refer to the “Regulation and supervision” and “Regulatory and
legal developments” sections of this report for more
information
47
Operating environment and strategy
Risk factors
If we are unable to maintain our capital strength, this may
adversely affect our ability to execute our strategy, our
client franchise and our competitive position
Maintaining our capital strength is a key component of our
strategy. It enables us to support the growth of our businesses
as well as to meet potential regulatory changes in capital
requirements. It reassures our stakeholders, forms the basis for
our capital return policy and contributes to our credit ratings.
Our capital ratios are determined primarily by RWA, eligible
capital and leverage ratio denominator (LRD), all of which may
fluctuate based on a number of factors, some of which are
outside our control.
Our eligible capital may be reduced by losses recognized
within net profit or other comprehensive income. Eligible capital
may also be reduced for other reasons, including certain
reductions in the ratings of securitization exposures, acquisitions
and divestments changing the level of goodwill, adverse
currency movements affecting the value of equity, prudential
adjustments that may be required due to the valuation
uncertainty associated with certain types of positions, and
changes in the value of certain pension fund assets and liabilities
or in the interest rate and other assumptions used to calculate
the changes in our net defined benefit obligation recognized in
other comprehensive income.
RWA are driven by our business activities, by changes in the
risk profile of our exposures, by changes in our foreign currency
exposures and foreign exchange rates and by regulation. For
instance, substantial market volatility, a widening of credit
spreads, which is a major driver of our value-at-risk, adverse
currency movements, increased counterparty risk, deterioration
in the economic environment or increased operational risk could
result in a rise in RWA. We have significantly reduced our market
risk and credit risk RWA in recent years. However, increases in
operational risk RWA, particularly those arising from litigation,
regulatory and similar matters, and regulatory changes in the
calculation of RWA and regulatory add-ons to RWA have offset
a substantial portion of this reduction. Changes
in the
calculation of RWA or, as discussed above, the imposition of
additional supplemental RWA charges or multipliers applied to
certain exposures and other methodology changes, as well as
the
implementation of the recently adopted changes to
international capital standards for banks, could substantially
increase our RWA. In addition, we may not be successful in our
plans to further reduce RWA, either because we are unable to
carry out fully the actions we have planned or because other
business or regulatory developments or actions counteract the
effects of our actions.
The leverage ratio is a balance sheet-driven measure and
limits balance sheet-intensive activities, such as
therefore
lending, more than activities that are less balance sheet
intensive, and it may constrain our business activities even if we
satisfy other risk-based capital requirements. Our LRD is driven
by, among other things, the level of client activity, including
deposits and loans, foreign exchange rates, interest rates and
other market factors. Many of these factors are wholly or
partially outside our control.
→ Refer to the “Regulatory and legal developments” section of
this report for more information
We may not be successful in the ongoing execution of our
strategic plans
Over the last six years, we have transformed our business to
focus on our wealth management businesses and our universal
bank in Switzerland, complemented by Asset Management and
a significantly smaller Investment Bank; substantially reduced the
RWA and LRD usage in our Corporate Center – Non-core and
Legacy Portfolio; and made significant cost reductions. We have
recently provided an update on the execution of our strategy
and updated our performance targets and provided guidance on
capital and resources. Risk remains that we may not succeed in
executing our strategy or achieve our performance targets, or
may be delayed in doing so. Market events or other factors may
adversely affect our ability
to achieve our objectives.
Macroeconomic conditions, geopolitical uncertainty, changes to
regulatory requirements and the continuing costs of meeting
these requirements have prompted us to adapt our targets in
the past and we may need to do so again in the future.
As part of our strategic plans, we expect to continue to make
significant expenditures on technology and infrastructure to
improve our client experience, improve and further enable digital
offerings and increase efficiency. There is a risk that our
investments in new technology will not fully achieve our
objectives or improve our ability to attract and retain customers.
In addition, we may face competition in providing digitally
enabled offerings from both existing competitors and new
financial service providers in various portions of the value chain.
Our ability to develop and implement competitive digitally
enabled offerings and processes will be an important factor in
our ability to compete.
Moreover, the continued illiquidity and complexity of many of
our legacy risk positions remaining in Corporate Center – Non-
core and Legacy Portfolio could make it difficult to sell or
otherwise exit these positions and there remains a risk that we
could incur significant losses in doing so.
48
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
As part of our strategy, we also have programs under way
that seek to improve our operating efficiency, in part by
controlling our costs. A number of factors could negatively
affect our plans. We may not be able to identify feasible cost
reduction opportunities that are also consistent with our
business goals, and cost reductions may be realized later or may
be less than we anticipate. Higher temporary and permanent
regulatory costs and higher business demand than we had
originally anticipated have partly offset our cost reductions and
delayed the achievement of our cost reduction targets in the
past, and we could continue to be challenged in the execution
of our ongoing plans.
Changes in our workforce as a result of outsourcing,
nearshoring or offshoring or staff reductions may introduce new
operational risks that, if not effectively addressed, could affect
our ability to recognize the desired cost and other benefits from
such changes or could result in operational losses. Such changes
can also lead to expenses recognized in the income statement
well in advance of the cost savings intended to be achieved
through such workforce strategy, for example, if provisions for
real estate lease contracts need to be recognized or when, in
connection with the closure or disposal of non-profitable
losses previously
operations,
recorded in other comprehensive income are reclassified to the
income statement.
foreign currency
translation
As we implement our effectiveness and efficiency programs,
we may also experience unintended consequences, such as the
loss or degradation of capabilities that we need in order to
maintain our competitive position, achieve our targeted returns
or meet existing or new
requirements and
expectations.
regulatory
→ Refer to the “Our strategy” section of this report for more
information
Material legal and regulatory risks arise in the conduct of
our business
As a global financial services firm operating in more than 50
countries, we are subject to many different legal, tax and
regulatory regimes, and we are subject to extensive regulatory
oversight and exposed to significant liability risk. We are subject
to a large number of claims, disputes, legal proceedings and
government investigations, and we expect that our ongoing
business activities will continue to give rise to such matters in the
future. The extent of our financial exposure to these and other
matters is material and could substantially exceed the level of
provisions that we have established. We are not able to predict
the financial and non-financial consequences these matters may
have when resolved. Resolution of regulatory proceedings may
require us to obtain waivers of regulatory disqualifications to
terminate
suspend or
maintain certain operations, may entitle regulatory authorities to
regulatory
limit,
authorizations, and may permit financial market utilities to limit,
suspend or terminate our participation in them. Failure to obtain
such waivers, or any limitation, suspension or termination of
licenses, authorizations or participations, could have material
consequences for us.
licenses
and
Our settlements with governmental authorities in connection
with foreign exchange, LIBOR and benchmark interest rates
starkly illustrate the significantly increased level of financial and
reputational risk now associated with regulatory matters in
major jurisdictions. In connection with investigations related to
LIBOR and other benchmark rates and to foreign exchange and
precious metals, very large fines and disgorgement amounts
were assessed against us, and we were required to enter guilty
pleas, despite our full cooperation with the authorities in the
investigations, and despite our receipt of conditional leniency or
conditional immunity from antitrust authorities in a number of
jurisdictions, including the US and Switzerland.
Ever since our material losses arising from the 2007–2009
financial crisis, we have been subject to a very high level of
regulatory scrutiny and to certain regulatory measures that
constrain our strategic flexibility. While we believe that we have
remediated the deficiencies that led to those losses as well as to
the unauthorized trading incident announced in September
2011, the effects on our reputation and relationships with
regulatory authorities of the LIBOR-related settlements of 2012
and settlements with some regulators of matters related to our
foreign exchange and precious metals business have resulted in
continued scrutiny. We are also subject to significant new
regulatory requirements,
including recovery and resolution
planning, US enhanced prudential standards and Comprehensive
Capital Analysis and Review (CCAR). Our implementation of
additional regulatory requirements and changes in supervisory
standards will likely receive heightened scrutiny from supervisors.
If we do not meet supervisory expectations in relation to these
or other matters, or have additional supervisory or regulatory
issues, we would likely be subject to continued regulatory
scrutiny as well as measures that might further constrain our
strategic flexibility. We are in active dialog with our regulators
concerning the actions that we are taking to improve our
operational risk management, control, anti-money laundering,
data management and other frameworks and otherwise seek to
meet supervisory expectations, but there can be no assurance
that our efforts will have the desired effects. As a result of this
history, our level of risk with respect to regulatory enforcement
may be greater than that of some of our peers.
→ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
49
Operating environment and strategy
Risk factors
Operational risks affect our business
third parties,
Our businesses depend on our ability to process a large number
of transactions, many of which are complex, across multiple and
diverse markets
in different currencies, to comply with
requirements of many different legal and regulatory regimes to
which we are subject and to prevent, or promptly detect and
stop, unauthorized, fictitious or fraudulent transactions. We also
rely on access to, and on the functioning of, systems maintained
including clearing systems, exchanges,
by
information processors and central counterparties. Any failure of
our or third-party systems could have an adverse effect on us.
Our operational risk management and control systems and
processes are designed to help ensure that the risks associated
with our activities, including those arising from process error,
failed execution, misconduct, unauthorized trading, fraud,
system failures, financial crime, cyberattacks, breaches of
information security, inadequate or ineffective access controls
and failure of security and physical protection, are appropriately
controlled. If our internal controls fail or prove ineffective in
identifying and
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.
remedying
these
We and other financial services firms have been subject to
breaches of security and to cyber- and other forms of attack,
some of which are sophisticated and targeted attacks intended
to gain access to confidential information or systems, disrupt
service or destroy data, including through the introduction of
viruses or malware, social engineering, distributed denial of
service attacks and other means. These attempts may occur
directly, or using equipment or security passwords of our
employees, third party service providers or other users. We may
not be able to anticipate, detect or recognize threats to our
systems or data or that our preventative measures may not be
effective to prevent an attack or a security breach. In the event a
security breach occurs notwithstanding our preventative
measures, we may not immediately detect a particular breach or
attack. Once a particular attack is detected time may be required
to investigate and assess the nature and extent of the attack. A
successful breach or circumvention of security of our systems or
data could have significant negative consequences for us,
including disruption of our operations, misappropriation of
confidential
information concerning us or our customers,
damage to our systems, financial losses for us or our customers,
violations of data privacy and similar laws, litigation exposure
and damage to our reputation.
A major focus of US and other countries’ governmental
policies relating to financial institutions in recent years has been
fighting money laundering and terrorist financing. We are
required to maintain effective policies, procedures and controls
to detect, prevent and report money laundering and terrorist
50
financing, and to verify the identity of our clients. We are also
subject to laws and regulations related to corrupt and illegal
payments to government officials by others, such as the US
Foreign Corrupt Practices Act and the UK Bribery Act. We have
implemented policies, procedures and internal controls that are
designed to comply with such laws and regulations. Failure to
maintain and implement adequate programs to combat money
laundering, terrorist financing or corruption, or any failure of our
programs in these areas, could have serious consequences both
from legal enforcement action and from damage to our
reputation.
As a result of new and changed regulatory requirements and
the changes we have made in our legal structure to meet
regulatory requirements and improve our resolvability, the
volume, frequency and complexity of our regulatory and other
reporting have significantly increased. Regulators have also
significantly increased expectations for our internal reporting
and data aggregation. We have incurred and continue to incur
significant costs to implement infrastructure to meet these
requirements. Failure to timely and accurately meet external
reporting requirements or to meet regulatory expectations for
internal reporting could result in enforcement action or other
adverse consequences for us.
Certain types of operational control weaknesses and failures
could also adversely affect our ability to prepare and publish
accurate and timely financial reports.
In addition, despite the contingency plans we have in place,
our ability to conduct business may be adversely affected by a
disruption in the infrastructure that supports our businesses and
the communities in which we are located. This may include a
disruption due to natural disasters, pandemics, civil unrest, war
communications,
or
transportation or other services used by us or third parties with
whom we conduct business.
electrical,
terrorism
involve
and
Our reputation is critical to the success of our business
Our reputation is critical to the success of our strategic plans,
business and prospects. Reputational damage is difficult to
reverse, and improvements tend to be slow and difficult to
measure. Our reputation has been adversely affected by our
losses during the financial crisis, investigations into our cross-
border private banking services, criminal resolutions of LIBOR-
related and foreign exchange matters, as well as other matters.
We believe that reputational damage as a result of these events
was an important factor in our loss of clients and client assets
across our asset-gathering businesses, and contributed to our
loss of and difficulty in attracting staff in the past. Any further
reputational damage could have a material adverse effect on our
operational results and financial condition and on our ability to
achieve our strategic goals and financial targets.
Performance in the financial services industry is affected
by market conditions and the macroeconomic climate
Our businesses are materially affected by market and economic
conditions. Adverse changes in interest rates, credit spreads,
securities prices, market volatility and liquidity, foreign exchange
rates, commodity prices, and other market fluctuations, as well
as changes in investor sentiment, can affect our earnings and
ultimately our financial and capital positions.
A market downturn and weak macroeconomic conditions can
be precipitated by a number of factors, including geopolitical
events, changes in monetary or fiscal policy, trade imbalances,
natural disasters, pandemics, civil unrest, acts of violence, war or
terrorism. Macroeconomic and political developments can have
unpredictable and destabilizing effects and, because financial
markets are global and highly interconnected, even local and
regional events can have widespread impact well beyond the
countries in which they occur. Moreover, if individual countries
impose restrictions on cross-border payments or other exchange
or capital controls, or change their currency (for example, if one
or more countries should leave the eurozone), we could suffer
losses from enforced default by counterparties, be unable to
access our own assets, and / or be impeded in, or prevented
from, managing our risks.
We could be materially affected if a crisis develops, regionally
or globally, as a result of disruptions in emerging markets or
developed markets that are susceptible to macroeconomic and
political developments, or as a result of the failure of a major
market participant. Over time, our strategic plans have become
more heavily dependent on our ability to generate growth and
revenue in emerging markets, including China, causing us to be
more exposed to the risks associated with such markets. The
binding scenario we use in our combined stress test framework
reflects these aspects, and assumes a hard landing in China,
leading to severe contagion of Asian and emerging markets
economies and at the same time multiple debt restructurings in
Europe, related direct losses for European banks and fear of a
eurozone breakup severely affecting developed markets such as
Switzerland, the UK and the US.
→ Refer to “Risk measurement” in the “Risk management and
control” section of this report for more information on our
stress testing framework
We have material exposures to a number of markets, and the
regional balance of our business mix also exposes us to risk. Our
Investment Bank’s Equities business, for example, is more heavily
weighted to Europe and Asia, and within this business our
derivatives business is more heavily weighted to structured
products for wealth management clients, in particular with
European and Asian underlyings. Turbulence in these markets
can therefore affect us more than other financial service
providers.
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
A decrease in business and client activity and market volumes,
for example, as a result of significant market volatility, adversely
affects transaction fees, commissions and margins, particularly in
our wealth management businesses and in the Investment Bank,
as we experienced in 2016. A market downturn is likely to
reduce the volume and valuations of assets that we manage on
behalf of clients, reducing our asset and performance-based
fees, and could also cause a decline in the value of assets that
we own and account for as investments or trading positions. On
the other hand, reduced market liquidity or volatility limits
trading opportunities and impedes our ability to manage risks,
impacting trading income, and may reduce institutional client
activity and therefore transaction and performance-based fees.
and
economic
Credit risk is an integral part of many of our activities,
lending, underwriting and derivatives activities.
including
Worsening
adverse market
conditions
developments could lead to impairments and defaults on credit
exposures and on our trading and investment positions. Losses
may be exacerbated by declines in the value of collateral we
hold. We are exposed to credit risk in activities such as our prime
brokerage, reverse repurchase and Lombard lending, as the
value or liquidity of the assets against which we provide
financing may decline rapidly. Macroeconomic developments,
such as the strength of the Swiss franc and its effect on Swiss
exports, the adoption of negative interest rates by the Swiss
National Bank or other central banks or any return of crisis
conditions within the eurozone or the EU, and the potential
reinstate
implications of
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.
in Switzerland
the decision
to
The aforementioned developments have in the past affected,
and could materially affect, the financial performance of
business divisions and of UBS as a whole, including through
impairment of goodwill and the adjustment of deferred tax asset
levels. Refer to “Our financial results may be negatively affected
by changes to assumptions and valuations, as well as changes to
accounting standards” and “The effect of taxes on our financial
results is significantly influenced by tax law changes and
reassessments of our deferred tax assets” below.
→ Refer to the “Current market climate and industry trends”
section of this report for more information
UK withdrawal from the EU
In December 2017, the UK and the remaining EU member states
reached an agreement on the separation issues under Phase I of
the negotiations for the UK’s withdrawal from the EU. As a
result, the European Council agreed that “sufficient progress”
had been made to allow the negotiations to move to Phase II on
transitional arrangements and the future EU-UK relationship.
The UK is still expected to leave the EU in March 2019, subject
to a possible transition period.
51
Operating environment and strategy
Risk factors
The nature of the UK’s future relationship with the EU
remains unclear. Any future limitations on providing financial
services into the EU from our UK operations could require us to
make potentially significant changes to our operations in the UK
and the EU, and to our legal structure. In the absence of
adequate transition relief being agreed and passed into law by
the United Kingdom and the European Union, we currently
expect to merge UBS Limited into UBS Europe SE, our German
headquartered European bank, prior to the United Kingdom
leaving the European Union on 29 March 2019. Clients and
other
Limited would become
counterparties of UBS Europe SE through the planned merger of
the two entities. However, we anticipate that clients of UBS
Limited who can be serviced by UBS AG, London Branch would
generally be migrated to UBS AG, London Branch prior to this
merger. We further anticipate that some staff would be
relocated as a result; the exact number of staff and roles would
be determined in due course. The timing and extent of the
actions we take may vary considerably depending on regulatory
requirements and the nature of any transition or successor
agreements with the EU.
counterparties of UBS
In recent years, our Wealth Management net new money
inflows have come predominantly from clients in Asia Pacific and
in the ultra high net worth segment globally. Over time, inflows
from these lower-margin segments and markets have been
replacing outflows from higher-margin segments and markets,
in particular cross-border clients. This dynamic, combined with
changes in client product preferences as a result of which low-
margin products account for a larger share of our revenues than
in the past, has put downward pressure on our Wealth
Management’s margins.
As the discussion above indicates, we are exposed to possible
outflows of client assets in our asset-gathering businesses and to
changes affecting the profitability of our wealth management
businesses. Initiatives that we may implement to overcome the
in the business environment on our
effects of changes
profitability, balance sheet and capital positions may not succeed
in counteracting those effects and may cause net new money
outflows and reductions in client deposits, as happened with our
balance sheet and capital optimization program in 2015. There
is no assurance that we will be successful in our efforts to offset
the adverse effect of these or similar trends and developments.
We may not be successful in implementing changes in our
wealth management businesses to meet changing market,
regulatory and other conditions
We may be unable to identify or capture revenue or
competitive opportunities, or retain and attract qualified
employees
implementation across
investment managers and other
Our wealth and asset management businesses operate in an
environment of increasing regulatory scrutiny and changing
standards with respect to fiduciary and other standards of care
and the focus on mitigating or eliminating conflicts of interest
between a manager or advisor and the client, which require
the global systems and
effective
processes of
industry
participants. For example, the US Department of Labor has
adopted a rule expanding the definition of “fiduciary” under the
(ERISA), which
Employee Retirement
requires us to comply with fiduciary standards under ERISA
when dealing with certain retirement plans. We will likely be
required to materially change business processes, policies and
the terms on which we interact with these clients in order to
comply with these rules when they become fully effective. In
addition, MiFID II imposes new requirements on us when
providing advisory services to clients in the EU, including new
requirements for agreements with clients.
Income Security Act
investment and fiscal amnesty programs,
We have experienced cross-border outflows over a number of
years as a result of heightened focus by fiscal authorities on
cross-border
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
cross-border
implementation of
enforcement,
tax
information exchange
tax amnesty or
regimes, national
enforcement programs or similar actions may affect our clients’
ability or willingness to do business with us and result in
additional cross-border outflows.
the
52
The financial services industry is characterized by intense
competition, continuous innovation, restrictive, detailed, and
sometimes fragmented regulation and ongoing consolidation.
We face competition at the level of local markets and individual
business lines, and from global financial institutions that are
comparable to us in their size and breadth. Barriers to entry in
individual markets and pricing levels are being eroded by new
technology. We expect
to continue and
these
competition to increase. Our competitive strength and market
position could be eroded if we are unable to identify market
trends and developments, do not respond to them by devising
and implementing adequate business strategies, adequately
developing or updating our technology, particularly in trading
businesses, and our digital channels and tools, or are unable to
attract or retain the qualified people needed to carry them out.
trends
The amount and structure of our employee compensation is
affected not only by our business results but also by competitive
factors and regulatory considerations.
In recent years, in response to the demands of various
stakeholders, including regulatory authorities and shareholders,
and in order to better align the interests of our staff with those
of other stakeholders, we have made changes to the terms of
compensation awards. Among other things, we have introduced
individual caps on the proportion of fixed to variable pay for the
GEB members, as well as certain other employees. We have
increased average deferral periods for stock awards, expanded
forfeiture provisions and, to a more limited extent, introduced
clawback provisions for certain awards linked to business
performance.
Constraints on the amount or structure of employee
compensation, higher levels of deferral, performance conditions
and other circumstances triggering the forfeiture of unvested
awards may adversely affect our ability to retain and attract key
employees. The loss of key staff and the inability to attract
qualified replacements, depending on which and how many
roles are affected, could seriously compromise our ability to
execute our strategy and to successfully improve our operating
and control environment and may affect our business
performance.
Swiss
the
compensation of the Board of Directors (BoD) and the Group
Executive Board (GEB) each year. If our shareholders fail to
approve the compensation for the GEB or the BoD, this could
have an adverse effect on our ability to retain experienced
directors and our senior management.
shareholders approve
requires
that
law
We depend on our risk management and control processes
to avoid or limit potential losses in our businesses
Controlled risk-taking is a major part of the business of a
financial services firm. Some losses from risk-taking activities are
inevitable, but to be successful over time, we must balance the
risks we take against the returns we generate. We must,
therefore, diligently identify, assess, manage and control our
risks, not only in normal market conditions but also as they
might develop under more extreme, stressed conditions, when
concentrations of exposures can lead to severe losses.
As seen during the financial crisis of 2007–2009, we are not
always able to prevent serious losses arising from extreme or
sudden market events that are not anticipated by our risk
measures and systems. The deterioration of financial markets
since the beginning of the crisis was extremely severe by
historical standards. Value-at-risk, a statistical measure for
market risk, is derived from historical market data, and thus by
definition could not have anticipated the losses suffered in the
stressed conditions of the crisis. Moreover, stress loss and
concentration controls and the dimensions
in which we
aggregated
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
to
risk concentrations and correlated risks;
– our assessment of the risks identified or our response to
inadequate,
to be untimely,
trends proves
negative
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;
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
– third parties to whom we have credit exposure or whose
securities we hold for our own account are severely affected
by events not anticipated by our models, and accordingly we
suffer defaults and impairments beyond the level implied by
our risk assessment; or
– collateral or other security provided by our counterparties
proves inadequate to cover their obligations at the time of
their default.
We hold positions related to real estate in various countries,
and could suffer losses on these positions. These positions
include a substantial Swiss mortgage portfolio. Although
management believes that this portfolio is prudently managed,
we could nevertheless be exposed to losses if the concerns
expressed by the Swiss National Bank and others about
unsustainable price escalation in the Swiss real estate market
come to fruition. In addition, we continue to hold substantial
legacy risk positions, primarily in Corporate Center − Non-core
and Legacy Portfolio. They remain illiquid in many cases, and we
continue to be exposed to the risk that they may again
deteriorate in value.
We also manage risk on behalf of our clients in our asset and
wealth management businesses. The performance of assets we
hold for our clients in these activities could be adversely affected
by the same factors mentioned above. If clients suffer losses or
the performance of their assets held with us is not in line with
relevant benchmarks against which clients assess investment
performance, we may suffer reduced fee income and a decline
in assets under management, or withdrawal of mandates.
Investment positions, such as equity investments made as part
of strategic initiatives and seed investments made at the
inception of funds that we manage, may also be affected by
market risk factors. These investments are often not liquid and
generally are intended or required to be held beyond a normal
trading horizon. They are subject to a distinct control
framework. Deteriorations in the fair value of these positions
would have a negative effect on our earnings.
Liquidity and funding management are critical to our
ongoing performance
The viability of our business depends on the availability of
funding sources, and our success depends on our ability to
obtain funding at times, in amounts, for tenors and at rates that
enable us to efficiently support our asset base in all market
conditions. The volume of our funding sources has generally
been stable, but could change in the future due to, among other
things, general market disruptions or widening credit spreads,
which could also influence the cost of funding. A substantial
part of our liquidity and funding requirements are met using
short-term unsecured funding sources, including retail and
wholesale deposits and the regular issuance of money market
securities. A change in the availability of short-term funding
could occur quickly.
53
Operating environment and strategy
Risk factors
Moreover, more stringent capital and liquidity and funding
requirements will likely lead to increased competition for both
secured funding and deposits as a stable source of funding, and
to higher funding costs. The addition of loss-absorbing debt as a
component of capital requirements, the regulatory requirements
to maintain minimum TLAC at holding company level and / or at
subsidiaries level, as well as the power of resolution authorities
to bail in TLAC and other debt obligations, and uncertainty as to
how such powers will be exercised, will increase our cost of
funding and could potentially increase the total amount of
funding required absent other changes in our business.
Reductions in our credit ratings may adversely affect the
market value of the securities and other obligations and increase
our funding costs, in particular with regard to funding from
wholesale unsecured sources, and can affect the availability of
certain kinds of funding. In addition, as we experienced in
connection with Moody’s downgrade of our long-term rating in
June 2012, rating downgrades can require us to post additional
collateral or make additional cash payments under master
trading agreements relating to our derivatives businesses. Our
credit ratings, together with our capital strength and reputation,
also contribute
to maintaining client and counterparty
confidence and it is possible that rating changes could influence
the performance of some of our businesses.
Our financial results may be negatively affected by
changes to assumptions and valuations, as well as
changes to accounting standards
We prepare our consolidated financial statements in accordance
with IFRS. The application of these accounting standards
judgment based on estimates and
requires the use of
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
the
underlying estimates and assumptions, which encompass
historical experience, expectations of the future and other
factors, are regularly evaluated to determine their continuing
relevance based on current conditions. Using different
assumptions could cause the reported results to differ. Changes
in assumptions, or failure to make the changes necessary to
reflect evolving market conditions, may have a significant effect
on the financial statements in the periods when changes occur.
Moreover, if the estimates and assumptions in future periods
deviate from the current outlook, our financial results may also
be negatively affected.
judgments,
including
Changes to IFRS or interpretations thereof may cause our
future reported results and financial position to differ from
current expectations, or historical results to differ from those
previously reported due to the adoption of accounting standards
on a retrospective basis. Such changes may also affect our
regulatory capital and ratios. For example, we adopted IFRS 9
effective on 1 January 2018, which required us to change the
accounting treatment of certain instruments, requires us to
54
record loans at inception net of expected credit losses instead of
recording credit losses on an incurred loss basis and is generally
expected to result in an increase in recognized credit loss
allowances. In addition, the expected credit loss (ECL) provisions
of IFRS 9 may result in greater volatility in credit loss expense as
ECL changes in response to developments in the credit cycle and
composition of our loan portfolio. The effect may be more
pronounced in a deteriorating economic environment.
→ Refer to the “Critical accounting estimates and judgments”
section and “Note 1 Summary of significant accounting policies”
in the “Consolidated financial statements” section of this report
for more information
The effect of taxes on our financial results is significantly
influenced by tax law changes and reassessments of our
deferred tax assets
Our effective tax rate is highly sensitive to our performance, our
expectation of future profitability and statutory tax rates. Based
on prior years’ tax losses, we have recognized deferred tax assets
(DTAs) reflecting the probable recoverable level based on future
taxable profit as informed by our business plans. If our
performance is expected to produce diminished taxable profit in
future years, particularly in the US, we may be required to write
down all or a portion of the currently recognized DTAs through
the income statement. This would have the effect of increasing
our effective tax rate in the year in which any write-downs are
taken. Conversely, if our performance is expected to improve,
particularly in the US or the UK, we could potentially recognize
additional DTAs as a result of that assessment. The effect of
doing so would be to significantly reduce our effective tax rate
in years in which additional DTAs are recognized and to increase
our effective tax rate in future years. Our effective tax rate is also
sensitive to any future reductions in statutory tax rates,
particularly in the US and Switzerland, which would cause the
expected future tax benefit from items such as tax loss carry-
forwards in the affected locations to diminish in value. This in
turn would cause a write-down of the associated DTAs. For
example, the reduction in the US federal corporate tax rate to
21% from 35% introduced by the US Tax Cuts and Jobs Act
(TCJA) resulted in a CHF 2.9 billion net write-down in the
Group’s DTAs in the fourth quarter of 2017. Changes in tax law
may materially affect our effective tax rate and in some cases
may substantially affect the profitability of certain activities. For
example, the TCJA introduced a new minimum tax regime
referred to as the base erosion and anti-abuse tax (BEAT) that
potentially subjects otherwise deductible payments made from
our US businesses to non-US affiliated parties to a minimum tax.
We currently expect that BEAT could increase our current tax
expense by up to CHF 60 million in 2018. The actual effects
could be materially higher as the amount of payments subject to
BEAT will increase with higher interest rates and business activity
and as a result of interpretative uncertainty relating to BEAT. It
may also be lower if we are able to successfully mitigate our
payments subject to BEAT.
We generally revalue our DTAs in the second half of the
financial year based on a reassessment of future profitability
taking into account updated business plan forecasts. We
consider the performance of our businesses and the accuracy of
historical forecasts tax rates and other factors in evaluating the
recoverability of our DTAs, including the remaining tax loss
carry-forward period and our assessment of expected future
taxable profits in the forecast period used for recognizing DTAs.
Estimating future profitability is inherently subjective and is
particularly sensitive to future economic, market and other
conditions, which are difficult to predict. Our results in recent
periods have demonstrated that changes in the recognition of
DTAs can have a very significant effect on our reported results.
The enactment of the TCJA, and the narrowing of the window
between the end of the forecast period and the expiry of our US
net operating losses, may also lead us to review our approach to
periodically remeasuring our US DTAs and the timing for
recognizing deferred tax in our income statement. Any change
in the manner in which we remeasure DTAs could impact the
effective tax rate, particularly in the year in which the change is
made.
Our full-year effective tax rate could also change if aggregate
tax expenses in respect of profits from branches and subsidiaries
without loss coverage differ from what is expected, or in case of
changes to the forecast period used for DTA recognition
purposes as part of the aforementioned reassessment of future
profitability. Moreover, tax laws or the tax authorities in
countries where we have undertaken legal structure changes
may prevent the transfer of tax losses incurred in one legal entity
to newly organized or reorganized subsidiaries or affiliates or
may impose limitations on the utilization of tax losses that relate
to businesses formerly conducted by the transferor. Were this to
occur in situations where there were also limited planning
opportunities to utilize the tax losses in the originating entity,
the DTAs associated with such tax losses could be written down
through the income statement.
In addition, statutory and regulatory changes, as well as
changes to the way in which courts and tax authorities interpret
tax laws, could cause the amount of taxes ultimately paid by us
to materially differ from the amount accrued.
Our stated capital returns objective is based, in part, on
capital ratios that are subject to regulatory change and
may fluctuate significantly
We plan to operate with a fully applied CET1 capital ratio of
around 13% and a fully applied CET1 leverage ratio of around
3.7%. Our ability to maintain these ratios is subject to numerous
risks, including the financial results of our businesses, the effect of
changes to capital standards, methodologies and interpretation
that may adversely affect the calculation of our fully applied CET1
capital ratio, the imposition of risk add-ons or capital buffers, and
the application of additional capital,
liquidity and similar
requirements to subsidiaries. These risks could prevent or delay
our ability to achieve our capital returns policy of a progressive
cash dividend coupled with a share repurchase program.
y
g
e
t
a
r
t
s
d
n
a
t
n
e
m
n
o
r
i
v
n
e
g
n
i
t
a
r
e
p
O
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
in
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
the
requirements of applicable law and regulatory, fiscal or other
restrictions. In particular, UBS Group AG’s direct and indirect
subsidiaries, including UBS AG, UBS Switzerland AG, UBS
Limited and UBS Americas Holding LLC, are subject to laws and
regulations that restrict dividend payments, authorize regulatory
bodies to block or reduce the flow of funds from those
subsidiaries to UBS Group AG, or could impact their ability to
repay any loans made to, or other investments in, such
subsidiary by UBS Group AG or another member of the Group.
financing agreements and
For example, the US CCAR process requires that our US
intermediate holding company demonstrate that it can continue
to meet minimum capital standards over a nine-quarter
hypothetical severely adverse economic scenario. If it fails to
meet the quantitative capital requirements, or the Federal
Reserve Board’s qualitative assessment of the capital planning
process is adverse, our US intermediate holding company will be
prohibited from paying dividends or making distributions.
Restrictions and regulatory actions of this kind could impede
access to funds that UBS Group AG may need to meet its
obligations or to pay dividends to shareholders. In addition, UBS
Group AG’s right to participate in a distribution of assets upon a
subsidiary’s liquidation or reorganization is subject to all prior
claims of the subsidiary’s creditors.
Our capital instruments may contractually prevent UBS Group
AG from proposing the distribution of dividends to shareholders,
other than in the form of shares, if we do not pay interest on
these instruments.
Furthermore, UBS Group AG may guarantee some of the
payment obligations of certain of the Group’s subsidiaries from
time to time. These guarantees may require UBS Group AG to
provide substantial funds or assets to subsidiaries or their
creditors or counterparties at a time when UBS Group AG is in
need of liquidity to fund its own obligations.
The credit ratings of UBS Group AG or its subsidiaries used
for funding purposes could be lower than the ratings of the
Group’s operating subsidiaries, which may adversely affect the
market value of the securities and other obligations of UBS
Group AG or those subsidiaries on a standalone basis.
55
Operating environment and strategy
Risk factors
If we experience financial difficulties, FINMA has the
power to open restructuring or liquidation proceedings or
impose protective measures in relation to UBS Group AG,
UBS AG or UBS Switzerland AG, and such proceedings or
measures may have a material adverse effect on our
shareholders and creditors
Under the Swiss Banking Act, FINMA is able to exercise broad
statutory powers with respect to Swiss banks and Swiss parent
companies of financial groups, such as UBS AG, UBS Group AG
and UBS Switzerland AG, if there is justified concern that the
entity is overindebted, has serious liquidity problems or, after the
expiration of any relevant deadline, no longer fulfills capital
adequacy requirements. Such powers include ordering protective
measures, instituting restructuring proceedings (and exercising
any Swiss resolution powers in connection therewith), and
instituting liquidation proceedings, all of which may have a
material adverse effect on our shareholders and creditors or may
prevent UBS Group AG, UBS AG or UBS Switzerland AG from
paying dividends or making payments on debt obligations.
Protective measures may include, but are not limited to,
certain measures that could require or result in a moratorium on,
or the deferment of, payments. We would have limited ability to
challenge any such protective measures, and creditors would
have no right under Swiss law or in Swiss courts to reject them,
seek their suspension, or challenge their imposition, including
measures that require or result in the deferment of payments.
If restructuring proceedings are opened with respect to UBS
Group AG, UBS AG or UBS Switzerland AG, the resolution
powers that FINMA may exercise include the power to (i)
transfer all or some of the assets, debt and other liabilities, and
contracts of the entity subject to proceedings to another entity,
(ii) stay for a maximum of two business days the termination of,
or the exercise of rights to terminate, netting rights, rights to
enforce or dispose of certain types of collateral or rights to
transfer claims, liabilities or certain collateral, under contracts to
which the entity subject to proceedings is a party, and / or (iii)
partially or fully write down the equity capital and, if such equity
capital is fully written down, convert into equity or write down
the capital and other debt instruments of the entity subject to
proceedings. Shareholders and creditors would have no right to
reject, or to seek the suspension of, any restructuring plan
pursuant to which such resolution powers are exercised. They
would have only limited rights to challenge any decision to
exercise resolution powers or to have that decision reviewed by
a judicial or administrative process or otherwise.
Upon full or partial write-down of the equity and of the debt
of the entity subject to restructuring proceedings, the relevant
shareholders and creditors would receive no payment in respect
of the equity and debt that is written down, the write-down
would be permanent, and the investors would not, at such time
or at any time thereafter, receive any shares or other
participation rights, or be entitled to any write-up or any other
compensation in the event of a potential recovery of the debtor.
If FINMA orders the conversion of debt of the entity subject to
restructuring proceedings into equity, the securities received by
the investors may be worth significantly less than the original
debt and may have a significantly different risk profile, and such
conversion would also dilute the ownership of existing
shareholders. In addition, creditors receiving equity would be
effectively subordinated to all creditors in the event of a
subsequent winding up, liquidation or dissolution of the entity
subject to restructuring proceedings, which would increase the
risk that investors would lose all or some of their investment.
its powers
FINMA has broad powers and significant discretion in the
exercise of
in connection with restructuring
proceedings. Furthermore, certain categories of debt obligations,
such as certain types of deposits, are subject to preferential
treatment. As a result, holders of obligations of an entity subject
to a Swiss restructuring proceeding may have their obligations
written down or converted into equity even though obligations
ranking on par with or junior to such obligations are not written
down or converted.
resolution strategy
Moreover, FINMA has expressed its preference for a “single-
point-of-entry”
for global systemically
important financial groups, led by the bank’s home supervisory
and resolution authorities and focused on the top-level group
company. This would mean that, if UBS AG or one of UBS
Group AG’s other subsidiaries faces substantial losses, FINMA
could open restructuring proceedings with respect to UBS Group
AG only and order a bail-in of its liabilities if there is a justified
concern that in the near future such losses could impact UBS
Group AG. In that case, it is possible that the obligations of UBS
AG or any other subsidiary of UBS Group AG would remain
unaffected and outstanding, while the equity capital and the
capital and other debt instruments of UBS Group AG would be
written down and / or converted into equity of UBS Group AG in
order to recapitalize UBS AG or such other subsidiary.
56
Financial and
operating
performance
Management report
Financial and operating performance
Critical accounting estimates and judgments
Critical accounting estimates and judgments
We believe that the judgments, estimates and assumptions
we have made are appropriate under the circumstances and that
our financial statements fairly present, in all material respects,
the financial position of UBS as of 31 December 2017 and the
results of our operations and cash flows for the year ended on
31 December 2017 in accordance with IFRS.
→ Refer to “Note 1a Significant accounting policies” in the
“Consolidated financial statements” section of this report for
more information
→ Refer to the “Risk factors” section of this report for more
information
In preparing our financial statements in accordance with
International Financial Reporting Standards (IFRS), as issued by
the Internal Accounting Standards Board (IASB), we apply
judgment and make estimates and assumptions that may involve
significant uncertainty at the time they are made. We regularly
reassess those estimates and assumptions, which encompass
historical experience, expectations of the future and other
pertinent factors, to determine their continuing relevance based
on current conditions and we update them as necessary.
Changes in estimates and assumptions may have a significant
impact on the financial statements. Furthermore, actual results
may differ significantly from our estimates, which could result in
significant losses to the Group, beyond what we anticipated or
provided for.
Key areas involving a high degree of judgment and areas
where estimates and assumptions are significant to the
consolidated and individual financial statements include:
– Fair value of financial instruments
– Allowances and provisions for credit losses
– Pension and other post-employment benefit plans
– Income taxes
– Goodwill
– Provisions and contingent liabilities
– Consolidation of structured entities
58
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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: 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 non-controlling interests
NNet profit / (loss) attributable to shareholders
Comprehensive income
Total comprehensive income
Total comprehensive income attributable to non-controlling interests
TTotal comprehensive income attributable to shareholders
For the year ended
331.12.17
6,528
(128)
6,400
17,186
4,972
509
29,067
11,499
15,889
6,808
1,033
70
23,800
5,268
4,139
1,128
76
1,053
218
428
(210)
31.12.16
6,413
(37)
6,376
16,397
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
31.12.15
6,732
(117)
6,615
17,140
5,742
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
% change from
31.12.16
2
246
0
5
0
(15)
3
1
1
(8)
5
(23)
(2)
29
414
(66)
(7)
(67)
(90)
22
59
Financial and operating performance
Group performance
Performance by business division and Corporate Center unit – reported and adjusted1,2
CHF million
Operating income as reported
of which: gains on sale of subsidiaries and businesses
of which: gains on sale of financial assets available for sale 4
of which: net foreign currency translation losses 5
FFor the year ended 31.12.17
WWealth
Manage-
ment
7,625
WWealth
Manage-
ment
Americas
8,349
PPersonal &
Corporate
Banking
3,850
AAsset
Manage-
ment
2,044
153
IInvestment
Bank
7,651
CCC –
Services3
(153)
CCC – Non-
core and
Legacy
Portfolio
(22)
CCC –
Group
ALM
(276)
136
(22)
UUBS
29,067
153
136
(22)
Operating income (adjusted)
7,625
8,349
3,850
1,891
7,515
(153)
(254)
(22)
28,800
Operating expenses as reported
of which: personnel-related restructuring expenses 6
of which: non-personnel-related restructuring expenses 6
of which: restructuring expenses allocated from CC Services 6
of which: expenses from modification of terms for certain DCCP
awards 7
5,330
38
73
353
7,141
1
0
113
2,272
7
1,466
16
0
96
22
62
Operating expenses (adjusted)
4,867
7,028
2,169
1,366
6,402
38
18
303
25
6,018
762
433
522
(935)
47
1
0
3
381
0
23,800
534
0
6
634
0
743
43
375
25
22,607
of which: net expenses for provisions for litigation, regulatory and
similar matters 8
26
144
2
(3)
(41)
242
0
51
420
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
2,295
2,758
1,208
1,321
1,578
1,681
578
525
1,249
1,497
(914)
(895)
(322)
(296)
(403)
(397)
5,268
6,194
CHF million
Operating income as reported
For the year ended 31.12.16
Wealth
Manage-
ment
7,291
Wealth
Manage-
ment
Americas
7,782
Personal &
Corporate
Banking
3,984
Asset
Manage-
ment
1,931
Investment
Bank
7,688
CC –
Services3
(102)
CC – Non-
core and
Legacy
Portfolio
(36)
CC –
Group
ALM
(219)
of which: gains on sale of financial assets available for sale 4
21
10
102
78
of which: gains on sales of real estate
of which: gains related to investments in associates
of which: net foreign currency translation losses 5
of which: losses on sales of subsidiaries and businesses
(23)
21
120
(122)
UBS
28,320
211
120
21
(122)
(23)
Operating income (adjusted)
7,293
7,772
3,861
1,931
7,610
(222)
(97)
(36)
28,113
Operating expenses as reported
of which: personnel-related restructuring expenses 6
of which: non-personnel-related restructuring expenses 6
of which: restructuring expenses allocated from CC Services 6
Operating expenses (adjusted)
of which: net expenses for provisions for litigation, regulatory and
similar matters 8
5,343
53
55
339
6,675
7
0
132
2,224
4
0
113
1,479
15
15
70
6,684
154
747
518
623
14
410 (1,084)
4,896
6,536
2,107
1,379
6,107
690
69
96
3
(2)
42
2
(1)
0
0
0
(1)
0
1,078
1
24,230
751
0
21
706
0
1,057
22,772
584
795
OOperating profit / (loss) before tax as reported
OOperating 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
60
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Performance by business division and Corporate Center unit – reported and adjusted (continued)1,2
CHF million
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: gains on sales of subsidiaries and businesses
of which: net foreign currency translation gains 5
of which: gains related to investments in associates
of which: gains on sale of financial assets available for sale 4
of which: net losses related to the buyback of debt
For the year ended 31.12.15
Wealth
Manage-
ment
8,155
Wealth
Manage-
ment
Americas
7,381
Personal &
Corporate
Banking
3,877
Asset
Manage-
ment
2,057
Investment
Bank
8,821
CC –
Services3
241
169
15
56
66
378
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 expenses 6
of which: non-personnel-related restructuring expenses 6
of which: restructuring expenses allocated from CC Services 6
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
14
7
406
719
376
(986)
of which: impairment of an intangible asset
Operating expenses (adjusted)
5,142
6,547
2,130
1,392
11
6,522
919
of which: net expenses for provisions for litigation, regulatory and
similar matters 8
104
351
(2)
(3)
2
15
CC – Non-
core and
Legacy
Portfolio
(203)
UBS
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
CC –
Group
ALM
277
553
88
(257)
(107)
(5)
0
0
0
(5)
0
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
2,689
2,828
718
834
1,646
1,681
584
610
1,892
2,288
(818)
282
(1,503)
5,489
(1,056)
(102)
(1,447)
5,635
11 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments
following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 3 Corporate Center
Services operating expenses presented in this table are after service allocations to business divisions and other Corporate Center units. 4 Includes a gain on the sale of our investment in London Clearing House in
the Investment Bank in 2017, gains on sales of our investment in IHS Markit in 2017, 2016 and 2015 in the Investment Bank and a gain on the sale of our investment in Visa Europe in 2016 in Wealth Management
and Personal & Corporate Banking. 5 Related to the disposal of foreign subsidiaries and branches. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements”
section of this report for more information. 7 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013. 8 Includes recoveries from third parties
of CHF 53 million, CHF 13 million and CHF 10 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015, respectively.
61
Financial and operating performance
Group performance
2017 compared with 2016
Results
recorded net profit attributable
We
to shareholders of
CHF 1,053 million in 2017, which included a net tax expense of
CHF 4,139 million, mainly driven by a CHF 2,865 million net
write-down of deferred tax assets (DTAs) following a reduction
in the US federal corporate tax rate after the enactment of the
Tax Cuts and Jobs Act (TCJA) in the US during the fourth quarter
of 2017. In 2016, net profit attributable to shareholders was
CHF 3,204 million, which included a net tax expense of CHF 805
million. Excluding the aforementioned net write-down of DTAs,
net profit attributable to shareholders would have increased
22%.
Profit before tax increased by CHF 1,178 million or 29% to
CHF 5,268 million, reflecting higher operating income and a
reduction in operating expenses. Operating income increased by
CHF 747 million or 3%, mainly due to CHF 789 million higher
net fee and commission income, primarily in our wealth
management businesses. Operating expenses decreased by
CHF 430 million or 2%, mainly due to CHF 626 million lower
general and administrative expenses, mainly reflecting CHF 375
million lower net expenses for provisions for litigation, regulatory
and similar matters.
In addition to reporting our results in accordance with
International Financial Reporting Standards (IFRS), we report
adjusted results that exclude items that management believes
are not representative of the underlying performance of our
businesses. Such adjusted results are non-GAAP financial
measures as defined by SEC regulations. For the purpose of
determining adjusted results for 2017, we excluded gains of
CHF 153 million on sale of subsidiaries and businesses related to
the disposal of Asset Management’s fund administration
in Luxembourg and Switzerland, gains of
servicing units
CHF 136 million on sale of financial assets available for sale, net
foreign currency translation losses of CHF 22 million, expenses
of CHF 25 million related to the modification of terms for
Deferred Contingent Capital Plan (DCCP) awards granted for the
performance years 2012 and 2013 and net restructuring
expenses of CHF 1,168 million. For 2016, we excluded gains of
CHF 211 million on sale of financial assets available for sale,
gains of CHF 120 million on sales of real estate, gains of CHF 21
million related to investments in associates, net foreign currency
translation losses of CHF 122 million, losses of CHF 23 million on
sales of subsidiaries and businesses and net restructuring
expenses of CHF 1,458 million.
On this adjusted basis, profit before tax increased by CHF 853
million or 16% to CHF 6,194 million, reflecting CHF 687 million
higher adjusted operating income and CHF 165 million lower
adjusted operating expenses.
Operating income
Total operating income was CHF 29,067 million compared with
CHF 28,320 million. On an adjusted basis, total operating
income increased by CHF 687 million or 2% to CHF 28,800
million, mainly reflecting an increase of CHF 789 million in net
fee and commission income.
Net interest and trading income
CHF million
Net interest and trading income
Net interest income
of which: Wealth Management
of which: Wealth Management Americas
of which: Personal & Corporate Banking
of which: Asset Management
Net trading income
of which: Wealth Management
of which: Wealth Management Americas
of which: Personal & Corporate Banking
of which: Asset Management
TTotal net interest and trading income
of which: Investment Bank
of which: Corporate Client Solutions
of which: Investor Client Services
of which: Corporate Center
of which: Services
of which: Group ALM
For the year ended
31.12.16
331.12.17
6,528
2,344
1,679
2,086
(14)
4,972
694
332
376
(10)
11,499
4,282
1,065
3,217
(270)
(42)
(157)
6,413
2,331
1,467
2,199
(24)
4,948
667
372
333
(5)
11,361
4,277
822
3,455
(256)
(89)
(104)
of which: own credit on financial liabilities designated at fair value
of which: Non-core and Legacy Portfolio
(71)
(62)
62
31.12.15
6,732
2,326
1,174
2,270
(17)
5,742
708
362
343
12
12,474
5,186
1,001
4,185
110
(3)
426
553
(313)
% change from
31.12.16
2
1
14
(5)
(42)
0
4
(11)
13
100
1
0
30
(7)
5
(53)
51
15
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Net interest and trading income
Total combined net interest and trading income increased by
CHF 138 million to CHF 11,499 million.
Wealth Management net interest income increased by CHF 13
million to CHF 2,344 million, mainly due to an increase in deposit
revenues, mostly reflecting higher short-term US dollar interest
rates, and higher lending revenues. This was largely offset by lower
allocated treasury-related income from Corporate Center – Group
Asset and Liability Management (Group ALM), reflecting lower
banking book interest income and higher funding costs for long-
term debt that contributes to total loss-absorbing capacity (TLAC).
Net trading income increased by CHF 27 million to CHF 694
million, mainly due to increased client activity, most notably in Asia
Pacific and Switzerland.
In Wealth Management Americas, net
income
increased by CHF 212 million to CHF 1,679 million, primarily due
to an increase in net interest margin on higher short-term US
dollar interest rates as well as higher lending balances. This was
partly offset by a CHF 40 million decrease in net trading income,
mainly due to lower client activity.
interest
Personal & Corporate Banking net interest income decreased by
CHF 113 million to CHF 2,086 million, mainly due to lower
allocated treasury-related income from Corporate Center – Group
ALM, reflecting higher funding costs for long-term debt that
contributes to TLAC and lower banking book interest income. This
was partly offset by higher deposit revenues. Net trading income
increased by CHF 43 million to CHF 376 million, mainly due to
higher revenues from foreign exchange transactions.
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
TTotal
In the Investment Bank, net interest and trading income was
broadly stable at CHF 4,282 million, due to a CHF 243 million
increase in Corporate Client Solutions, mainly in Equity Capital
Markets and Risk Management, which was almost entirely offset
by a CHF 238 million decrease in Investor Client Services,
reflecting lower revenues in Foreign Exchange, Rates and Credit,
partly offset by higher revenues in Equities.
In Corporate Center, net interest and trading income
decreased by CHF 14 million to negative CHF 270 million, mainly
due to a CHF 53 million decrease in Corporate Center – Group
ALM, primarily reflecting negative income related to accounting
asymmetries. This was largely offset by an increase of CHF 47
million in Corporate Center – Services, mainly reflecting higher
allocated treasury-related income from Corporate Center –
Group ALM, primarily resulting from a change made in the first
quarter of 2017 to the methodology used to allocate certain
Corporate Center – Group ALM revenues.
Refer to “Note 3 Net interest and trading income” in the
“Consolidated financial statements” section of this report for
more information
Credit loss expense / recovery
The net credit loss expense was CHF 128 million compared with
CHF 37 million, mainly reflecting CHF 79 million higher expenses
in the Investment Bank, primarily related to a margin loan to a
single client following a significant decrease in the value of the
collateral.
→ Refer to the “Risk management and control” section of this
report for more information
For the year ended
31.12.16
(5)
(3)
(6)
(11)
(13)
(13)
(37)
331.12.17
(4)
(4)
(19)
(90)
(11)
(11)
(128)
31.12.15
0
(4)
(37)
(68)
(8)
(8)
(117)
% change from
31.12.16
(20)
33
217
718
(15)
(15)
246
63
Financial and operating performance
Group performance
Net fee and commission income
Net fee and commission income increased by CHF 789 million to
CHF 17,186 million.
Portfolio management and advisory fees
increased by
CHF 507 million to CHF 8,542 million, primarily driven by our
wealth management businesses, mainly due to higher invested
assets.
Underwriting fees increased by CHF 349 million to CHF 1,295
million, largely due to higher equity underwriting revenues,
mainly in the Investment Bank.
→ Refer to “Note 4 Net fee and commission income” in the
“Consolidated financial statements” section of this report for
more information
Other income
Other income was CHF 509 million compared with CHF 599
million. Excluding the aforementioned adjusting items, which
consist of gains on sales of subsidiaries and businesses, gains on
sales of financial assets available for sale and real estate, gains
related to investments in associates and net foreign currency
translation losses, adjusted other income decreased by CHF 150
million. This decrease was mainly due to lower gains on sale of
financial assets available for sale and a decrease in other sundry
income.
→ Refer to “Note 5 Other income” in the “Consolidated financial
Personnel expenses
Personnel expenses increased by CHF 169 million to CHF 15,889
million and included net restructuring expenses of CHF 534
million in 2017, mainly related to our transitioning activities to
nearshore and offshore locations, compared with CHF 751
million in 2016. In addition, 2017 included expenses of CHF 25
million in the Investment Bank related to the modification of
terms in DCCP awards granted for the performance years 2012
and 2013. On an adjusted basis, personnel expenses increased
by CHF 361 million to CHF 15,330 million.
Adjusted expenses for salaries decreased by CHF 104 million
to CHF 5,691 million, mainly reflecting our nearshoring and
offshoring initiatives and cost reduction programs.
Adjusted expenses for total variable compensation increased
by CHF 103 million, reflecting an increase of CHF 241 million in
expenses for current-year awards, partly offset by CHF 140
million lower expenses for awards related to prior years.
Adjusted other personnel expenses increased by CHF 75
million, largely due to CHF 49 million higher social security
expenses.
Financial advisor compensation
in Wealth Management
Americas increased by CHF 289 million to CHF 3,986 million,
mainly due to higher compensable revenues and changes we
announced in 2016 to our financial advisor compensation
model.
statements” section of this report for more information
→ Refer to the “Compensation” section of this report for more
Operating expenses
Total operating expenses decreased by CHF 430 million or 2%
to CHF 23,800 million. Excluding net restructuring expenses of
CHF 1,168 million compared with CHF 1,458 million in 2016
and expenses of CHF 25 million in 2017 in the Investment Bank
related to the modification of terms in DCCP awards granted for
the performance years 2012 and 2013, adjusted total operating
expenses decreased by CHF 165 million or 1% to CHF 22,607
million. This decrease was mainly due to CHF 375 million lower
net expenses for provisions for litigation, regulatory and similar
matters, partly offset by a CHF 289 million increase in financial
advisor compensation in Wealth Management Americas.
→ Refer to “Note 30 Changes in organization and disposals” in the
“Consolidated financial statements” section of this report for
more information on restructuring expenses
information
→ Refer to “Note 6 Personnel expenses,” “Note 26 Pension and
other post-employment benefit plans” and “Note 27 Employee
benefits: variable compensation” in the “Consolidated financial
statements” section of this report for more information
General and administrative expenses
General and administrative expenses decreased by CHF 626
million to CHF 6,808 million. Excluding net restructuring
expenses of CHF 627 million compared with CHF 695 million,
adjusted general and administrative expenses decreased by
CHF 558 million, primarily reflecting CHF 375 million lower net
expenses for provisions for litigation, regulatory and similar
matters, a decrease in expenses for marketing and public
relations and lower professional fees. In addition, the net
expense for the UK bank levy was CHF 17 million in 2017
compared with CHF 123 million, primarily as 2017 included a
CHF 82 million credit related to prior years.
64
Operating expenses
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
TTotal operating expenses as reported
Adjusting items
Personnel expenses
of which: restructuring expenses 1
of which: expenses from modification of terms for certain DCCP awards 2
of which: a gain related to a change to retiree benefit plans in the US
General and administrative expenses3
Depreciation and impairment of property, equipment and software3
Amortization and impairment of intangible assets
of which: restructuring expenses 1
of which: impairment of an intangible asset
TTotal adjusting items
For the year ended
31.12.16
331.12.17
15,889
6,808
1,033
70
23,800
559
534
25
627
7
0
0
15,720
7,434
985
91
24,230
751
751
695
11
0
0
1,193
1,458
31.12.15
15,981
8,107
920
107
25,116
439
460
(21)
761
12
13
2
11
1,225
% change from
31.12.16
1
(8)
5
(23)
(2)
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
General and administrative expenses
Operating expenses (adjusted)4
Personnel expenses
of which: salaries
of which: total variable compensation
of which: relating to current year 5
of which: relating to prior years 6
of which: expenses for provisions for litigation, regulatory and similar matters
of which: other general and administrative expenses
of which: Wealth Management Americas Financial advisor compensation 7
of which: other personnel expenses 8
2
(2)
3
11
(17)
8
3
(8)
(47)
(3)
5
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
(23)
TTotal operating expenses (adjusted)
(1)
11 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information. 2 Relates to the removal of the service period requirement for
DCCP awards granted for the performance years 2012 and 2013. 3 Consists of restructuring expenses. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Includes expenses
relating to performance awards and other variable compensation for the respective performance year. 6 Consists of amortization of prior years’ awards relating to performance awards and other variable
compensation. 7 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the
basis of financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment that are
subject to vesting requirements. 8 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other personnel expenses. Refer to “Note 6 Personnel
expenses” in the “Consolidated financial statements” section of this report for more information.
15,542
5,970
3,410
2,610
799
3,552
2,613
7,346
1,087
6,259
908
94
23,891
15,330
5,691
3,182
2,490
692
3,986
2,471
6,181
420
5,761
1,026
70
22,607
14,969
5,795
3,079
2,249
832
3,697
2,396
6,739
795
5,944
974
91
22,772
At this point in time, we believe that the industry continues to
operate in an environment in which expenses associated with
litigation, regulatory and similar matters will remain elevated for
the foreseeable future and we continue to be exposed to a
number of significant claims and regulatory matters. The
outcome of many of these matters, the timing of a resolution,
and the potential effects of resolutions on our future business,
financial results or financial condition are extremely difficult to
predict.
Depreciation, impairment and amortization
Depreciation and impairment of property, equipment and
software increased by CHF 48 million to CHF 1,033 million,
largely driven by higher expenses related to internally generated
capitalized software.
Amortization and impairment of intangible assets was CHF 70
million compared with CHF 91 million.
→ Refer to “Note 14 Property, equipment and software” and
“Note 15 Goodwill and intangible assets” in the “Consolidated
→ Refer to “Note 7 General and administrative expenses” and
financial statements” section of this report for more
“Note 20 Provisions and contingent liabilities” in the
information
“Consolidated financial statements” section of this report for
more information
65
Financial and operating performance
Group performance
Tax
Total comprehensive income attributable to shareholders
We recognized an income tax expense of CHF 4,139 million for
2017, which included a net Swiss tax expense of CHF 485
million and a net non-Swiss tax expense of CHF 3,654 million.
The Swiss tax expense included a current tax expense of
CHF 448 million related to taxable profits earned by Swiss
subsidiaries, against which no losses were available to offset. In
addition, it included a deferred tax expense of CHF 37 million,
which reflected a net decrease in deferred tax assets (DTAs)
previously recognized in relation to tax losses carried forward
and temporary differences.
The non-Swiss tax expense included a current tax expense of
CHF 427 million related to taxable profits earned by non-Swiss
losses were
subsidiaries and branches, against which no
available to offset. In addition, it included a deferred tax expense
of CHF 3,227 million, which reflected a net decrease in DTAs
previously recognized in relation to tax losses carried forward
and temporary differences and mainly related to the write-down
of US DTAs resulting from the reduction in the federal corporate
tax rate to 21% from 35% after the enactment of the TCJA
during the fourth quarter of 2017.
The tax expense of CHF 4,139 million for 2017 was higher
than the tax expense of CHF 805 million in 2016, mainly as
2017 included a net write-down of DTAs of CHF 2,865 million
resulting from the aforementioned reduction in the US federal
corporate tax rate.
The TCJA also introduced a new minimum tax regime,
referred to as the base erosion and anti-abuse tax (BEAT), which
targets US businesses benefiting from deductible payments
made to non-US related parties.
For 2018, we currently forecast a full-year tax rate of
approximately 25%,
including the effects of BEAT, and
excluding the effects from any periodic remeasurement of DTAs
and any change in the manner in which we remeasure DTAs.
→ Refer to “Note 8 Income taxes” in the “Consolidated financial
statements” section of this report for more information
→ Refer to the “Regulatory and legal developments” section of
this report for more information on the TCJA
→ Refer to the “Risk factors” section of this report for more
information
In 2017, total comprehensive income attributable to shareholders
was negative CHF 210 million, reflecting net profit of CHF 1,053
million, more than offset by negative other comprehensive income
(OCI) of CHF 1,263 million.
OCI related to cash flow hedges was negative CHF 621 million,
primarily reflecting a decrease in unrealized gains on hedging
derivatives that resulted from increases in long-term interest rates. In
2016, OCI related to cash flow hedges was negative CHF 666
million.
Foreign currency translation OCI was negative CHF 530 million,
mainly resulting from the weakening of the US dollar against the
Swiss franc, partly offset by the strengthening of the euro against
the Swiss franc. In 2016, foreign currency translation OCI was
positive CHF 292 million.
OCI related to own credit on financial liabilities designated at fair
value was negative CHF 313 million compared with negative
CHF 115 million and mainly reflected a tightening of credit spreads
in 2017.
OCI associated with financial assets available for sale was
negative CHF 86 million compared with negative CHF 73 million
and primarily reflected the reclassification of net gains from OCI to
the income statement upon sale of assets, partly offset by net
unrealized gains following decreases in the respective long-term
interest rates.
Defined benefit plan OCI was positive CHF 288 million compared
with negative CHF 824 million. Total pre-tax OCI related to UK
defined benefit plans was positive CHF 296 million, reflecting OCI
gains of CHF 213 million from the return on plan assets and an OCI
gain of CHF 83 million due to a net decrease in the defined benefit
obligation (DBO). The OCI gain of CHF 83 million from the net DBO
decrease reflected gains of CHF 80 million due to changes in life
expectancy assumptions, a gain of CHF 60 million due to a decline
in the rate of pension increase and an OCI experience gain of
CHF 49 million, reflecting the effects of differences between the
previous actuarial assumptions and what actually occurred, partly
offset by a loss of CHF 105 million from a decrease in the applicable
discount rate.
Total pre-tax OCI related to the Swiss defined benefit plan was
negative CHF 78 million. This reflected an OCI gain of CHF 1,619
million from the return on plan assets, which was more than offset
by an OCI loss of CHF 1,394 million representing an increase in the
excess of the pension surplus over the estimated future economic
benefit and an OCI loss of CHF 303 million due to the DBO
remeasurement. The OCI loss of CHF 303 million related to the DBO
remeasurement mainly reflected a loss of CHF 170 million from a
decrease in the applicable discount rate and an OCI experience loss
of CHF 152 million, reflecting the effects of differences between the
previous actuarial assumptions and what actually occurred.
→ Refer to “Statement of comprehensive income” in the
“Consolidated financial statements” section of this report for
more information
→ Refer to “Note 26 Pension and other post-employment benefit
plans” in the “Consolidated financial statements” section of this
report for more information on defined benefit plans
66
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Sensitivity to interest rate movements
As of 31 December 2017, we estimate that a parallel shift in
yield curves by +100 basis points could lead to a combined
increase in annual net interest income of approximately CHF 0.7
billion in Wealth Management, Wealth Management Americas
and Personal & Corporate Banking. Of
increase,
approximately CHF 0.4 billion would result from changes in US
dollar interest rates.
this
The immediate effect on shareholders’ equity of such a shift
in yield curves would be a decrease of approximately CHF 1.5
billion recognized in OCI, of which approximately CHF 1.3 billion
would result from changes in US dollar interest rates. Since the
majority of this effect on shareholders’ equity is related to cash
flow hedge OCI, which is not recognized for the purposes of
calculating regulatory capital, the immediate effect on regulatory
capital would be an increase of approximately CHF 0.1 billion,
primarily related to the estimated effect related to pension fund
assets and liabilities.
The aforementioned estimates are based on an immediate
increase in interest rates, equal across all currencies and relative
to implied forward rates applied to our banking book and
financial assets available for sale. These estimates further assume
no change to balance sheet size and structure, constant foreign
exchange rates and no specific management action.
Net profit attributable to non-controlling interests
Net profit attributable to non-controlling interests was CHF 76
million in 2017 compared with CHF 82 million in the prior year.
From 2018, we currently expect net profit attributable to
non-controlling interests to be less than CHF 10 million per year
following the redemption of a EUR 600 million non-Basel III-
compliant hybrid tier 1 capital instrument in the fourth quarter
of 2017.
Key figures
Return on tangible equity
The return on tangible equity (RoTE) was 2.4% compared with
6.9%. On an adjusted basis, the RoTE was 4.0% compared with
9.0% and was below our 2017 target of more than 15%. This
was mainly due to a CHF 2,865 million net write-down of DTAs
in 2017 following a reduction in the US federal corporate tax
rate after the enactment of the TCJA during the fourth quarter
of 2017.
Cost / income ratio
The cost / income ratio was 81.5% compared with 85.4%. On
an adjusted basis, the cost / income ratio was 78.1% compared
with 80.9% and was above our 2017 target range of 60–70%.
Common equity tier 1 capital ratio / risk-weighted assets
Our fully applied common equity tier 1 (CET1) capital ratio
remained stable at 13.8% as of 31 December 2017, exceeding
our 2017 target ratio of 13.0% and reflecting a CHF 2 billion
increase in CET1 capital and a CHF 15 billion increase in risk-
weighted assets (RWA).
Our fully applied RWA increased by CHF 15 billion to
CHF 237 billion as of 31 December 2017, primarily due to a
CHF 17 billion increase in methodology, policy changes and
model updates.
→ Refer to the “Investment Bank,” “Corporate Center” and
“Capital management” sections of this report for more
information
Common equity tier 1 leverage ratio / leverage ratio denominator
Our fully applied CET1 leverage ratio increased 0.2 percentage
points to 3.7% as of 31 December 2017, reflecting the
aforementioned increase in CET1 capital, partly offset by a
CHF 16 billion increase in the leverage ratio denominator (LRD).
Our fully applied LRD increased by CHF 16 billion to CHF 886
billion as of 31 December 2017, primarily due to asset size and
other increases of CHF 20 billion, partly offset by CHF 3 billion
incremental netting and collateral mitigation as well as currency
effects of CHF 1 billion.
→ Refer to the “Investment Bank,” “Corporate Center” and
“Capital management” sections of this report for more
information
Going concern leverage ratio
Our fully applied going concern leverage ratio increased 0.1
percentage points to 4.7% as of 31 December 2017, reflecting a
CHF 2 billion increase in going concern capital, partly offset by
the aforementioned increase in LRD.
→ Refer to the “Capital management” section of this report for
more information
67
Financial and operating performance
Group performance
Net new money and invested assets
Management’s discussion and analysis on net new money and
invested assets is provided in the “Wealth Management,”
“Wealth Management Americas” and “Asset Management”
sections of this report.
Disposals in 2018
Hana Financial Group, our partner in South Korea, exercised a
10-year buyout option to acquire Asset Management’s 51%
stake in UBS Hana Asset Management in the third quarter of
2017. This transaction is pending and still subject to regulatory
approval.
Seasonal characteristics
Our revenues may show seasonal patterns, notably in the
Investment Bank and our wealth management businesses, which
typically show the highest client activity levels in the first quarter,
with lower levels throughout the rest of the year, especially
during the summer months and end-of-year holiday season.
Other seasonal factors that may affect our businesses include
annual tax payments (which are concentrated in the second
quarter in the US) and asset withdrawals that tend to occur in
the fourth quarter.
Return on equity
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
of which: deferred tax (expense) / benefit 4
Adjusted net profit attributable to shareholders excluding deferred tax expense / benefit
Equity
Equity attributable to shareholders
Less: goodwill and intangible assets
Tangible equity attributable to shareholders
of which: DTAs not eligible as CET1 capital 5
Tangible equity attributable to shareholders excluding DTAs
Return on equity
Return on equity (%)
Return on tangible equity (%)
Adjusted return on tangible equity (%)1
As of or for the year ended
331.12.17
31.12.16
31.12.15
1,053
70
926
(204)
1,845
(3,264)
5,109
51,214
6,398
44,816
6,654
38,162
2.0
2.4
4.0
3,204
91
1,251
(275)
4,271
7
4,264
53,621
6,556
47,065
10,238
36,827
5.9
6.9
9.0
6,203
107
135
(140)
6,305
1,613
4,692
55,313
6,568
48,745
10,066
38,679
11.8
13.7
13.7
Adjusted return on tangible equity excluding deferred tax expense / benefit and DTAs (%)1,6
11 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Refer to the “Performance by business division and Corporate Center unit reported and adjusted” table in this section for
more information. 3 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items. 2015 included own credit on financial liabilities designated at fair value as an adjusting item with an indicative tax
rate of 2%. 4 Deferred tax expense / benefit in respect to taxable profits and any remeasurements of DTAs, such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017.
5 DTAs that do not qualify as CET1 capital, reflecting DTAs recognized for tax loss carry-forwards of CHF 5,797 million as 31 December 2017 (31 December 2016: CHF 8,403 million; 31 December 2015: CHF 7,468
million) as well as DTAs on temporary differences, excess over threshold of CHF 857 million as of 31 December 2017 (31 December 2016: CHF 1,835 million; 31 December 2015: CHF 2,598 million), in accordance
with fully applied Swiss SRB rules. Refer to the “Capital management” section of this report for more information. 6 Calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax
expense / benefit, such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not
qualify as fully applied CET1 capital.
13.8
12.4
11.3
68
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Net new money1
CHF billion
WWealth Management
WWealth Management (adjusted)2
WWealth Management Americas
AAsset Management
of which: excluding money market flows
of which: money market flows
For the year ended
331.12.17
31.12.16
31.12.15
51.1
51.1
(6.8)
58.7
48.1
10.6
26.8
26.8
15.4
(15.5)
(22.5)
7.0
12.9
22.8
21.3
(5.4)
(0.7)
(4.7)
11 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 Americas1
Asset Management
of which: excluding money market funds
of which: money market funds
As of
% change from
31.12.17
31.12.16
31.12.15
31.12.16
1,148
1,195
776
701
76
977
1,119
656
591
66
947
1,024
650
592
58
18
7
18
19
15
1 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12 billion and CHF 11 billion, respectively.
69
Financial and operating performance
Group performance
2016 compared with 2015
Operating income
Results
recorded net profit attributable
We
to shareholders of
CHF 3,204 million in 2016, which included a net tax expense of
CHF 805 million. In 2015, net profit attributable to shareholders
was CHF 6,203 million, which included a net tax benefit of
CHF 898 million.
Profit before tax was CHF 4,090 million in 2016 compared
with CHF 5,489 million in the prior year. Operating income
decreased by CHF 2,285 million or 7%, mainly due to
CHF 1,113 million lower combined net interest and trading
income, primarily in the Investment Bank and Corporate Center
– Group ALM, and a decline of CHF 743 million in net fee and
commission
in Wealth Management.
Operating expenses decreased by CHF 886 million or 4%, mainly
due to CHF 673 million lower general and administrative
expenses and a decline of CHF 261 million in personnel
expenses.
income, primarily
In addition to reporting our results in accordance with IFRS,
we report adjusted results that exclude items that management
believes are not representative of the underlying performance of
our businesses. Such adjusted results are non-GAAP financial
measures as defined by SEC regulations. For the purpose of
determining adjusted results for 2016, we excluded gains of
CHF 211 million on sale of financial assets available for sale,
gains on sales of real estate of CHF 120 million, gains of CHF 21
million related to investments in associates, net foreign currency
translation losses of CHF 122 million, losses on sales of
subsidiaries and businesses of CHF 23 million and net
restructuring expenses of CHF 1,458 million. For 2015, we
excluded an own credit gain of CHF 553 million, gains on sales
of real estate of CHF 378 million, gains on sales of subsidiaries
and businesses of CHF 225 million, net foreign currency
translation gains of CHF 88 million, gains of CHF 81 million
related to investments in associates, gains of CHF 11 million on
sale of financial assets available for sale, net losses related to the
buyback of debt in a tender offer of CHF 257 million, net
restructuring expenses of CHF 1,235 million, a gain of CHF 21
million related to a change to retiree benefit plans in the US and
an impairment of an intangible asset of CHF 11 million.
On this adjusted basis, profit before tax was CHF 5,341
million in 2016 compared with CHF 5,635 million in the prior
year, reflecting CHF 1,413 million lower operating income,
largely offset by CHF 1,119 million lower operating expenses.
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
lower
combined net interest and trading income.
income and CHF 560 million
Net interest and trading income
Total combined net interest and trading income decreased by
CHF 1,113 million to CHF 11,361 million. Excluding the own
credit gain of CHF 553 million in 2015, adjusted net interest and
trading income decreased by CHF 560 million.
In Wealth Management, net interest and trading income
decreased by CHF 36 million to CHF 2,998 million, mainly
reflecting reduced client activity.
Wealth Management Americas net interest and trading
income increased by CHF 302 million to CHF 1,839 million,
primarily due to an increase in net interest income, reflecting
higher short-term interest rates as well as growth in loan and
deposit balances.
In Personal & Corporate Banking, net interest and trading
income declined by CHF 81 million to CHF 2,532 million, mainly
due to lower treasury-related income from Corporate Center –
Group ALM and lower deposit-related income.
In the Investment Bank, net interest and trading income
decreased by CHF 909 million to CHF 4,277 million, primarily
due to a CHF 513 million decline in Equities, with lower
revenues in Derivatives and Financing Services. In addition, net
interest and trading income decreased by CHF 217 million in our
Foreign Exchange, Rates and Credit businesses, mainly as 2015
benefited from higher volatility and client activity levels following
the Swiss National Bank’s actions in January 2015.
Corporate Center – Group ALM net interest and trading
income, excluding the effect of own credit, improved by CHF 23
million.
In Corporate Center – Non-core and Legacy Portfolio, net
interest and trading income improved by CHF 251 million,
primarily as the prior year included higher losses related to
unwind and novation activities.
Credit loss expense / recovery
The net credit loss expense was CHF 37 million compared with
CHF 117 million. The Investment Bank recorded a net credit loss
expense of CHF 11 million compared with CHF 68 million in the
prior year, reflecting lower expenses related to the energy
sector. Net credit loss expense in Personal & Corporate Banking
was CHF 6 million compared with CHF 37 million, mainly due to
higher net recoveries on existing impaired positions.
70
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
into
to the effects of cross-border outflows and shifts
retrocession-free products, as well as changes in clients’ asset
allocation.
Underwriting fees decreased by CHF 300 million to CHF 946
revenues,
equity underwriting
million due
predominantly in the Investment Bank.
lower
to
Net brokerage fees declined by CHF 276 million to CHF 2,784
million, mainly in Wealth Management and the Investment
Bank, largely driven by reduced client activity.
Portfolio management and advisory fees
increased by
CHF 177 million to CHF 8,035 million, primarily in Wealth
Management Americas, mainly due to increased managed
account fees, reflecting higher invested asset levels.
Other income
Other income was CHF 599 million compared with CHF 1,107
million. Excluding certain gains on sales of financial assets
available for sale and real estate, gains related to investments in
associates, net foreign currency translation gains and losses, and
gains and losses on sales of subsidiaries and businesses, adjusted
other income decreased by CHF 189 million. This decline was
mainly due to lower gains on sale of financial assets available for
sale.
Operating expenses
Total operating expenses decreased by CHF 886 million or 4%
to CHF 24,230 million. Net
restructuring expenses were
CHF 1,458 million compared with CHF 1,235 million, reflecting
an increase of CHF 291 million in personnel-related restructuring
expenses, mainly related to our transitioning activities to
nearshore and offshore locations, partly offset by a decrease of
CHF 69 million in non-personnel-related restructuring expenses.
Adjusted total operating expenses decreased by CHF 1,119
million or 5% to CHF 22,772 million. This decrease was mainly
due to a decline of CHF 607 million in adjusted general and
administrative expenses, of which CHF 292 million related to net
expenses for provisions for litigation, regulatory and similar
matters, and a decrease of CHF 573 million in adjusted
personnel expenses, primarily due to lower expenses for salaries
and variable compensation.
Personnel expenses
to
Personnel expenses decreased by CHF 261 million
CHF 15,720 million and included net restructuring expenses of
CHF 751 million compared with CHF 460 million, largely related
to our transitioning activities to nearshore and offshore locations
and our cost reduction programs. On an adjusted basis,
personnel expenses decreased by CHF 573 million
to
CHF 14,969 million. Adjusted expenses for salaries decreased by
CHF 175 million to CHF 5,795 million, mainly reflecting our cost
reduction programs. Adjusted expenses for total variable
compensation decreased by CHF 331 million, reflecting a
decrease of CHF 361 million in expenses for current-year
awards.
Adjusted other personnel expenses decreased by CHF 217
million, largely due to CHF 149 million lower pension costs for
our Swiss pension plan, reflecting the effect of changes to
demographic and financial assumptions, and a decline of
CHF 76 million in social security expenses.
Financial advisor compensation
in Wealth Management
Americas increased by CHF 145 million to CHF 3,697 million,
mainly due to currency effects and higher expenses for
compensation commitments, reflecting the recruitment of
financial advisors.
General and administrative expenses
General and administrative expenses decreased by CHF 673
million to CHF 7,434 million.
Excluding net restructuring expenses of CHF 695 million
compared with CHF 761 million, adjusted general and
administrative expenses decreased by CHF 607 million, primarily
reflecting CHF 292 million lower net expenses for provisions for
litigation, regulatory and similar matters, a decrease of CHF 95
million in professional fees and CHF 79 million lower expenses
for outsourcing of IT and other services. Also, the net expense
for the annual UK bank levy was CHF 123 million compared with
CHF 166 million, primarily related to currency effects. This net
expense was mainly recorded in the Investment Bank and
Corporate Center – Non-core and Legacy Portfolio.
Tax
We recognized a net income tax expense of CHF 805 million for
2016, which included a net Swiss tax expense of CHF 1,094
million and a net non-Swiss tax benefit of CHF 289 million.
The Swiss tax expense included a current tax expense of
CHF 459 million related to taxable profits, mainly earned by
Swiss subsidiaries, against which no losses were available to
offset. In addition, it included a deferred tax expense of CHF 635
million, which reflected a decrease in deferred tax assets
previously recognized in relation to tax losses carried forward
and temporary differences.
71
Financial and operating performance
Group performance
The net non-Swiss tax benefit included a current tax expense
of CHF 353 million related to taxable profits earned by non-
Swiss subsidiaries and branches, against which no losses were
available to offset. This was more than offset by a net deferred
tax benefit of CHF 642 million, primarily due to an increase in
our US deferred tax assets, reflecting updated profit forecasts.
We recognized a tax expense in 2016 compared with a tax
benefit in 2015, mainly due to an upward revaluation of US
deferred tax assets in 2015 in relation to the extension of the
forecast period for US taxable profits to seven years from six. In
2016, there was no extension of the forecast period.
Total comprehensive income attributable to shareholders
total
comprehensive
to
In 2016,
shareholders was CHF 1,817 million, reflecting net profit of
CHF 3,204 million, partly offset by negative OCI of CHF 1,386
million.
income attributable
Defined benefit plan OCI was negative CHF 824 million
compared with positive CHF 298 million. In 2016, we updated
and refined certain actuarial assumptions used in calculating our
defined benefit obligations (DBOs). This resulted in net OCI gains
of CHF 319 million related to the Swiss defined benefit plan and
an OCI gain of CHF 63 million related to the UK pension plan.
Total pre-tax OCI related to UK defined benefit plans was
negative CHF 615 million, reflecting an OCI loss of CHF 928
million due to a net increase in the DBO, mainly due to a
decrease in the applicable discount rate, partly offset by the
aforementioned gain of CHF 63 million from changes in
assumptions. The OCI loss related to the net increase in the DBO
was partly offset by OCI gains of CHF 312 million from the
return on plan assets.
largely offset by an OCI gain of CHF 824 million from the return
on plan assets. The OCI loss of CHF 477 million related to the
net DBO increase was mainly due to an experience loss of
CHF 438 million, reflecting the effects of differences between
the previous actuarial assumptions and what actually occurred,
and a loss of CHF 433 million from a decline in the applicable
discount rate, partly offset by the aforementioned net gain of
CHF 319 million from changes in assumptions.
OCI related to cash flow hedges was negative CHF 666
million, which primarily reflected a decrease in unrealized gains
on hedging derivatives due to an increase in US dollar long-term
interest rates. In 2015, OCI related to cash flow hedges was
negative CHF 509 million.
OCI related to own credit on financial liabilities designated at
fair value was negative CHF 115 million in 2016, mainly
reflecting a downward shift in LIBOR curves.
OCI associated with financial assets available for sale was
negative CHF 73 million compared with negative CHF 63 million
and primarily reflected the reclassification of net gains from OCI
to the income statement upon sale of assets, partly offset by net
unrealized gains following decreases in the respective long-term
interest rates.
Foreign currency translation OCI was CHF 292 million, mainly
resulting from the strengthening of the US dollar against the
Swiss franc, partly offset by the significant weakening of the
British pound against the Swiss franc. In addition, net losses
totaling CHF 126 million were reclassified to the income
statement following the disposal of foreign subsidiaries and
branches.
Net profit attributable to non-controlling interests
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,
Net profit attributable to non-controlling interests was CHF 82
million in 2016 compared with CHF 183 million in the prior year.
This mainly related to dividends of CHF 79 million that were paid
to preferred noteholders, for which no accrual was required in a
prior period.
72
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results4
TTotal operating income as reported
of which: gain / (loss) on sales of subsidiaries and businesses
of which: gain related to investments in associates
of which: gain on sale of financial assets available for sale 5
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Key performance indicators6
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 indicators4,6
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
2,344
3,634
1,611
39
7,629
(4)
7,625
2,354
594
2,372
2,294
3
7
5,330
2,295
7,625
7,625
5,330
38
73
353
4,867
2,295
2,758
17.8
69.9
5.2
72
22
15.1
63.8
5.2
72
26
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
1
2
15
95
5
(20)
5
0
(7)
1
2
50
75
0
18
5
5
0
(1)
18
15
(6)
5
(6)
4
73
Financial and operating performance
Wealth Management
Wealth Management (continued)1
CHF million, except where indicated
Additional information
Recurring income7
Recurring income as a percentage of income (%)
Average attributed equity (CHF billion)8
Return on attributed equity (%)8
Return on attributed tangible equity (%)8
Risk-weighted assets (CHF billion)8
of which: held by Wealth Management (CHF billion)
of which: held by CC – Group ALM on behalf of Wealth Management (CHF billion) 9
Leverage ratio denominator (CHF billion)8
of which: held by Wealth Management (CHF billion)
of which: held by CC – Group ALM on behalf of Wealth Management (CHF billion) 9
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
5,880
80.6
3.5
56.1
25.8
25.8
115.5
115.5
6,146
75.4
3.5
77.4
25.3
25.3
119.0
119.0
2
77
17
12
51
11
5,978
78.4
6.2
37.1
47.7
30.2
29.0
1.2
173.9
128.0
45.9
1.4
51.1
1,148
1,338
115.2
195.3
9,665
3,794
Goodwill and intangible assets (CHF billion)
Net new money (CHF billion)
Invested assets (CHF billion)
18
16
Client assets (CHF billion)
Loans, gross (CHF billion)
13
Due to customers (CHF billion)
2
Personnel (full-time equivalents)
(1)
(2)
Client advisors (full-time equivalents)
11 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of
new accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio
management fees, asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and
commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Adjusted results
are non-GAAP financial measures as defined by SEC regulations. 5 Reflects a gain on the sale of our investment in Visa Europe in 2016. 6 Refer to the “Measurement of performance” section of this report for
the definitions of our key performance indicators. 7 Recurring income consists of net interest income and recurring net fee income. 8 Refer to the “Capital management” section of this report for more
information. 9 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business
divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other
Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on
attributed equity” in the “Capital management” section of this report for more information.
1.3
12.9
947
1,122
105.2
172.3
10,239
4,019
1.3
26.8
977
1,157
101.9
192.3
9,721
3,859
8
Regional breakdown of key figures1
As of or for the year ended 31.12.17
Net new money (CHF billion)
Net new money growth (%)
Invested assets (CHF billion)
Client advisors (full-time equivalents)
Europe
17.4
Asia Pacific
28.3
Switzerland
5.7
Emerging markets
0.8
Total of
regions2
52.2
of which: ultra high
net worth
45.2
of which: Global
Family Office 3
6.3
4.9
402
1,265
9.7
373
1,037
3.2
204
743
0.5
166
651
5.3
1,145
3,696
8.2
678
810 4
6.7
120
1 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 2 Excluding minor functions with 98 client advisors, CHF 3 billion of invested assets, and
CHF 1.1 billion of net new money outflows in 2017. 3 Joint venture between Wealth Management and the Investment Bank. Global Family Office is reported as a sub-segment of ultra high net worth and is
included in the ultra high net worth figures. 4 Represents client advisors who exclusively serve ultra high net worth clients. In addition to these, other client advisors may also serve certain ultra high net worth
clients, but not exclusively.
74
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2017 compared with 2016
Results
Profit before tax increased by CHF 347 million or 18% to
CHF 2,295 million and adjusted profit before tax increased by
CHF 361 million or 15% to CHF 2,758 million, mainly reflecting
higher operating income.
Operating income
Total operating income increased by CHF 334 million or 5% to
CHF 7,625 million. 2016 included a loss on the sale of
subsidiaries and businesses of CHF 23 million and a gain of
CHF 21 million on the sale of our investment in Visa Europe.
Excluding these items, adjusted operating income increased by
CHF 332 million or 5% to CHF 7,625 million, driven by increases
across all income lines.
Net interest income increased by CHF 13 million to CHF 2,344
million, primarily due to higher deposit revenues, mostly
reflecting higher short-term US dollar interest rates, as well as an
increase in lending revenues. This was partly offset by lower
allocated treasury-related income from Corporate Center –
Group Asset and Liability Management (Group ALM), reflecting
lower banking book interest income and higher funding costs
for long-term debt that contributes to total loss-absorbing
capacity.
Recurring net fee income increased by CHF 86 million to
CHF 3,634 million, predominantly driven by higher average
invested assets, increases in discretionary and advisory mandate
penetration and pricing measures. These factors were partly
offset by the effects of cross-border outflows and shifts into
retrocession-free products.
Transaction-based income increased by CHF 214 million to
CHF 1,611 million across all regions and most products, mainly
due to increased client activity, most notably in Asia Pacific and
Switzerland.
Other income increased by CHF 19 million to CHF 39 million,
reflecting net gains on sales of subsidiaries and businesses.
Operating expenses
Total operating expenses decreased by CHF 13 million to
CHF 5,330 million and adjusted operating expenses decreased
by CHF 29 million or 1% to CHF 4,867 million.
Personnel expenses increased by CHF 5 million to CHF 2,354
million and increased by CHF 20 million to CHF 2,316 million on
an adjusted basis, mainly due to higher variable compensation.
General and administrative expenses decreased by CHF 46
million to CHF 594 million and decreased by CHF 64 million to
CHF 521 million on an adjusted basis, predominantly driven by
lower net expenses for provisions for litigation, regulatory and
similar matters.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 24 million to CHF 2,372
million and increased by CHF 10 million to CHF 2,019 million on
an adjusted basis, mainly reflecting higher costs related to
strategic and regulatory initiatives and higher net expenses from
control functions, partly offset by lower net expenses from
Group Technology.
Cost / income ratio
The cost / income ratio decreased to 69.9% from 73.2%. On an
adjusted basis, the ratio decreased to 63.8% from 67.1% and
was within our 2017 target range of 55% to 65%.
Net new money
Net new money was CHF 51.1 billion compared with CHF 26.8
billion, resulting in an annual growth rate of 5.2% compared
with 2.8%, which was above our 2017 target range of 3% to
5%. Net new money was positive in all regions, predominantly
driven by inflows in Asia Pacific and Europe. Cross-border-
related net outflows were CHF 12 billion compared with CHF 14
billion, mainly driven by outflows in emerging markets. In
addition, we incurred net outflows of CHF 8 billion related to
the introduction of fees on euro deposit concentrations in
Europe, emerging markets and Switzerland. Net new money
from ultra high net worth clients was CHF 45.2 billion compared
with CHF 27.3 billion.
Invested assets
Invested assets increased by CHF 171 billion to CHF 1,148
billion, primarily reflecting positive market performance of
CHF 114 billion, net new money of CHF 51 billion, positive
foreign currency translation effects of CHF 4 billion and an
increase of CHF 4 billion due to the positive net effect of
acquisitions and divestments of subsidiaries and businesses.
Discretionary and advisory mandate penetration increased to
28.9% from 26.9%.
Personnel
Wealth Management employed 9,665 personnel compared with
9,721. The number of client advisors decreased by 65 to 3,794
and the number of non-client-facing staff remained stable at
5,871.
75
Financial and operating performance
Wealth Management
2016 compared with 2015
Results
Profit before tax decreased by CHF 741 million or 28% to
CHF 1,948 million and adjusted profit before tax decreased by
CHF 431 million or 15% to CHF 2,397 million, reflecting lower
operating
income, partly offset by decreased operating
expenses.
Operating income
Total operating income decreased by CHF 864 million or 11% to
CHF 7,291 million. 2016 included a loss on the sale of
subsidiaries and businesses of CHF 23 million and a gain of
CHF 21 million on the sale of our investment in Visa Europe.
2015 included net gains of CHF 169 million on the sale of
subsidiaries and businesses and a CHF 15 million gain related to
our investment in the SIX Group. Excluding these items, adjusted
operating income decreased by CHF 678 million or 9% to
CHF 7,293 million, mainly due to lower transaction-based
income and recurring net fee income.
Net interest income increased by CHF 5 million to CHF 2,331
million, mainly due to higher deposit revenues, partly offset by
lower treasury-related income from Corporate Center – Group
Asset and Liability Management (Group ALM).
Recurring net fee income decreased by CHF 272 million to
CHF 3,548 million due to the effects of cross-border outflows
and shifts into retrocession-free products, changes in clients’
asset allocation and the effect of our exit from the Australian
and Belgian domestic businesses. This was partly offset by the
effects of increases in discretionary and advisory mandate
penetration and pricing measures.
Transaction-based income decreased by CHF 381 million to
CHF 1,397 million across all regions and most products, mainly
due to reduced client activity, most notably in Asia Pacific and
emerging markets. Additionally, 2015 included a fee of CHF 45
million received from Personal & Corporate Banking for the shift
of clients, as a result of a detailed client segmentation review.
Other income decreased by CHF 211 million to CHF 20
million, mainly related to the aforementioned net gains on the
sale of subsidiaries and businesses in 2015.
Operating expenses
Total operating expenses decreased by CHF 122 million or 2%
to CHF 5,343 million and adjusted operating expenses decreased
by CHF 246 million or 5% to CHF 4,896 million.
to
Personnel expenses decreased by CHF 183 million
CHF 2,349 million and adjusted personnel expenses decreased
by CHF 216 million to CHF 2,296 million, driven by a decrease in
staff levels and lower variable compensation expenses, as well as
lower pension costs for our Swiss pension plan, reflecting the
effects of changes to demographic and financial assumptions.
General and administrative expenses increased by CHF 3
to CHF 640 million and adjusted general and
million
administrative expenses decreased by CHF 14 million to CHF 585
million. This was driven by a CHF 35 million decrease in net
expenses for provisions for litigation, regulatory and similar
matters, partly offset by higher professional fees.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 59 million to CHF 2,348
million and adjusted net expenses for services decreased by
CHF 15 million to CHF 2,009 million, mainly reflecting lower
expenses from Group Operations partly offset by higher
occupancy expenses from Group Corporate Services.
Cost / income ratio
The cost / income ratio increased to 73.2% from 67.0%. On an
adjusted basis, the ratio increased to 67.1% from 64.5% and
was above our target range of 55% to 65%.
Net new money
Net new money was CHF 26.8 billion compared with adjusted
net new money of CHF 22.8 billion in the prior year, which
excluded the negative effect of CHF 9.9 billion from our balance
sheet and capital optimization program. The net new money
growth rate was 2.8% compared with an adjusted growth rate
of 2.3%, and was below our target range of 3% to 5%. Net
new money was driven predominantly by inflows in Asia Pacific,
but also Europe and Switzerland, partly offset by outflows in
emerging markets, mainly due to cross-border outflows. Total
cross-border outflows were CHF 14 billion compared with CHF 8
billion, mainly driven by outflows in emerging markets. On a
global basis, net new money from ultra high net worth clients
was CHF 27.3 billion compared with adjusted net new money of
CHF 23.4 billion.
Invested assets
Invested assets increased by CHF 30 billion to CHF 977 billion,
primarily reflecting net new money of CHF 27 billion and
positive market performance of CHF 19 billion, partly offset by a
CHF 13 billion decrease due to the sale of subsidiaries and
businesses that did not affect net new money, and negative
translation effects of CHF 1 billion.
foreign
Discretionary and advisory mandate penetration increased to
26.9% from 26.4%.
currency
Personnel
Wealth Management employed 9,721 personnel compared with
10,239. The number of client advisors decreased by 160 to
3,859 and the number of non-client-facing staff decreased by
358 to 5,862, both driven by our cost reduction programs and
our exit from the Australian domestic business. Of the
aforementioned decrease in client advisors, 82 were related to
our exit from the Australian domestic business.
76
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results6
TTotal operating income as reported
of which: gain on sale of financial assets available for sale
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness 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 indicators6,7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
1,712
5,263
1,516
24
8,516
(4)
8,512
5,274
3,310
754
1,210
657
1,307
1,286
2
42
7,282
1,230
8,512
8,512
7,282
1
0
115
7,167
1,230
1,345
10.0
85.5
(0.7)
73
11
7.6
84.2
(0.7)
73
12
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
74
10
43.0
84.1
1.5
74
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
75
7
(15.1)
88.5
2.1
75
9
15
8
3
(31)
8
33
8
8
13
(7)
7
14
5
4
0
(16)
8
10
8
8
8
8
10
8
(1)
10
(1)
0
77
Financial and operating performance
Wealth Management Americas
Wealth Management Americas – in US dollars (continued)1
USD million, except where indicated
Additional information
Recurring income8
Recurring income as a percentage of income (%)
Average attributed equity (USD billion)9
Return on attributed equity (%)9
Return on attributed tangible equity (%)9
Risk-weighted assets (USD billion)9
of which: held by Wealth Management Americas (USD billion)
of which: held by CC – Group ALM on behalf of Wealth Management Americas (USD billion) 10
Leverage ratio denominator (USD billion)9
of which: held by Wealth Management Americas (USD billion)
of which: held by CC – Group ALM on behalf of Wealth Management Americas (USD billion) 10
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
6,364
80.8
2.6
43.0
23.4
23.4
66.9
66.9
6,010
78.5
2.6
29.3
21.9
21.9
62.8
62.8
10
158
16
12
35
10
6,975
81.9
6.7
18.3
41.6
27.2
26.2
1.0
90.2
73.7
16.6
3.6
(7.2)
21.7
1,225
1,288
54.4
77.6
2,619
580
13,512
6,822
(3)
Goodwill and intangible assets (USD billion)
Net new money (USD billion)
Net new money including interest and dividend income (USD billion)11
Invested assets (USD billion)12
11
11
Client assets (USD billion)
5
Loans, gross (USD billion)
(13)
Due to customers (USD billion)
Recruitment loans to financial advisors
(14)
26
Other loans to financial advisors
Personnel (full-time equivalents)
0
Financial advisors (full-time equivalents)
(3)
11 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of
new accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio
management fees, asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and
commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor
compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity,
firm tenure, assets and other variables. 5 Compensation commitments with recruited financial advisors represent expenses related to compensation commitments granted to financial advisors at the time of
recruitment that are subject to vesting requirements. 6 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 7 Refer to the “Measurement of performance” section of this report for
the definitions of our key performance indicators. 8 Recurring income consists of net interest income and recurring net fee income. 9 Refer to the “Capital management” section of this report for more
information. 10 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business
divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other
Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on
attributed equity” in the “Capital management” section of this report for more information. 11 Presented in line with historical reporting practice in the US market. 12 Certain account types were corrected
during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by USD 11 billion. The effect on net new money in all periods was immaterial.
3.7
21.4
47.8
1,022
1,084
48.7
83.1
3,179
418
13,611
7,140
3.7
15.4
40.8
1,100
1,160
51.6
89.2
3,033
462
13,526
7,025
78
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2017 compared with 2016
Results
Profit before tax increased by USD 112 million or 10% to
USD 1,230 million, and adjusted profit before tax increased by
USD 95 million or 8% to USD 1,345 million driven by higher
operating income, partly offset by higher operating expenses.
Operating income
Total operating income increased by USD 641 million or 8% and
adjusted operating income increased by USD 651 million or 8% to
USD 8,512 million, mainly due to higher net interest income and
recurring net fee income.
Net interest income increased by USD 228 million to USD 1,712
million, primarily due to an increase in net interest margin on
higher short-term US dollar interest rates as well as higher lending
balances. The average mortgage portfolio balance increased 18%
and the average securities-backed lending portfolio balance
increased 2%.
Recurring net fee income increased by USD 383 million to
USD 5,263 million, mainly due to increased invested assets in
managed accounts.
Transaction-based income increased by USD 42 million to
USD 1,516 million, primarily due to higher client activity.
Operating expenses
Total operating expenses increased by USD 530 million or 8% to
USD 7,282 million and adjusted operating expenses increased by
USD 557 million or 8% to USD 7,167 million.
Personnel expenses
increased by USD 400 million
to
USD 5,274 million and adjusted personnel expenses increased by
USD 406 million to USD 5,273 million, mainly due to USD 379
million higher financial advisor compensation and an increase in
salaries and other personnel costs. The higher financial advisor
compensation reflects higher compensable revenues as well as
changes we announced in 2016 to our financial advisor
compensation model. The
in salaries and other
personnel costs is due to an increase in support staff. These
increases were partly offset by lower expenses for compensation
commitments with recruited financial advisors.
increase
General and administrative expenses increased by USD 81
million to USD 657 million, largely due to a USD 51 million net
expense for provisions for litigation, regulatory and similar matters.
Furthermore, other provisions increased by USD 22 million, mainly
as 2016 included a release of USD 18 million.
Net expenses for services from Corporate Center and other
business divisions increased by USD 57 million to USD 1,307 million
and increased by USD 76 million to USD 1,192 million on an
adjusted basis, mainly reflecting higher costs related to Group
Technology and strategic and regulatory initiatives.
Cost / income ratio
The cost / income ratio decreased to 85.5% from 85.8%. On an
adjusted basis, the cost / income ratio was 84.2% compared with
84.1% and was within our 2017 target range of 75% to 85%.
Net new money
Net new money outflows were USD 7.2 billion compared with net
inflows of USD 15.4 billion, reflecting outflows from net recruiting
partly offset by inflows from financial advisors employed with UBS
for more than one year. The net new money growth rate was
negative 0.7% compared with positive 1.5%, and was below our
2017 target range of 2% to 4%.
Invested assets
Invested assets increased by USD 125 billion to USD 1,225 billion,
reflecting positive market performance of USD 135 billion, partly
offset by net new money outflows of USD 7 billion. Discretionary
and advisory mandate penetration increased to 36.8% from
35.1%.
Personnel
As of 31 December 2017, Wealth Management Americas
employed 13,512 personnel, a decrease of 14 from 31 December
2016. Financial advisor headcount decreased by 203 to 6,822, due
to attrition. Non-financial advisor headcount increased by 189 to
6,690 due to an increase in support staff.
79
Financial and operating performance
Wealth Management Americas
2016 compared with 2015
Results
Profit before tax increased by USD 364 million or 48% to
USD 1,118 million, and adjusted profit before tax increased by
USD 376 million or 43% to USD 1,250 million due to higher
operating income and lower operating expenses.
Operating income
Total operating income increased by USD 218 million or 3% to
USD 7,871 million. Adjusted operating income increased by
USD 208 million or 3% to USD 7,861 million, due to higher net
interest income and recurring net fee income, partly offset by lower
transaction-based income.
Net interest income increased by USD 269 million to USD 1,484
million, due to higher short-term interest rates and growth in loan
and deposit balances. The average mortgage portfolio balance
increased 12% and the average securities-backed lending portfolio
balance increased 6%.
Recurring net fee income increased by USD 85 million to
USD 4,880 million, mainly due to increased managed account fees,
reflecting higher invested asset levels.
Transaction-based income decreased by USD 140 million to
USD 1,474 million, primarily due to lower client activity levels.
Operating expenses
Operating expenses decreased by USD 147 million or 2% to
USD 6,752 million and adjusted operating expenses decreased by
USD 169 million or 2% to USD 6,610 million, due to USD 260
million lower net expenses for provisions for litigation, regulatory
and similar matters, partly offset by higher adjusted personnel
expenses.
Personnel expenses increased by USD 128 million to USD 4,874
million and adjusted personnel expenses increased by USD 101
million to USD 4,867 million, mainly due to higher salary costs and
other personnel costs due to an increase in support staff, as well as
higher expenses for compensation commitments, reflecting the
recruitment of financial advisors.
General and administrative expenses decreased by USD 269
million to USD 576 million, mainly due to the aforementioned
reduction in net expenses for provisions for litigation, regulatory
and similar matters.
Cost / income ratio
The cost / income ratio was 85.8% compared with 90.1%. On an
adjusted basis, the cost / income ratio was 84.1% compared with
88.5% and was within our target range of 75% to 85%.
Net new money
Net new money was USD 15.4 billion compared with USD 21.4
billion, reflecting lower inflows from financial advisors employed
with UBS for more than one year. The net new money growth rate
was 1.5% compared with 2.1%, and was below our target range
of 2% to 4%.
Invested assets
Invested assets increased by USD 78 billion to USD 1,100 billion,
reflecting positive market performance of USD 62 billion and net
new money inflows of USD 15 billion. Discretionary and advisory
mandate penetration increased to 35.1% from 34.3%.
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.
80
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results6
TTotal operating income as reported
of which: gain on sale of financial assets available for sale
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness 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 indicators6,7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
1,679
5,162
1,488
24
8,353
(4)
8,349
5,173
3,246
740
1,187
644
1,282
1,262
2
41
7,141
1,208
8,349
8,349
7,141
1
0
113
7,028
1,208
1,321
9.1
85.5
(0.6)
73
11
6.9
84.1
(0.6)
73
12
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
75
11
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
75
7
(11.8)
88.7
2.1
75
8
14
7
2
(31)
7
33
7
7
12
(7)
6
13
4
3
0
(18)
7
9
7
7
7
8
9
7
(3)
0
(1)
0
81
Financial and operating performance
Wealth Management Americas
Wealth Management Americas – in Swiss francs (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 (%)9
Return on attributed tangible equity (%)9
Risk-weighted assets (CHF billion)9
of which: held by Wealth Management Americas (CHF billion)
of which: held by CC – Group ALM on behalf of Wealth Management Americas (CHF billion) 10
Leverage ratio denominator (CHF billion)9
of which: held by Wealth Management Americas (CHF billion)
of which: held by CC – Group ALM on behalf of Wealth Management Americas (CHF billion) 10
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
6,292
80.8
2.6
43.4
23.8
23.8
68.1
68.1
5,798
78.5
2.5
29.0
21.9
21.9
62.9
62.9
9
154
11
7
29
5
6,841
81.9
6.6
18.3
41.6
26.5
25.5
1.0
88.0
71.8
16.2
3.5
(6.8)
21.4
1,195
1,256
53.0
75.6
2,553
565
13,512
6,822
(5)
Goodwill and intangible assets (CHF billion)
Net new money (CHF billion)
Net new money including interest and dividend income (CHF billion)11
Invested assets (CHF billion)12
7
6
Client assets (CHF billion)
1
Loans, gross (CHF billion)
(17)
Due to customers (CHF billion)
Recruitment loans to financial advisors
(17)
20
Other loans to financial advisors
Personnel (full-time equivalents)
0
Financial advisors (full-time equivalents)
(3)
11 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of
new accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio
management fees, asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and
commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor
compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity,
firm tenure, assets and other variables. 5 Compensation commitments with recruited financial advisors represent expenses related to compensation commitments granted to financial advisors at the time of
recruitment that are subject to vesting requirements. 6 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 7 Refer to the “Measurement of performance” section of this report for
the definitions of our key performance indicators. 8 Recurring income consists of net interest income and recurring net fee income. 9 Refer to the “Capital management” section of this report for more
information. 10 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center − Group ALM that are directly associated with activity managed centrally on behalf of the business
divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other
Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on
attributed equity” in the “Capital management” section of this report for more information. 11 Presented in line with historical reporting practice in the US market. 12 Certain account types were corrected
during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12 billion and CHF 11 billion, respectively. The effect on net new money in all periods was
immaterial.
3.7
21.3
46.9
1,024
1,085
48.8
83.2
3,184
418
13,611
7,140
3.7
15.4
40.5
1,119
1,181
52.5
90.8
3,087
471
13,526
7,025
82
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results4
TTotal operating income as reported
of which: gain related to investments in associates
of which: gain on sale of financial assets available for sale 5
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Key performance indicators6
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for personal banking (%)
Adjusted key performance indicators4,6
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for personal banking (%)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
2,086
593
1,104
86
3,869
(19)
3,850
836
290
1,133
1,227
13
0
2,272
1,578
3,850
3,850
2,272
7
0
96
2,169
1,578
1,681
(10.3)
58.7
157
4.0
(4.2)
56.1
157
4.0
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
(5)
7
7
(59)
(3)
217
(3)
(1)
2
5
3
(13)
2
(10)
(3)
0
2
3
(10)
(4)
(4)
(4)
83
Financial and operating performance
Personal & Corporate Banking
Personal & Corporate Banking (continued)1
CHF million, except where indicated
Additional information
Average attributed equity (CHF billion)7
Return on attributed equity (%)7
Return on attributed tangible equity (%)7
Risk-weighted assets (CHF billion)7
of which: held by Personal & Corporate Banking (CHF billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (CHF billion) 8
Leverage ratio denominator (CHF billion)7
of which: held by Personal & Corporate Banking (CHF billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (CHF billion) 8
Business volume for personal banking (CHF billion)
Net new business volume for personal banking (CHF billion)
Client assets (CHF billion)9
Loans, gross (CHF billion)
Due to customers (CHF billion)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
6.1
25.8
25.8
49.1
48.0
1.0
186.9
148.0
38.9
155
6.0
667
131.4
135.9
4.1
43.2
41.6
41.6
152.2
152.2
149
4.6
630
133.9
135.9
3.9
41.9
34.6
34.6
153.8
153.8
148
3.4
611
135.6
132.4
49
18
15
23
(3)
4
6
(2)
0
92.7
Secured loan portfolio as a percentage of total loan portfolio, gross (%)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)10
Personnel (full-time equivalents)
(1)
11 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of
new accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio
management fees, asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and
commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Adjusted results
are non-GAAP financial measures as defined by SEC regulations. 5 Reflects a gain on the sale of our investment in Visa Europe in 2016. 6 Refer to the “Measurement of performance” section of this report for
the definitions of our key performance indicators. 7 Refer to the “Capital management” section of this report for more information. 8 Represents risk-weighted assets and leverage ratio denominator held by
Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the
revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet
the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information. 9 Client
assets are comprised of invested assets and other assets held purely for transactional purposes or custody only. We do not measure net new money for Personal & Corporate Banking. 10 Refer to the “Risk
management and control” section of this report for more information on impaired loan exposures.
0.6
5,102
0.6
5,058
0.6
5,143
93.9
92.9
84
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2017 compared with 2016
Results
Profit before tax decreased by CHF 182 million or 10% to
CHF 1,578 million. Adjusted profit before tax decreased by
CHF 73 million or 4% to CHF 1,681 million, due to slightly lower
operating income and higher operating expenses.
Operating income
Total operating income decreased by CHF 134 million or 3% to
CHF 3,850 million. 2016 included a gain on the sale of our
investment in Visa Europe of CHF 102 million, as well as gains
related to investments in associates of CHF 21 million. Excluding
these items, adjusted operating income decreased by CHF 11
million to CHF 3,850 million, mainly reflecting lower net interest
income, partly offset by higher transaction-based income.
Net
interest
income decreased by CHF 113 million to
CHF 2,086 million, mainly due to lower allocated treasury-
related income from Corporate Center – Group Asset and
Liability Management (Group ALM) reflecting higher funding
costs for long-term debt that contributes to total loss-absorbing
capacity and lower banking book interest income. This was
partly offset by higher deposit revenues.
→ Refer to the “Corporate Center – Group Asset and Liability
Management” section under “Financial and operating
performance” for more information
Recurring net fee income increased by CHF 40 million to
CHF 593 million, mainly reflecting higher custody and mandates
revenues.
Transaction-based income increased by CHF 76 million to
CHF 1,104 million, mainly reflecting higher revenues from
foreign exchange and credit card transactions.
Other income decreased by CHF 125 million to CHF 86
million, mainly due to the aforementioned gains on the sale of
our investment in Visa Europe and investments in associates.
We recorded a net credit loss expense of CHF 19 million
compared with CHF 6 million, reflecting higher expenses for
newly impaired positions as well as lower net recoveries on
existing impaired positions.
→ Refer to the “Risk management and control” section of this
report for more information
Operating expenses
Operating expenses increased by CHF 48 million to CHF 2,272
million and adjusted operating expenses increased by CHF 62
million to CHF 2,169 million.
Personnel expenses decreased by CHF 9 million to CHF 836
million and adjusted personnel expenses decreased by CHF 12
million to CHF 829 million, mainly reflecting lower salary costs
due to a decrease in the number of employees and other cost
saving initiatives.
General and administrative expenses slightly increased by
CHF 5 million to CHF 290 million.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 53 million to CHF 1,133
million. Adjusted net expenses increased by CHF 70 million to
CHF 1,037 million, mainly reflecting higher expenses for services
for strategic and regulatory
initiatives and from Group
Operations.
Cost / income ratio
The cost / income ratio increased to 58.7% from 55.7%. On an
adjusted basis, the ratio increased to 56.1% compared with
54.5% and remained within our 2017 target range of 50% to
60%.
Net interest margin
The net interest margin decreased 6 basis points to 157 basis
points on both a reported and adjusted basis, and remained
within our 2017 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
banking business was 4.0% compared with 3.1% and remained
within the upper level of our 2017 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 5,102 personnel as of
31 December 2017, a decrease of 41 compared with 5,143
personnel as of 31 December 2016.
85
Operating expenses
Operating expenses decreased by CHF 7 million to CHF 2,224
million 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
financial 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
million 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
million. Adjusted net expenses decreased by CHF 11 million to
CHF 967 million, mainly reflecting lower allocations from Group
Operations 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
banking 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
personnel 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 million 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
investment 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
reflecting higher transaction-based income and a lower net
credit loss expense, partly offset by decreased net interest
income.
Net
income decreased by CHF 71 million to
CHF 2,199 million, mainly due to lower treasury-related income
from Corporate 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
portfolios. This was partly offset by higher loan-related income.
interest
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 investment in Visa Europe and investments in associates.
We recorded a net credit loss expense of CHF 6 million
compared with CHF 37 million, mainly due to higher net
recoveries on existing impaired positions.
86
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Asset Management
Asset Management1
CHF million, except where indicated
Results
Net management fees2
Performance fees
Gains on sale of subsidiaries and businesses
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results3
TTotal operating income as reported
of which: gains on sale of subsidiaries and businesses
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Key performance indicators4
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 indicators3,4
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 / asset class5
NNet new money (CHF billion)
Equities
Fixed Income
of which: money market
Multi Assets & Solutions
Hedge Fund Businesses
Real Estate & Private Markets
TTotal net new money
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
1,764
127
153
2,044
716
231
514
551
1
3
1,466
578
2,044
153
1,891
1,466
16
22
62
1,366
578
525
27.9
71.7
8.1
29
8
(4.9)
72.2
8.1
26
7
18.5
28.1
10.6
4.9
2.2
5.0
58.7
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
(9.9)
(3.0)
7.0
(4.2)
(0.3)
1.8
(15.5)
1,847
154
56
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
(16.3)
(3.2)
(4.7)
6.5
4.3
3.2
(5.4)
(3)
4
6
(2)
(4)
2
4
0
(25)
(1)
28
6
(2)
(1)
(1)
28
(5)
(3)
14
(13)
(22)
87
Financial and operating performance
Asset Management
Asset Management (continued)1
CHF million, except where indicated
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
IInvested assets (CHF billion)
Equities
Fixed Income
of which: money market
Multi Assets & Solutions
Hedge Fund Businesses
Real Estate & Private Markets
TTotal invested assets
of which: passive strategies
Information by region
IInvested assets (CHF billion)
Americas
Asia Pacific
Europe, Middle East and Africa
Switzerland
TTotal invested assets
Information by channel
IInvested assets (CHF billion)
Third-party institutional
Third-party wholesale
UBS’s wealth management businesses
TTotal invested assets
Assets under administration6
Assets under administration (CHF billion)7
Net new assets under administration (CHF billion)8
Gross margin on assets under administration (bps)
Additional information
Average attributed equity (CHF billion)9
Return on attributed equity (%)9
Return on attributed tangible equity (%)9
Risk-weighted assets (CHF billion)9
of which: held by Asset Management (CHF billion)
of which: held by CC – Group ALM on behalf of Asset Management (CHF billion) 10
Leverage ratio denominator (CHF billion)9
of which: held by Asset Management (CHF billion)
of which: held by CC – Group ALM on behalf of Asset Management (CHF billion) 10
Goodwill and intangible assets (CHF billion)
Personnel (full-time equivalents)
293
242
76
126
41
74
776
286
183
159
174
261
776
486
80
210
776
1.7
34.0
184.6
4.0
3.9
0.1
4.8
2.7
2.1
1.4
2,335
220
210
66
121
39
67
656
207
160
129
143
225
656
395
75
186
656
420
0.3
3
1.4
32.3
3.9
3.9
2.7
2.7
219
208
58
123
39
62
650
197
152
136
143
219
650
383
71
196
650
407
24.0
5
1.6
36.5
2.6
2.6
2.7
2.7
1.4
2,308
1.4
2,277
33
15
15
4
5
10
18
38
14
23
22
16
18
23
7
13
18
21
3
0
78
0
0
1
11 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, and other items that are not
performance fees. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Refer to the “Measurement of performance” section of this report for the definitions of our key
performance indicators. 5 As of 1 January 2017, Asset Management was reorganized into the following business lines: Equities, Fixed Income, Multi Assets & Solutions, Hedge Fund Businesses and Real Estate &
Private Markets. Prior-period figures are presented in accordance with this new structure. 6 Following the sale of our fund administration servicing units in Luxembourg and Switzerland to Northern Trust on 1
October 2017, we no longer report assets under administration. 7 Includes UBS and third-party fund assets for which the fund services unit provided professional services, including fund setup, accounting and
reporting for traditional investment funds and alternative funds. 8 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits. 9 Refer to the “Capital
management” section of this report for more information. 10 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center – Group ALM that are directly associated with activity
managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are
allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%.
Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.
88
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2017 compared with 2016
Results
Profit before tax increased by CHF 126 million or 28% to CHF 578
million, primarily driven by a gain of CHF 153 million on the sale of
our fund administration servicing units in Luxembourg and
Switzerland to Northern Trust. Excluding this gain, adjusted profit
before tax decreased by CHF 27 million or 5% to CHF 525 million,
primarily reflecting lower operating income.
Operating income
Total operating income increased by CHF 113 million or 6% to
CHF 2,044 million. Excluding the aforementioned gain on sale of
our fund administration servicing units, adjusted operating income
decreased by CHF 40 million or 2%. Net management fees
decreased by CHF 46 million to CHF 1,764 million, reflecting lower
revenues following the aforementioned sale, the positive effect of
fee true-ups of CHF 17 million in 2016 as well as an impairment loss
of CHF 13 million on a co-investment in an infrastructure fund,
partly offset by the effect of higher average invested assets.
Performance fees increased by CHF 5 million to CHF 127 million,
with a decline in Real Estate being more than offset by Equities and
our hedge fund businesses.
As of 31 December 2017, approximately 71% of performance
fee-eligible assets within our hedge fund businesses exceeded high-
water marks compared with 43%.
Operating expenses
Total operating expenses and adjusted operating expenses
decreased by CHF 13 million to CHF 1,466 million and CHF 1,366
million, respectively.
Personnel expenses decreased by CHF 11 million to CHF 716
million and adjusted personnel expenses decreased by CHF 12
million to CHF 700 million, mainly driven by lower salary costs.
General and administrative expenses decreased by CHF 10
million to CHF 231 million. Adjusted general and administrative
expenses decreased by CHF 17 million to CHF 209 million, mainly
driven by lower professional fees.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 8 million to CHF 514 million.
Adjusted net expenses for services from Corporate Center and other
business divisions increased by CHF 16 million, mainly driven by
higher expenses from Group Risk Control as well as increased costs
for occupancy and strategic and regulatory initiatives.
Cost / income ratio
The cost / income ratio was 71.7% compared with 76.6%. On
an adjusted basis, the cost / income ratio was 72.2% compared
with 71.4%, and was above our 2017 target range of 60% to
70%.
Net new money
Excluding money market flows, net new money was CHF 48.1
billion compared with outflows of CHF 22.5 billion, primarily driven
by our third-party institutional channel. The net new money growth
rate was positive 8.1% compared with negative 3.8% and was
above our 2017 target range of 3% to 5%. Net inflows were
mainly driven by Switzerland and Asia Pacific.
Invested assets
Invested assets increased to CHF 776 billion from CHF 656 billion,
mainly due to positive market performance of CHF 65 billion and
net new money inflows of CHF 59 billion, including money market
flows, partly offset by negative foreign currency translation effects
of CHF 1 billion.
As of 31 December 2017, CHF 286 billion or 37% of invested
assets were managed in passive strategies, while CHF 414 billion or
53% of invested assets were managed in active, non-money market
strategies. The remaining CHF 76 billion or 10% of invested assets
were managed in money market strategies. 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
The aforementioned sale of our fund administration servicing units
in Luxembourg and Switzerland to Northern Trust concluded our
exit from this line of business.
Personnel
Asset Management employed 2,335 personnel as of 31 December
2017 compared with 2,308 personnel as of 31 December 2016.
89
Financial and operating performance
Asset Management
Investment performance
The market environment in 2017 was generally supportive for
investments. Asset class correlations and market volatility fell as
favorable
financial conditions supported global economic
growth but inflationary pressures remain subdued.
For 2017, 89% of our active traditional funds outperformed
their benchmark and 67% outperformed peer averages. Long-
term performance is strong, with 85% outperforming their
benchmark and 80% outperforming peer averages over 5 years.
Investment performance as of 31 December 2017
Active funds versus benchmark
Percentage of fund assets exceeding benchmark
Equities1
Fixed income1
Multi-asset1
TTotal traditional investments
Active funds versus peers
Percentage of fund assets ranking in first or second quartile / exceeding peer index
Equities1
Fixed income1
Multi-asset1
TTotal traditional investments
Passive funds tracking accuracy
Annualized
1 year
3 years
5 years
74
97
98
89
70
54
74
67
65
95
89
83
71
77
81
76
75
87
93
85
78
74
89
80
Percentage of passive fund assets within applicable tracking tolerance
All asset classes2
11 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 2017. Source of comparison versus peers: Thomson Reuters LIM (Lipper Investment Management). Source of comparison versus benchmark: UBS. Universe represents
approximately 72% of all active fund assets and 17% of all actively managed assets (including segregated accounts) in these asset classes globally as of 31 December 2017. 2 Percentage of passive fund assets
within applicable tracking tolerance on a gross of fees basis. Tracking accuracy information represents a universe of European domiciled institutional and wholesale funds representing approximately 44% of our
total passive invested assets as of 31 December 2017. Source: UBS.
89
91
93
90
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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%.
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 million
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 billion.
Net outflows were mainly from clients serviced from Asia Pacific, the
Americas and Europe, partly offset by inflows in Switzerland. 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 allocation 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
passive strategies. The remaining CHF 66 billion, or 10%, were
managed 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 performance of
CHF 13 billion.
Personnel
Asset Management employed 2,308 personnel as of
31 December 2016 compared with 2,277 personnel as of
31 December 2015.
91
Financial and operating performance
Investment Bank
Investment Bank
Investment Bank1
CHF million, except where indicated
Results
CCorporate Client Solutions
Advisory
Equity Capital Markets
Debt Capital Markets
Financing Solutions
Risk Management
IInvestor Client Services
Equities
Foreign Exchange, Rates and Credit
Income
Credit loss (expense) / recovery
TTotal 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
TTotal operating expenses
BBusiness division operating profit / (loss) before tax
Adjusted results2
TTotal operating income as reported
of which: gains on sale of financial assets available for sale 3
TTotal operating income (adjusted)
TTotal 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: impairment of an intangible asset
of which: expenses from modification of terms for certain DCCP awards 4
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
92
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
2,813
636
1,054
782
307
35
4,928
3,546
1,382
7,740
(90)
7,651
2,949
662
2,769
2,676
10
12
6,402
1,249
7,651
136
7,515
6,402
38
18
303
25
6,018
1,249
1,497
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
8,821
11
8,810
6,929
14
7
376
11
6,522
1,892
2,288
18
(8)
56
6
(15)
(7)
2
(25)
1
718
0
(4)
(18)
0
0
(52)
0
(4)
24
0
(1)
(4)
(1)
24
0
Investment Bank (continued)1
CHF million, except where indicated
Key performance indicators5
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)6
Adjusted key performance indicators2,5
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)6
Additional information
Total assets (CHF billion)7
Average attributed equity (CHF billion)6
Return on attributed tangible equity (%)6
Risk-weighted assets (CHF billion)6
of which: held by the Investment Bank (CHF billion)
of which: held by CC – Group ALM on behalf of the Investment Bank (CHF billion) 8
Return on risk-weighted assets, gross (%)9
Leverage ratio denominator (CHF billion)6
of which: held by the Investment Bank (CHF billion)
of which: held by CC – Group ALM on behalf of the Investment Bank (CHF billion) 8
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
(46.9)
86.8
13.1
(34.3)
80.1
19.6
242.3
7.7
70.4
70.4
11.9
231.2
231.2
78.0
25.9
73.5
31.3
253.5
7.3
62.9
62.9
13.7
268.0
268.0
9
21
7
6
23
14
24.4
82.7
13.4
(0.4)
79.1
16.0
262.9
9.3
13.6
75.0
74.5
0.5
10.6
283.6
264.1
19.4
2.8
0.1
38.1
9
1.0
4,822
Return on leverage ratio denominator, gross (%)9
Goodwill and intangible assets (CHF billion)
Compensation ratio (%)
Average VaR (1-day, 95% confidence, 5 years of historical data)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)10
Personnel (full-time equivalents)
11 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 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 3 Reflects gains on sales of
our investment in IHS Markit in 2017, 2016 and 2015 as well as a gain on the sale of our investment in London Clearing House in 2017. 4 Relates to the removal of the service period requirement for DCCP
awards granted for the performance years 2012 and 2013. 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 Represents risk-weighted assets (RWA) and leverage ratio denominator (LRD) held
by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the
revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet
the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information. 9 Based
on total RWA and LRD. Figures for 31 December 2016 and 31 December 2015 are based on RWA and LRD held by the Investment Bank and are therefore not fully comparable. 10 Refer to the “Risk management
and control” section of this report for more information on impaired loan exposures.
3.1
0.1
36.2
12
1.5
5,243
3.0
0.1
40.0
9
0.9
4,734
2
0
0
93
Financial and operating performance
Investment Bank
2017 compared with 2016
Results
Profit before tax increased by CHF 245 million or 24% to
CHF 1,249 million, due to lower operating expenses. Adjusted
profit before tax was broadly unchanged at CHF 1,497 million,
primarily due to lower operating income, largely offset by lower
operating expenses.
Operating income
Total operating
income decreased by CHF 37 million to
CHF 7,651 million. Excluding gains of CHF 78 million in 2016
and CHF 107 million in 2017 related to sales of our investment
in IHS Markit and a gain of CHF 29 million in 2017 related to the
sale of our investment in London Clearing House, adjusted total
operating income decreased by CHF 95 million or 1% to
CHF 7,515 million from CHF 7,610 million, mainly reflecting
CHF 448 million lower revenues in Investor Client Services,
mostly offset by CHF 431 million
in
Corporate Client Solutions. Net credit loss expense was CHF 90
million compared with CHF 11 million, mainly related to a
margin loan to a single client following a significant decrease in
the value of the collateral. In US dollar terms, adjusted operating
income decreased 1%.
increased revenues
→ 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 increased by CHF 431
million or 18% to CHF 2,813 million, largely due to higher
revenues in Equity Capital Markets. In US dollar terms, revenues
increased 19%.
Advisory revenues decreased by CHF 55 million to CHF 636
million, reflecting lower revenues from private transactions, and
lower revenues from merger and acquisition transactions against
a global fee pool decline of 2%.
Equity Capital Markets revenues increased by CHF 380 million
to CHF 1,054 million, mainly due to higher revenues from public
offerings as the global fee pool increased 31% as well as higher
revenues from private transactions.
Debt Capital Markets revenues increased by CHF 42 million to
CHF 782 million, largely due to higher revenues from leveraged
finance against a global fee pool increase of 11%. This increase
was partly offset by lower investment grade revenues.
Financing Solutions revenues decreased by CHF 53 million to
CHF 307 million, reflecting lower client activity across all
products.
Risk Management revenues were positive CHF 35 million
compared with negative CHF 84 million, mainly due to lower
costs related to portfolio hedges.
Investor Client Services
Investor Client Services revenues decreased by CHF 390 million
or 7% to CHF 4,928 million. Excluding the aforementioned
gains totaling CHF 136 million in 2017 and CHF 78 million in
2016, adjusted revenues decreased by CHF 448 million or 9% to
CHF 4,792 million due to lower revenues in Foreign Exchange,
Rates and Credit businesses. In US dollar terms, adjusted
revenues decreased 8%.
Equities
Equities revenues increased by CHF 60 million to CHF 3,546
million. Excluding a gain of CHF 27 million in 2017 related to
sales of our investment in IHS Markit and a gain of CHF 29
million in 2017 related to the sale of our investment in London
Clearing House, adjusted revenues increased by CHF 4 million to
CHF 3,490 million.
Adjusted Cash revenues decreased by CHF 27 million to
CHF 1,198 million, due to lower trading revenues.
Derivatives revenues increased by CHF 146 million to CHF 868
million, reflecting increased client activity levels and stronger
trading revenues.
Adjusted Financing Services revenues decreased by CHF 81
million to CHF 1,448 million, due to weaker trading revenues in
Equity Finance.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues decreased by
CHF 449 million to CHF 1,382 million. Excluding gains of CHF 80
million in 2017 and CHF 78 million in 2016 related to sales of
our investment in IHS Markit, adjusted revenues decreased to
CHF 1,302 million from CHF 1,753 million, mainly due to
reduced client activity across the majority of products reflecting
persistent low market volatility.
Operating expenses
Total operating expenses decreased by CHF 282 million or 4%
to CHF 6,402 million, and adjusted operating expenses
decreased by CHF 89 million or 1% to CHF 6,018 million. In US
dollar terms, adjusted operating expenses also decreased 1%.
Personnel expenses decreased to CHF 2,949 million from
CHF 3,082 million, and adjusted personnel expenses decreased
to CHF 2,886 million from CHF 2,928 million, mainly due to
lower salary expenses as a result of our cost reduction programs,
partly offset by higher variable compensation expenses. In
addition, 2017 included an expense of CHF 25 million related to
the modification of terms of Deferred Contingent Capital Plan
awards granted for the performance years 2012 and 2013. This
was treated as an adjusting item.
General and administrative expenses decreased to CHF 662
million from CHF 805 million and on an adjusted basis decreased
to CHF 644 million from CHF 791 million, mainly due to CHF 83
million lower expenses for provisions for litigation, regulatory
and similar matters. In addition, the net expense for the UK bank
levy was CHF 33 million compared with a net expense of CHF 80
million, primarily as 2017 included a CHF 49 million credit
related to prior years.
94
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
Net expenses for services from Corporate Center and other
business divisions were broadly unchanged at CHF 2,769 million
and on an adjusted basis increased to CHF 2,466 million from
CHF 2,355 million, mainly due to higher costs for strategic and
regulatory initiatives and higher net expenses from Group
Technology and Group Risk Control.
Cost / income ratio
The cost / income ratio decreased to 82.7% from 86.8%. On an
adjusted basis, the cost / income ratio decreased to 79.1% from
80.1% and was within our target range of 70% to 80%.
Return on attributed equity
Return on attributed equity (RoAE) for 2017 was 13.4%, and
16.0% on an adjusted basis, above our target of over 15%.
Leverage ratio denominator
The leverage ratio denominator (LRD) held by the Investment
Bank increased by CHF 33 billion to CHF 264 billion as of
31 December 2017, mainly due to higher trading portfolio
assets, reflecting client-driven increases and higher equity
markets, and an increase in financial assets designated at fair
value, available for sale and held to maturity. These increases
were partly offset by lower off-balance sheet and net derivative
exposures. Total LRD, including LRD held by Corporate Center –
Group ALM on behalf of the Investment Bank, was CHF 284
billion as of 31 December 2017 and remained below our 2017
short- to medium-term expectation of around CHF 325 billion.
→ Refer to the “Capital management” section of this report for
more information
→ Refer to “Equity attribution and return on attributed equity” in
the “Capital management” section of this report for more
Personnel
The
Investment Bank employed 4,822 personnel as of
31 December 2017, an increase of 88 compared with 4,734 as
of 31 December 2016, primarily due to the transfer of business-
aligned personnel in our Business Solutions Centers from
Corporate Center to the Investment Bank, partly offset by a
decrease as a result of our cost reduction programs.
information
Risk-weighted assets
Risk weighted assets (RWA) held by the Investment Bank
increased by CHF 4.1 billion to CHF 74.5 billion as of
31 December 2017, driven by an increase in credit and
counterparty credit risk RWA, mostly due to model updates and
regulatory add-ons, partly offset by a decrease in market risk
RWA. Total RWA, including RWA held by Corporate Center –
Group Asset and Liability Management (Group ALM) on behalf
of the Investment Bank, was CHF 75.0 billion as of 31 December
2017, below our 2017 short- to medium-term expectation of
around CHF 85 billion.
→ Refer to the “Capital management” section of this report for
more information
95
Financial and operating performance
Investment Bank
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%.
Operating income by business unit:
Corporate Client Solutions
Corporate Client Solutions revenues decreased by CHF 578
million or 20% to CHF 2,382 million, largely due to lower
revenues in Equity Capital Markets, Risk Management and
Financing Solutions. 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
transactions 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 million 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
Finance from a strong 2015.
to CHF 1,831 million. Excluding
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues decreased by
CHF 136 million
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 variable 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
litigation, 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 Corporate Center and other
business divisions decreased
from
CHF 2,817 million and on an adjusted basis decreased to
CHF 2,355 million from CHF 2,441 million.
to CHF 2,765 million
96
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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%.
Leverage ratio denominator
The LRD 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.
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%.
Personnel
Risk-weighted assets
RWA increased by CHF 7.5 billion 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.
The
Investment Bank employed 4,734 personnel as of
31 December 2016, a decrease of 509 compared with 5,243 as
of 31 December 2015, largely reflecting our cost reduction
programs.
97
Financial and operating performance
Corporate Center
Corporate Center
Corporate Center1
CHF million, except where indicated
Results
TTotal 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
TTotal operating expenses
OOperating profit / (loss) before tax
Adjusted results2
TTotal operating income as reported
of which: own credit on financial liabilities designated at fair value
of which: gain on sales of real estate
of which: net gain / (loss) related to the buyback of debt
of which: net foreign currency translation gain / (loss) 3
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
(451)
3,862
4,387
(8,071)
1,004
7
1,189
(1,640)
(357)
3,899
4,893
(7,933)
944
21
1,824
(2,181)
(451)
(357)
120
(122)
(355)
1,824
519
623
(1,064)
1,746
(2,181)
(2,101)
(22)
(429)
1,189
434
522
(926)
1,159
(1,640)
(1,588)
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)
26
(1)
(10)
2
6
(67)
(35)
(25)
26
21
(35)
(34)
(25)
(24)
Additional information
Average attributed equity (CHF billion)4
Total assets (CHF billion)5
Risk-weighted assets (fully applied, CHF billion)4,6
Leverage ratio denominator (fully applied, CHF billion)4,6
Personnel (full-time equivalents)
11 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 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 3 Related to the disposal of
foreign subsidiaries and branches. 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 Prior to attributions to
business divisions and other Corporate Center units for the purpose of attributing equity.
291.2
23,671
271.4
25,817
300.7
23,955
(10)
8
312.8
354.5
359.4
56.5
22.9
60.2
57.1
29.1
25.8
(21)
(13)
(1)
98
Corporate Center – Services
Corporate Center – Services1
CHF million, except where indicated
Results
TTotal operating income
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
TTotal 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
TTotal operating expenses
OOperating profit / (loss) before tax
Adjusted results2
TTotal operating income as reported
of which: gain on sales of real estate
TTotal operating income (adjusted)
TTotal operating expenses as reported before allocations
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
TTotal operating expenses (adjusted) before allocations
Services (to) / from BDs and other CC units
of which: restructuring expenses allocated to BDs and other CC units
TTotal operating expenses as reported after allocations
TTotal operating expenses (adjusted) after allocations
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (CHF billion)3
Total assets (CHF billion)4
Risk-weighted assets (fully applied, CHF billion)3
of which: held by CC – Services (fully applied, CHF billion)
Leverage ratio denominator (fully applied, CHF billion)3
of which: held by CC – Services (fully applied, CHF billion)
of which: held by CC – Group ALM on behalf of CC – Services (fully applied, CHF billion) 5
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
As of or for the year ended
% change from
331.12.17
31.12.16
31.12.15
31.12.16
(153)
3,785
4,247
1,004
7
9,043
(8,281)
(2,294)
(1,262)
(1,227)
(551)
(2,676)
(142)
(194)
762
(914)
(153)
(153)
9,043
433
522
8,088
(8,281)
(935)
762
743
(914)
(895)
18.9
20.9
29.2
29.2
6.8
6.7
(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
27.6
5.8
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
23.6
4.8
4.8
50
0
2
6
(67)
1
1
2
3
3
4
0
29
(14)
2
8
50
(31)
1
4
1
2
8
8
(2)
(17)
(12)
6
6
17
16
0.1
25,623
99
Personnel (full-time equivalents)
11 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 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 3 Refer to the “Capital
management” section of this report for more information. 4 Based on third-party view, i.e., without intercompany balances. 5 Represents leverage ratio denominator held by Corporate Center – Group ALM that
is directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January
2017, this resource is allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio
requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.
23,470
23,750
8
Financial and operating performance
Corporate Center
2017 compared with 2016
Corporate Center – Services recorded a loss before tax of
CHF 914 million compared with CHF 849 million, and CHF 895
million on an adjusted basis compared with CHF 912 million.
Operating income
Operating income was negative CHF 153 million compared with
negative CHF 102 million, partly as 2016 recorded gains on sales
of real estate of CHF 120 million. On an adjusted basis,
operating income was negative CHF 153 million compared with
negative CHF 222 million, mainly due to higher treasury-related
income from Corporate Center – Group Asset and Liability
Management (Group ALM), resulting from a change made in the
first quarter of 2017 to the methodology used to allocate
revenues from the investment of equity and the funding costs
for long-term debt that contributes to total loss-absorbing
capacity. This was partly offset by higher funding costs relating
to Corporate Center – Services’ balance sheet assets.
Operating expenses
Operating expenses before service allocations to business
divisions and other Corporate Center units
Before service allocations to business divisions and other
Corporate Center units, total operating expenses increased by
CHF 132 million or 1% to CHF 9,043 million. Restructuring
expenses were CHF 955 million compared with CHF 1,141
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 increased by CHF 318 million or 4% to CHF 8,088
million.
to
Personnel expenses decreased by CHF 16 million
CHF 3,785 million. Excluding restructuring expenses, adjusted
personnel expense increased by CHF 69 million to CHF 3,352
million, mainly driven by increased staffing levels and insourcing
of certain activities from third-party vendors to our Business
Solutions Centers. General and administrative expenses
increased by CHF 102 million to CHF 4,247 million and adjusted
general and administrative expenses increased by CHF 198
million, mainly due to CHF 240 million higher net expenses for
provisions for litigation, regulatory and similar matters, partly
offset by lower marketing costs.
Depreciation and impairment of property, equipment and
software increased to CHF 1,004 million from CHF 944 million,
reflecting increased depreciation expenses related to internally
generated capitalized software.
Services to / from business divisions and other Corporate Center
units
Corporate Center – Services allocated expenses of CHF 8,281
million to the business divisions and other Corporate Center
units compared with CHF 8,164 million. Adjusted net allocated
expenses for services to business divisions and other Corporate
Center units were CHF 7,346 million compared with CHF 7,080
million, mainly as the costs allocated to business divisions and
other Corporate Center units in 2016 were lower than the
actual costs incurred by Corporate Center – Services on their
behalf. Since 2017, costs are allocated to the business divisions
and other Corporate Center units based on actual costs incurred
by Corporate Center – Services.
Operating expenses after service allocations to / from business
divisions and other Corporate Center units
Corporate Center – Services retains costs related to Group
governance and other corporate activities, certain strategic and
regulatory projects and certain restructuring expenses. Total
operating expenses remaining in Corporate Center – Services
after allocations increased to CHF 762 million from CHF 747
million and to CHF 743 million from CHF 690 million on an
adjusted basis, driven by the aforementioned higher net
expenses for provisions for litigation, regulatory and similar
matters, largely offset by lower retained expenses as the costs
allocated to business divisions and other Corporate Center units
in 2016 were lower than the actual costs incurred by Corporate
Center – Services on their behalf.
100
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
Corporate 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 million or 5% to CHF 7,770
million.
to
Personnel expenses decreased by CHF 102 million
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
administrative expenses decreased by CHF 242 million, mainly
due
for outsourcing and decreased
professional fees.
lower expenses
to
Depreciation and impairment of property, equipment and
software increased to CHF 944 million from CHF 868 million,
reflecting increased depreciation expenses related to internally
generated capitalized software.
Services to / from business divisions and other Corporate Center
units
Corporate Center – Services allocated expenses of CHF 8,164
million 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
governance 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 regulatory projects, a reduction of CHF 13 million
in expenses for provisions 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.
101
Financial and operating performance
Corporate Center
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
TTotal 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
TTotal risk management net income after allocations
Accounting asymmetries related to economic hedges
Hedge accounting ineffectiveness2
Net foreign currency translation gain / (loss)3
Net gain / (loss) related to the buyback of debt
Own credit on financial liabilities designated at fair value
Other
TTotal operating income as reported
TTotal 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
TTotal 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
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)4
Additional information
Average attributed equity (CHF billion)6
Total assets (CHF billion)7
Risk-weighted assets (CHF billion)6
of which: held by CC – Group ALM on behalf of BDs and other CC units (CHF billion) 8
Leverage ratio denominator (CHF billion)6
of which: held by CC – Group ALM on behalf of BDs and other CC units (CHF billion) 8
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
712
(119)
(510)
84
(264)
(256)
(115)
(181)
(18)
344
(120)
83
(179)
(62)
(12)
(22)
0
(276)
(254)
34
26
0
0
(13)
47
1
0
3
43
(322)
(296)
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)
0
0
0
(1)
(218)
(96)
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)
0
0
0
(5)
282
(102)
2.7
245.7
11.2
3.9
249.9
4.3
267.2
10.6
3.3
237.5
6.0
272.4
247.9
(16)
(7)
(76)
(48)
(34)
(3)
(45)
157
32
233
(25)
7
(100)
26
162
10
53
(73)
48
208
(37)
(8)
6
(8)
124.4
143
Personnel (full-time equivalents)
11 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 Excludes 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.
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 Represents risk-weighted assets and leverage ratio
denominator held by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing
equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets
needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more
information.
125
142
1
102
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2017 compared with 2016
Corporate Center – Group Asset and Liability Management
(Group ALM) recorded a loss before tax of CHF 322 million
compared with a loss of CHF 218 million. On an adjusted basis,
the loss before tax was CHF 296 million compared with a loss of
CHF 96 million, driven by lower net income on accounting
asymmetries related to economic hedges and higher retained
operating expenses.
Operating income
Total operating income was negative CHF 276 million compared
with negative CHF 219 million. Adjusted total operating income
retained by Group ALM was negative CHF 254 million compared
with negative CHF 97 million.
Total risk management net income before allocations
Total risk management net income before allocations to business
divisions and other Corporate Center units was CHF 84 million
compared with CHF 345 million, mainly reflecting lower net
income
risk management
activities and negative net income from capital investment and
issuance.
from business division-aligned
Business division-aligned risk management net income
Net income from business division-aligned risk management
activities was CHF 712 million compared with CHF 847 million,
mainly reflecting reduced
interest rate risk management
revenues in the banking book for Wealth Management and
Personal & Corporate Banking. This decrease was mainly due to
lower interest income from managing euro- and Swiss franc-
denominated deposits in the current negative interest rate
environment.
Capital investment and issuance net income
Net income from capital investment and issuance activities was
negative CHF 119 million compared with positive CHF 45
million. This decrease was due to CHF 83 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 81 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 510 million compared with negative CHF 547
million. An increase in income of CHF 132 million from the
management of the Group’s high-quality liquid assets (HQLA),
mainly due to wider spreads between certain HQLA and internal
funding liabilities, was largely offset by an increase in net
interest expense of CHF 98 million due to issuances of long-term
debt during 2017.
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 264 million compared with CHF 512 million. This decrease
primarily reflects the aforementioned lower net income from
capital investment and issuance activities, which is fully allocated
to the business divisions and other Corporate Center units in
proportion to their attributed equity, and lower net income from
business division-aligned risk management activities, which is
allocated
to business divisions, predominantly Wealth
Management and Personal & Corporate Banking.
Total risk management net income after allocations
Group ALM retained negative CHF 179 million from its risk
management activities after allocations compared with negative
CHF 167 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.
103
Operating expenses
Total operating expenses were CHF 47 million compared with
negative CHF 1 million. From June 2017, Group ALM retains
costs related to Group structural risk management income to the
extent that such income is not allocated to the business divisions
and other Corporate Center units. Previously, Group ALM
allocated all costs to business divisions and other Corporate
Center units.
Balance sheet assets
Balance sheet assets decreased by CHF 21 billion to CHF 246
billion as of 31 December 2017, reflecting increased net funding
consumption 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
than centrally managed asset
requirements.
the Group
rather
→ Refer to the “Treasury management” section of this report for
more information
Risk-weighted assets
Risk-weighted assets (RWA) were largely stable at CHF 11 billion
as of 31 December 2017.
→ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The leverage ratio denominator (LRD) decreased to CHF 250
billion from CHF 272 billion, consistent with the decrease in
balance sheet assets.
→ Refer to the “Capital management” section of this report for
more information
Financial and operating performance
Corporate Center
Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting
asymmetries related to economic hedges was negative CHF 62
million compared with positive CHF 27 million, primarily due to a
loss of CHF 170 million compared with a loss of CHF 38 million
on Group ALM’s cross-currency and interest rate derivatives
hedges related to its portfolio of internal funding as well as
lower fair value gains of CHF 70 million compared with CHF 174
million on certain internal funding transactions due to the
tightening of own credit funding spreads. This was partly offset
by a gain of CHF 38 million compared with a loss of CHF 43
million related to HQLA classified as available for sale.
Hedge accounting ineffectiveness
Net income related to hedge accounting ineffectiveness was
negative CHF 12 million compared with positive CHF 7 million.
This ineffectiveness 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 nil compared with CHF 37 million, mainly
reflecting lower interest income retained by Group ALM on
behalf of non-controlling interests.
104
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
2016 compared with 2015
Corporate Center – Group Asset and Liability Management
(Group ALM) recorded a loss before tax of CHF 218 million
compared 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
segment 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 activities performed by Group ALM. REM
primarily performs risk management 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 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 & Corporate 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 deposits in the current negative interest rate
environment.
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 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 547 million compared with negative CHF 647
million. An increase in income of CHF 481 million from the
management of the Group’s high-quality liquid assets (HQLA),
mainly due to wider spreads between certain HQLA and internal
funding liabilities, 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 divisions and other Corporate Center units in
proportion to their attributed equity. In addition, cost allocations
from Group structural 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
management 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.
105
Balance sheet assets
Balance sheet assets increased by CHF 30 billion to CHF 267
billion, 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 central banks that primarily occurred toward the
end of the year. These increases mainly reflected liquidity
requirements applicable
intermediate holding
company and UBS Europe SE and also resulted from an increase
in net funds transferred to Group ALM by the business divisions.
to our US
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 managed asset requirements.
Risk-weighted assets
Fully applied risk-weighted assets (RWA) increased by CHF 5
billion 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.
Leverage ratio denominator
The LRD increased to CHF 272 billion from CHF 248 billion,
consistent with the increase in balance sheet assets.
Financial and operating performance
Corporate Center
Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting
asymmetries 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 available for sale.
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
ineffectiveness 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.
106
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
TTotal 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
TTotal operating expenses
OOperating profit / (loss) before tax
Adjusted results2
TTotal operating income as reported
TTotal operating income (adjusted)
TTotal 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
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (CHF billion)3
Total assets (CHF billion)4
Risk-weighted assets (CHF billion)3
of which: held by CC – Non-core and Legacy Portfolio (CHF billion)
Leverage ratio denominator (CHF billion)3
of which: held by CC – Non-core and Legacy Portfolio (CHF billion)
of which: held by CC – Group ALM on behalf of CC – Non-core and Legacy Portfolio
(CHF billion) 5
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
As of or for the year ended
331.12.17
31.12.16
31.12.15
% change from
31.12.16
(11)
(11)
(22)
43
114
224
194
0
0
381
(403)
(22)
(22)
381
0
0
6
375
(403)
(397)
1.3
46.2
16.1
16.1
16.6
14.9
(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
18.9
22.4
22.4
(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
30.7
38.5
38.5
(52)
(15)
(39)
(35)
(84)
(20)
(14)
(65)
(64)
(39)
(39)
(65)
(65)
(64)
(64)
(38)
(33)
(15)
(15)
(26)
(33)
(17)
Personnel (full-time equivalents)
11 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 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 3 Refer to the “Capital
management” section of this report for more information. 4 Based on third-party view, i.e., without intercompany balances. 5 Represents leverage ratio denominator held by Corporate Center – Group ALM that
is directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January
2017, this resource is allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio
requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.
77
63
1.7
52
107
Financial and operating performance
Corporate Center
2017 compared with 2016
Corporate Center – Non-core and Legacy Portfolio recorded a
loss before tax of CHF 403 million compared with CHF 1,114
million.
Operating income
Operating income was negative CHF 22 million compared with
negative CHF 36 million. The improved result was mainly due to
income related to a claim on a defaulted counterparty position,
largely allocated from Corporate Center – Group Asset and
Liability Management (Group ALM), and lower losses from
novation and unwind activities.
Operating expenses
Total operating expenses decreased by CHF 697 million or 65%
to CHF 381 million. 2017 included CHF 51 million net expenses
for provisions for litigation, regulatory and similar matters
compared with CHF 584 million. Net expenses for services from
business divisions and other Corporate Center units decreased
by CHF 56 million as a result of reduced consumption of shared
services. Furthermore, professional fees declined by CHF 42
million and personnel expenses decreased by CHF 23 million due
to lower staff levels.
In addition, 2017 reflected a net credit for the UK bank levy
of CHF 11 million compared with a net expense of CHF 31
million, primarily as 2017 included a CHF 22 million credit
related to prior years.
Balance sheet assets
During 2017, total assets decreased by CHF 22 billion to CHF 46
billion, mainly due to a CHF 19 billion reduction in positive
replacement values (PRVs), primarily reflecting trade terminations
and maturities, mainly related to interest rate and foreign
exchange contracts.
Total assets excluding PRVs decreased by CHF 4 billion to
CHF 8 billion, mainly due to a reduction in cash collateral
receivables on derivative instruments.
Assets classified as Level 3 in the fair value hierarchy totaled
CHF 1.6 billion as of 31 December 2017.
Risk-weighted assets
Risk-weighted assets (RWA) decreased by CHF 3 billion to
CHF 16 billion.
→ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The leverage ratio denominator (LRD) decreased to CHF 15
billion from CHF 22 billion, consistent with the reduction in
balance sheet assets.
→ Refer to the “Capital management” section of this report for
more information
108
e
c
n
a
m
r
o
f
r
e
p
g
n
i
t
a
r
e
p
o
d
n
a
l
i
a
c
n
a
n
F
i
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
magnitude of the risks associated with them, nor do the metrics
shown in the table necessarily represent the risk measures used
to manage and control these positions.
Exposure category
Description
RWA
Total assets¹
LRD²
Rates (linear)
Rates (non-linear)
Credit
Securitizations
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 85% of gross PRVs are collateralized and more
than 95% of uncollateralized exposures are rated
investment grade. More than 60% of gross PRVs are due
to mature by the end of 2021.
Consists primarily of a residual structured credit book that
is largely hedged against market risk and is expected to
materially run off by the end of 2018. The remaining
counterparty risk is fully collateralized and diversified
across multiple names. 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
settle by 2020.
31.12.17
31.12.16
31.12.17
31.12.16
31.12.17
31.12.16
1.3
2.5
28.6
42.6
6.2
9.4
0.2
0.8
8.4
14.5
1.2
2.0
0.3
0.5
0.7
1.0
0.9
2.2
1.9
2.4
0.9
1.4
0.8
1.4
Auction preferred stocks (APSs)
and auction rate securities (ARSs)
Portfolio of long-dated APSs and municipal ARSs. All APSs
were rated A or above and all ARS exposures were rated
Ba1 or above as of 31 December 2017.
Municipal swaps and options
Swaps and options with US state and local governments.
More than 99% of the PRVs are with counterparties that
were rated investment grade as of 31 December 2017.
Other
Diverse portfolio of smaller positions.
Operational risk
Total
Operational risk RWA allocated to Non-core and Legacy
Portfolio.
0.6
0.7
2.1
2.5
2.1
2.5
0.5
1.0
10.3
16.1
0.4
1.5
10.1
18.9
2.1
3.4
2.3
4.2
1.5
2.2
1.7
3.2
46.2
68.5
14.9
22.4
1 Total assets of CHF 46.2 billion as of 31 December 2017 (CHF 68.5 billion as of 31 December 2016) include positive replacement values (gross exposure excluding the impact of any counterparty netting) of
CHF 38.0 billion (CHF 56.5 billion as of 31 December 2016). 2 Swiss SRB leverage ratio denominator.
109
replacement values
Balance sheet assets
During 2016, balance sheet assets decreased to CHF 68 billion
from CHF 94 billion. Positive
(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 derivative 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 RWA decreased by CHF 12 billion 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.
Leverage ratio denominator
The fully applied LRD decreased to CHF 22 billion from CHF 38
billion, consistent with the reduction in balance sheet assets.
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
million.
Operating income
Operating income was negative CHF 36 million compared with
negative CHF 203 million. The improved result was mainly due
from novation and unwind activities.
to
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.
losses
lower
Operating expenses
Total operating expenses decreased by CHF 223 million or 17%
to CHF 1,078 million. Net expenses for services from business
divisions and other Corporate Center units decreased by CHF 99
million as a result of reduced consumption of shared services.
Personnel 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 million. Moreover, 2016 included an expense of
CHF 33 million for the annual UK bank levy compared with
CHF 50 million in 2015.
110
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), Presentation of Financial Statements form
part of the financial 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. The risk profile of UBS AG consolidated does not differ materially from that of UBS Group AG
consolidated. Audited information provided in the “Risk management and control” and “Treasury management” sections
applies to both UBS Group AG consolidated and UBS AG consolidated.
Table of contents
113
116
115
119
113
117
Risk management and control
Overview of risks arising from our business activities
Risk categories
Top and emerging risks
Risk governance
Risk appetite framework
Internal risk reporting
Risk measurement
Credit risk
126
148 Market risk
Country risk
159
Operational risk
122
123
164
167
167
178
181
182
183
183
185
188
193
197
199
201
Treasury management
Balance sheet, liquidity and funding management
Off-balance sheet
Currency management
Cash flows
Capital management
Capital management objectives, planning and activities
Swiss SRB total loss-absorbing capacity framework
Total loss-absorbing capacity
Risk-weighted assets
Leverage ratio denominator
Equity attribution and return on attributed equity
UBS shares
112
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.
Our overall credit risk profile remained stable over the year
and we continued to manage market risks at generally low
levels. Operational risk remains a focus.
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 the table, and it illustrates 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 equity attribution framework
→ Refer to “Statistical measures” in this section for more
information 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
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
113
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
Small amounts of
credit and market
risk
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
collateral 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
Credit risk from
lending (including
temporary loan
underwriting
activities),
derivatives
trading and
securities
financing
Market risk from
primary under-
writing activities
and secondary
trading is
materially hedged
No material risk
exposures
Credit and mmarket
risk arising from
management of
the Group’s
balance sheet,
capital, profit or
loss and liquidity
portfolios.
Market risk is
materially hedged
Central
management of
liquidity, funding,
counterparty
credit and
structural FX risk
CC – Non-core
and Legacy
Portfolio
Credit risk from
remaining lending
and derivative
exposures
Market risk is
materially hedged
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 and counterparty credit risk
of which: market risk
of which: operational risk
Leverage ratio denominator (fully applied)1
Risk-based capital3
Average attributed tangible equity4
Total assets
Operating profit / (loss) before tax (as reported)
Operating profit / (loss) before tax (adjusted)5
Wealth
Management
29.0
15.4
0.0
13.5
128.0
3.0
4.8
123.0
2.3
2.8
Wealth
Management
Americas
25.5
10.4
1.6
13.5
71.8
1.8
3.0
67.1
1.2
1.3
Personal &
Corporate
Banking
48.0
44.0
0.0
4.0
148.0
3.2
6.1
135.6
1.6
1.7
31.12.17
Asset
Management
3.9
1.5
0.0
2.4
2.7
0.4
0.3
14.3
0.6
0.5
Investment
Bank
74.5
42.9
11.7
19.8
264.1
6.8
9.3
262.9
1.2
1.5
31.12.16
CC –
Services
29.2
1.8
(3.1) 2
13.3
6.7
11.0
18.9
20.9
(0.9)
(0.9)
CC –
Group
ALM
11.2
8.0
0.7
2.5
249.9
5.7
2.7
245.7
(0.3)
(0.3)
CC –
Non-core
and Legacy
Portfolio
16.1
4.5
1.3
10.3
14.9
2.0
1.3
46.2
(0.4)
(0.4)
Group
237.5
128.4
12.3
79.4
886.1
33.9
46.4
915.6
5.3
6.2
CHF billion, as of or for the year ended
Risk-weighted assets (fully applied)1
of which: credit and counterparty credit risk
of which: market risk
of which: operational risk
Wealth
Management
25.8
12.5
0.0
13.2
115.5
1.5
2.8
115.5
1.9
2.4
Wealth
Management
Americas
23.8
9.1
1.4
13.2
68.1
1.3
1.9
65.9
1.1
1.2
Personal &
Corporate
Banking
41.6
37.7
0.0
3.9
152.2
2.7
4.1
139.9
1.8
1.8
Asset
Management
3.9
1.6
0.0
2.3
2.7
0.3
0.2
12.0
0.5
0.6
Investment
Bank
70.4
37.0
14.0
19.5
231.2
7.8
7.6
242.3
1.0
1.5
CC –
Services
27.6
1.4
(3.2) 2
13.1
5.8
12.7
19.2
23.7
(0.8)
(0.9)
CC –
Group
ALM
10.6
7.3
0.7
2.5
272.4
5.2
4.3
267.2
(0.2)
(0.1)
CC –
Non-core
and Legacy
Portfolio
18.9
6.2
2.6
10.1
22.4
2.4
2.1
68.5
(1.1)
(1.1)
Group
222.7
112.8
15.5
77.8
870.5
33.9
42.2
935.0
4.1
5.3
Leverage ratio denominator (fully applied)1
Risk-based capital3
Average attributed tangible equity4
Total assets
Operating profit / (loss) before tax (as reported)
Operating profit / (loss) before tax (adjusted)5
1 Represents RWA and LRD prior to allocation of RWA and LRD held by Corporate Center – Group ALM that is directly associated with activity managed centrally on behalf of the business divisions and other
Corporate Center units. Calculated in accordance with Swiss systemically relevant banks rules. 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 Refer to “Statistical measures” in this section for more information on risk-based capital. 4 Refer to the
“Capital management” section of this report for more information on our equity attribution framework. 5 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.
114
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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 that
are intended for further distribution p
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 that
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 p
Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby
a(cid:124)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(cid:124)
appetite framework
Business management
Risk Control
Business management
Risk Control
CC – Group ALM
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 p
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 p
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 counter-
parties, 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(cid:124)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 Treasury
Risk Control
CC – Group ALM
Risk Control
Business management
Risk Control
Legal
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 damage to 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
115
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 that 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 are exposed to a number of macroeconomic issues as
well as general market conditions. As noted in “Market
conditions and fluctuations may have a detrimental effect on
our profitability, capital strength, liquidity and funding
position” and “Performance in the financial services industry
is affected by market conditions and the macroeconomic
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
these
and other valuation adjustments. Accordingly,
macroeconomic factors are considered in the development of
stress testing scenarios for our ongoing risk management
activities.
– We are exposed to substantial changes in the regulation of
our businesses that could have a material adverse effect on
our business, as discussed in the “Regulatory and legal
developments” section of this report and in “Substantial
changes in the regulation of our businesses may adversely
affect our business and our ability to execute our strategic
plans” in the “Risk factors” section of this report.
– As a global financial services firm we are subject to many
different legal, tax and regulatory regimes and extensive
regulatory oversight. We are exposed to significant liability
risk and we are subject to various claims, disputes, legal
proceedings and government investigations, as noted in
“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
in “Note 20
currently consider significant
Provisions and contingent liabilities” in the “Consolidated
financial statements” section of this report.
is disclosed
– 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. Additionally, 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. Refer to “Operational risk” in this section and
“Operational risks affect our business” in the “Risk factors”
section of this report for more information.
– Our reputation is critical to achieving our strategic goals and
performance targets, and damage to it can have fundamental
negative 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.
116
Risk governance
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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
including robust and
comprehensive internal controls and documented procedures.
Business management has appropriate supervisory controls and
review processes
identify control
weaknesses and inadequate processes.
in place designed
its risks,
to
Our second line of defense is formed by the control functions,
which are independent from the business and report directly to
independent
the Group CEO. Control
functions provide
(cid:35)(cid:87)(cid:70)(cid:75)(cid:86)(cid:71)(cid:70)(cid:2)(cid:94)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)
oversight of risks, including setting risk limits and protecting
against non-compliance with applicable laws and regulations.
Our third line of defense, Group Internal Audit (GIA), reports
to the Audit Committee of the Board of Directors and evaluates
the overall effectiveness of governance, risk management and
the control environment, including the assessment of how the
first and second lines of defense meet their objectives.
The key roles and responsibilities for risk management and
control are illustrated in the following chart and described on
the next pages.
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:35)(cid:87)(cid:70)(cid:75)(cid:86)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:37)(cid:87)(cid:78)(cid:86)(cid:87)(cid:84)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:52)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:41)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:48)(cid:81)(cid:79)(cid:75)(cid:80)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:36)(cid:81)(cid:67)(cid:84)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:38)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85)
(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:43)(cid:80)(cid:70)(cid:71)(cid:82)(cid:71)(cid:80)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:72)(cid:87)(cid:80)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:35)(cid:87)(cid:70)(cid:75)(cid:86)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:36)(cid:81)(cid:67)(cid:84)(cid:70)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:49)(cid:72)(cid:386)(cid:69)(cid:71)(cid:84)
(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:46)(cid:71)(cid:73)(cid:67)(cid:78)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:49)(cid:72)(cid:386)(cid:69)(cid:71)(cid:84)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)
(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:49)(cid:72)(cid:386)(cid:69)(cid:71)(cid:84)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:37)(cid:81)(cid:87)(cid:80)(cid:85)(cid:71)(cid:78)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:46)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:42)(cid:71)(cid:67)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:35)(cid:46)(cid:47)
(cid:54)(cid:84)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:91)(cid:2)(cid:37)(cid:52)(cid:49)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:54)(cid:84)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:84)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)
(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:85)
(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:52)(cid:75)(cid:85)(cid:77)(cid:2)
(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:17)(cid:78)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:85)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:17)(cid:2)(cid:78)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)
(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:78)(cid:71)(cid:84)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:35)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:49)(cid:72)(cid:386)(cid:69)(cid:71)(cid:84)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:37)(cid:52)(cid:49)(cid:85)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:37)(cid:40)(cid:49)(cid:85)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)
(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:37)(cid:81)(cid:87)(cid:80)(cid:85)(cid:71)(cid:78)(cid:85)
(cid:37)(cid:81)(cid:79)(cid:82)(cid:78)(cid:75)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:8)(cid:2)
(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:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
(cid:38)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:17)
(cid:78)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)(cid:2)(cid:37)(cid:52)(cid:49)(cid:85)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:47)(cid:71)(cid:86)(cid:74)(cid:81)(cid:70)(cid:81)(cid:78)(cid:81)(cid:73)(cid:91)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:37)(cid:49)(cid:49)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:17)
(cid:78)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)(cid:2)(cid:37)(cid:40)(cid:49)(cid:85)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:35)(cid:80)(cid:67)(cid:78)(cid:91)(cid:85)(cid:75)(cid:85)(cid:2)(cid:8)(cid:2)
(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:8)(cid:2)
(cid:35)(cid:80)(cid:67)(cid:78)(cid:91)(cid:86)(cid:75)(cid:69)(cid:85)(cid:2)(cid:53)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)
(cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:17)(cid:78)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)
(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:37)(cid:81)(cid:87)(cid:80)(cid:85)(cid:71)(cid:78)(cid:85)
(cid:2)(cid:86)
117
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, experience and responsibilities.
The Group Chief Financial Officer (Group CFO) is responsible
for assessing and facilitating transparency in the financial
performance of the Group and business divisions, and for
monitoring whether disclosure of our financial performance
meets regulatory requirements 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.
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) manages the Group’s
legal affairs and is responsible for supporting the Group with
effective and timely assessment of legal matters impacting the
Group or its businesses and for providing the legal advice required
by the Group. The Group GC is further responsible for the
management and reporting of all litigation and other significant
contentious matters, including all legal proceedings, that involve
UBS.
(GIA)
Group
Internal Audit
independently assesses the
adherence to our strategy, the effectiveness of governance, risk
management 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
contracts. The Head GIA reports to the Chairman of the BoD
and, in addition, 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. (cid:3)
Risk, treasury and capital management
Risk management and control
Audited
| The Board of Directors (BoD) is responsible for
determining 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
implementation of the risk
Group’s risk profile and the
framework as approved by the BoD, as well as assesses the
Group’s key risk measurement methodologies. The Corporate
Culture and Responsibility Committee 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 expectations pertaining
to UBS’s societal performance and corporate culture and
recommends appropriate actions to the BoD.
The Group Executive Board (GEB) implements the risk
framework, 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,
positions 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 balancing profit potential, risk, balance
sheet and capital usage. The regional Presidents facilitate the
implementation of UBS’s strategy in their region, and have the
mandate to escalate activities and issues that may give rise to
reputational
actual or potentially material
concerns.
regulatory or
The Group Chief Risk Officer (Group CRO) is responsible for
Risk Control. Risk Control independently oversees all primary
in “Risk
risks and most consequential risks as outlined
categories” above. This includes establishing methodologies to
measure and assess risk, setting risk limits, and developing and
operating 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
118
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
quantitative 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 below shows
the key elements of this framework, which are described in
more detail further 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 risk
appetite objectives cover the Group’s minimum capital and
leverage ratios, solvency, earnings, 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
appetite objectives, which are established for each of our
operational risk categories, such as market conduct, theft, fraud,
data confidentiality 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 respective 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
business unit, at legal entity level, or to an asset class. These
additional quantitative controls are typically bottom-up and are
designed to monitor specific portfolios and to identify potential
risk concentrations.
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:82)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)(cid:14)(cid:2)(cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:81)(cid:78)(cid:71)(cid:85)(cid:17)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:14)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:85)
(cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:82)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)
(cid:115)(cid:2)(cid:37)(cid:81)(cid:70)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:37)(cid:81)(cid:80)(cid:70)(cid:87)(cid:69)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:39)(cid:86)(cid:74)(cid:75)(cid:69)(cid:85)
(cid:115)(cid:2)(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)
(cid:115)(cid:2)(cid:49)(cid:84)(cid:73)(cid:67)(cid:80)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:17)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:75)(cid:71)(cid:85)
(cid:115)(cid:2)(cid:52)(cid:81)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)
(cid:115)(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:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:115)(cid:2)(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:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:85)
(cid:115)(cid:2)(cid:35)(cid:87)(cid:86)(cid:74)(cid:81)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:75)(cid:85)(cid:69)(cid:78)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:14)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:14)(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:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)
insight
Risk reports aggregating measures of risk across products and
businesses provide
into the amounts, types, and
sensitivities of the various risks in our portfolios and are intended
to ensure compliance with defined limits. Risk officers, senior
management and the BoD use this information to understand
our risk profile and the performance 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.
Our risk appetite framework is encompassed in a single
overarching 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 maintaining
a strong 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
delivering unrivaled client satisfaction, creating long-term value
for stakeholders, and making UBS one of the most attractive
companies to work for in the world.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
119
Risk, treasury and capital management
Risk management and control
Our risk appetite framework combines all the important
elements 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 strategy, principles and risk appetite. They help provide
a solid foundation 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
Risk management and control principles
include our principles of good supervision, which establish clear
expectations of managers and employees 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 compliance culture
and to respond to and resolve issues.
→ Refer to the “Our employees” section of this report for more
information on our Pillars, Principles and Behaviors
→ Refer to “Key principles and policies” in the “UBS and Society”
section of this report and to the UBS Code of Conduct and
Ethics at www.ubs.com/code for more information
Protection of
financial strength
Protection of reputation
Business management
accountability
Independent controls
Risk disclosure
Protecting UBS’s financial strength
by controlling our risk exposure
and avoiding potential risk
concentrations 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,
particularly our Code of Conduct
and Ethics
Maintaining management
accountability, whereby business
management, as opposed to Risk
Control, owns all risks assumed
throughout the Group and is
responsible for the continuous and
active management of all risk
exposures to provide for balanced
risk and return
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
comprehensiveness and
transparency
To maintain an environment where staff are comfortable
raising concerns, we have whistleblowing 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 standards. Our program is designed to
ensure that whistleblowing 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
sessions within the given deadline results in consequences,
including disciplinary action. Our operational risk framework,
incorporating the conduct risk framework, aims to identify and
manage financial, regulatory, and reputational risks, together
with risks to clients and to markets.
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
management decisions on potential adjustments to the business
strategy 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
frameworks capture exposures to all material primary and
consequential risks as well as business risks across our business
divisions and Corporate Center units.
→ Refer to “Risk measurement” in this section for more
information on our stress testing and statistical frameworks
120
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
(cid:20)(cid:18)(cid:19)(cid:25)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:47)(cid:75)(cid:80)(cid:75)(cid:79)(cid:87)(cid:79)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:47)(cid:75)(cid:80)(cid:75)(cid:79)(cid:87)(cid:79)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)
(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:53)(cid:81)(cid:78)(cid:88)(cid:71)(cid:80)(cid:69)(cid:91)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:39)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:46)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:40)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)
(cid:37)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:85)(cid:2)(cid:85)(cid:87)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:86)(cid:81)(cid:2)
(cid:79)(cid:67)(cid:75)(cid:80)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:67)(cid:2)(cid:82)(cid:81)(cid:85)(cid:86)(cid:15)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:72)(cid:87)(cid:78)(cid:78)(cid:91)(cid:2)
(cid:67)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:70)(cid:2)(cid:37)(cid:39)(cid:54)(cid:19)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2)
(cid:81)(cid:72)(cid:2)(cid:67)(cid:86)(cid:2)(cid:78)(cid:71)(cid:67)(cid:85)(cid:86)(cid:2)(cid:19)(cid:18)(cid:7)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:2)
(cid:82)(cid:81)(cid:85)(cid:86)(cid:15)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:73)(cid:81)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:84)(cid:80)(cid:2)
(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2)(cid:81)(cid:72)(cid:2)(cid:67)(cid:86)(cid:2)(cid:78)(cid:71)(cid:67)(cid:85)(cid:86)(cid:2)(cid:19)(cid:21)(cid:7)
(cid:37)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:85)(cid:2)(cid:85)(cid:87)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:86)(cid:81)(cid:2)
(cid:79)(cid:67)(cid:75)(cid:80)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:67)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:67)(cid:86)(cid:2)(cid:78)(cid:71)(cid:67)(cid:85)(cid:86)(cid:2)(cid:20)(cid:16)(cid:23)(cid:7)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)
(cid:37)(cid:39)(cid:54)(cid:19)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:86)(cid:2)(cid:78)(cid:71)(cid:67)(cid:85)(cid:86)(cid:2)
(cid:22)(cid:16)(cid:18)(cid:7)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:73)(cid:81)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:84)(cid:80)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:14)(cid:2)(cid:71)(cid:88)(cid:71)(cid:80)(cid:2)(cid:75)(cid:72)(cid:2)(cid:67)(cid:2)
(cid:85)(cid:71)(cid:88)(cid:71)(cid:84)(cid:71)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:71)(cid:88)(cid:71)(cid:80)(cid:86)(cid:2)(cid:89)(cid:71)(cid:84)(cid:71)(cid:2)
(cid:86)(cid:81)(cid:2)(cid:81)(cid:69)(cid:69)(cid:87)(cid:84)
(cid:37)(cid:39)(cid:54)(cid:19)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:82)(cid:78)(cid:87)(cid:85)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:73)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:85)(cid:2)(cid:85)(cid:87)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:86)(cid:81)(cid:2)(cid:71)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)
(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:68)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:111)(cid:85)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:85)(cid:2)
(cid:75)(cid:85)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:71)(cid:80)(cid:86)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:111)(cid:85)(cid:2)
(cid:86)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:39)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:81)(cid:84)(cid:71)(cid:2)
(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:71)(cid:85)(cid:2)(cid:85)(cid:74)(cid:81)(cid:87)(cid:78)(cid:70)(cid:2)(cid:68)(cid:71)(cid:2)
(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:79)(cid:81)(cid:85)(cid:86)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:85)(cid:16)(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:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:67)(cid:75)(cid:79)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:88)(cid:81)(cid:75)(cid:70)
(cid:69)(cid:81)(cid:80)(cid:85)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:84)(cid:86)(cid:71)(cid:84)(cid:78)(cid:91)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85)(cid:2)
(cid:75)(cid:80)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:81)(cid:84)(cid:71)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:2)
(cid:85)(cid:71)(cid:88)(cid:71)(cid:84)(cid:71)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:71)(cid:88)(cid:71)(cid:80)(cid:86)
(cid:39)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:386)(cid:84)(cid:79)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)
(cid:85)(cid:87)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)
(cid:85)(cid:87)(cid:84)(cid:88)(cid:75)(cid:88)(cid:71)(cid:2)(cid:67)(cid:2)(cid:85)(cid:71)(cid:88)(cid:71)(cid:84)(cid:71)(cid:2)(cid:19)(cid:20)(cid:15)(cid:79)(cid:81)(cid:80)(cid:86)(cid:74)(cid:2)
(cid:75)(cid:70)(cid:75)(cid:81)(cid:85)(cid:91)(cid:80)(cid:69)(cid:84)(cid:67)(cid:86)(cid:75)(cid:69)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:15)
(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:78)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:71)(cid:88)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:89)(cid:75)(cid:86)(cid:74)(cid:81)(cid:87)(cid:86)(cid:2)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:78)(cid:91)(cid:2)
(cid:75)(cid:79)(cid:82)(cid:67)(cid:69)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)
(cid:72)(cid:84)(cid:67)(cid:80)(cid:69)(cid:74)(cid:75)(cid:85)(cid:71)(cid:85)
(cid:39)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:386)(cid:84)(cid:79)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)
(cid:85)(cid:87)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:15)(cid:86)(cid:71)(cid:84)(cid:80)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:86)(cid:81)(cid:2)(cid:79)(cid:67)(cid:75)(cid:80)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:72)(cid:84)(cid:67)(cid:80)(cid:69)(cid:74)(cid:75)(cid:85)(cid:71)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)
(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:86)(cid:67)(cid:80)(cid:86)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:2)(cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)
(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:69)(cid:81)(cid:80)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:87)(cid:82)(cid:2)(cid:86)(cid:81)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:69)(cid:67)(cid:82)(cid:67)(cid:69)(cid:75)(cid:86)(cid:91)
(cid:50)(cid:84)(cid:81)(cid:76)(cid:71)(cid:69)(cid:86)(cid:71)(cid:70)(cid:2)(cid:71)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)
(cid:35)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:84)(cid:71)(cid:387)(cid:71)(cid:69)(cid:86)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)
(cid:53)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:28)(cid:2)(cid:69)(cid:81)(cid:79)(cid:68)(cid:75)(cid:80)(cid:71)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:71)(cid:85)(cid:86)
(cid:53)(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:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:28)(cid:2)(cid:71)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)(cid:15)(cid:67)(cid:86)(cid:15)(cid:84)(cid:75)(cid:85)(cid:77)(cid:14)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:15)(cid:67)(cid:86)(cid:15)(cid:84)(cid:75)(cid:85)(cid:77)(cid:14)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:15)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)
(cid:37)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)
(cid:35)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:84)(cid:71)(cid:387)(cid:71)(cid:69)(cid:86)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:69)(cid:86)(cid:2)(cid:81)(cid:80)(cid:2)
(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:15)(cid:84)(cid:71)(cid:78)(cid:71)(cid:88)(cid:67)(cid:80)(cid:86)(cid:2)(cid:71)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:71)(cid:86)(cid:86)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:81)(cid:67)(cid:80)(cid:2)(cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:89)(cid:84)(cid:75)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:11)(cid:124)
(cid:47)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(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:86)(cid:74)(cid:67)(cid:86)(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)
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 this page provides an overview of our
quantitative risk appetite objectives during 2017. For 2018, we
have decided to remove the going concern minimum capital and
leverage ratio objectives as they would be satisfied when the
corresponding CET1 objective is met, given the amount of
additional tier 1 (AT1) instruments that have been issued. Our
earnings objectives will consider the entire Group instead of only
the core businesses going forward, and potential losses under a
stress event are compared with historical earnings.
Risk appetite statements at the business division level are
derived from the Group-wide objectives. They may also comprise
objectives specific to the division, related to the specific activities
and risks in that division. Risk appetite objectives are also set for
certain 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.
Differences may exist that reflect the specific nature, size,
complexity and regulations applicable to the relevant legal
entity.
121
Risk, treasury and capital management
Risk management and control
Internal risk reporting
Comprehensive and transparent reporting of risks is central to
the control and oversight responsibilities set out in our risk
governance framework and is a requirement of our risk
management and control principles. Accordingly, risks are
reported at a frequency 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 distributed 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 business divisions and Corporate Center units,
to enable risk officers and senior management to monitor and
control the Group’s risk profile.
Our
internal risk reporting, which covers primary and
consequential risks, is supported by risk data and measurement
systems, which are also used for external disclosure and
regulatory reporting. Dedicated units within Risk Control assume
responsibility for measurement, analysis and reporting of risk
and for overseeing 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.
122
Risk measurement
Audited | We apply a variety of methodologies and measurements
to quantify the risks of our portfolios and potential risk
concentrations. Risks that are not fully reflected within standard
measures are subject to additional controls, which may include
preapproval 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 independent verification. (cid:3)
Models and methodologies must be approved and are
regularly reviewed in accordance with regulatory requirements
as well as internal policies to test that models perform as
expected, produce 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
relevant
to
governance body and, as required, to regulators.
the
The ongoing process of assessing model quality and
performance in the production environment comprises two
components: model verification,
in which Model Risk
Management & Control (MRMC) independently assesses a
model’s conceptual soundness, and model confirmation, the
regular process of confirming 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 the regulators of our legal entities in
accordance with their requirements. As described in “Risk
appetite framework” above, stress testing, along with statistical
loss measures, plays a central role in our risk appetite and
business planning processes.
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.
Our combined stress test (CST) framework is scenario based
and aims to quantify overall Group-wide losses that could result
from a number of potential global systemic events. The
framework captures all material primary and consequential risks,
as well as business risks, as indicated in “Risk categories” above.
Scenarios are forward looking and encompass macroeconomic
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
scenario, known as the binding scenario, to be used as the main
scenario for regular CST reporting and for monitoring risk
exposure against our minimum capital, earnings and leverage
ratio objectives in our risk appetite framework. Results are
reported to the Risk Committee, BoD, GEB and FINMA on a
monthly basis.
in
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 seeks to ensure that the suite of
stress scenarios adequately reflects current and potential
developments
the macroeconomic and geopolitical
environment, our current and planned business activities, and
actual or potential risk concentrations 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 responsibilities, 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 current 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.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Each scenario captures a wide range of macroeconomic
variables. 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
in
capital and
macroeconomic variables are updated periodically to take
account of changes in the current and possible future market
environment.
ratios. The assumed changes
leverage
123
Risk, treasury and capital management
Risk management and control
Through 2017, the binding scenario for CST was the internal
Global Deflation scenario, which is characterized by: a crisis in
the eurozone, with sovereign defaults in peripheral economies
and the abandonment of the monetary union by Greece; a
China hard landing, triggered by excessive policy tightening in
light of market turbulence, including high real interest rates,
insufficient
stringent anti-corruption
campaigns; an ineffective direct support of the equity market by
governments; and a global recession, with central banks in
major developed economies such as the eurozone, US and UK
attempting to stimulate growth and restore market confidence
by reducing policy rates further into negative territory.
stimulus, and
fiscal
The CST risk exposure was broadly stable over the year with
most of the month-on-month variability arising primarily from
temporary loan underwriting exposure in the Investment Bank.
As part of the CST framework, we routinely monitored four
additional stress scenarios throughout 2017.
– 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 deleveraging 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
substantial US dollar sell-off. The US is pushed back into
recession, other industrialized countries replicate this pattern
and inflationary 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 Interest Rate Steepening scenario represents a sudden
shift in market sentiment causing a disorderly sell-off in long-
dated bonds and a rapid steepening of the yield curve,
exacerbated by a lack of liquidity in financial markets. This in
turn triggers a sovereign crisis in Japan and a global recession.
We have developed a new Severe Eurozone Crisis scenario to
be used as the binding stress scenario in our combined stress
test framework for 2018. In line with the Global Deflation
scenario, this retains a eurozone crisis at its core, but with
greater severity through the inclusion of an additional sovereign
debt restructuring as a consequence of the ensuing crisis. A
China hard landing remains a feature of the scenario, while the
assumption of more severe negative rates in major developed
countries has been removed.
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
consideration of defined scenarios that have never occurred.
Results of portfolio-specific stress tests may be subject to limits
124
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
backward 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
thereby potentially challenge
normally considered, and
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.
testing
Moreover, Group Treasury performs stress
to
determine the optimum asset and liability structure that allows
us to maintain an appropriately balanced liquidity and funding
position under various scenarios. These scenarios differ from
those outlined above, because they are focused on specific
situations that 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 of this report for
more information 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
Statistical measures
In addition to our scenario-based CST measure, we employ a
statistical 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
combination with the firm’s actual risk exposures, considering
effects on both income and expenses. From this, we determine
earnings-at-risk (EaR), which measures the potential shortfall in
earnings (i.e., the deviation from forecast earnings) at a 95%
confidence 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 impairment 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.
→ Refer to the “Capital management” section of this report for
more information on the equity attribution framework
Portfolio and position limits
The Group-wide stress and statistical metrics are complemented
by more granular portfolio and position limits, triggers and
targets. The combination of these measures provides a
comprehensive, granular control framework that 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 business 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
limits,
economic 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.
loan underwriting
Portfolio measures are supplemented with position-level
controls. 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
positions 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 geographical 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 instrument 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. (cid:3)
→ 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
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
125
Risk, treasury and capital management
Risk management and control
Credit risk
Key developments
Audited | Main sources of credit risk
Overall, our gross credit risk exposures decreased by CHF 30
billion to CHF 518 billion during 2017. The increase in our gross
loan portfolio of CHF 13 billion to CHF 319 billion, mainly driven
by an increase in Wealth Management, was more than offset by
exposure reductions in balances with central banks, loan
commitments and over-the-counter derivatives.
Total net credit loss expense was CHF 128 million compared
with CHF 37 million, mainly reflecting CHF 79 million higher
expenses in the Investment Bank in the fourth quarter of 2017,
primarily related to a margin loan to a single client following a
significant decrease in the value of the collateral.
for
lending portfolios, which
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 our counterparties and
lead to an increase in credit loss expenses from the low levels
recently observed.
account
Swiss
Our
Volatility was remarkably low in 2017, amid a broad-based
acceleration
in global growth, strong corporate profits,
predictable and still largely supportive monetary policy and
expectations of US tax cuts. Tensions around Syria and North
Korea, the fallout from natural disasters and political turmoil in
the US contributed to intermittent periods of market volatility
during the year, although overall the market reaction to
geopolitical and other risk events has been largely muted.
In 2017, many counterparties in the energy segments
adapted to operating in a lower oil price environment, hence
price volatility during the year had very little impact on our
portfolio.
– A substantial portion of our lending exposure arises from our
Swiss domestic business, which offers corporate loans and
mortgage loans mainly 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 mainly arises
from lending, derivatives trading and securities financing and
is predominantly investment grade. Loan underwriting activity
can be lower rated and gives rise to concentrated exposure of
a temporary nature.
– Our wealth management businesses predominately conduct
securities-based lending and mortgage lending.
– Credit risk within Non-core and Legacy Portfolio relates to
derivative transactions, predominantly carried out on a cash-
collateralized basis, and securitized positions. (cid:3)
Audited | Overview of measurement, monitoring and
management techniques
– Credit
from
risk arising
transactions with
individual
counterparties 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.
Within the loan underwriting business, we continued to see a
steady flow of transactions as leveraged loan markets remained
relatively strong.
– 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 that
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 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
portfolio and sub-portfolio levels with regard to sector
exposure, country risk and specific product exposures. (cid:3)
126
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
products comprise drawn loans, undrawn guarantees and loan
commitments, amounts due from banks and balances with
central banks. Traded products comprise over-the-counter (OTC)
derivatives, 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 products 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 (CDS), is not
reflected. Guarantees and loan commitments are shown on a
notional basis, without applying credit conversion factors.
Total gross banking products exposure decreased to CHF 474
billion as of 31 December 2017 compared with CHF 497 billion
at the end of 2016, mainly due to decreases in balances with
central banks in Corporate Center – Group Asset and Liability
Management (Group ALM) and in loan commitments in the
Investment Bank, partly offset by higher loan balances in 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
BBanking products exposure2
BBanking products exposure, net4
Over-the-counter derivatives5
Securities financing transactions5
Exchange-traded derivatives5
TTraded products exposure5
TTraded products exposure, net5
CCredit exposure5
CCredit exposure, net5
WWealth
Management
427
1,356
115,180
1,982
1,861
120,806
120,701
5,547
0
963
6,510
6,510
127,316
127,211
WWealth
Management
Americas
0
3,357
53,014
460
347
57,178
57,153
26
222
1,730
1,978
1,978
59,156
59,131
PPersonal &
Corporate
Banking
0
1,485
131,380
9,551
9,160
151,576
151,105
1,234
0
76
1,310
1,310
152,886
152,414
AAsset
Management
0
570
1
0
0
570
570
0
0
0
0
0
570
570
331.12.17
IInvestment
Bank
32
8,725
12,094
5,040
20,619
46,510
44,693
31.12.16
CCC –
Services
0
356
34
105
0
496
496
CCC –
Group ALM
86,618
2,740
7,226
2
0
96,585
96,585
CCC –
Non-core
and Legacy
Portfolio
0
0
88
2
0
90
61
11,444
17,842
5,444
34,729
33,996
178,411
175,832
GGroup
87,078
18,589
319,016
17,142
31,988
473,8133
471,364
18,250
18,064
8,213
44,527
43,794
518,339
515,158
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Investment
Bank
37
9,662
12,022
5,336
36,496
63,553
57,682
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
Group
CHF million
107,100
Balances with central banks
18,543
Due from banks
Loans1
306,379
17,220
Guarantees
47,943
Loan commitments
497,1863
BBanking products exposure2
BBanking products exposure, net4
490,541
Over-the-counter derivatives5
24,353
Securities financing transactions5
17,669
Exchange-traded derivatives5
9,454
TTraded products exposure5
51,476
TTraded products exposure, net5
50,324
CCredit exposure5
548,662
CCredit exposure, net5
540,865
11 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 2017, total banking
products exposure of UBS AG consolidated was CHF 2.1 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 2016: CHF 0.6 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.
17,540
17,414
7,031
41,985
40,833
221,063
213,843
Asset
Management
0
544
1
0
0
545
545
0
0
0
0
0
545
545
CC –
Group ALM
106,162
2,176
5,962
1
0
114,301
114,301
CC –
Services
0
455
43
111
0
610
610
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
CC –
Non-core
and Legacy
Portfolio
0
0
129
4
481
614
418
127
Risk, treasury and capital management
Risk management and control
Wealth Management
Gross banking products exposure within Wealth Management
increased to CHF 121 billion from CHF 108 billion, mainly driven
by loan growth in Asia Pacific. Our Wealth Management loan
portfolio is mainly secured by securities (Lombard loans) and by
residential property. Most of the Lombard loans were of high
quality, with 96% rated investment grade based on our internal
ratings, 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 increased to CHF 6.2 billion from CHF 5.5 billion,
driven mainly by the UK and Monaco. The overall quality of this
portfolio remained high over the year.
Wealth Management Americas
Gross banking products exposure within Wealth Management
Americas increased to CHF 57 billion from CHF 56 billion, driven
mainly by increased loan origination. This exposure largely
relates to loans secured by securities and by residential property.
Out of the loans secured by securities, 99% were rated
investment grade based on our internal ratings, compared with
96% in 2016, with the increase driven by a model change.
The portfolio of loans secured by residential property consists
primarily of residential mortgage loans offered in the US. Gross
exposure increased to CHF 11.4 billion from CHF 10.2 billion.
The overall quality of this portfolio remained high with an
average loan-to-value ratio (LTV) of 58%, unchanged from
2016, and we have experienced negligible credit losses since the
inception of the mortgage program in 2009. Natural disasters
that occurred in the US during 2017 had a very limited impact
on properties within the mortgage loan portfolio. The five
largest geographic concentrations in the portfolio were in
California (30%), New York (16%), Florida (10%), Texas (4%)
and New Jersey (4%).
Wealth Management, Wealth Management Americas and Personal & Corporate Banking loan portfolios, gross1
Wealth Management
331.12.17
34,644
CHF million
Secured by residential property
Wealth Management Americas
331.12.17
11,367
331.12.17
95,381
31.12.16
32,208
31.12.16
10,239
Personal & Corporate Banking
Secured by commercial / industrial property
Secured by cash
Secured by securities
Secured by guarantees and other collateral
Unsecured loans
2,071
10,271
59,946
7,869
379
1,974
14,436
46,194
6,697
366
0
4,276
36,231
800
341
0
1,042
40,182
716
307
16,619
1,458
1,868
6,442
9,611
31.12.16
95,966
17,819
1,884
1,990
6,707
9,496
133,861
TTotal loans, gross
133,419
TTotal loans, net of allowances
11 Collateral arrangements generally incorporate a range of collateral, including cash, securities, property and other collateral. In 2017, we further aligned our collateral allocation processes within Wealth
Management Americas to prioritize collateral mainly according to its liquidity profile. This change resulted in increases in loans secured by cash and decreases in loans secured by securities of CHF 4.5 billion.
115,180
115,076
131,380
130,939
101,876
101,814
53,014
52,989
52,486
52,455
128
Personal & Corporate Banking
Gross banking products exposure within Personal & Corporate
Banking decreased to CHF 152 billion from CHF 154 billion. Net
banking products exposure was CHF 151 billion compared with
CHF 153 billion, of which approximately 60% was classified as
investment grade compared with 61% in the prior year. Around
53% of the exposure is categorized in the lowest loss given
default (LGD) bucket of 0% to 25%, compared with 81% in
2016. This significant decrease is due to the introduction of a
new LGD framework, leading to higher LGDs mainly for the
mortgage business. The size of Personal & Corporate Banking’s
gross loan portfolio decreased by CHF 2 billion to CHF 131
billion. As of 31 December 2017, 93% of this portfolio was
secured by collateral, mainly
residential and commercial
property. Of the total unsecured amount, 77% related to cash
flow-based lending to corporate counterparties and 9% related
to lending to public authorities. Based on our internal ratings,
51% of the unsecured loan portfolio was rated investment
grade compared with 50% in 2016.
Credit loss expense for this portfolio remained low in 2017.
Given the reliance of the Swiss economy on exports, the slight
weakening of the Swiss franc may have provided some support
to the financials of export-oriented counterparties.
loans, guarantees and
Our Swiss corporate banking products portfolio, which
totaled CHF 26.2 billion compared with CHF 25.5 billion,
consists of
loan commitments to
multinational and domestic counterparties. The small and
medium-sized enterprises portfolio, especially, is well diversified
across industries. However, such companies are reliant on the
domestic economy and the economies to which they export, in
particular the EU and the US. In addition, the development of
the EUR / CHF exchange rate is an important risk factor for Swiss
corporates.
The delinquency ratio, being the ratio of past due but not
impaired loans to total loans, was 0.6% for the corporate loan
portfolio compared with 0.7% at the end of 2016.
→ Refer to “Credit risk models” in this section for more
information on loss given default, rating grades and rating
agency mappings
Swiss mortgage loan portfolio
Our Swiss mortgage loan portfolio secured by residential and
commercial real estate in Switzerland continues to be our largest
loan portfolio. These mortgage loans totaling CHF 136 billion
mainly originate from Personal & Corporate Banking, but also
from Wealth Management. CHF 124 billion of these mortgage
loans related to residential properties that the borrower was
either occupying or renting out, with full recourse to the
borrower. Of this CHF 124 billion, CHF 90 billion related to
properties occupied by the borrower, with an average LTV ratio
of 56% compared with 53% as of 31 December 2016. The
average LTV for newly originated loans for this portion was
65%, compared with 62% in 2016. The remaining CHF 34
billion of the Swiss residential mortgage loan portfolio relates to
properties rented out by the borrower and the average LTV of
this portfolio was 57%, compared with 56% as of 31 December
2016. The average LTV for newly originated Swiss residential
mortgage loans for properties rented out by the borrower was
60% compared with 54% in 2016.
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
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.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
129
Risk, treasury and capital management
Risk management and control
31.12.16
WWeighted
average
LGD (%)
26
32
32
32
39
28
Exposure
94,083
59,817
52,878
5,053
1,886
153,900
(486)
Weighted
average
LGD (%)
17
18
18
14
38
17
Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings
and loss given default (LGD) buckets
CHF million, except where indicated
331.12.17
LLGD buckets
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
EExposure
89,975
61,602
00–25%
53,566
27,210
226–50% 551–75%
6,508
27,950
776–100%
1,951
21,878
10,193
55,730
25,234
19,036
9,358
4,040
1,832
1,894
82
1,266
1,575
662
172
2,321
2,101
217
3
Total exposure before deduction of allowances and provisions
151,576
80,776
49,827
16,701
4,272
Less: allowances and provisions
(472)
NNet banking products exposure
11 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 this section.
151,105
153,414
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
31.12.17
CHF million
127
1,162
83
1,779
1,367
877
181
1,978
1,821
236
9,611
%
1.3
12.1
0.9
18.5
14.2
9.1
1.9
20.6
18.9
2.5
100.0
31.12.16
CHF million
140
1,675
96
1,188
1,334
1,221
143
1,694
1,748
258
9,496
Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments
and loan-to-value (LTV) buckets
%
1.5
17.6
1.0
12.5
14.0
12.9
1.5
17.8
18.4
2.7
100.0
31.12.16
31.12.17
LTV buckets
≤30%
67.3
58
10.7
60
5.4
61
0.6
65
84.0
59
86.7
60
31–50%
51–60%
61–70%
71–80% 81–100% >100%
Total
Total
31.5
27
4.8
27
2.2
25
0.2
21
38.7
27
38.8
27
9.3
8
1.4
8
0.6
7
0.1
7
11.3
8
10.7
7
5.0
4
0.7
4
0.3
4
0.0
5
6.1
4
5.3
4
1.9
2
0.2
1
0.2
2
0.0
2
2.3
2
1.7
1
0.3
0
0.0
0
0.1
1
0.0
0
0.5
0
0.3
0
0.0
115.4
114.6
0
0.0
0
0.1
1
0.0
0
100
17.9
100
8.9
100
0.9
100
19.1
8.7
1.0
0.1
143.0
143.5
0
100
0.1
143.5
0
100
CHF billion, except where indicated
Exposure segment
Residential mortgages
Net EAD
as a % of row total
Income-producing real estate (IPRE)
Net EAD
Corporates
Other segments
Mortgage-covered exposure
Mortgage-covered exposure 31.12.16
as a % of row total
Net EAD
as a % of row total
Net EAD
as a % of row total
Net EAD
as a % of total
Net EAD
as a % of total
130
Asset Management
Gross banking products exposure within Asset Management
was less than CHF 1 billion as of 31 December 2017 and
31 December 2016.
The Investment Bank actively manages the credit risk of this
portfolio and, as of 31 December 2017, held CHF 1.8 billion of
single-name CDS hedges against its exposures to corporates and
other non-banks, a decrease of CHF 4.1 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 2017, the gross banking products exposure of the
Investment Bank decreased to CHF 47 billion from CHF 64
billion. The decrease was due to lower corporate lending
exposure, which also includes temporary loan underwriting
activity.
Within the loan underwriting business, we continued to see a
steady flow of transactions as leveraged loan markets remained
relatively strong. Total temporary underwriting exposure ended
2017 significantly lower than the previous year as our ability to
distribute was robust, while a large investment grade merger
and acquisition financing commitment, which had exceeded our
targeted distribution date, expired unused during the second
quarter of 2017. Loan underwriting exposures are classified as
held for trading, with fair values reflecting market conditions at
the end of 2017.
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
NNet exposure after allowances, provisions and hedges
from CHF 49.9 billion, driven by
Net banking products exposure, excluding balances with
central banks and the vast majority of amounts due from banks,
and after allowances, provisions and hedges, decreased to
CHF 36.6 billion
the
aforementioned lower level of corporate lending at the end of
2017. Based on our internal ratings, 57% of the Investment
Bank’s net banking products exposure was classified as
investment grade compared with 63% at the end of the prior
year. The majority of the Investment Bank’s net banking
products exposure had an estimated LGD of between 0% and
50%.
Many counterparties in the energy segments adapted in 2017
to operating in a lower oil price environment, hence price
volatility during the year had very little impact on our portfolio.
Overall, while our exposures remain relatively stable, we
continue to actively monitor exposures to this sector.
→ Refer to “Credit risk models” in this section for more
information on loss given default, rating grades and rating
agency mappings
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
331.12.17
38,439
(42)
(1,755)
36,643
31.12.16
55,709
(41)
(5,810)
49,859
11 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.
131
Risk, treasury and capital management
Risk management and control
Investment Bank: distribution of net banking products exposure across internal UBS ratings and loss given default
(LGD) buckets
CHF million, except where indicated
331.12.17
31.12.16
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
LLGD buckets
EExposure
20,704
00–25%
5,738
226–50%
9,708
551–75%
1,516
776–100%
3,742
15,939
10,435
10,376
5,282
281
8,266
1,989
180
4,378
1,456
2,821
101
669
653
15
0
456
0
456
0
WWeighted
average
LGD (%)
49
22
17
33
19
Weighted
average
LGD (%)
50
23
21
29
11
Exposure
31,398
18,461
12,444
5,391
625
NNet banking products exposure, after application
of credit hedges
40
16,174
11 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 this section.
36,643
14,087
49,859
2,185
4,198
37
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
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
31.12.17
CHF million
1,424
164
73
27,087
135
7,761
36,643
31.12.17
CHF million
1,399
843
2,425
13,207
4,123
2,755
963
3,340
971
2,687
2,798
1,131
36,643
4,290
%
3.9
0.4
0.2
73.9
0.4
21.2
100.0
%
3.8
2.3
6.6
36.0
11.3
7.5
2.6
9.1
2.6
7.3
7.6
3.1
100.0
11.7
31.12.16
CHF million
1,978
212
32
37,691
3,128
6,818
49,859
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
1 As of 31 December 2017, the CHF 4.3 billion Investment Bank net banking products exposure to the oil and gas sector comprised CHF 2.3 billion related to mining, CHF 1.5 billion related to transport and storage
and CHF 0.4 billion related to manufacturing. As of 31 December 2016, the CHF 5.1 billion Investment Bank net banking products 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.
132
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, decreased
by CHF 18 billion to CHF 97 billion. This was driven by a
decrease in balances with central banks of CHF 20 billion, mainly
due to higher consumption by the business divisions, partly
offset by net issuances of short-term and long-term debt.
→ Refer to “Balance sheet assets – Group ALM“ in the “Treasury
management“ section of this report
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 over-the-counter (OTC) derivatives
exposures, as well as securities financing transactions (SFTs) and
exchange-traded derivatives (ETD) exposures. Credit risk arising
from traded products, after the effects of master netting
agreements but excluding credit valuation adjustments and
hedges, decreased by CHF 7 billion to CHF 45 billion as of
31 December 2017. OTC derivatives accounted for CHF 18
billion, exposures from SFTs were CHF 18 billion, and ETD
exposures amounted to CHF 8 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 35 billion compared with CHF 42 billion as of
31 December 2016. As counterparty risk for traded products is
managed at counterparty level, no further 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 derivatives exposures of CHF 11
billion in the Investment Bank and Non-core and Legacy
Portfolio, a decrease of CHF 6 billion from the prior year. During
2017, SFT exposures increased slightly to CHF 18 billion and ETD
exposures decreased by CHF 2 billion to CHF 5 billion. The tables
below and on the following pages provide more information on
the OTC derivatives, SFT and ETD exposures of the Investment
Bank, Non-core and Legacy Portfolio and Group ALM.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Investment Bank, Non-core and Legacy Portfolio and Group ALM: traded products exposure
CHF million
OOTC derivatives
SSFTs
331.12.17
EETD
TTotal
Total exposure, before deduction of credit valuation adjustments and hedges
11,442
17,810
5,444
34,696
Less: credit valuation adjustments and allowances
Less: credit protection bought (credit default swaps, notional)
(297)
(436)
(297)
(436)
TTotal
31.12.16
41,941
(376)
(757)
NNet exposure after credit valuation adjustments, allowances and hedges
10,710
17,810
5,444
33,964
40,808
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
31.12.16
31.12.17
LGD buckets
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
Exposure
0–25% 26–50% 51–75% 76–100%
10,076
304
633
226
59
349
56
43
0
13
8,604
437
52
50
335
1,016
152
73
69
4
0
67
62
5
0
Total net OTC derivatives exposure, after credit valuation adjustments
and hedges
10,710
361
9,041
1,088
220
45
16,395
Net SFT exposure
Investment grade
Sub-investment grade
Total net SFT exposure
17,302
508
17,810
14
1
14
14,530
2,303
156
53
14,686
2,357
455
297
752
44
72
44
16,877
504
17,381
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 this section.
133
Weighted
average
LGD (%)
45
41
62
41
27
Exposure
15,672
723
294
85
344
Weighted
average
LGD (%)
30
34
46
34
24
30
28
58
28
Risk, treasury and capital management
Risk management and control
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
NNet exposure
NNet OTC derivatives
NNet SFTs
331.12.17
31.12.16
331.12.17
31.12.16
CCHF million
1,154
59
143
3,420
292
5,642
%%
10.8
0.5
1.3
31.9
2.7
52.7
CHF million
2,904
83
149
4,931
453
7,876
%
17.7
0.5
0.9
30.1
2.8
48.0
CCHF million
3,624
144
622
4,241
771
8,407
%%
20.3
0.8
3.5
23.8
4.3
47.2
CHF million
3,410
114
1,126
4,548
825
7,358
%
19.6
0.7
6.5
26.2
4.7
42.3
10,710
100.0
16,395
100.0
17,810
100.0
17,381
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
31.12.17
31.12.16
31.12.17
31.12.16
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
CHF million
4,559
11
166
3,600
139
7
1,513
9
289
417
%
42.6
0.1
1.5
33.6
1.3
0.1
14.1
0.1
2.7
3.9
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
CHF million
5,288
%
29.7
CHF million
4,095
%
23.6
10,983
61.7
11,932
68.6
1,500
3
35
8.4
0.0
0.2
100.0
1,350
2
2
17,381
7.8
0.0
0.0
100.0
10,710
100.0
16,395
100.0
17,810
to 80%, depending on the type of property, the age of the
property and the amount of 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. (cid:3)
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 regression 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 validation 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.
Audited | We actively manage the credit risk in our portfolios by
taking collateral against exposures and by utilizing credit
hedging. (cid:3)
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. (cid:3)
The calculation of affordability takes into account interest
payments, 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 estimated using a predefined framework, which
takes into account the potential for significant increases in
interest rates during the lifetime of the loan. The interest rate is
floored at 5% per annum.
For residential 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 other properties, the maximum LTV
allowed within the standard approval process ranges from 30%
134
For income-producing real estate, the capitalization model is
used to determine the property valuation by discounting
estimated 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 certain other standardized input parameters (e.g.,
property condition). 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 taking
into account affordability of the loans and sufficiency of
collateral. The maximum 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 property, based on associated risk
factors, such as property types, loan size and loan purpose.
Maximum LTVs go as low as 45%. Additionally, 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.
LTV
exposures within
A risk limit framework is applied to the Wealth Management
Americas mortgage portfolio. Limits have been established to
govern
categories, geographic
concentrations, 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
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 monitor compliance
with mortgage underwriting and documentation requirements.
(cid:3)
→ Refer to “Swiss mortgage loan portfolio” in this section for
more information on loan-to-value in our Swiss mortgage
portfolio
→ Refer to “Wealth Management Americas” in this section for
more information on loan-to-value in our Wealth Management
Americas mortgage portfolio
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Lombard lending
Audited | Lombard loans are secured by a pledge of marketable
securities, guarantees and other forms of collateral. Eligible
financial securities primarily include transferable securities (such
as bonds and equities), that 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 collateral is also financed.
the view of
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 counterparty’s
creditworthiness. Less liquid or more volatile collateral will typically
attract larger haircuts. For less liquid instruments, such as
structured products, some bonds, and products with long
redemption periods, the assumed 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, guarantees and letters of credit, haircuts are
determined on a product- or client-specific basis.
We also consider concentration and correlation risks across
collateral 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 collateral
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. (cid:3)
Exposures and collateral values are monitored on a daily basis
with the intention of ensuring 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
provide 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 are
called.
We also conduct stress testing of collateralized exposures to
simulate market events that increase the risk of collateral shortfalls
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 calculated stress
exposures are applied and controlled on a counterparty level. In
addition, there are portfolio limits applied across certain businesses
or collateral types.
→ Refer to “Stress loss” in this section for more information on
our stress testing
135
Risk, treasury and capital management
Risk management and control
Counterparty credit risk
Audited | Counterparty credit risk arising from traded products,
which
include OTC derivatives, ETD exposures and SFTs
originating in the Investment Bank, Non-core and Legacy
Portfolio and Corporate Center – Group ALM, is generally
managed on a close-out basis. This takes into account the effect
of market movements on the exposure and any associated
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
counterparty as determined by Credit Risk Control. Limit
frameworks are also applied to control overall exposure to
specific classes or categories of collateral on a portfolio level.
Such portfolio limits are monitored and reported to senior
management.
law.
Trading in OTC derivatives is conducted through central
counterparties (CCPs) where practicable. Where CCPs are not
used, we have clearly defined policies and processes for trading
on a bilateral basis. Trading is typically conducted under bilateral
International Swaps and Derivatives Association (ISDA) or similar
master netting agreements, which generally allow for the close-
out and netting of transactions in the event of default subject to
applicable
For most major market participant
counterparties, we employ two-way collateral agreements under
which either party can be required to provide collateral in the
form of cash or marketable securities when the exposure
exceeds specified levels. This collateral typically consists of well-
rated government debt or other collateral permitted by
applicable regulations. For certain counterparties, initial margin
is taken to cover some or all of the calculated close-out
exposure. This is in addition to the variation margin taken to
settle changes in the market value of transactions. Regulations
governing the margining of uncleared OTC derivatives continue
to evolve. These generally expand the scope of bilateral
derivatives activity subject to margining. In addition, they will
result in greater amounts of initial margin received from, and
posted to, certain bilateral trading counterparties than had been
required in the past. These changes should result in lower close-
out risk over time. (cid:3)
→ 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
counterparties, sectors or portfolios and, in the case of
counterparty credit risk, the profit or loss impact arising from
changes in credit valuation 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
usually 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 counterparties. 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. (cid:3)
→ 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
volumes 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
in foreign exchange
not fully eliminate our credit risk
transactions resulting from changes in exchange rates prior to
settlement, which is managed as part of our overall credit risk
management of OTC derivatives.
136
Credit risk models
| We have developed tools and models in order to
Audited
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
parameters 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 governing international convergence of capital. We
also use models to derive the portfolio credit risk measures of
expected loss, statistical loss and stress loss. (cid:3)
The “Key features of our main credit risk models” table on
the next page shows the number and key features of the models
that we use to derive PD, LGD and EAD for our main portfolios
and asset classes, and is followed by more detailed explanations
of these models and parameters.
→ Refer to the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on the regulatory capital calculation under the advanced
internal ratings-based approach
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
137
Risk, treasury and capital management
Risk management and control
Key features of our main credit risk models
PProbability of
default
PPortfolio in scope
Sovereigns and central banks
Owner-occupied mortgages in
Switzerland and the US
Income-producing real estate
mortgages
AAsset class
Central governments and
central banks
Retail: residential
mortgages
Retail: residential
mortgages,
Corporates: specialized
lending
MModel
approach
Score card
Score card
Score card
Lombard lending
Retail: other
Merton type
Small and medium-sized
enterprises
Corporates: other lending Score card
Banks
Commodity traders
Banks and securities
dealers
Corporates: specialized
lending
Aircraft financing
Corporates: other lending
Large corporates
Corporates: other lending
LLoss given default
Other portfolios
Owner-occupied mortgages in
Switzerland and the US
Income-producing real estate
mortgages
Corporates: other
lending,
Public sector entities and
multilateral development
banks
Retail: residential
mortgages
Retail: residential
mortgages, Corporates:
specialized lending
Lombard lending
Retail: other
Small and medium-sized
enterprises
Investment Bank – all
counterparties
Corporates: other lending
Across the asset classes
EExposure at default Banking products
Across the asset classes
Traded products
Across the asset classes
Score card
Rating
template
Rating
template
Score card /
market data
Score card /
pooled rating
approach /
rating
template
Statistical
model
Statistical
model
Statistical
model,
simulation
Statistical
model
Statistical
model
Statistical
model
Statistical
model
NNumber of
main models MMain drivers
1 Political, institutional and economic indicators
Behavioral data, affordability relative to income,
property type, loan-to-value. Separate models for
mortgages in Switzerland and the US
Loan-to-value, debt service coverage, financial data
(for large corporates only), behavioral data; weights
of risk drivers differ between corporate and private
clients
Loan-to-value, historical asset returns, behavioral
data
Financial data including balance sheet ratios and
profit and loss, behavioral data. Weights of risk
drivers differ depending on the corporate client sub-
segment
Financial data including balance sheet ratios and
profit and loss. Separate models for banks –
developed markets, banks – emerging markets,
broker-dealers and investment banks, private banks
Financial data including balance sheet ratios and
profit and loss, as well as non-financial criteria
2
1
1
1
4
1
1 Financial structure of the transaction
Financial data including balance sheet ratios and
profit and loss, and market data. Separate models for
corporates with publicly traded and highly liquid
stocks (Market Intelligence Tool), private corporates,
leveraged corporates and corporates in construction
and real estate business
Financial data and / or historical portfolio
performance for pooled ratings. Separate models for
hedge funds, managed funds, insurance companies,
retail aggregators, commercial real estate loans,
mortgage originators, Australian protected lending
clients, ETD-only clients and sub-sovereigns / public-
sector entities
Loan-to-value, time since last valuation. Separate
models for mortgages in Switzerland and the US
Loan-to-value, time since last valuation, property
type, location indicator
4
13
2
1
1 Historical observed loss rates
Separate models for mortgage and non-mortgage
LGDs. Mortgage models: loan-to-value, time since
last valuation, property type, location indicator. Non-
mortgage models: historical observed loss rates
Counterparty- and facility-specific drivers, including
industry segment, collateral, seniority, legal
environment and bankruptcy procedures
Separate models based on exposure type (committed
credit lines, revocable credit lines, contingent
products)
Product-specific market drivers, e.g., interest rates.
Separate models for OTC Derivatives, ETDs and SFTs
that generate the simulation of risk factors used for
the credit exposure measure
2
1
3
2
NNumber of
years loss
data1
10
23
23
5–10
23
10
19
7
10
10
11
11
10–15
11–17
5–10
>10
n/a
11 For sovereign and Investment Bank PD models, the length of internal portfolio history is shown in “Number of years loss data.”
138
Audited |
Internal UBS rating scale and mapping of external ratings
IInternal UBS rating
00 and 1
22
33
44
55
66
77
88
99
110
111
112
113
CCounterparty is in default
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
Aaa
Aa1 to Aa3
A1 to A3
Baa1 to Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa
Ca to C
Standard & Poor’s
mapping
AAA
AA+ to AA–
A+ to A–
BBB+ to BBB
BBB–
BB+
BB
BB–
B+
B
B–
CCC
CC to C
D
Fitch mapping
AAA
AA+ to AA–
A+ to A–
BBB+ to BBB
BBB–
BB+
BB
BB–
B+
B
B–
CCC
CC to C
D
(cid:3)
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. Additionally, for the Swiss owner-
occupied mortgages we apply an 8-basis-point PD floor and for the
Lombard loans a 4-basis-point PD floor.
PD is assessed using rating tools tailored to the various
categories 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 historical return-based 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 probabilities. Counterparties migrate between rating
classes as our assessment of their PD changes.
The ratings of the major credit rating agencies, and their
mapping to our internal rating masterscale and internal PD bands,
are shown in the “Internal UBS rating scale and mapping of
external ratings” table above. 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 correlated 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.
the
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
conditions, include loss of principal, interest and other amounts
(such as workout costs, including the cost of carrying an impaired
position during the workout process) less recovered amounts. We
determine LGD based on the likely recovery rate of claims against
defaulted counterparties, which depends on
type of
counterparty and any credit mitigation by way of collateral or
guarantees. Our estimates are supported by our internal loss data
information where available. Where we hold
and external
collateral, such as marketable securities or a mortgage on a
property, loan-to-value ratios typically 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. In the RWA calculation, the regulatory LGD floor of
10% is applied for exposures secured by residential properties.
Additionally, we applied a 30% LGD floor for Lombard loans in
Wealth Management and a 25% LGD floor for Lombard loans in
Wealth Management Americas. All other LGDs are subject to a 5%
floor.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
139
Risk, treasury and capital management
Risk management and control
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.
Expected loss
Credit losses are an inherent cost of doing business and the
occurrence and amount of credit losses can be erratic. In order to
quantify future credit losses that may be implicit in our current
portfolio, we use the concept of expected loss.
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 (CCFs) based on
historical observations. To comply with regulatory guidance, we
floor individual observed CCF values at zero in the CCF model, i.e.,
we assume that the drawn exposure at default will be no less than
the drawn amount one year prior to default.
For traded products, we derive the EAD by modeling the range
of possible exposure outcomes at various points in time using
scenario 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 derivatives, 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 exposures 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.
the
factors driving
We assess our exposures where there is a material correlation
the
between
counterparty and those driving the potential future value of our
traded products exposure (wrong-way risk), and we have
established specific controls to mitigate these risks.
the credit quality of
Expected loss is a statistical measure used to estimate the
average 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 counterparties
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.
We use a statistical modeling approach to estimate the loss
profile of each of our credit portfolios over a one-year period to a
specified level of confidence. The mean value of this loss distribution
is the expected loss. The loss estimates deviate from the mean value
due to statistical uncertainty on the defaulting counterparties and to
systematic default relationships among counterparties within and
between segments. The statistical measure
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.
is sensitive
→ Refer to “IFRS 9, Financial Instruments” in the “Significant
accounting and financial reporting changes in 2018” section of
this report for more information on future requirements of the
expected credit loss methodology under IFRS 9
140
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
systemic 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 collateral and exposure positions, taking into consideration
their liquidity 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
assessments, 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
regular analysis of the evolution of portfolios to identify such
changes in the structure and credit quality of portfolios. This
includes analysis of changes in key attributes, changes in
portfolio concentration measures, as well as changes in RWA.
→ Refer to “Risk measurement” in this section for more
information on our approach to model confirmation procedures
Main credit models backtesting by regulatory asset class
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
2017 in %
PProbability of default3
Central governments and central banks
Banks and securities dealers
Public sector entities, multilateral development banks
Corporates: specialized lending
Corporates: other lending
Retail: residential mortgages
Retail: other
LLoss given default
Central governments and central banks
Banks and securities dealers
Public sector entities, multilateral development banks
Corporates: specialized lending
Corporates: other lending
Retail: residential mortgages
Retail: other
CCredit conversion factors
Corporates
> 104
> 10
> 10
> 10
> 10
> 20
> 10
> 10
> 10
> 10
> 10
> 10
> 20
> 10
0.00
0.17
0.06
0.25
0.23
0.17
0.01
0.00
8.02
24.65
1.48
13.43
0.00
0.00
0.00
0.15
0.21
0.12
0.00
0.00
14.41
0.26
8.48
0.00
0.53
0.19
0.39
0.26
0.28
0.02
20.48
28.86
2.63
65.26
0.35
0.71
0.20
0.98
0.49
0.57
0.15
40.42
42.09
21.44
15.72
22.61
7.28
20.00
>10
24.09
6.87
44.32
37.97
11 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 Average PD estimation is based on all rated clients in the portfolio. 4 Sovereign PD model is calibrated to UBS masterscale, length of time series shows span of internal
history for this portfolio.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
141
Risk, treasury and capital management
Risk management and control
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
derivatives 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
distribution of the number of defaults. The observed number of
defaults is then compared with this distribution, allowing us to
derive a
the model
conservativeness. 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.
level of confidence
statistical
in
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
for defaulted
historical utilization of
such
is
counterparties.
observed, the relevant CCFs are redefined.
If any statistically significant deviation
facilities
The “Main credit models backtesting by regulatory asset
class” 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 newly available data, we updated
several models in the course of 2017.
rating approach where
Within Personal & Corporate Banking and Wealth
Management, we updated the PD model for income-producing
real estate mortgages from a transaction rating approach to a
counterparty-based
financial and
behavioral data of the client is now taken into account.
Additionally, we enhanced the PD model for Swiss owner-
occupied mortgages to include behavioral information via a
vendor credit score. New LGD models were implemented for
most of the portfolios in Personal & Corporate Banking and the
mortgage portfolios in Wealth Management. The RWA impact
of the new LGD model and the new PD model for the Swiss
owner-occupied mortgages will be phased in over the years
2018 and 2019.
→ Refer to “Risk-weighted assets” in the “Capital management”
section of this report for more information on the impact of the
changes to models and model parameters on credit risk RWA
142
For
the Lombard portfolio, we globally
implemented
redeveloped PD and LGD models. These models reflect a Monte
Carlo-based historical simulation approach, taking into account
the individual client’s loan-to-value and historical securities
return data including the financial crisis of 2007-2009.
Within the Investment Bank, we have recalibrated the rating
tool for residential real estate mortgage finance originators,
bringing resulting PDs to a more conservative level.
With respect to the LGD model used for sovereigns,
multinationals and financial institutions (mainly counterparties of
the Investment Bank and Corporate Center – Group ALM), the
model was recalibrated, which impacted mainly banks and non-
leveraged managed funds. Other corporates and sovereigns
were impacted to a lesser extent.
With regard to the EAD, we implemented revised credit
conversion factors for contingent products and construction
loans in Personal & Corporate Banking and for unutilized
Lombard loan facilities in our wealth management businesses.
As part of a review of our internal rating models, we
transferred our unsecured lending portfolio of private clients and
account overdrafts from the internal ratings-based approach to
the standardized approach for the RWA calculation.
Where required, changes to models and model parameters
were approved by the Swiss Financial Market Supervisory
Authority (FINMA) prior to implementation.
Future credit risk-related regulatory capital developments
In December 2017, the Basel Committee on Banking Supervision
published the final Basel III framework to be implemented until
1 January 2022. The updated framework has made a number of
revisions to the internal ratings-based (IRB) approaches, namely:
(i) removing the possibility to use the advanced IRB (A-IRB)
approach for certain asset classes (including large and medium-
sized corporates, banks and other financial institutions); (ii)
placing floors on certain model inputs under the IRB approach,
introducing various
such as for PD and LGD; and
requirements to reduce RWA variability, for example, for LGD.
(iii)
The published framework has a number of requirements that
are subject to national discretion. In addition, revisions to the
credit valuation adjustment (CVA) framework were published,
including the removal of the advanced CVA (A-CVA) approach.
UBS maintains a close dialog with FINMA to discuss in more
detail the implementation objectives and to ensure a smooth
transition of the capital regime for credit risk.
→ Refer to “Capital management objectives, planning and
activities” in the “Capital management” section of this report
for more information on the development of RWA
→ Refer to “Risk measurement” in this section for more
information on our approach to model confirmation procedures
→ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
Policies for past due, non-performing and impaired claims
The diagram “Exposure categorization” on the next page
illustrates how we categorize 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
therefore 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 (i) the
payment of interest, principal or fees is past due by more than
90 days, or more than 180 days for certain specified retail
portfolios. Claims are also classified as non-performing when
(ii) the counterparty is subject to bankruptcy, or insolvency
proceedings or enforced liquidation have commenced or (iii)
obligations have been restructured on preferential terms, such as
preferential interest rates, extension of maturity, modifying the
schedule of repayments or subordination.
Claims are classified as impaired if, following an individual
impairment assessment, an allowance or provision for credit
losses is established. Accordingly, both performing and non-
performing loans may be classified as impaired.
When a
financial asset has become non-performing,
individually
the
impaired or otherwise has defaulted,
counterparty is rated as in default according to our UBS internal
rating scale.(cid:3)
Restructured claims
Audited | Under imminent payment default or where default has
already occurred, we sometimes restructure claims by providing
concessions that we would otherwise not consider and that are
outside our normal risk appetite, such as preferential interest
rates, extension of maturity, modifying the schedule of
repayments, debt/equity swap and subordination. When a credit
restructuring takes place, each case is considered individually
and the exposure is classified as defaulted and assessed for
impairment. It will remain so, until the loan is collected or
written off, non-preferential conditions are granted that
supersede the preferential conditions or until the counterparty
has recovered and the preferential conditions no longer exceed
our risk appetite.
Contractual adjustments when there is no evidence of
imminent payment default, or where changes to terms and
conditions are within our usual risk appetite, are not considered
to be a credit restructuring. (cid:3)
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. (cid:3)
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
shortfalls 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.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
143
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
recoverable 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
values of impaired claims in compliance with IFRS requirements.
Our credit controls applied to valuation processes and workout
agreements are the same for credit products measured at
amortized cost and fair value. Our workout strategy and
estimation of recoverable amounts are independently approved
in accordance with our credit authorities. (cid:3)
Collective impairment assessment
Audited | We assess our portfolios of claims carried at amortized
cost with similar credit risk characteristics for collective
impairment 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 identification 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.
(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)
Additionally, for all of our portfolios we assess whether there
have been any developments that 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
impairment 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. (cid:3)
Recognition of impairment
Audited | The recognition of impairment in our financial statements
depends on the accounting treatment of the claim. For claims
carried at amortized cost, impairment is recognized through the
creation of an allowance, or in the case of off-balance sheet
items
loan
commitments through a provision, both charged to the income
statement as a credit loss expense.
financial guarantees and certain
such as
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. (cid:3)
→ 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
(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:2)
(cid:115)(cid:2) (cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(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:86)(cid:74)(cid:67)(cid:86)(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: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: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:86)(cid:74)(cid:67)(cid:86)(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:86)(cid:74)(cid:67)(cid:86)(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: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: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 2017, gross impaired financial instruments
stood at CHF 1.3 billion compared with CHF 1.2 billion as of
31 December 2016. After deducting the estimated liquidation
proceeds of collateral and specific allowances and provisions, net
impaired financial instruments were CHF 0.3 billion compared
with CHF 0.4 billion. (cid:3)
→ 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
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
carrying amount of foreclosed property recorded in our balance
sheet at the end of 2017 and 2016 amounted to CHF 60 million
and CHF 51 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. (cid:3)
Specific and collective allowances and provisions for credit
losses increased by CHF 41 million to CHF 694 million as of
31 December 2017. This includes collective loan loss allowances
of CHF 13 million, broadly unchanged from the prior year.
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 “Note 11 Allowances and provisions for credit losses” in
the “Consolidated financial statements” section of this report for
→ Refer to “Policies for past due, non-performing and impaired
claims” in this section, and to “Note 10 Due from banks and loans
more information on movements in allowances and provisions
(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
Impaired loans
During 2017, gross impaired loans (including amounts due from
banks) increased to CHF 1,076 million from CHF 975 million.
The majority of this exposure relates to loans in our Swiss
domestic business. The ratio of impaired loans to total loans
remained at 0.3%.
Audited |
Impaired financial instruments by type
CHF million
Loans (including amounts due from banks)
Guarantees and loan commitments
TTotal impaired financial instruments
Gross impaired
financial instruments
331.12.17
31.12.16
1,076
199
1,2752
975
260
1,235
Allowances and provisions
331.12.17
31.12.16
Estimated liquidation
proceeds of collateral1
331.12.17
31.12.16
Net impaired
financial instruments
331.12.17
31.12.16
(661)
(33)
(694)2
(599)
(54)
(653)
(206)
(5)
(210)
(161)
(10)
(171)
210
161
371
215
195
411
11 Does not include oil and gas reserves related to reserve-based lending. 2 Includes CHF 13 million in collective loan loss allowances (31 December 2016: CHF 12 million). Does not include exposures within Other
assets of CHF 352 million, with associated allowances of CHF 19 million.
(cid:3)
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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 loans 1
Net write-offs3
of which: net write-offs for due from banks and loans
31.12.17
333,967
1,076
2,095
694
661
98
98
(128)
31.12.16
320,080
975
2,399
653
599
123
123
(37)
31.12.15
324,594
1,226
1,630
727
692
116
116
(117)
31.12.14
329,800
1,204
1,602
735
708
124
124
(78)
31.12.13
301,601
1,241
1,582
750
686
83
83
(50)
Credit loss (expense) / recovery4
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
1 Includes collective loan loss allowances. Does not include allowances for other receivables for an amount of CHF 19 million (31 December 2016: CHF 0 million, 31 December 2015: CHF 0 million, 31 December
2014: CHF 0 million, 31 December 2013: CHF 0 million). 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, guarantees and securities financing transactions.
0.3
0.6
0.2
0.0
0.3
0.7
0.2
0.0
0.4
0.5
0.2
0.0
0.4
0.5
0.2
0.0
0.4
0.5
0.2
0.0
145
Risk, treasury and capital management
Risk management and control
Allowances and provisions for credit losses
CHF million, except where indicated
Group
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
IFRS exposure, gross1
Impaired exposure,
gross
331.12.17
31.12.16
331.12.17 31.12.16
Estimated liquidation
proceeds of collateral2
331.12.17
31.12.16
Allowances and provisions
for credit losses3
331.12.17
31.12.16
Impairment ratio (%)
331.12.17
31.12.16
87,078
13,741
320,225
18,854
39,069
107,100
13,159
306,921
16,711
54,430
478,9674,5 498,322
3
1,074
168
31
1,275
3
972
202
58
1,235
206
4
1
210
161
7
3
171
3
658
13
20
6945
3
596
8
47
653
0.0
0.3
0.9
0.1
0.3
0.0
0.3
1.2
0.1
0.2
0
0
13
77
77
13
62
29
27
27
29
26
22
22
45
45
26
0.1
0.1
0.1
0.0
0.1
0.1
0.0
0.0
570
1056
1606
1606
61
1
1046
1
121
7
3
131
113
4
1
118
3
443
7
34
486
3
756
202
35
995
3
441
12
16
472
3
733
158
12
906
0
2,635
52,486
558
375
56,054
0
3,357
53,014
460
347
57,178
901
915
101,876
2,187
1,730
107,608
0
2,156
133,861
9,023
8,861
153,900
0
1,485
131,380
9,551
9,160
151,576
427
1,356
115,180
1,982
1,861
120,806
Wealth Management
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
Wealth Management Americas
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
Personal & Corporate Banking
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
Asset Management
TTotal
Investment Bank
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
CC – Services
TTotal
CC – Group ALM
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
CC – Non-core and Legacy Portfolio
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
TTotal
11 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 13
million (31 December 2016: CHF 12 million) in collective loan loss allowances for credit losses. 4 As of 31 December 2017, total IFRS exposure of UBS AG consolidated was CHF 2.1 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 2016: CHF 0.6 billion). 5 Does not include exposures within Other assets
of CHF 352 million, of which CHF 347 million were in Corporate Center – Non-core and Legacy Portfolio and CHF 5 million were in the Investment Bank, with associated allowances of CHF 19 million, of which CHF
14 million were in Corporate Center – Non-core and Legacy Portfolio and CHF 5 million were in the Investment Bank. 6 The increase in impaired exposure and allowances relates mainly to a margin loan to a
single client originated by Wealth Management and risk-managed by the Investment Bank.
106,162
2,176
5,962
1
0
114,301
32
3,855
11,165
6,739
27,700
49,4915
86,618
2,740
7,226
2
0
96,585
37
4,234
10,086
4,790
42,937
62,085
0
22
2,226
16
0
2,2645
0
43
2,606
41
527
3,218
0.2
0.6
1.7
0.1
0.6
0.1
0.6
2.2
0.4
0.6
110
10
19
139
95
0
23
118
1.0
0.1
0.1
0.3
0.9
0.0
0.1
0.2
4
615
13
61
496
610
545
295
0.0
0.0
0.0
2.1
2.1
0.0
0.0
0.0
0.6
0.5
29
57
47
47
48
48
48
27
27
15
17
17
15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
146
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Development of individually impaired loans (including due from banks)
CHF million
BBalance at the beginning of the year
New impaired loans
Increase in existing impaired loans
Repayments / sales / upgrades
Write-offs
Foreign currency translations effects
BBalance at the end of the year
For the year ended
331.12.17
975
448
102
(328)
(115)1
(5)
1,076
31.12.16
1,226
356
140
(605)
(143)1
1
975
11 Does not include CHF 2 million in write-offs charged directly to collective loan loss allowances (31 December 2016: CHF 2 million).
Past due but not impaired loans
The table below shows a breakdown of total loan balances
where payments have been missed, but that 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.
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 153,729 million (31 December 2016: CHF 153,006 million).
31.12.17
31.12.16
126
108
126
192
507
336 1
1,059
54
113
68
10
641
542 1
887
(cid:3)
147
Risk, treasury and capital management
Risk management and control
Market risk
Key developments
We continued to manage market risk to low levels during 2017.
Average 1-day, 95% confidence level, management value-at-risk
(VaR) was unchanged at CHF 11 million. With VaR at such low
levels, we continue to see some volatility in the measure driven
by positions arising from client facilitation as well as option
expiries. The number of backtesting exceptions within a 250-
business-day window decreased to one from seven by the end
of the year. Accordingly, the FINMA VaR multiplier used to
compute regulatory and stressed VaR RWA decreased to 3.00
from 3.65 as of 31 December 2017.
Audited | Main sources of market risk
– Market risks arise from both our trading and non-trading
business activities.
– Trading market risks arise mainly in connection with primary
debt and equity underwriting, securities and derivatives
trading for market-making and client facilitation within our
Investment Bank, as well as the remaining positions within
Non-core and Legacy Portfolio and our municipal securities
trading business 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
businesses, our personal and corporate banking business in
Switzerland and the Investment Bank’s lending business, in
addition 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 (including high-quality liquid
assets) 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. (cid:3)
Audited | Overview of measurement, monitoring and
management techniques
– Management VaR measures exposures under the market risk
framework. This includes trading market risks and parts of
non-trading market risks. Non-trading market risks not
included in VaR are covered in the risks controlled by Treasury
Risk Control as set out further below.
– 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
148
common 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 uncertainty 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
jump-to-zero measures, which
estimate our maximum default exposure (the loss in the case
of a default event assuming zero recovery).
level based on
– Non-trading foreign exchange risks are managed under
market 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
framework, which sets the appetite for treasury-related risk-
taking activities across the Group. A key element of the
framework is an overarching 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 analyze 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 foreign 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
controls, including preapproval of new investments by business
management 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. (cid:3)
→ Refer to the “Treasury management” section of this report for
more information on Corporate Center – Group ALM’s
management 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
extensive series of stress tests and scenario analyses, which we
continuously evaluate with the intention of ensuring 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
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 management 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
holding 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
positions in each major risk factor in a stressed environment,
assuming 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
combination of historical market behavior, based on an analysis
of historical events, and forward-looking analysis that includes
consideration 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
component of our combined stress test framework and is
therefore integral 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 developed VaR model. The VaR model simulates
returns over the holding 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 decomposed 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 and 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 fortnightly basis.
Although our VaR model does not have full revaluation
capability, 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
purposes and determining market risk regulatory capital
requirements, 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 consider the risks associated with our trading
activities. The regulatory 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.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Additionally,
the population of
the portfolio within
management and regulatory VaR is slightly different. The
population within regulatory VaR meets 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 management and control
We also use stressed VaR (SVaR) for the calculation of regulatory
capital. SVaR adopts broadly the same methodology as regulatory
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 holding period VaR
for the current portfolio of the Group across all one-year look-back
windows that fall into the interval from 1 January 2007 to the
present. SVaR is computed weekly. (cid:3)
→ Refer to the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
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
remaining stable compared with year-end 2016.
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
FFor the year ended 31.12.17
CHF million
TTotal 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
MMin.
5
0
0
0
0
4
0
3
3
Min.
MMax.
AAverage
18
0
1
0
0
17
0
8
5
331.12.17
10
0
1
0
0
8
0
4
3
(6)
11
0
1
0
0
9
0
6
3
(8)
EEquity
1
14
6
4
0
0
0
0
6
0
0
1
(1)
IInterest
rates
6
12
9
8
FForeign
exchange
1
5
2
3
CCredit
spreads
4
8
6
8
AAverage (per business division and risk type)
0
1
0
0
5
0
2
2
(4)
0
0
0
0
2
0
1
0
(1)
0
1
0
0
7
0
5
2
(6)
CCommodities
0
6
2
2
0
0
0
0
2
0
0
0
0
For the year ended 31.12.16
Equity
1
15
5
4
31.12.16
11
Interest
rates
9
15
11
11
Credit
spreads
3
6
4
5
Average (per business division and risk type)
Foreign
exchange
1
5
3
2
Commodities
0
2
1
1
TTotal management VaR, Group
8
18
11
Max.
Average
0
Wealth Management
0
Wealth Management Americas
0
Personal & Corporate Banking
0
Asset Management
1
Investment Bank
0
CC – Services
0
CC – Group ALM
0
CC – Non-core and Legacy Portfolio
Diversification effect2,3
0
11 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.
(cid:3)
0
0
0
0
9
0
7
4
(10)
0
1
0
0
3
0
1
2
(3)
0
0
0
0
3
0
1
1
(1)
0
1
0
0
8
0
7
4
(9)
0
1
0
0
8
0
6
4
(8)
0
0
0
0
5
0
0
0
0
0
1
0
0
18
0
9
5
0
0
0
0
5
0
5
3
150
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
management 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
portfolios. 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
estimation errors, which may result from non-linear risk
sensitivities, as well as the potential for actual volatility and
correlation levels 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, following 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 historical 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.
Consequently, we employ a suite of various metrics with both
overlapping and complementary characteristics in order to create
a holistic framework that seeks to ensure material completeness
of risk identification and measurement. As a statistical aggregate
risk measure, VaR supplements our liquidity-adjusted stress and
comprehensive stress testing frameworks.
In the fourth quarter of 2017, we went live with a new
framework to identify and quantify potential risks that are not
fully captured by our VaR model. We refer to these risks as risks-
not-in-VaR. This framework is used to underpin these potential
risks with regulatory capital, calculated as a multiple of
regulatory VaR and stressed VaR.(cid:3)
Backtesting of VaR
For backtesting purposes, we compute backtesting VaR using a
99% confidence level and one-day holding period for the
population included within regulatory VaR. The backtesting
process compares 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 provide for a like-for-like
comparison. A backtesting exception occurs when backtesting
revenues are negative and the absolute value of those revenues
is greater than the previous day’s backtesting VaR.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:28)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:81)(cid:72)(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:19)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(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:20)(cid:2)(cid:67)(cid:73)(cid:67)(cid:75)(cid:80)(cid:85)(cid:86)(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:56)(cid:67)(cid:52)(cid:21)(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:11)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)
(cid:44)
(cid:40)
(cid:47)
(cid:35)
(cid:47)
(cid:44)
(cid:44)
(cid:35)
(cid:53)
(cid:49)
(cid:48)
(cid:38)
(cid:19)(cid:18)(cid:18)
(cid:26)(cid:18)
(cid:24)(cid:18)
(cid:22)(cid:18)
(cid:20)(cid:18)
(cid:18)
(cid:10)(cid:20)(cid:18)(cid:11)
(cid:10)(cid:22)(cid:18)(cid:11)
(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:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)
(cid:35)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(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: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:68)(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:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(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: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:21)(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:14)(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)
151
100
100
72
72
44
44
16
16
-12
-12
-40
-40
VaR model confirmation
In addition to model backtesting performed for regulatory
purposes 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 distribution, not just the tails, and at multiple levels within
the business division and Corporate Center unit hierarchies.
→ Refer to “Risk measurement” in this section for more
information on our approach to model confirmation procedures
VaR model developments in 2017
Audited | We have not made any material changes to the VaR
model in 2017.(cid:3)
Future market risk-related regulatory capital developments
In December 2017, the Basel Committee on Banking Supervision
extended the implementation date of the revised minimum
capital requirements for market risk to 1 January 2022. The
extension aligns implementation with the Basel III revisions to
credit risk and operational risk and recognizes that some of the
market risk-related rules are still being finalized by the Basel
Committee.
internal model-based approach,
Key elements of the revised market risk framework include: (i)
changes to the
including
changes to the model approval and performance measurement
process; (ii) changes to the standardized approach with the aim
of it being a credible fallback method for an internal model-
based approach; and (iii) a revised boundary between trading
book and banking book. UBS maintains a close dialog with
FINMA to discuss in more detail the implementation objectives
and to ensure a smooth transition of the capital regime for
market risk.
→ Refer to “Capital management objectives, planning and
activities” in the “Capital management” section of this report
for more information on the development of RWA
→ Refer to “Risk measurement” in this section for more
information on our approach to model confirmation procedures
→ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
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
exceptions than this could indicate that the VaR model is not
performing 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 backtesting revenues, with results being
reported to senior business management, 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 and actual
trading revenues against backtesting VaR” chart on the previous
page shows the 12-month development of backtesting VaR
against the Group’s backtesting revenues and actual trading
revenues for 2017. The chart shows both the negative and
positive 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 confidence. 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 actual
trading
backtesting revenues, intraday revenues.
revenues
include,
in addition
to
The number of negative backtesting exceptions within a 250-
business-day window decreased to one from seven by the end
of the year. Accordingly, the FINMA VaR multiplier used to
compute regulatory and stressed VaR RWA decreased to 3.00
from 3.65 as of 31 December 2017.
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, 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
income statement,
the
(OCI) or
income
comprehensive
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
Management and Personal & Corporate Banking, the inherent
interest rate risks are transferred either by means of back-to-
back transactions 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 centrally by Market Risk
Control. To manage the interest rate risk centrally, Corporate
Center – Group ALM uses derivative instruments, most of which
are in designated hedge accounting relationships. 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-monetary 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. As of 31 December 2017, the target replication
portfolios for equity, goodwill and real estate were defined as
francs with an average duration of
follows:
approximately two years and fair value sensitivity of CHF 5
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. Corporate Center – Group ALM also maintains a
portfolio of debt investments to meet the Group’s liquidity
needs.
in Swiss
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
managed 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
Solutions, where transactions are subject to approval on a case-
by-case basis.
Corporate Center – Non-core and Legacy Portfolio assets that
are classified as loans and receivables, and certain other debt
securities held as loans and receivables, also give rise to non-
trading interest rate risk. (cid:3)
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
153
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 carrying 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 as assets 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 factors are important as yield curves
Accounting and capital effect of changes in interest rates1
may not shift on a parallel basis and could, for example, exhibit
an initial steepening, followed by a flattening over time.
to
recognize an
initial decrease
By virtue of the accounting treatment and yield curve
sensitivities outlined above, in a steepening yield curve scenario
we would expect
in
shareholders’ equity as a result of fair value losses recognized in
OCI. This would be compensated 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 less
pronounced, as gains and losses on interest rate swaps
designated as cash flow hedges are not recognized for
regulatory capital purposes. Fair value losses on instruments
designated at fair value are expected to be offset by economic
hedges.
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.
RRecognition
SShareholders’ equity
CCET1 capital
Financial assets available for sale
Derivatives transacted as economic hedges
Derivatives designated as cash flow hedges
Loans and deposits at amortized costs3
Financial assets designated at fair value
TTiming
Immediate
Immediate
Immediate
Gradual
IIncome statement / OCI
OCI
Income statement
OCI2
Income statement
Immediate
Income statement
Gains
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Losses
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Gains
(cid:3)
Losses
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Financial assets held to maturity3
11 Refer to the “Reconciliation of 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. 3 For fixed-rate financial instruments, changes in interest rates impact the income
statement when these instruments roll over and reprice.
Income statement
Gradual
154
At the end of 2017, the following scenarios were analyzed in
detail:
– Negative Interest Rates (NIR) then Recovery: Yield curves drop
50 basis points in parallel with no zero-floor applied and
therefore can become negative, or more negative. Thereafter,
all rates recover according to market-implied forward rates.
– NIR then Constant: Same assumptions as the NIR then
Recovery scenario, but after the initial shock, rates do not
recover but remain at the then-prevailing levels until the end
of the simulated time horizon.
– Global Interest Rate Steepener: Represents a sudden shift in
market sentiment causing a disorderly sell-off in long-dated
bonds and a rapid steepening of the yield curve, exacerbated
by the lack of liquidity in financial markets. This corresponds
to the general interest rate movements contained in the
corresponding CST scenario described in “Stress testing” in
this section.
– Parallel +100 basis points: All yield curves rise 100 basis
points in parallel.
– Severe Eurozone Crisis: This scenario assumes a eurozone
crisis at its core and includes sovereign debt restructuring as a
consequence of the ensuing crisis. A China hard landing is
also a feature of the scenario. This corresponds to the general
interest rate movements contained in the binding stress
scenario in our CST framework for 2018 described in “Stress
testing” in this section.
– 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 the 5-year tenor and +20 basis
points for 8-year to 10-year tenors.
– Constant Rates: All rates stay at current levels.
The results are compared with 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 and no specific
management actions. The calculated effects on baseline NII
range between a deterioration of approximately 6% and 9%
over a one-year and three-year horizon, respectively, and an
improvement of approximately 27% and 52% over a one-year
and a three-year horizon, respectively. The most adverse
scenario is the Negative Interest Rates then Constant over both a
one-year horizon and three-year horizon. The most beneficial
scenario is the Inverted Steepener over a one-year horizon and
the Global Interest Rate Steepener over a three-year horizon.
In addition to the above scenario analysis, we also monitor
the sensitivity of the NII to immediate parallel shocks of –200
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
and +200 basis points compared with baseline NII, under the
assumption of a constant balance sheet volume and structure.
Any resulting 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 2017, the baseline NII would have
been approximately 17% less under a parallel shock of –200
basis points, whereas under a parallel +200-basis-point shock,
the baseline NII would have been approximately 29% 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
lose this
interest rate-linked product pricing. Should we
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 scenarios.
low and negative
Moreover, should the
interest rate
environment 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 funding, whether such funding is raised in the
wholesale markets or from swapping with available funding
denominated
the other hand,
imbalances leading to an excess deposit position could require
additional investments at negative yields, which we might not be
able to compensate for sufficiently as a result of our excess
deposit balance charging mechanisms.
in another currency. On
155
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 2017, the economic-value effect of an adverse
parallel shift in interest rates of ±200 basis points on our
banking book interest rate risk exposures was significantly below
the threshold of 20% of eligible capital recommended by
regulators.
The interest rate risk sensitivity figures presented in the
“Interest rate sensitivity – banking book” table on the next page
represent 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 environment for the Swiss franc in particular, and to
a lesser extent for the euro and the Japanese yen, interest rates
for Wealth Management 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 was
approximately nil compared with negative CHF 3.1 million per
basis point at prior year-end. This was mainly due to increased
sensitivity in Corporate Center – Group ALM, reduced negative
sensitivity in Wealth Management Americas and, to a lesser
extent, a change in the sensitivity in Corporate Center – Non-
core and Legacy Portfolio from negative CHF 0.1 million per
basis point to positive CHF 0.5 million per basis point. The
increased sensitivity in Corporate Center – Group ALM was
mainly due to adjustments leading to more-positive sensitivity to
interest rates in Swiss francs and a reduction of negative
sensitivity in US dollar interest rates. The reduction in negative
interest rate sensitivity within Wealth Management Americas
was primarily due to the introduction of a new deposit pricing
interest rate
approach, which resulted
sensitivity, thus providing a larger offset to asset sensitivity. The
change in Corporate Center – Non-core and Legacy Portfolio
was due to improved capture of risk sensitivities of auction rate
securities and auction preferred securities.
in higher deposit
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.
(excluding hedges and
The sensitivity of these positions
excluding investments in funds accounted for as available for
sale) to a 1-basis-point parallel increase in the yields of the
respective instruments is approximately negative CHF 2 million,
which would be recorded in OCI if such a change occurred. This
sensitivity is around CHF 1 million per basis point less than as of
31 December 2016, mainly due to a further reduction in
available-for-sale debt securities 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
associated 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 derivatives 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 million, excluding adjustments for tax. (cid:3)
→ 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
TTotal 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
TTotal 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
331.12.17
(31.8)
(142.0)
(57.6)
26.6
4.4
(200.4)
144.8
32.9
(272.4)
(106.2)
(31.8)
(90.5)
(55.4)
14.4
0.8
(162.5)
59.1
18.3
(188.1)
(52.1)
1.0
0.2
0.1
(1.3)
0.0
0.0
(1.8)
(0.2)
1.4
0.5
97.7
15.2
11.2
(135.1)
5.0
(6.0)
(175.5)
(15.4)
138.6
46.6
191.2
31.1
21.3
(280.6)
10.3
(26.7)
(362.3)
(30.8)
279.8
87.3
–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)
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
89.3
(2.6)
(27.7)
(704.3)
(6.3)
(651.6)
(583.8)
(25.9)
(24.2)
(15.6)
(cid:3)
11 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 participants. We also estimate debit valuation
adjustments (DVA) to incorporate own credit in the valuation of
derivatives.
→ Refer to “Note 22 Fair value measurement” in the “Consolidated
financial statements” section of this report for more
information on own credit
Structural foreign exchange risk
in foreign
Upon consolidation, assets and
operations are translated into Swiss francs at the closing foreign
exchange rate on the balance sheet date. Value changes (in
Swiss francs) of non-Swiss franc assets or liabilities due to
foreign exchange movements are recognized in OCI and
therefore affect shareholders’ equity and CET1 capital.
liabilities held
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 12 Derivative instruments and hedge
accounting” in the “Consolidated financial statements” section
of this report for more information on our hedges of net
investments in foreign operations
Equity investments
Audited | Under International Financial Reporting Standards (IFRS)
effective on 31 December 2017, 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
activities. 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 align 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.
157
Risk, treasury and capital management
Risk management and control
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
to senior
limits, and
management. They are also included in our Group-wide
statistical and stress testing metrics, which flow into our risk
appetite framework.
regular monitoring and
reporting
As of 31 December 2017, we held equity investments totaling
CHF 1.6 billion, of which CHF 0.5 billion were classified as
Financial assets available for sale and CHF 1.0 billion as
Investments in associates. This was broadly unchanged from the
prior year. (cid:3)
→ 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
→ Refer to the “Significant accounting and financial reporting
changes in 2018” section of this report for more information on
the classification of financial instruments under IFRS 9
Debt investments
Audited | Debt investments classified as Financial assets available for
sale as of 31 December 2017 were 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, regulatory or liquidity reasons.
The risk control framework applied to debt instruments classified
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 metrics,
which flow into our risk appetite framework.
Debt instruments classified as Financial assets available
for sale had a fair value of CHF 8.1 billion as of 31 De-
cember 2017 compared with CHF 15.0 billion as of
31 December 2016.(cid:3)
→ 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
Pension risk
We provide a number of pension plans for past and current
employees, some of which are classified as defined benefit
pension 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 benefit 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 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 bond yields, interest rates, inflation rates and life expectancy.
Pension risk is included in our Group-wide statistical and stress
testing metrics, which 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,” “Note 26 Pension and other post-employment
benefit plans” and “Note 35 Events after the reporting period” in
the “Consolidated financial statements” section of this report for
more information on defined benefit plans and on changes to the
pension fund of UBS in Switzerland to support its long-term
financial stability
UBS own share exposure
Group Treasury holds UBS Group AG shares to hedge future share
delivery obligations related to employee share-based compensation
and participation plans. 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
issued structured debt
instruments.
to hedge certain
The Group has announced a share repurchase program under
which it may acquire up to CHF 2 billion of UBS Group AG shares
over the next three years, of which up to CHF 550 million may be
acquired in 2018. Shares acquired through the share repurchase
program are intended for cancelation. Until the shareholders of
UBS Group AG approve cancelation of the shares, shares acquired
in the repurchase program will be held in Group Treasury.
curves” in this section for more information
→ Refer to “UBS shares” in the “Capital management” section of this
→ Refer to the “Treasury management” section of this report for
report for more information
more information
→ Refer to the “Significant accounting and financial reporting
changes in 2018” section of this report for more information on
the classification and measurement of financial instruments
under IFRS 9
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 manifest itself through increased and multiple counterparty
and issuer default risk (systemic risk) on the one hand, and on
the other hand through events that may affect the standing of a
country, such as adverse shocks affecting political stability or the
legal framework. We maintain a well-
institutional and
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 establish rules as to how the aspects of
“other” country risk should be incorporated into the analysis of
the counterparty rating of entities that are domiciled in the
respective country.
Our risk exposure to foreign countries considers the credit
ratings assigned to those countries. A country risk ceiling (i.e.,
maximum aggregate exposure) applies to our exposures to
counterparties 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 risk ceiling, even if our exposure to a
counterparty is otherwise 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
markets, 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
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
identification of countries that may potentially be subject to a
losses and making
crisis event, determining potential
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
combined stress testing as well, whereby we apply market shock
factors to equity indices, interest rates 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
for
syndication.
loans
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
therefore 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
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 “Stress testing” in this section, a eurozone crisis
remains a core part of the new binding Severe Eurozone Crisis
scenario for combined stress test purposes, making it central to
the regular monitoring 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 such rated countries as
of 31 December 2017.
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 2017, and not taking into account the risk-
reducing effect of master netting agreements, we had
purchased approximately CHF 12 billion gross notional of single
name CDS protection on issuers domiciled in Greece, Italy,
Ireland, Portugal and Spain (GIIPS) and had sold CHF 11 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,
to
approximately CHF 3 billion notional purchased and CHF 2
billion notional sold. All gross protection purchased was from
investment grade counterparties (based on our internal ratings)
and on a collateralized basis. The vast majority of this was from
financial institutions domiciled outside the eurozone. The gross
protection purchased from counterparties domiciled in a GIIPS
country was CHF 66 million, with only CHF 18 million from
counterparties domiciled in the same country as the reference
entity.
this equates
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
revenue 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
counterparty and additionally in full against the country in which
the branch is located.
In the case of derivatives, we show the counterparty risk
associated with the positive replacement value (PRV) 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
trading
issuer of
inventory). This approach allows us to capture both the
counterparty and, where applicable, issuer elements of risk
arising from derivatives and applies comprehensively for all
derivatives, including single-name credit default swaps (CDSs)
and other credit derivatives.
(presented within
reference asset
the
As a basic example: if CDS protection for a notional value of
100 bought from a counterparty domiciled in country X
referencing debt of an issuer domiciled in country Y has a PRV of
20, we record (i) the fair value of the CDS (20) against country X
(within traded products) and (ii) the hedge benefit (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
160
Exposures to eurozone countries rated lower than AAA / Aaa by at least one major rating agency
TTraded products
(counterparty risk from derivatives and
securities financing)
after master netting agreements
and net of collateral
TTrading inventory
(securities and potential
benefits / remaining
exposure from
derivatives)
CHF million
TTotal
BBanking products
(loans, guarantees, loan commitments)
Exposure
before
hedges
94
5
Net of
hedges1
94
5
of which:
unfunded
46
Net of
hedges1
896
516
Net long
per issuer
770
502
Exposure
before hedges
137
114
Net of
hedges
32
9
5
2
490
74
15
88
71
16
49
74
15
88
15
8
85
71
16
34
15
8
85
10
76
6
10
76
6
1,001
621
2
12
37
30
235
485
2
6
28
716
3
6
43
722
3
264
3
235
221
354
26
408
221
354
26
408
221
2
2
2
926
223
2
2
2
1,018
315
83
104
93
30
2
9
52
7,843
6,292
0
477
1,074
14
83
104
77
30
2
9
37
7,744
6,199
0
477
1,068
14
31.12.17
AAustria
Sovereign, agencies and central bank
Local governments
Banks
Other2
BBelgium
Sovereign, agencies and central bank
Local governments
Banks
Other2
FFinland
Sovereign, agencies and central bank
Local governments
Banks
Other2
FFrance
Sovereign, agencies and central bank
Local governments
Banks
Other2
GGreece
Sovereign, agencies and central bank
Local governments
Banks
Other2
IIreland3
Sovereign, agencies and central bank
Local governments
Banks
Other2
IItaly
Sovereign, agencies and central bank
Local governments
Banks
Other2
PPortugal
Sovereign, agencies and central bank
Local governments
Banks
0
Other2
12
SSpain
114
Sovereign, agencies and central bank
36
Local governments
2
Banks
1
Other2
75
OOther4
50
11 Not deducted from the “Net of hedges” exposures are total allowances and provisions for credit losses of CHF 48 million (of which: Malta CHF 36 million, Ireland CHF 6 million and France CHF 4 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.
99
1,014
1,114
5
69
271
769
31
0
99
1,014
1,507
45
69
271
1,122
31
0
1
7
6,102
5,974
0
1
127
11
5
112
89
1
6
9
74
12
0
12
792
166
4
63
17
82
1
12
792
207
45
63
17
82
1
18
13
614
48
2
143
421
465
18
13
749
48
2
143
555
465
2
11
1,114
1
2
11
1,114
1
82
111
1,212
0
11
118
1
241
462
0
241
462
0
82
111
859
235
479
2
245
614
17
119
329
413
245
967
17
119
464
413
2
0
193
2
0
193
24
17
1
24
17
1
0
1
40
0
1
40
594
12
460
12
756
369
803
803
44
15
17
17
1
8
0
0
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
161
Risk, treasury and capital management
Risk management and control
Exposure from single-name credit default swaps referencing Greece, Italy, Ireland, Portugal or Spain (GIIPS)
PProtection bought
PProtection sold
of which: counterparty
domiciled in GIIPS
country
of which: counterparty
domicile is the same as the
reference entity domicile
NNet position
(after application of counterparty master netting
agreements)
Notional
31
9,718
535
392
1,265
11,941
RV
(3)
(31)
(18)
(10)
(32)
(94)
Notional
0
4
14
0
49
66
RV
0
0
(1)
0
(1)
(2)
Notional
0
4
14
0
0
18
RV
0
0
(1)
0
0
(1)
Notional
(26)
(9,430)
(448)
(396)
(957)
(11,258)
RV
2
(35)
11
8
27
12
Buy
notional
19
1,669
264
175
622
Sell
notional
(14)
(1,381)
(177)
(179)
(315)
2,749
(2,066)
PRV
0
34
2
4
11
50
NRV
(2)
(100)
(9)
(6)
(16)
(132)
CHF million
31.12.17
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 Derivatives 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 market 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 2017
compared with 31 December 2016. Based on the sovereign
rating categories, as of 31 December 2017, 79% of our
emerging market country exposure was rated investment grade,
compared with 83% as of 31 December 2016.
Our direct net exposure to China was CHF 5 billion, down
CHF 0.1 billion from the prior year. 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
31.12.17
31.12.16
14,021
3,772
17,794
13,833
2,787
16,620
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 74 million are not deducted (31 December 2016: CHF 79
million).
162
Emerging market net exposures by major geographical region and product type
TTotal
Net of hedges1
BBanking products
(loans, guarantees, loan
commitments)
Net of hedges1
TTraded products
(counterparty risk from derivatives
and securities financing)
after master netting agreements
and net of collateral
Net of hedges
TTrading inventory
(securities and potential
benefits / remaining
exposure from derivatives)
Net long per issuer
331.12.17
31.12.16
331.12.17
31.12.16
331.12.17
31.12.16
331.12.17
31.12.16
CHF million
EEmerging America
Brazil
Mexico
Argentina
Chile
Colombia
Other
EEmerging Asia
China
Hong Kong
South Korea
India
Thailand
Other
EEmerging Europe
Russia
Turkey
Azerbaijan
Poland
Ukraine
Other
MMiddle East and Africa
South Africa
United Arab Emirates
Saudi Arabia
Kuwait
Israel
Other
TTotal
1,405
813
355
79
51
30
76
1,426
968
247
27
24
62
98
12,085
10,799
5,020
2,534
1,453
857
789
1,432
1,625
608
552
218
63
60
126
2,678
886
533
279
216
200
565
5,141
1,715
1,058
1,047
443
1,395
1,467
532
467
145
61
32
229
2,929
681
556
577
490
225
401
17,794
16,620
400
131
148
22
28
18
53
3,955
706
1,445
527
467
136
674
493
199
147
14
16
49
69
3,838
868
1,113
348
661
131
717
1,124
1,007
206
507
211
43
56
100
1,321
345
251
136
19
53
518
6,800
181
438
117
50
23
199
1,029
34
391
124
31
61
388
6,367
267
225
20
0
14
4
5
321
263
49
2
4
3
1,705
1,676
330
403
607
165
8
192
93
51
21
1
8
12
807
123
279
143
197
35
30
394
282
469
251
2
278
106
41
25
28
7
5
1,373
239
163
453
459
49
10
2,872
3,475
738
457
188
57
9
8
19
6,425
3,984
685
319
225
645
566
408
351
23
5
12
4
13
551
418
3
113
17
8,121
11 Not deducted are total allowances and provisions for credit losses of CHF 74 million (31 December 2016: CHF 79 million).
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
612
506
52
13
7
9
26
5,285
3,880
320
241
135
310
400
353
311
4
4
10
25
527
408
2
115
3
6,778
163
Risk, treasury and capital management
Risk management and control
Operational risk
Key developments
The pervasive consequential risk themes that continue to
challenge UBS and the financial industry are operational
resilience, conduct and financial crime.
Operational resilience remains critical, as the cyber threat
landscape continues to evolve while other disaster scenarios
remain an ever-present threat. In 2017, many organizations
were affected by two prominent global malware attacks.
Throughout 2017, data theft continued to be the most prevalent
threat with a number of serious breaches at high-profile
organizations. UBS continues to invest in both preventive
measures and measures
from
cyberattacks. We have implemented cyber recovery playbooks
for various scenarios, as well as regular cyber crisis exercises up
to the Group Executive Board and Board of Directors level.
to detect and
recover
As a global firm, UBS was affected by extreme weather
events in the US and India in 2017, in each case triggering
business continuity procedures, which allowed us to monitor the
safety of staff and for operations to continue with minimal
disruption.
this
Achieving fair outcomes for our clients, upholding market
integrity and cultivating the highest standards of employee
conduct are of critical importance to the firm. Management of
conduct risks is an integral part of our operational risk
framework. In managing conduct risk, we continue to focus on
embedding
the management
framework, enhancing
information and maintaining momentum on addressing culture.
Conduct-related management information is reviewed at the
business and regional governance level, providing metrics on
employee conduct, clients and markets, with employee conduct
being a central consideration in the annual compensation
process. Our incentive schemes distinguish clearly between
quantitative performance and conduct-related behaviors, so that
achievement against financial targets
is not the primary
determinant of our employees’ performance assessment.
Furthermore, we continue to deliver on behavioral initiatives,
such as the “Principles of Good Supervision,” and provide
mandatory compliance and risk training.
Suitability risk, product selection, cross-divisional service
offerings, 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
Instruments
Directive II (MiFID II) in the EU, continue. We regularly monitor
our suitability, product and conflicts of
interest control
frameworks to assess whether they are reasonably designed to
facilitate our adherence to applicable laws and regulatory
expectations.
in Financial
164
for
laundering,
Financial crime,
terrorist
including money
financing, sanctions violations, fraud, bribery and corruption,
continues to present risks, as technological innovation and
geopolitical developments have increased the complexity of
operating an effective program to prevent and detect financial
crime. Regulators and other governmental authorities have
heightened expectations
financial crime compliance
programs and have significantly increased their focus in this area
over the last several years. Given the profile of our wealth
management businesses as well as heightened regulatory
expectations, maintaining effective programs for prevention and
detection of money laundering and for sanctions compliance is a
high priority for us. We are investing to improve our detection
and monitoring capabilities, including in automation of our
techniques are
processes. Money
becoming increasingly sophisticated, while geopolitical volatility
makes the sanctions landscape more complex. We continue to
invest in improving our anti-money laundering (AML), terrorist
financing prevention, sanctions and fraud control capabilities to
meet
regulatory
expectations.
the evolving challenge and heightened
laundering and
fraud
We also continue to invest heavily in our detection capabilities
and core systems as part of our financial crime prevention
program. We have been exploring new technologies to combat
financial crime, and implementing rule-based monitoring by
applying self-learning systems to identify suspicious transactions.
Furthermore, we are actively participating in AML public-private
partnerships with public-sector stakeholders, including law
enforcement, to improve information sharing and better detect
financial crimes.
Cross-border risk remains an area of regulatory attention for
global financial institutions, with a strong focus on fiscal
transparency and increased legislation, such as the automatic
exchange of information. We continue to adapt our cross-border
control framework to adhere to the regulatory expectations and
facilitate compliant client-driven cross-border business.
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 models, 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
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 ultimately accountable for the effectiveness of operational
risk management and for implementing the operational risk
framework. Responsibility
front-to-back control
for
environment and risk management is held by the Chief
Operating Officers. Management in all functions is responsible
risk management
robust operational
for establishing a
environment, including establishing and maintaining internal
controls, effective supervision and a strong risk culture. In 2017,
we
framework,
streamlined administrative processes, strengthened our abilities
to detect and mitigate operational risk and better embedded the
framework as a key tool used by the business to manage its risks
day-to-day.
improved our operational
further
risk
the
(C&ORC)
Compliance & Operational Risk Control
is
responsible for providing an independent and objective view of
the adequacy of operational risk management across the Group,
and aims to ensure 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 C&ORC, who reports to the Group Chief Risk
Officer and is a member of the Risk Executive Committee.
risk
The operational
framework establishes general
requirements for managing and controlling operational risks,
including compliance and conduct risk at UBS. It is built on the
following pillars:
– classifying
taxonomy
the operational
inherent
through
risks
risk
– assessing the design and operating effectiveness of controls
through the internal control assessment process
– assessing residual risk through the risk assessment processes
with remediation to address identified deficiencies that are
outside accepted levels of residual risk
– defining operational risk appetite,
levels of
operational risk that exceed defined thresholds and taking
appropriate measures to bring residual risk back within the
defined appetite
identifying
The operational risk taxonomy provides a clear and logical
inherent operational risks, across all
classification of our
divisions. Throughout the organizational hierarchy, a level of risk
appetite must be agreed for each of the taxonomy categories,
together with a minimum set of internal controls and associated
performance thresholds considered necessary to keep risk
exposure within acceptable levels.
All functions within our firm are required to assess internal
controls periodically, 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 internal
controls over financial reporting as required by the Sarbanes-
Oxley Act, section 404 (SOX 404). The framework facilitates the
identification of SOX 404-relevant controls for independent
testing, functional assessments, management affirmation and,
where control weaknesses are identified, remediation tracking.
We employ a consistent global framework to assess the
aggregated impact of control deficiencies and the adequacy of
remediation efforts.
The UBS risk assessment approach covers all business
activities and internal as well as external identified or known
factors posing a threat to the UBS Group. Aggregated with any
identified or known weaknesses in the control environment, the
risk assessment articulates the current operational risk exposure
against the firm’s risk appetite.
Key control deficiencies that surface during the internal
control and risk assessment processes are required to be
reported in the operational risk inventory, and sustainable
remediation must be defined and executed. These issues are
assigned to owners at the senior management level and must be
reflected in the respective manager’s annual performance
measurement and management objectives. To assist with
prioritizing the known operational risk issues, irrespective of
origin, a common rating methodology 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 maintain rigorous management
discipline in the sustainable mitigation and control of operational
risk issues.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
165
Risk, treasury and capital management
Risk management and control
Advanced measurement approach model
The operational risk framework detailed above is aligned with
and underpins
for
operational risk, which in turn allows us to quantify operational
risk and to define effective management incentives.
the calculation of
regulatory capital
We measure operational
risk exposure and calculate
operational 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 applied 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.
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
calibrated. The modeled distribution
for both
frequency and severity are then leveraged to generate the
annual loss distribution. The resulting 99.9% quantile of the
overall annual operational 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.
functions
A key assumption when calibrating the base or data-driven
frequency and severity distributions is that historical loss patterns
and exposures form a reasonable proxy for future events.
However, it is important to note that our approach not only
models historical internal losses, but also includes external
industry losses. A statistical mechanism aims to ensure that only
those industry losses that are fairly consistent with the internal
UBS loss profile are used in modeling.
AMA model calibration and review
To account for fast-changing external developments such as
new regulations, geopolitical change, and volatile market and
economic conditions, as well as internal factors including
changes in business strategy and internal control framework
enhancements, the modeling of historical internal and external
losses is further enriched to more effectively forecast potential
future losses. To refine the loss forecast, qualitative information
on both the external business environment and the internal
166
control framework is summarized and an overall rating is
determined to structure and facilitate the Subject Matter Expert
(SME) inputs. The purpose of the SME reviews is to account for
important qualitative elements in calibrating the AMA model,
but also to consider expert knowledge and insights that the
SMEs can provide into the calibration process.
To maintain risk sensitivity, our model has to be regularly
recalibrated. Therefore, the SME reviews are conducted at least
annually, and encompass all UoMs. Change recommendations
are presented to FINMA for approval prior to their utilization for
disclosure purposes. In addition to the annual reviews, a high-
level semiannual review accounts for any material developments
between annual calibrations to be reflected in the model
outputs. Following regulatory approval, these changes become
effective for the subsequent disclosures accordingly.
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 and confirmed by Model Risk
Management & Control and supplemented with additional
sensitivity and benchmarking analysis by the model owner.
Future operational risk-related regulatory capital developments
In December 2017, the Basel Committee on Banking Supervision
published the final Basel III framework. Based on the published
framework, the regulatory capital requirements on operational
risks will be determined by the standardized measurement
approach (SMA), which will replace the AMA capital regime.
The SMA is mainly based on two components: a business
indicator component, which is basically utilized as a size proxy
for the banks in the SMA context, and a historical loss
experience component. With regard to the loss experience
component, the published framework has a number of
parameters that are subject to national discretion. UBS maintains
a close dialog with FINMA to discuss in more detail the
implementation objectives and to provide for a smooth
transition of the capital regime for operational risks.
→ Refer to “Capital management objectives, planning and
activities” in the “Capital management” section of this report
for more information on the development of RWA
→ Refer to “Risk measurement” in this section for more
information on our approach to model confirmation procedures
→ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
Treasury management
Balance sheet, liquidity and funding management
Strategy, objectives and governance
future
in consideration of current and
Audited | We manage our balance sheet, liquidity and funding
positions with the overall objective of optimizing the value of
our business franchise across a broad range of market conditions
and
regulatory
constraints. We employ a number of measures to monitor these
positions under normal and stressed conditions. In particular, we
use stress scenarios to apply behavioral adjustments to our
balance sheet and calibrate the results from these internal stress
models with external 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 committee of the Group Executive
Board, and is overseen by the Risk Committee of the Board of
Directors (BoD). (cid:3)
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
fluctuate 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. 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).
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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. Group Treasury reports on the Group’s overall liquidity
and
and
concentration risks, at least monthly to the Group ALCO and the
Risk Committee of the BoD.
funding position,
including
funding
status
Audited | Liquidity and funding limits and targets are set at a
Group and, where appropriate, at legal entity and business
division levels, and are reviewed and reconfirmed at least once a
year by the BoD, the Group ALCO, the Group Chief Financial
Officer, the Group Treasurer and the business 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. (cid:3)
→ 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
167
Risk, treasury and capital management
Treasury management
Assets and liquidity management
Audited | Our liquidity risk management aims to maintain a sound
liquidity position to meet all our liabilities when due and to
provide 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 damage to our various businesses. (cid:3)
Balance sheet assets – Group
As of 31 December 2017, balance sheet assets totaled CHF 916
billion, a decrease of CHF 19 billion from 31 December 2016,
mainly due to reductions in positive replacement values (PRVs),
cash and balances with central banks and financial assets
designated at fair value, available for sale and held to maturity,
partly offset by an increase in trading portfolio assets. Total
assets excluding PRVs increased by CHF 21 billion to CHF 797
billion as of 31 December 2017. Excluding currency effects, total
assets excluding PRVs increased by CHF 22 billion.
PRVs decreased by CHF 40 billion, primarily resulting from a
CHF 24 billion decrease in our Foreign Exchange, Rates and
Credit business within the Investment Bank, mainly related to
foreign exchange contracts, primarily reflecting net maturities,
partly offset by fair value changes resulting from currency
market movements, and a CHF 19 billion reduction in Non-core
and Legacy Portfolio, primarily reflecting trade terminations and
maturities, mainly related to interest rate and foreign exchange
contracts. Cash and balances with central banks decreased by
CHF 20 billion, largely in Group ALM, mainly due to higher
consumption by the business divisions, partly offset by net
issuances of short-term and long-term debt. Financial assets
designated at fair value, available for sale and held to maturity
decreased by CHF 14 billion, primarily resulting from rebalancing
within our HQLA portfolio held by Group ALM, partly offset by a
client-driven increase in Corporate Client Solutions within the
Investment Bank.
These decreases were partly offset by a CHF 34 billion
increase in trading portfolio assets, primarily in our Equities
IFRS balance sheet assets
business within the Investment Bank, mainly reflecting a client-
driven increase and higher equity markets. Lending assets
increased by CHF 14 billion, mainly due to higher Lombard
lending balances in Wealth Management. Receivables from
securities financing transactions increased by CHF 8 billion,
the
primarily
aforementioned rebalancing within our HQLA portfolio.
in Group ALM, mainly
resulting
from
Other assets were broadly unchanged as a CHF 9 billion
client-driven increase in prime brokerage receivables was offset
by a decrease in assets held for sale, following completion of the
sale of a life insurance subsidiary within Wealth Management, a
reduction in cash collateral receivables on derivative instruments
and lower deferred tax assets.
→ Refer to the “Consolidated financial statements” section of this
report for more information
Balance sheet assets – Investment Bank
Investment Bank total assets increased by CHF 21 billion to
CHF 263 billion, and total assets excluding PRVs increased by
CHF 41 billion, mainly due to a CHF 34 billion increase in trading
portfolio assets and a CHF 9 billion increase in prime brokerage
receivables, primarily in our Equities business, reflecting client-
driven increases and higher equity markets. A CHF 7 billion
increase in financial assets designated at fair value, available for
sale and held to maturity, primarily in Corporate Client
Solutions, was more than offset by an CHF 8 billion decrease in
receivables from securities financing transactions, mainly in
Equities.
Balance sheet assets – Non-core and Legacy Portfolio
Non-core and Legacy Portfolio total assets decreased by CHF 22
billion to CHF 46 billion, mainly due to a CHF 19 billion
reduction in PRVs, primarily reflecting trade terminations and
maturities, mainly related to interest rate and foreign exchange
contracts.
Total assets excluding PRVs decreased by CHF 4 billion to
CHF 8 billion, mainly due to a reduction in cash collateral
receivables on derivative instruments.
% change from
CHF billion
31.12.16
(19)
Cash and balances with central banks
Lending1
4
Collateral trading2
10
Trading portfolio
35
(25)
Positive replacement values
Financial assets at FV / AFS / HTM3
(15)
Other assets4
(2)
TTotal IFRS assets
(2)
11 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.
331.12.17
87.8
333.3
89.6
130.7
118.2
76.8
79.2
915.6
31.12.16
107.8
319.5
81.4
96.6
158.4
90.3
81.1
935.0
As of
168
Balance sheet assets – Group ALM
Group ALM total assets decreased by CHF 21 billion to CHF 246
billion, primarily reflecting a CHF 20 billion reduction in cash and
balances with central banks, mainly due to higher consumption
by the business divisions, partly offset by net issuances of short-
term and long-term debt. Financial assets designated at fair
value, available for sale and held to maturity decreased by
CHF 20 billion, mostly offset by a CHF 17 billion increase in
receivables from securities financing transactions, primarily
resulting from rebalancing within our HQLA portfolio.
Balance sheet assets – Other business divisions
Wealth Management total assets increased by CHF 7 billion,
primarily due to higher Lombard lending balances, partly offset
by a decrease in assets held for sale, following completion of the
sale of a life insurance subsidiary. Asset Management total
assets increased by CHF 2 billion to CHF 14 billion, reflecting an
increase in unit-linked investment contracts.
Personal & Corporate Banking total assets decreased by
CHF 4 billion to CHF 136 billion, mainly reflecting
lower
mortgage and other lending balances. Corporate Center –
Services total assets decreased by CHF 3 billion to CHF 21 billion,
resulting from the net write-down of the Group’s deferred tax
assets following a reduction in the US federal corporate tax rate
after the enactment of the Tax Cuts and Jobs Act in the US
during the fourth quarter of 2017.
Wealth Management Americas total assets were broadly
unchanged at CHF 67 billion.
including cash, central bank
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 30-calendar-day
liquidity stress scenario. Our HQLA
predominantly consist of assets that qualify as Level 1 in the LCR
reserves and
framework,
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
regulatory
local
limitations are
requirements,
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 30 billion of assets were
excluded from our daily average Group HQLA for the fourth
quarter of 2017. Amounts held in excess of local liquidity
requirements that are not subject to other restrictions are
generally available for transfer within the Group.
result of
the
local LCR and
typically
including
The total weighted liquidity value of HQLA decreased by
CHF 13 billion to CHF 183 billion, primarily reflecting increased
funding consumption by the business divisions.
Liquidity coverage ratio
The LCR measures the short-term resilience of a bank’s liquidity
profile by comparing whether sufficient HQLA are available to
survive 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 all significant currencies in order to
manage any currency mismatches between HQLA and the net
expected cash outflows in times of stress.
Our daily average LCR for the fourth quarter of 2017 was
143% compared with a three-month average of 132% in the
fourth quarter of 2016, mainly due to a CHF 20 billion reduction
in net cash outflows, partly offset by the aforementioned
reduction in HQLA. The CHF 20 billion reduction in net cash
outflows was primarily driven by secured financing transactions,
financial liabilities at fair value reported in unsecured wholesale
funding and committed facilities reported
in other cash
outflows.
→ Refer to the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on the liquidity coverage ratio
→ Refer to “Holding company and significant regulated
subsidiaries and sub-groups” at www.ubs.com/investors for
more information on the liquidity coverage ratio of UBS AG and
UBS Switzerland AG
In December 2017, FINMA amended its circular “Liquidity
risks – banks” following the Federal Council’s amendment to a
number of provisions on bank
in the Liquidity
Ordinance. The circular is effective from 1 January 2018. We
expect moderate upward pressure in net cash outflows affecting
our LCR in the first quarter of 2018 as a result of these
amendments.
liquidity
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
169
Risk, treasury and capital management
Treasury management
Liquidity coverage ratio
High-quality liquid assets2
Cash balances3
Securities (on- and off-balance sheet)
TTotal high-quality liquid assets4
Cash outflows5
Retail deposits and deposits from small business customers
Unsecured wholesale funding
Secured wholesale funding
Other cash outflows
TTotal cash outflows
Cash inflows5
Secured lending
Inflows from fully performing exposures
Other cash inflows
TTotal cash inflows
Liquidity coverage ratio
High-quality liquid assets
AAverage 4Q171
Average 4Q161
103
80
183
26
104
79
44
254
83
33
10
126
183
102
94
196
26
109
73
58
266
71
32
15
117
196
Net cash outflows
148
LLiquidity coverage ratio (%)
132
11 Calculated based on an average of 63 data points in the fourth quarter of 2017. The fourth quarter of 2016 is based on a three-month average. 2 Calculated after the application of haircuts. 3 Includes cash
and balances with central banks and other eligible balances as prescribed by FINMA. 4 Calculated in accordance with FINMA requirements. 5 Calculated after the application of inflow and outflow rates.
128
143
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 jurisdictions 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
considered available to secure funding or to meet collateral
needs. These mainly include collateral trading assets, PRVs, 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.
170
Encumbered
Assets
otherwise
restricted and
not available
to secure
funding
Assets
pledged
as collateral
Unencumbered
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)
170
17,631
17,631
17,801
46,219 1
4,397
2,307
2,495
8
8
37,013
64,020
57,213
3,280
2,602
1,256
7,137
0
0
957
0
208
749
11,316
246
3,822
95
3,917
23,573
26,470
87,775
45,117
45,117
68,369
8,457
6,048
6,389
360
149
42,552
4,563
8,419
9,166
10,432
10,439
288,967
145,493
309,838
3,847
3,847
1,018
8,829
218,846
238,321
9,847
323,532
304,944
0
27
605
11,713
12,344
12,393
77,240
89,633
118,227
19,612
6,398
9,844
29,612
65,466
285,671
308,069
87,775
13,739
58,933
319,568
163,124
392,239
12,393
77,240
89,633
119,392
12,854
8,563
3,847
9,632
368
157
79,565
4,563
11,316
118,227
8,665
9,166
23,434
1,018
8,829
6,398
9,844
29,706
79,230
915,642
935,016
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Asset encumbrance
CHF million
OOn-balance sheet assets
CCash and balances with central banks
Due from banks
Financial assets designated at fair value
Loans
of which: mortgage loans
LLending
Cash collateral on securities borrowed
Reverse repurchase agreements
CCollateral trading
TTrading 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
FFinancial assets for unit-linked investment contracts
PPositive replacement values
FFinancial assets available for sale
FFinancial 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
OOther
TTotal on-balance sheet assets as of 31 December 2017
Total on-balance sheet assets as of 31 December 2016
CHF million
OOff-balance sheet assets
TTotal off-balance sheet assets as of 31 December 2017
Total off-balance sheet assets as of 31 December 2016
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
337,514
316,323
13,005
12,632
114,144
96,833
332,990
172,391
335,153
200,226
TTotal on- and off-balance sheet assets as of 31 December 2017
401,534
36,579
of which: high-quality liquid assets
Total on- and off-balance sheet assets as of 31 December 2016
373,536
39,102
of which: high-quality liquid assets
11 Includes CHF 35,363 million of assets pledged as collateral that may be sold or repledged by counterparties.
Other
realizable
assets
4,469
3,540
Assets that
cannot be
pledged as
collateral
Total assets
received that
can be sold
or repledged
469,132
429,327
328,001
285,671
308,484
308,069
171
Risk, treasury and capital management
Treasury management
Unencumbered assets available to secure funding on a Group and / or legal entity level by currency
331.12.17
63,193
139,699
42,754
87,344
332,990
31.12.16
71,915
132,379
54,867
75,993
335,153
funding, unusually
Acute scenario
The acute scenario represents an extreme stress event that
combines 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
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 obligations to unwind derivative positions or to
deliver
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 outflows over a one-month time
horizon for day-to-day risk management, while the latter
involves a more detailed assessment of asset and liability cash
flows.
additional
additional
collateral,
and
Contingency funding
Audited | Our Group contingency funding plan is an integral part
of our global crisis management framework, which covers
various types of crisis events. This contingency funding plan
contains an assessment of contingent funding sources in a
stressed environment, liquidity status indicators and metrics, and
contingency procedures. 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 funding sources include our HQLA
portfolio, available and unutilized liquidity facilities at several
major central banks, and contingent reductions of liquid trading
portfolio assets.(cid:3)
CHF million
Swiss franc
US dollar
Euro
Other
TTotal
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 immediate corrective measures to absorb potential sudden
liquidity shortfalls can be put into effect. (cid:3)
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
markets from stress events affecting all parts of our business.
These models and their assumptions are reviewed regularly to
incorporate the latest business and market developments. We
continuously refine the assumptions used to maintain a robust,
actionable 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
addition to the loss of the ability to replace maturing wholesale
funding, it assumes a gradual decline of otherwise stable client
deposits 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
scenario and measures the amount of long-term funding
available to fund illiquid assets. The illiquid portion of an asset is
the difference, i.e., the haircut, between the carrying value of
the asset and its effective cash value when used as collateral in a
secured funding transaction. Long-term funding used as cash
capital to support 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.
172
Liabilities and funding management
Audited | Group Treasury regularly monitors our funding status,
including concentration risks, to ensure we maintain a well-
balanced and diversified liability structure. Our funding risk
management aims for the optimal asset and liability structure to
finance our businesses reliably and cost-efficiently, and our
funding activities are planned by analyzing the overall liquidity
and funding profile of our balance sheet, taking into account
the amount of stable funding that would be needed to support
ongoing business activities through periods of difficult market
conditions. (cid:3)
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 debt.
IFRS balance sheet liabilities and equity
These programs allow institutional 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 16 billion to CHF 864 billion as
of 31 December 2017. Negative replacement values decreased
by CHF 38 billion, in line with the aforementioned decreases in
PRVs. Customer deposits decreased by CHF 15 billion, primarily
in Wealth Management Americas, mainly reflecting client-driven
decreases, in response to rising interest rates and higher equity
markets, and the shift of customer sweep deposit balances in
excess of insured limits to third-party banks. As of 31 December
2017, customer deposits represented 60% of our funding
sources and our ratio of customer deposits to outstanding loan
balances was 128% (31 December 2016: 138%). Other
liabilities decreased by CHF 11 billion, mainly due to the
aforementioned completion of the sale of a life insurance
subsidiary in Wealth Management, a reduction in cash collateral
payables on derivative instruments and lower prime brokerage
payables.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
As of
% change from
31.12.16
CHF billion
Short-term borrowings1
59
Collateral trading2
81
Trading portfolio
33
Negative replacement values
(24)
(3)
Due to customers
Long-term debt issued3
8
Other liabilities4
(11)
TTotal IFRS liabilities
(2)
Share capital
0
Share premium
(8)
Treasury shares
(5)
3
Retained earnings
Other comprehensive income5
28
(4)
TTotal IFRS equity attributable to shareholders
(92)
IFRS equity attributable to non-controlling interests
(6)
TTotal IFRS equity
TTotal IFRS liabilities and equity
(2)
11 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.
331.12.17
58.5
17.0
30.5
116.1
409.0
142.8
90.4
864.4
0.4
25.9
(2.1)
32.8
(5.7)
51.2
0.1
51.3
915.6
31.12.16
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
935.0
173
Risk, treasury and capital management
Treasury management
These decreases were offset by a CHF 22 billion increase in
short-term borrowings, which represented 9% of our funding
sources, mainly reflecting net issuances of commercial paper and
certificates of deposit, primarily to support short-term funding
requirements.
Long-term debt issued, which represented 21% of our
funding sources as of 31 December 2017, increased by CHF 10
billion, mainly due to an CHF 11 billion increase in long-term
debt held at amortized cost, primarily reflecting the issuance of
CHF 10 billion equivalent of US dollar-, euro- and Swiss franc-
denominated senior unsecured debt that contributes to our total
loss-absorbing capacity (TLAC) and the issuance of CHF 14
billion equivalent of senior unsecured debt, partly offset by the
maturity or early redemption of CHF 8 billion equivalent of
senior unsecured debt and CHF 2 billion equivalent of tier 2
capital instruments.
(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:25)
(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:26)
(cid:20)(cid:18)(cid:19)(cid:27)
(cid:20)(cid:18)(cid:20)(cid:18)
(cid:20)(cid:18)(cid:20)(cid:19)(cid:115)(cid:20)(cid:18)(cid:20)(cid:20) (cid:20)(cid:18)(cid:20)(cid:21)(cid:115)(cid:20)(cid:18)(cid:20)(cid:25) (cid:20)(cid:18)(cid:20)(cid:26)(cid:115)(cid:20)(cid:18)(cid:21)(cid:25)
(cid:67)(cid:72)(cid:86)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:21)(cid:25)
(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)
liabilities
Trading portfolio
increased by CHF 8 billion,
primarily reflecting client-driven increases in Corporate Client
transactions
financing
Solutions. Payables
increased by CHF 8 billion, primarily in Group ALM.
from securities
→ 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
Funding by product and currency
Short-term borrowings
of which: due to banks
of which: short-term debt issued1
Securities financing transactions
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
TTotal
CCHF billion
AAll currencies
331.12.17 31.12.16
36.8
10.6
26.2
9.4
2.8
6.6
58.5
7.5
51.0
17.0
1.8
15.3
30.2
35.5
409.0
423.7
188.6 194.0
161.8 170.7
52.7
47.4
11.2
6.2
132.5
142.8
32.0
29.6
AAll currencies
331.12.17 31.12.16
5.5
1.6
3.9
1.4
0.4
1.0
8.5
1.1
7.4
2.5
0.3
2.2
4.4
59.5
27.4
23.5
6.9
1.6
20.8
4.3
5.3
63.2
29.0
25.5
7.9
0.9
19.8
4.8
687.2
669.9
100.0
100.0
AAs a percentage of total funding sources (%)
EEUR
331.12.17 31.12.16
0.9
0.1
0.8
0.3
0.0
0.3
CCHF
331.12.17 31.12.16
0.6
0.5
0.1
0.0
0.0
0.0
UUSD
331.12.17 31.12.16
2.9
0.7
2.2
1.0
0.4
0.6
0.5
0.4
0.0
0.0
0.0
0.0
3.1
0.1
2.9
0.3
0.0
0.3
3.7
0.3
3.4
2.0
0.2
1.8
0.1
24.7
9.1
14.5
1.0
0.1
1.8
0.1
27.2
0.2
24.4
8.9
14.1
1.4
0.1
1.9
0.1
27.2
1.4
7.2
6.3
0.8
0.1
0.0
4.9
0.5
1.8
7.7
6.6
0.8
0.2
0.1
4.9
0.6
17.3
16.2
2.1
22.2
8.1
8.2
4.5
1.4
12.5
2.5
44.9
2.3
25.7
9.6
10.6
4.9
0.6
11.6
2.8
46.2
OOther
331.12.17 31.12.16
1.1
0.3
0.8
0.1
0.0
0.1
1.3
0.2
1.1
0.2
0.0
0.2
0.8
5.4
4.0
0.0
1.3
0.1
1.6
1.3
1.0
5.4
3.9
0.0
1.4
0.1
1.3
1.3
10.5
10.3
11 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.
174
(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)
(cid:19)(cid:18)(cid:20)
(cid:25)(cid:25)
(cid:27)(cid:18)
(cid:37)(cid:67)(cid:85)(cid:74)(cid:14)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:69)(cid:71)(cid:80)(cid:86)(cid:84)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:85)
(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(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:14)(cid:2)
(cid:67)(cid:88)(cid:67)(cid:75)(cid:78)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:85)(cid:67)(cid:78)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:74)(cid:71)(cid:78)(cid:70)(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:53)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:67)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)
(cid:19)(cid:21)(cid:19)
(cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)
(cid:21)(cid:20)(cid:18)
(cid:46)(cid:81)(cid:67)(cid:80)(cid:85)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:25)(cid:21)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)
(cid:85)(cid:87)(cid:84)(cid:82)(cid:78)(cid:87)(cid:85)
(cid:19)(cid:20)(cid:26)(cid:7)(cid:2)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:26)(cid:27)(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:53)(cid:74)(cid:81)(cid:84)(cid:86)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)(cid:68)(cid:81)(cid:84)(cid:84)(cid:81)(cid:89)(cid:75)(cid:80)(cid:73)(cid:85)
(cid:53)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:67)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)
(cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)
(cid:38)(cid:71)(cid:79)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:71)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:85)
(cid:52)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:2)(cid:85)(cid:67)(cid:88)(cid:75)(cid:80)(cid:73)(cid:85)(cid:17) (cid:70)(cid:71)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:85)
(cid:54)(cid:75)(cid:79)(cid:71)(cid:2)(cid:70)(cid:71)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:85)
(cid:40)(cid:75)(cid:70)(cid:87)(cid:69)(cid:75)(cid:67)(cid:84)(cid:91)(cid:2)(cid:70)(cid:71)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(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:42)(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:85)
(cid:84)
(cid:71)
(cid:79)
(cid:81)
(cid:86)
(cid:85)
(cid:87)
(cid:69)
(cid:2)
(cid:81)
(cid:86)
(cid:2)
(cid:71)
(cid:87)
(cid:38)
(cid:149)
(cid:70)
(cid:71)
(cid:87)
(cid:85)
(cid:85)
(cid:75)
(cid:2)
(cid:86)
(cid:68)
(cid:71)
(cid:70)
(cid:2)
(cid:79)
(cid:84)
(cid:71)
(cid:86)
(cid:15)
(cid:73)
(cid:80)
(cid:81)
(cid:46)
(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)
(cid:26)(cid:19)
(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:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)
(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: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:20)(cid:2)(cid:43)(cid:80)(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: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:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:25)
(cid:22)(cid:18)(cid:27)
(cid:19)(cid:22)(cid:21)
(cid:23)(cid:26)
(cid:19)(cid:25)
(cid:21)(cid:18)
(cid:19)(cid:26)(cid:27)
(cid:19)(cid:24)(cid:20)
(cid:22)(cid:25)
(cid:19)(cid:19)
(cid:23)(cid:22)
(cid:26)(cid:27)
(cid:27)(cid:18)
(cid:23)(cid:19)
Equity
Equity attributable to shareholders decreased by CHF 2,407
million to CHF 51,214 million as of 31 December 2017.
Total comprehensive income attributable to shareholders was
negative CHF 210 million, reflecting net profit of CHF 1,053
million and negative other comprehensive income (OCI) of
CHF 1,263 million. Negative OCI included net losses on cash
flow hedges of CHF 621 million, foreign currency translation
losses of CHF 530 million, own credit losses of CHF 313 million
and negative OCI related to financial assets available for sale of
CHF 86 million, partly offset by net gains on defined benefit
plans of CHF 288 million.
Share premium decreased by CHF 2,313 million, primarily due
to the distribution of CHF 2,229 million out of the capital
contribution reserve and a reduction of CHF 845 million from
the delivery of treasury shares under share-based compensation
plans, partly offset by an increase of CHF 721 million due to the
amortization of deferred equity compensation awards in the
income statement.
Net treasury share activity increased equity attributable to
shareholders by CHF 116 million, mainly reflecting the net
disposal of treasury shares related to employee share-based
compensation awards.
Equity attributable to non-controlling interests decreased by
CHF 625 million to CHF 57 million, primarily as we redeemed a
EUR 600 million non-Basel III-compliant hybrid tier 1 capital
instrument on its first call date.
→ Refer to the “Group performance” and “Consolidated financial
statements” sections of this report for more information
Net stable funding ratio
The NSFR framework is intended to limit overreliance 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 Basel
Committee on Banking Supervision (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
according to the final implementation of the BCBS NSFR disclosure
standards in Switzerland.
As of 31 December 2017, our estimated pro forma NSFR was
105%, a decrease of 11 percentage points from 31 December
2016, primarily reflecting a CHF 44 billion increase in required
stable funding, mainly driven by an increase in trading assets,
loans and prime brokerage receivables. The calculation of our pro
forma NSFR includes interpretation and estimates of the effect of
the NSFR rules, and will be refined as regulatory interpretations
evolve and as new models and associated systems are enhanced.
In November 2017, the Swiss Federal Council informed that the
introduction of the NSFR, which was originally planned for
1 January 2018, has been postponed and that it will reconsider
the matter at the end of 2018.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Pro forma net stable funding ratio
CHF billion, except where indicated
Available stable funding
Required stable funding
PPro forma net stable funding ratio (%)
331.12.17
31.12.16
447
425
105
442
381
116
175
Risk, treasury and capital management
Treasury management
Internal funding and funds transfer pricing
We employ an integrated liquidity and funding framework to
govern 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, except in
those circumstances where transfer restrictions exist.
Funding costs and benefits are allocated to our business
divisions 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. The funds transfer pricing mechanism 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 and, for
major subsidiaries, is entity-specific. We regularly review our
transfer pricing mechanisms, and make
internal
enhancements where appropriate to help better accomplish our
liquidity and funding management objectives.
funds
Credit ratings
Credit ratings can affect the cost and availability of funding,
especially funding from wholesale unsecured sources. Our credit
ratings can also influence the performance of some of our
businesses and the levels of client and counterparty confidence.
Rating agencies take into account a range of factors when
assessing creditworthiness 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 management, 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.
In evaluating our liquidity and funding requirements, we
consider 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 over-the-counter (OTC) derivative positions
and other obligations. Based on our credit ratings as of
31 December 2017, CHF 0.1 billion, CHF 0.4 billion and CHF 1.3
billion would have been
for such contractual
obligations in the event of a one-notch, two-notch and three-
required
notch reduction in long-term credit ratings, respectively. Of
these, the portion related to additional collateral is CHF 0.1
billion, CHF 0.3 billion and CHF 0.8 billion, respectively.
There were two main rating actions on UBS Group AG’s and
UBS AG’s solicited credit ratings in 2017 and one rating action
related to UBS Group AG in 2018 up to the date of this report.
On 28 September 2017, Fitch Ratings upgraded UBS Group
AG’s long-term issuer default rating to A+ (stable outlook) from
A, and UBS AG’s long-term issuer default rating to AA– (stable
outlook) from A+.
On 25 September 2017, Scope Ratings AG upgraded UBS
Group AG’s issuer credit strength rating to A+ (stable outlook)
from A, and UBS AG’s issuer credit strength rating to AA–
(stable outlook) from A.
On 29 January 2018, Standard & Poor’s Global Ratings
downgraded UBS Group AG’s high-trigger additional tier 1
instruments rating to BB (stable outlook) from BB+.
→ 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. The presentation of liabilities at carrying value
in this table differs from “Note 25d Maturity analysis of financial
liabilities” in the “Consolidated financial statements” section of
liabilities are presented on an
this report, where these
undiscounted basis, as required by
International Financial
Reporting Standards (IFRS).
Derivative replacement values and trading portfolio assets and
liabilities are assigned to the column Due within 1 month, noting
that the respective contractual maturities may extend over
significantly longer periods.
Other financial assets and liabilities with no contractual
maturity, 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
counterparty of the instrument is entitled to give. Where there is
no contractual 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.
176
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
Total
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
TTotal assets as of 31 December 2017
TTotal assets as of 31 December 2016
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
TTotal liabilities as of 31 December 2017
TTotal liabilities as of 31 December 2016
GGuarantees, commitments and forward starting transactions
Loan commitments
Guarantees
Reverse repurchase agreements
Securities borrowing agreements
TTotal as of 31 December 2017
TTotal as of 31 December 2016
87.7
12.4
12.4
40.9
130.7
118.2
23.4
117.7
12.1
3.6
88.7
13.3
4.7
0.7
25.3
574.2
591.6
6.1
1.6
11.8
30.5
116.1
30.2
393.0
18.6
4.0
3.1
52.3
667.5
720.2
38.6
18.8
12.7
0.0
70.1
81.0
38.3
21.7
5.5
9.1
2.1
9.7
0.1
0.1
70.7
73.4
0.4
0.1
2.8
10.2
10.2
14.1
2.9
40.7
40.4
0.2
0.0
0.2
0.2
0.7
0.0
21.7
0.3
5.8
0.1
0.0
2.6
0.1
1.6
0.0
0.4
0.2
0.0
4.2
7.0
3.1
0.4
2.8
0.6
4.7
0.4
1.2
0.0
17.5
18.2
0.4
0.2
1.8
2.5
10.9
15.8
12.9
13.8
6.0
1.2
4.9
1.7
5.0
0.2
0.7
0.0
25.9
22.5
0.5
0.3
2.8
5.5
21.8
30.8
19.5
8.9
3.5
0.5
3.3
1.6
10.4
0.2
0.7
0.1
22.9
20.8
0.0
0.1
0.5
3.2
10.8
14.6
6.0
24.4
14.5
1.5
2.4
6.0
6.5
0.9
1.5
0.1
35.0
43.2
0.1
0.0
0.3
3.5
9.5
0.5
14.0
12.6
87.8
13.7
12.4
77.2
130.7
118.2
23.4
319.6
144.4
18.7
115.0
39.4
2.1
58.9
8.7
9.2
1.0
8.8
6.4
9.8
29.7
915.6
935.0
0.6
0.7
1.0
8.8
6.4
9.8
27.4
30.3
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
0.1
0.0
47.2
40.9
2.1
0.2
1.9
2.1
1.3
4.1
3.1
62.3
42.7
3.9
3.5
12.2
16.1
1.4
2.0
2.2
84.4
75.4
1.9
57.6
59.7
0.0
0.0
0.3
4.5
33.0
0.2
38.0
25.7
0.1
6.2
27.9
0.3
34.4
34.8
7.6
1.0
8.6
8.5
0.1
0.0
0.0
0.1
0.1
0.1
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
7.5
1.8
15.3
30.5
116.1
30.2
409.0
54.2
139.6
3.1
57.1
864.4
880.7
39.1
18.9
12.7
0.0
70.6
81.4
177
Risk, treasury and capital management
Treasury management
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 IFRS. These transactions include derivative
instruments, guarantees 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 31 December 2017 Pillar
3 report – Group and significant regulated subsidiaries and sub-
groups under “Pillar 3 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 2017, 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.
178
Guarantees and similar arrangements
In the normal course of business, we issue various forms of
guarantees, commitments to extend credit, standby and other
letters of credit to support our clients, commitments to enter
into forward 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 2017, the net exposure (gross values less
sub-participations) from guarantees and similar instruments was
CHF 16.0 billion compared with CHF 13.8 billion as of
31 December 2016. Fee income from issuing guarantees was
not significant to total revenues in 2017 and 2016.
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 contractual 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 2017, we
recognized a net credit loss recovery of CHF 21 million related to
loan commitments and guarantees compared with a net credit
loss expense of CHF 9 million in 2016. Provisions recognized for
guarantees and loan commitments were CHF 33 million as of
31 December 2017 and CHF 54 million as of 31 December
2016.
→ 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
into partial
For certain obligations, we enter
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.
Guarantees, commitments and forward starting transactions
The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions.
CHF million
GGuarantees
Credit guarantees and similar instruments
Performance guarantees and similar instruments
Documentary credits
TTotal guarantees
LLoan commitments
FForward starting transactions1
Reverse repurchase agreements
Securities borrowing agreements
Repurchase agreements
11 Cash to be paid in the future by either UBS or the counterparty.
331.12.17
31.12.16
GGross
SSub-participations
NNet
Gross
Sub-participations
Net
8,428
3,420
7,007
18,854
39,069
12,683
23
8,187
(433)
(823)
(1,612)
(2,867)
(1,074)
7,995
2,597
5,395
15,987
37,995
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
Clearing house and exchange memberships
We are a member of numerous securities and derivative
exchanges and clearing houses. In connection with some of
those memberships, we may be required to pay a share of the
financial obligations of another member who defaults or we
may be otherwise exposed to additional financial obligations.
While the membership rules vary, obligations generally would
arise only if the exchange or clearing house had exhausted its
resources. We consider the probability of a material loss due to
such obligations to be remote.
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 estimates our share in the deposit insurance
system to be CHF 0.9 billion.
As a member of the Deposit Protection Fund of the
Association of German Banks (the Fund), we are required to
provide an indemnity to the Fund related to its coverage of
certain non-institutional deposits for amounts above EUR 0.1
million and below EUR 261 million per depositor in the event
that a German bank becomes unable to meet its obligations.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
The
aforementioned deposit
requirements
represent a contingent payment obligation and expose us to
additional risk. As of 31 December 2017, we considered the
probability of a material loss from our obligations to be remote.
insurance
179
Risk, treasury and capital management
Treasury management
Contractual obligations
The table below summarizes payments due by period under
contractual obligations as of 31 December 2017.
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
services), 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 statements” section of this report.
Contractual obligations
CHF million
Long-term debt obligations
Finance lease obligations
Operating lease obligations
Purchase obligations
TTotal as of 31 December 2017
Payment due by period
Within 1 year
53,671
3
666
1,229
55,569
1–3 years
34,431
5
1,118
1,049
36,604
3–5 years
Over 5 years
Total
25,203
45,172
158,476
0
811
320
18
2,013
220
26
4,608
2,819
26,335
47,422
165,929
Long-term debt obligations as of 31 December 2017 were
CHF 158 billion. They consisted of financial liabilities designated
at fair value (CHF 56 billion) and long-term debt issued (CHF 102
billion) and represent estimated future interest and principal
payments on an undiscounted basis.
→ 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
fair value hedge accounting
relationships, are not included in the table above. The notional
amount of these interest rate swaps was CHF 60 billion as of
31 December 2017. Financial liabilities designated at fair value
mostly consist of
structured notes and are generally
economically hedged, but it would not be practicable to
in
estimate the amount and / or timing of the payments on interest
swaps used to hedge these instruments as interest rate risk
inherent in respective liabilities is generally risk managed on a
portfolio level.
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
180
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 and investment of 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 arising on
transactions denominated in a currency other than the reporting
entity’s functional currency are managed under market risk
limits. Activities performed by Group ALM
the
management of the structural currency composition at the
consolidated Group level.
include
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
matching the currencies of our assets and liabilities for funding
purposes. 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
movements 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
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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
foreign
translation of previously
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 functional currencies.
Retained earnings in foreign subsidiaries with a functional
currency other than the Swiss franc are integrated and managed
as part of our net investment hedge accounting program.
recognized earnings
in
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 transactions 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
181
Risk, treasury and capital management
Treasury management
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
liquidity, funding and capital management frameworks and
measures described elsewhere in the “Risk, treasury and capital
management” section of this report.
Cash and cash equivalents
As of 31 December 2017, cash and cash equivalents totaled
CHF 102.2 billion, a decrease of CHF 18.9 billion from
31 December 2016, driven by net cash outflows from operating
activities, partly offset by net cash inflows from financing
activities.
Operating activities
In 2017, net cash outflows from operating activities were
CHF 50.9 billion. Net operating cash flow, before changes in
operating assets and liabilities and income taxes paid, was an
inflow of CHF 7.0 billion. Changes in operating assets and
liabilities resulted in net cash outflows of CHF 56.9 billion,
mainly driven by a CHF 21.8 billion net outflow related to
trading portfolio activity, a CHF 14.2 billion net increase in
lending balances and a CHF 12.7 billion net decrease in
customer deposits.
In 2016, net cash outflows from operating activities were
CHF 16.5 billion, mainly due to the increase of financial assets
designated at fair value of CHF 60.7 billion, substantially due to
cash proceeds from reductions 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 operating activities. This
effect was partly offset by inflows related to an increase in
customer deposits of CHF 33.6 billion and net operating cash
flow, before changes in operating assets and liabilities and
income taxes paid, of CHF 12.5 billion.
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
NNet increase / (decrease) in cash and cash equivalents
CCash and cash equivalents at the end of the year
182
Investing activities
Investing activities resulted in a net cash inflow of CHF 5.1 billion
in 2017, primarily related to gross cash inflows of CHF 14.9
billion from the disposal and redemption of financial assets
available for sale, partly offset by gross cash outflows of CHF 8.4
billion related to the purchase of financial assets available for
sale.
In 2016, investing activities generated a net cash inflow of
CHF 36.3 billion, as disposals and redemptions of financial assets
available for sale exceeded purchases of financial assets available
for sale and financial assets held to maturity.
Financing activities
Financing activities resulted in a net cash inflow of CHF 26.6
billion in 2017, mainly due to the net issuance of CHF 24.1
billion of short-term debt and CHF 6.2 billion of long-term debt,
which includes financial liabilities designated at fair value, partly
offset by a dividend distribution to shareholders of CHF 2.2
billion.
In 2016, financing activities resulted in a net cash outflow of
CHF 1.0 billion, primarily due to a dividend distribution to
shareholders of CHF 3.2 billion, payments of CHF 1.4 billion 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
CHF 5.4 billion of short-term debt.
For the year ended
331.12.17
(50,911)
5,100
26,608
265
(18,938)
102,200
31.12.16
(16,457)
36,328
(972)
(806)
18,094
121,138
Capital management
Capital management objectives, planning and activities
Capital management objectives
Audited | An adequate level of total loss-absorbing capacity (TLAC)
in accordance with both our internal assessment and regulatory
requirements is a prerequisite to conducting our business
activities.(cid:3) We are therefore committed to maintaining a strong
TLAC position and sound TLAC ratios at all times in order to
meet regulatory capital requirements and our target capital
ratios, and to support the growth of our businesses.
increases
We expect to meet known future
in TLAC
requirements 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) employee compensation awards, as well as issuing
senior unsecured debt that contributes to our TLAC.
As of 31 December 2017, our fully applied common equity
tier 1 (CET1) capital ratio and our fully applied CET1 leverage
ratio were 13.8% and 3.7%, respectively, each of which is
above the requirements for Swiss systemically relevant banks
(SRBs), which are stricter than the Basel Committee on Banking
Supervision (BCBS) requirements and which will apply from
1 January 2020.
In December 2017, the BCBS announced the finalization of
the Basel III framework. As a result, we have provided updated
capital guidance for the 2018–2020 period. We plan to operate
with a fully applied CET1 capital ratio of around 13% and a fully
applied CET1 leverage ratio of around 3.7%.
We currently estimate that the introduction of the revised
Basel III framework will likely lead to a further net increase in
risk-weighted assets (RWA) of around CHF 35 billion, before
taking into account mitigation actions. These estimates are
based on our current understanding of the relevant standards
and may change as a result of new or changed regulatory
interpretations, implementation of the Basel III standards into
national law, changes in business growth, market conditions and
other factors. We plan to update our guidance on CET1 ratios
when further details on the final implementation of the new
Basel III rules into national law are available.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
In addition, over the next three years, as a result of other
known regulatory changes and estimated business growth, we
estimate our RWA may increase by around CHF 40 billion and
our leverage ratio denominator (LRD) by around CHF 85 billion.
Actual increases may vary depending on growth opportunities,
market conditions and mitigation actions. As a consequence,
and based on the estimates above, we may build approximately
CHF 4 billion of additional fully applied CET1 capital over the
next three years, subject to market conditions, as well as RWA
and LRD development.
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 the “Our strategy” section of this report for more
information on our updated capital guidance
→ Refer to “Finalization of the Basel III capital framework” in the
“Regulatory and legal developments” section of this report for
more information on changes to our regulatory capital
requirements
→ 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
Capital planning and activities
Audited | We manage our balance sheet, RWA, LRD and TLAC ratio
levels within our internal limits and targets and on the basis of our
regulatory TLAC 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 entities, 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 earnings projections, which are reflected in our
capital plans.
The annual strategic planning process includes a capital-planning
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.
183
Risk, treasury and capital management
Capital management
Limits and targets are established at both the Group and
business division levels, and are submitted to the BoD for approval
at least annually. In the target-setting process, we take into account
the current and potential future TLAC 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.(cid:3) 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 TLAC
information on an ongoing basis, also considering developments in
capital regulations. In addition, capital planning and monitoring are
performed at the legal entity level for our significant subsidiaries
that are subject to prudential supervision and must meet capital and
other supervisory requirements.
Audited | In 2017, we continued to focus on meeting the Swiss
SRB fully applied capital requirements, which will go into effect
from 1 January 2020. Therefore, we executed a series of
transactions, including:
– the issuance of CHF 10.4 billion equivalent of TLAC-eligible
senior unsecured debt
– the issuance of CHF 0.4 billion of high-trigger loss-absorbing AT1
capital instruments related to DCCP awards granted for the
performance year 2017
– the call of CHF 2.7 billion equivalent of non-Basel III-compliant
tier 1 and tier 2 capital instruments.(cid:3)
As of 31 December 2017, these transactions contributed to our
fully applied TLAC ratio amounting to 33.0% of our RWA and
8.8% of our LRD compared with the respective minimum
requirements of 26.6%, excluding
countercyclical buffer
requirements, and 9.3%, which are applicable as of 1 January 2020.
→ Refer to “Equity attribution and return on attributed equity” 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
subsidiaries” in this section for more information
184
Swiss SRB total loss-absorbing capacity framework
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Disclosures in this section are provided for UBS Group AG on a
consolidated basis and focus on information in accordance with
the Basel III framework as applicable to Swiss systemically
relevant banks (SRBs).
Information in accordance with the Basel Committee on
Banking Supervision (BCBS) framework, including requirements
for global systemically important banks as of 31 December 2017
for UBS Group AG consolidated, is provided in the 31 December
2017 Pillar 3 report – Group and significant regulated
subsidiaries and sub-groups under “Pillar 3 disclosures” at
www.ubs.com/investors.
Capital and other regulatory information as of 31 December
2017 for UBS AG consolidated is provided in the UBS Group AG
and UBS AG Annual Report 2017 under “Annual reporting” at
www.ubs.com/investors.
Capital and other regulatory information as of 31 December
2017 for UBS AG standalone, UBS Switzerland AG standalone,
UBS Limited standalone and UBS Americas Holding LLC
consolidated is provided in the “Financial and regulatory key
figures for our significant regulated subsidiaries and sub-groups”
section of this report and in the 31 December 2017 Pillar 3
report – Group and significant regulated subsidiaries and sub-
groups under “Pillar 3 disclosures” at www.ubs.com/investors.
Regulatory framework
The Basel III framework came into effect in Switzerland on
1 January 2013 and is embedded in the Swiss Capital Adequacy
Ordinance (CAO). The CAO also includes the too big to fail
provisions applicable to Swiss SRBs, which became effective on
1 July 2016 and will be transitioned in until 1 January 2020.
Under the Swiss SRB framework, going and gone 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 restructuring measures.
Common equity tier 1 capital
The Basel III framework includes prudential filters for the
calculation 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, risk-weighted assets (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 2017, we deducted from our phase-in CET1 capital 80%
(in 2016: 60%) 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. As of 31 December 2017, we deducted 80% (in 2016:
60%) of our goodwill from phase-in CET1 capital and 20% (in
2016: 40%) of our goodwill from loss-absorbing AT1 capital.
Starting 1 January 2018, the aforementioned requirements are
fully phased in.
Capital and other instruments contributing to our total 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 2 capital instruments
– TLAC-eligible senior unsecured debt instruments
Under the fully applied Swiss SRB rules, going concern capital
includes CET1 and high-trigger loss-absorbing AT1 capital
instruments. Under the transitional rules for the Swiss SRB
framework, outstanding low-trigger loss-absorbing AT1 capital
instruments are available to meet the going concern capital
requirements until their first call date, even if the first call date is
after 31 December 2019. As of their first call date, these
instruments are eligible to meet the gone concern requirements.
Outstanding high- and low-trigger loss-absorbing tier 2
capital instruments are available to meet the going concern
capital requirements until the earlier of (i) their maturity or first
call date or (ii) 31 December 2019, and to meet gone concern
requirements thereafter. Outstanding low-trigger loss-absorbing
tier 2 capital instruments are subject to amortization starting five
years prior to their maturity, with the amortized portion
qualifying as gone concern loss-absorbing capacity.
Non-Basel III-compliant tier 2 capital instruments and TLAC-
eligible senior unsecured debt instruments are eligible to meet
gone concern requirements.
Instruments available to meet gone concern requirements are
eligible until one year before maturity, with a haircut of 50%
applied in the last year of eligibility.
→ Refer to “Bondholder information” at www.ubs.com/investors for
more information on the eligibility of capital and senior
unsecured debt instruments and on key features and terms and
conditions of capital instruments
185
Risk, treasury and capital management
Capital management
Total loss-absorbing capacity and leverage ratio requirements
Going concern capital requirements
Once the Swiss SRB requirements are fully implemented by
1 January 2020, total going concern minimum requirements for
all Swiss SRBs are 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
leverage ratio denominator (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 requirements applicable starting as of
1 January 2020 of 14.3% of RWA (excluding countercyclical
buffer requirements) and 5.0% of the 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 private sector credit
exposures in their jurisdictions. The requirement 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 residential property in Switzerland, applicable since
30 June 2014. Furthermore, since 1 July 2016, we are required
to apply additional
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 2017 was
immaterial.
countercyclical buffer
Gone concern loss-absorbing capacity requirements
As an internationally active Swiss SRB, UBS is also subject to
gone concern loss-absorbing capacity requirements. 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.
Under the Swiss SRB framework, banks are eligible for a
rebate 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. In addition, in
the event that certain low-trigger loss-absorbing 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. 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 5.72% for the
RWA-based requirement of 14.3% and 2% for the LRD-based
requirement of 5%. The amount of the rebate for improved
resolvability is assessed annually by FINMA. Based on actions we
completed up to December 2016 to improve resolvability,
FINMA granted a rebate on the gone concern requirement of
35% of the aforementioned maximum rebate in 2017, which
resulted in a reduction of 2.0 percentage points for the RWA-
based requirement and 0.7 percentage points for the LRD-based
requirement. This rebate will be phased in until 1 January 2020,
when UBS will be subject to a 12.3% RWA-based and 4.3%
LRD-based gone concern
requirement. As we complete
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 the LRD
upon completion of the phase-in period.
In this report, we refer to the RWA-based gone concern
capacity
concern
requirements as gone
requirements, and the RWA-based gone concern ratio is referred
to as the gone concern loss-absorbing capacity ratio.
loss-absorbing
Swiss SRB going and gone concern requirements – time series1
RRisk-weighted assets (%)
RRequirements
11.1.18
11.1.19
331.12.17
11.1.20
331.12.17
LLeverage ratio (%)
RRequirements
11.1.18
11.1.19
11.1.20
GGoing concern
Minimum capital
Buffer capital including applicable add-ons2
TTotal going concern
8.00
4.22
12.22
9.22
8.00
4.86
12.86
9.46
8.00
5.58
13.58
9.68
8.00
6.30
14.30
10.00
3.00
0.50
3.50
2.60
3.00
1.00
4.00
2.90
3.00
1.50
4.50
3.20
3.00
2.00
5.00
3.50
of which: common equity tier 1 capital 2
of which: maximum high-trigger loss-absorbing additional tier 1
capital
GGone concern
Base requirement including applicable add-ons and rebate
TTotal gone concern
TTotal loss-absorbing capacity
11 This table includes a rebate equal to 35% of the maximum rebate on the gone concern requirements, which was granted by FINMA due to improved resolvability. This resulted in a reduction of 2.0 percentage
points for the RWA-based requirement and 0.7 percentage points for the LRD-based requirement and will be phased in until 1 January 2020. This table does not include a rebate for the usage of low-trigger loss-
absorbing additional tier 1 or tier 2 capital instruments to meet the gone concern requirements. 2 Going concern capital ratio requirements as of 31 December 2017 include a countercyclical buffer requirement of
0.22%. Requirements for subsequent periods exclude the effect of the countercyclical buffer requirement, as potential future countercyclical buffer requirements are not yet known.
9.98
9.98
23.56
12.30
12.30
26.60
5.33
5.33
17.55
7.65
7.65
20.51
2.58
2.58
6.58
1.72
1.72
5.22
3.44
3.44
7.94
4.30
4.30
9.30
3.00
3.90
1.10
3.40
4.30
0.90
1.30
1.50
186
Swiss SRB going and gone concern requirements and information1
As of 31.12.17
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: low-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
TTotal going concern capital
Base gone concern loss-absorbing capacity,
including applicable add-ons and rebate
TTotal gone concern loss-absorbing capacity
TTotal loss-absorbing capacity
As of 31.12.17
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
SSwiss SRB, including transitional arrangements (phase-in)
RRequirement (%)
9.22
RRWA
AActual (%)
14.89
RRequirement
21,974
EEligible
35,494
RRequirement (%)
2.60
LLRD
AActual (%)
4.00
RRequirement
23,079
EEligible
35,494
3.00
6.82
7,152
16,254
0.90
1.83
7,989
16,254
2.88
0.46
0.18
3.30
21.71
11.87
11.87
33.58
6,857
1,087
435
7,874
51,748
28,300
28,300
80,048
29,126
12,711
12,711
41,837
12.224
5.336
5.33
17.55
0.77
0.12
0.05
0.89
5.83
3.19
3.19
9.02
6,857
1,087
435
7,874
51,748
28,300
28,300
80,048
31,067
15,267
15,267
46,335
3.505
1.726
1.72
5.22
SSwiss SRB as of 1.1.20 (fully applied)
RRequirement (%)
10.22
RRWA
AActual (%)
13.76
RRequirement
24,266
EEligible
32,671
RRequirement (%)
3.50
LLRD
AActual (%)
3.69
RRequirement
31,014
EEligible
32,671
4.30
3.89
10,212
9,240
1.50
1.04
13,292
9,240
2.89
6,857
0.77
6,857
1.00
17.65
2,383
41,911
0.27
4.73
2,383
41,911
5.008
14.527
34,478
15.32
15.32
32.97
12.309
12.30
26.82
TTotal going concern capital
Base gone concern loss-absorbing capacity,
including applicable add-ons and rebate
TTotal gone concern loss-absorbing capacity
TTotal loss-absorbing capacity
11 This table includes a rebate equal to 35% of the maximum rebate on the gone concern requirements, which was granted by FINMA. This resulted in a reduction of 2.0 percentage points for the RWA-based
requirement and 0.7 percentage points for the LRD-based requirement and will be phased in until 1 January 2020. This table does not include a rebate for the usage of low-trigger loss-absorbing additional tier 1 or
tier 2 capital instruments to meet the gone concern requirements. 2 Includes outstanding low-trigger loss-absorbing additional tier 1 (AT1) capital instruments, which are available under the transitional rules of
the Swiss SRB framework to meet the going concern requirements until their first call date, even if the first call date is after 31 December 2019. As of their first call date, these instruments are eligible to meet the
gone concern requirements. Low-trigger loss-absorbing AT1 capital was partly 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 are available under the transitional rules of the Swiss SRB framework to meet the going concern requirements until the earlier of (i) their maturity or first call date or (ii) 31 December
2019, and to meet gone concern requirements thereafter. Outstanding low-trigger loss-absorbing tier 2 capital instruments are subject to amortization starting five years prior to their maturity, with the amortized
portion qualifying as gone concern loss-absorbing capacity. Instruments available to meet gone concern requirements are eligible 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 4.22%, including the effect of countercyclical buffers of 0.22%. 5 Consists of a minimum leverage ratio
requirement of 3% and a buffer leverage ratio requirement of 0.5%. 6 Includes applicable add-ons of 0.36% for RWA and 0.13% for leverage ratio denominator and a rebate of 0.87% for RWA and 0.28% for
LRD. 7 Consists of a minimum capital requirement of 8% and a buffer capital requirement of 6.52%, including the effect of countercyclical buffers of 0.22% and applicable add-ons of 1.44%. 8 Consists of a
minimum leverage ratio requirement of 3% and a buffer leverage ratio requirement of 2%, including applicable add-ons of 0.5%. 9 Includes applicable add-ons of 1.44% for RWA and 0.5% for LRD and a rebate
of 2% for RWA and 0.7% for LRD.
36,392
36,392
78,303
36,392
36,392
78,303
29,207
29,207
63,685
38,103
38,103
82,409
4.309
4.30
9.30
4.11
4.11
8.84
44,306
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
187
Risk, treasury and capital management
Capital management
Total loss-absorbing capacity
Swiss SRB going and gone concern information
CHF million, except where indicated
331.12.17
31.12.16
331.12.17
31.12.16
SSwiss SRB, including
transitional arrangements
(phase-in)
SSwiss SRB as of 1.1.20
(fully applied)
35,494
6,857
1,0871
7,944
43,438
435
7,8742
8,309
51,748
0
0
3782
689
1,067
27,233
28,300
37,788
6,5121
01
6,512
44,299
891
10,402
11,293
55,593
642
642
698
698
16,890
18,229
32,671
6,857
2,383
9,240
41,911
30,693
6,809
2,342
9,151
39,844
41,911
39,844
0
0
218
8,252
689
9,159
27,233
36,392
642
642
679
10,402
698
11,779
16,890
29,311
80,048
73,822
78,303
69,154
238,394
887,635
225,412
874,925
237,494
886,116
222,677
870,470
21.7
14.9
11.9
33.6
24.7
16.8
8.1
32.7
17.6
13.8 5
15.3
33.0
17.9
13.8
13.2
31.1
Gone concern leverage ratio
Total loss-absorbing capacity leverage ratio
11 High-trigger loss-absorbing additional tier 1 (AT1) capital (31 December 2016: CHF 6,809 million) and low-trigger loss-absorbing AT1 capital (31 December 2017: CHF 2,383 million; 31 December 2016: CHF
2,342 million) were partly offset by required deductions for goodwill (31 December 2017: CHF 1,296 million; 31 December 2016: CHF 2,639 million). 2 Outstanding low-trigger loss-absorbing tier 2 capital
instruments are subject to amortization starting five years prior to their maturity, with the amortized portion qualifying as gone concern loss-absorbing capacity. 3 Instruments available to meet gone concern
requirements are eligible until one year before maturity, with a haircut of 50% applied in the last year of eligibility. 4 Non-Basel III-compliant tier 1 and tier 2 capital instruments qualify as gone concern
instruments. 5 Our post-stress CET1 capital ratio exceeded the 10% objective as of 31 December 2017.
5.8
4.0
3.2
9.0
6.4
4.3
2.1
8.4
4.7
3.7
4.1
8.8
4.6
3.5
3.4
7.9
Going concern capital
CCommon equity tier 1 capital
High-trigger loss-absorbing additional tier 1 capital
Low-trigger loss-absorbing additional tier 1 capital
TTotal loss-absorbing additional tier 1 capital
TTotal tier 1 capital
High-trigger loss-absorbing tier 2 capital
Low-trigger loss-absorbing tier 2 capital
TTotal tier 2 capital
TTotal going concern capital
Gone concern loss-absorbing capacity3
Non-Basel III-compliant tier 1 capital4
TTotal tier 1 capital
High-trigger loss-absorbing tier 2 capital
Low-trigger loss-absorbing tier 2 capital
Non-Basel III-compliant tier 2 capital4
TTotal tier 2 capital
TTLAC-eligible senior unsecured debt
TTotal gone concern loss-absorbing capacity
Total loss-absorbing capacity
TTotal loss-absorbing capacity
Risk-weighted assets / leverage ratio denominator
Risk-weighted assets
Leverage ratio denominator
Capital and loss-absorbing capacity ratios (%)
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 (%)
Going concern leverage ratio
of which: common equity tier 1 leverage ratio
188
Audited |
Reconciliation of IFRS equity to Swiss SRB common equity tier 1 capital
CHF million
TTotal IFRS equity
Equity attributable to non-controlling interests
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
Compensation-related components (not recognized in net profit)
Expected losses on advanced internal ratings-based portfolio less general provisions
Unrealized (gains) / losses from cash flow hedges, net of tax
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
TTotal common equity tier 1 capital
SSwiss SRB, including
transitional arrangements
(phase-in)
331.12.17
31.12.16
SSwiss SRB as of 1.1.20
(fully applied)
331.12.17
31.12.16
51,271
54,302
51,271
54,302
(57)
(682)
(4,637)
(5,042)
(489)
(741)
(5,183)
(3,959)
(214)
(241)
(57)
(5,797)
(857)
(6,479)
(214)
(682)
(8,403)
(1,835)
(6,599)
(241)
(1,620)
(1,589)
(1,620)
(1,589)
(634)
(351)
133
(193)
(59)
(44)
(356)
(972)
(294)
(262)
(68)
(129)
(634)
(351)
133
(193)
(59)
(44)
(356)
(972)
(294)
(262)
(68)
(129)
(2,438)
(2,250)
(2,438)
(2,250)
10
71
10
71
35,494
37,788
32,671
30,693
11 As of 31 December 2017, the phase-in deduction applied was 80%; as of 31 December 2016, the phase-in deduction applied was 60%. 2 Includes goodwill related to significant investments in financial
institutions of CHF 350 million (31 December 2016: CHF 342 million).
(cid:3)
Total loss-absorbing capacity and movement
Going concern capital and movement
Audited | Our CET1 capital mainly consists of share capital, share
premium, which primarily consists of additional paid-in capital
related to shares issued, and retained earnings. A detailed
reconciliation of IFRS equity to CET1 capital is provided in the
“Reconciliation of IFRS equity to Swiss SRB common equity tier 1
capital” table.
Loss-absorbing capacity and leverage ratios
Our fully applied CET1 capital ratio was 13.8%, unchanged from
31 December 2016, exceeding our 2017 target ratio of 13.0%,
reflecting a CHF 2.0 billion increase in CET1 capital and a
CHF 14.8 billion increase in risk-weighted assets (RWA). The net
write-down of deferred tax assets (DTAs) following a reduction
in the US federal corporate tax rate after the enactment of the
Tax Cuts and Jobs Act in the US during the fourth quarter of
2017 had a negligible effect on this ratio.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Our fully applied CET1 capital increased by CHF 2.0 billion to
CHF 32.7 billion as of 31 December 2017, mainly as a result of
operating profit before tax, partly offset by accruals for capital
returns to shareholders. Our loss-absorbing additional tier 1
capital
from
31 December 2016, as a CHF 0.4 billion increase related to
Deferred Contingent Capital Plan (DCCP) awards granted for the
performance year 2017 was offset by currency effects.(cid:3)
at CHF 9.2 billion, unchanged
remained
Gone concern loss-absorbing capacity and movement
Audited | Our fully applied total gone concern loss-absorbing
capacity increased by CHF 7.1 billion to CHF 36.4 billion as of
31 December 2017, including CHF 27.2 billion of TLAC-eligible
senior unsecured debt. (cid:3) This was primarily driven by the
issuance of CHF 10.4 billion TLAC-eligible senior unsecured
debt, partly offset by a CHF 3.3 billion decrease mainly resulting
from the call of a low-trigger tier 2 capital instrument equivalent
to CHF 2.0 billion, the call of a CHF 0.7 billion non-Basel III-
compliant tier 1 capital instrument and CHF 0.4 billion related to
the decrease in eligibility of certain DCCP awards due to the
shortening of the residual tenor.
Our
fully
applied CET1
increased
0.2 percentage points to 3.7% as of 31 December 2017,
reflecting the aforementioned increase in CET1 capital, partly
offset by a CHF 16 billion increase in the leverage ratio
denominator (LRD).
leverage
ratio
On a fully applied basis, our gone concern loss-absorbing
capacity ratio increased 2.1 percentage points to 15.3%,
primarily driven by the aforementioned issuance of TLAC-eligible
senior unsecured debt. Our gone concern leverage ratio on a
fully applied basis increased 0.7 percentage points to 4.1% due
to the aforementioned increase in the gone concern loss-
absorbing capacity, partly offset by the higher LRD.
→ Refer to the “Regulatory and legal developments” section of
this report for more information on the significant tax law
changes enacted in the US
189
Risk, treasury and capital management
Capital management
Swiss SRB total loss-absorbing capacity movement
CHF million
Going concern capital
CCommon equity tier 1 capital as of 31.12.16
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
Deferred tax assets recognized for tax loss carry-forwards
Deferred tax assets recognized for temporary differences
Foreign currency translation effects
Expected loss on advanced IRB portfolio less general provisions
Compensation-related capital and share premium components
Defined benefit plans
Own credit risk related to derivative liabilities
Consolidation scope
Accruals for proposed dividends to shareholders
Other
CCommon equity tier 1 capital as of 31.12.17
LLoss-absorbing additional tier 1 capital as of 31.12.16
Goodwill, additional phase-in effect
Issuance of high-trigger loss-absorbing additional tier 1 capital
Foreign currency translation and other effects
LLoss-absorbing additional tier 1 capital as of 31.12.17
TTier 2 capital as of 31.12.16
Call of a low-trigger loss-absorbing tier 2 capital instrument
Amortization due to shortening residual tenor
Amortization of Deferred Contingent Capital Plan (DCCP)
Foreign currency translation and other effects
TTier 2 capital as of 31.12.17
TTotal going concern capital as of 31.12.16
TTotal going concern capital as of 31.12.17
Gone concern loss-absorbing capacity
TTier 1 capital as of 31.12.16
Call of the non-Basel III-compliant tier 1 capital instrument
Foreign currency translation and other effects
TTier 1 capital as of 31.12.17
TTier 2 capital as of 31.12.16
Call of a low-trigger loss-absorbing tier 2 capital instrument
Amortized portion, which qualifies as gone concern loss-absorbing capacity
Decrease in eligibility due to shortening residual tenor (DCCP)
Foreign currency translation and other effects
TTier 2 capital as of 31.12.17
TTLAC-eligible senior unsecured debt as of 31.12.16
Issuance of TLAC-eligible senior unsecured debt instruments
Foreign currency translation and other effects
TTLAC-eligible senior unsecured debt as of 31.12.17
TTotal gone concern loss-absorbing capacity as of 31.12.16
TTotal gone concern loss-absorbing capacity as of 31.12.17
Total loss-absorbing capacity
TTotal loss-absorbing capacity as of 31.12.16
TTotal loss-absorbing capacity as of 31.12.17
190
SSwiss SRB, including
transitional arrangements
(phase-in)
SSwiss SRB as of 1.1.20
(fully applied)
37,788
5,268
(76)
(875)
(1,681)
(547)
(1,320)
(432)
(79)
(302)
(278)
(28)
263
101
85
(2,438)
45
35,494
6,512
1,320
383
(270)
7,944
11,293
(1,982)
(380)
(398)
(225)
8,309
55,593
51,748
642
(687)
45
0
698
380
(10)
1,067
16,890
10,377
(33)
27,233
18,229
28,300
73,822
80,048
30,693
5,268
(76)
(875)
100
(186)
(278)
(28)
263
101
85
(2,438)
42
32,671
9,151
383
(294)
9,240
39,844
41,911
642
(687)
45
0
11,779
(1,982)
(446)
(193)
9,159
16,890
10,377
(33)
27,233
29,311
36,392
69,154
78,303
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
are denominated in US dollars, euros, British pounds and other
foreign currencies. In order to hedge the CET1 capital ratio,
CET1 capital needs to have foreign currency exposure, leading to
currency sensitivity of CET1 capital. As a consequence, it is not
possible to simultaneously fully hedge the capital and the capital
ratio. As the proportion of RWA denominated in foreign
currencies outweighs the capital in these currencies, a significant
appreciation of the Swiss franc against these currencies could
benefit our capital ratios, while a significant depreciation of the
Swiss franc against these currencies could adversely affect our
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 balance 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 appreciation or depreciation of 10% in the
value of the Swiss franc against other currencies.
Sensitivity to currency movements
Risk-weighted assets
We estimate that a 10% depreciation of the Swiss franc against
other currencies would have increased our fully applied RWA by
fully applied CET1 capital by
CHF 11 billion and our
CHF 1.2 billion as of 31 December 2017 (31 December 2016:
CHF 10 billion and CHF 1.2 billion, respectively) and reduced our
fully applied CET1 capital
ratio by 11 basis points
(31 December 2016: 7 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 10 billion and our
fully applied CET1 capital by
CHF 1.1 billion
(31 December 2016: CHF 9 billion and
CHF 1.1 billion, respectively) and increased our fully applied
CET1 capital ratio by 11 basis points (31 December 2016: 7 basis
points).
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Leverage ratio denominator
is also sensitive to foreign exchange
leverage ratio
Our
movements due to the currency mix of our capital and LRD.
When adjusting the currency mix in capital, potential effects on
the going concern leverage ratio are taken into account and the
sensitivity of the going concern 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
LRD by CHF 68 billion (31 December 2016: CHF 64 billion) and
reduced our fully applied Swiss SRB going concern leverage ratio
by 12 basis points (31 December 2016: 9 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 61 billion (31 December 2016: CHF 58
billion) and increased our fully applied Swiss SRB going concern
leverage ratio by 12 basis points (31 December 2016: 10 basis
points).
The aforementioned 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” in the “Consolidated
financial statements” section of this report. 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
level over a 12-month horizon. The
99.9% confidence
methodology
industry
into consideration UBS and
takes
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 standalone basis, we estimate the loss in capital that we
could incur over a 12-month period as a result of our risks
at
associated with
CHF 4.8 billion as of 31 December 2017 (31 December 2016:
CHF 4.8 billion). This estimate is not related to and 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.
these operational
categories
risk
→ 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
191
Risk, treasury and capital management
Capital management
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
requirements. Regulatory capital components and capital ratios
of our significant regulated subsidiaries determined under the
regulatory framework of each subsidiary’s home jurisdiction are
provided in the “Financial and regulatory key figures for our
significant regulated subsidiaries and sub-groups” section of this
report. 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.
→ Refer to the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on capital and other regulatory information of our subsidiaries
and sub-groups
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
Switzerland from UBS AG to UBS Switzerland AG, UBS AG and
UBS Switzerland 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 Banking 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. As of 31 December 2017, the joint liability of UBS AG and
UBS Switzerland AG amounted to less than CHF 1 billion and
CHF 69 billion, respectively.
192
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.
On a fully applied basis, any net defined benefit pension asset
recognized in accordance with IAS 19 is fully deducted from
common equity tier 1 (CET1) capital. On a phase-in basis, the
deduction 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 a result of these differences, our phase-in RWA were
CHF 0.9 billion higher than our fully applied RWA as of
31 December 2017 (31 December 2016: CHF 2.7 billion higher),
entirely attributable to non-counterparty-related risk RWA.
RWA development in 2017
As of 31 December 2017, fully applied RWA increased by
CHF 14.8 billion
a
CHF 15.6 billion increase in credit and counterparty credit risk
and a CHF 1.6 billion increase in operational risk, partly offset by
a CHF 3.2 billion decrease in market risk.
to CHF 237.5
billion,
driven
by
The
total RWA
increase was primarily driven by a
CHF 17.4 billion increase from methodology, policy changes and
model updates, mainly relating to credit and counterparty credit
increased by CHF 0.4 billion as
risk. RWA also slightly
CHF 2.2 billion higher
for credit and
counterparty credit risk were partly offset by CHF 1.8 billion
lower regulatory add-ons for market risk.
regulatory add-ons
These increases were partly offset by a CHF 2.1 billion
decrease in asset size and other movements, primarily in credit
and counterparty credit risk and in market risk, as well as
CHF 1.0 billion lower RWA due to currency effects.
On a phase-in basis, RWA increased by CHF 13.0 billion to
CHF 238.4 billion as of 31 December 2017.
→ Refer to the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on RWA movements and definitions of RWA movement key
drivers
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Movement in fully applied risk-weighted assets by key driver
CHF billion
Credit and counterparty credit risk2
Non-counterparty-related risk
Market risk
Operational risk
TTotal
RWA as of
31.12.16
112.8
16.6
15.5
77.8
222.7
Currency
effects
(0.7)
(0.2)
(1.0)
Methodology,
policy changes
and model
updates
16.5
Regulatory
add-ons
2.2
Asset size
and other1
(2.3)
RRWA as of
31.12.17
128.4
(0.7)
1.6
17.4
(1.8)
0.4
1.0
(0.8)
0.0
(2.1)
17.4
12.3
79.4
237.5
11 Includes the Pillar 3 categories “Asset size,” “Credit quality of counterparties,” “Acquisitions and disposals” and “Other.” Refer to the 31 December 2017 Pillar 3 report – Group and significant regulated
subsidiaries and sub-groups under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 2 Includes settlement risk, credit valuation adjustments, equity exposures in the banking book and
securitization exposures in the banking book.
193
Risk, treasury and capital management
Capital management
Credit and counterparty credit risk
increased by
Credit and counterparty credit
CHF 15.6 billion to CHF 128.4 billion as of 31 December 2017.
This increase was primarily driven by a CHF 16.4 billion increase
risk RWA
resulting from model updates and a CHF 2.2 billion increase
from regulatory add-ons, partly offset by a CHF 1.0 billion
decrease in asset quality and a CHF 0.8 billion decrease in asset
size as well as currency effects and other changes.
Movement in fully applied credit and counterparty credit risk RWA by key driver1
CHF billion
TTotal credit and counterparty credit risk RWA as of
31.12.16
Asset size
Asset quality
Model updates
Methodology and policy changes
Regulatory add-ons
Acquisitions and disposals
Foreign exchange movements
Other
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
CC –
Group ALM
12.5
1.4
(0.4)
1.8
0.0
0.0
0.0
0.1
0.0
9.1
0.6
0.1
1.2
0.0
0.0
0.0
(0.4)
(0.3)
37.7
(1.6)
1.4
6.3
0.0
(0.2)
0.0
(0.1)
0.6
1.6
0.1
0.0
0.0
(0.2)
0.0
0.0
0.0
0.0
37.0
(0.2)
(1.4)
6.1
0.0
2.4
0.0
(0.3)
(0.6)
1.4
0.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
7.3
(0.4)
0.0
0.9
0.3
0.0
0.0
0.0
(0.1)
CC – Non-
core and
Legacy
Portfolio
6.2
(1.0)
(0.8)
0.2
0.0
0.0
0.0
(0.1)
(0.1)
GGroup
112.8
(0.8)
(1.0)
16.4
0.1
2.2
0.0
(0.7)
(0.5)
TTotal movement
TTotal credit and counterparty credit risk RWA as of
31.12.17
11 Refer to the 31 December 2017 Pillar 3 report – Group and significant regulated subsidiaries and sub-groups under “Pillar 3 disclosures” at www.ubs.com/investors for the definitions of credit and counterparty
credit risk RWA movement categories.
128.4
(1.7)
(0.1)
44.0
15.4
10.4
42.9
15.6
1.8
6.3
0.4
4.5
8.0
0.7
2.9
1.3
1.5
5.9
Model updates
The increase in credit and counterparty credit risk RWA from
model updates of CHF 16.4 billion was driven by an increase of
CHF 6.6 billion resulting from the implementation of changes to
the probability of default (PD) and loss given default (LGD)
parameters for income-producing real estate exposures and
Lombard exposures, of which CHF 4.3 billion was in Personal &
Corporate Banking, CHF 1.7 billion in Wealth Management and
CHF 0.6 billion
in Wealth Management Americas. A
CHF 5.4 billion increase primarily resulted from changes to LGD
parameters for exposures to multinationals, sovereigns and
financial institutions, of which CHF 3.6 billion was in the
Investment Bank, CHF 0.9 billion in Corporate Center – Group
Asset and Liability Management (Group ALM) and CHF 0.7
billion in Personal & Corporate Banking. A further increase of
CHF 2.0 billion was driven by the implementation of revised
credit conversion factors (CCFs) for letters of credit, trade
finance-related guarantees, deferred payments and construction
loans in Personal & Corporate Banking of CHF 1.2 billion, as well
as for unutilized Lombard loan facilities of CHF 0.6 billion in
Wealth Management Americas. An increase of CHF 2.5 billion
was due to higher RWA for derivative exposures, driven by an
update of the stress period used for the Basel III exposure-at-
default calculation, mainly in the Investment Bank.
We anticipate that methodology changes and model updates,
including adjustments to probability of default and loss given
default factors, CCFs, the revised Basel
III securitization
framework, and scheduled increases in the FINMA-required
194
multiplier for Investment Bank exposures to corporates will
increase credit risk RWA by around CHF 12 billion in 2018, of
which around CHF 4 billion in the first quarter of 2018. The
extent and timing of RWA increases may vary as methodology
changes and model updates are completed and receive
regulatory approval, and as regulatory multipliers are adjusted.
In addition, changes in composition of the relevant portfolios
and other factors will affect our RWA.
→ Refer to “Credit risk models” in the “Risk management and
control” section of this report for more information on model
updates
from
increase
Regulatory add-ons
The net RWA
regulatory add-ons of
CHF 2.2 billion was mainly driven by an increase in the internal
ratings-based (IRB) multiplier on Investment Bank exposures to
corporates of CHF 2.9 billion, as well as an increase in the IRB
multiplier on Swiss residential mortgages of CHF 1.4 billion in
Personal & Corporate Banking and CHF 0.4 billion in Wealth
Management. These increases were partly offset by decreases of
CHF 1.8 billion in Personal & Corporate Banking, CHF 0.4 billion
in Wealth Management and CHF 0.5 billion in the Investment
Bank, following FINMA approval of the aforementioned updates
to PD and LGD parameters.
→ Refer to the “Risk management and control” section of this
report and the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on credit and counterparty credit risk developments
risk RWA decreased by CHF 3.2 billion
Market risk
to
Market
CHF 12.3 billion as of 31 December 2017, mainly driven by
CHF 1.8 billion lower regulatory add-ons, a CHF 0.8 billion
decrease due to asset size and other movements and a
CHF 0.7 billion decrease due to methodology, policy changes
and model updates.
The CHF 1.8 billion lower RWA from regulatory add-ons
mainly reflected a lower regulatory value-at-risk (VaR) multiplier,
which decreased from 3.65 to 3.0 as a result of fewer
backtesting exceptions, partly offset by changes to the risks-not-
in-VaR (RniV) framework.
The CHF 0.8 billion decrease
in asset size and other
movements was primarily driven by lower average VaR and
stressed VaR levels observed during the year, primarily in the
Investment Bank’s Equities business.
The CHF 0.7 billion decrease in methodology, policy changes
and model updates resulted from the effects of an enhancement
to VaR model parameters. We will continue to implement the
changes to the RniV framework over the first three quarters of
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
2018, with RWA expected to increase by around CHF 3 billion in
total, of which around CHF 1 billion in the first quarter. Our
estimates of future RWA increases do not reflect mitigating
actions that we may take or any changes in the trading book
composition or risk levels.
→ Refer to the “Risk management and control” section of this
report and the 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on market risk developments
risk RWA
Operational risk
Operational
to
CHF 79.4 billion as of 31 December 2017, driven by changes to
the advanced measurement approach (AMA) model used for the
calculation of operational risk capital. These changes were
approved by FINMA in the first quarter of 2017.
increased by CHF 1.6 billion
→ Refer to “Operational risk” in the “Risk management and
control” section of this report for more information on the AMA
model
195
Risk, treasury and capital management
Capital management
Risk-weighted assets by business division and Corporate Center unit
CHF billion
CCredit and counterparty credit risk1
Advanced IRB approach 2
Standardized approach 3
NNon-counterparty-related risk4
MMarket risk
OOperational risk
TTotal RWA, phase-in
Phase-out items6
TTotal RWA, fully applied7
RWA held by CC – Group ALM on behalf of
business divisions and other CC units8
RRWA after allocation from CC – Group ALM to
business divisions and other CC units
CCredit and counterparty credit risk1
Advanced IRB approach 2
Standardized approach 3
NNon-counterparty-related risk4
MMarket risk
OOperational risk
TTotal RWA, phase-in
Phase-out items6
TTotal RWA, fully applied
CCredit and counterparty credit risk1
Advanced IRB approach 2
Standardized approach 3
NNon-counterparty-related risk4
MMarket risk
OOperational risk
TTotal RWA, phase-in
Phase-out items6
TTotal RWA, fully applied
WWealth
Management
WWealth
Management
Americas
PPersonal &
Corporate
Banking
AAsset
Manage-
ment
IInvestment
Bank
CCC –
Services
331.12.17
1.5
0.8
0.6
0.1
0.0
2.4
3.9
0.0
3.9
0.1
44.0
CCC –
Group
ALM
8.0
6.3
1.8
0.0
0.7
2.5
11.2
0.0
11.2
CCC – Non-
core and
Legacy
Portfolio
TTotal
RWA
4.5
128.4
3.4 108.9
1.1
19.6
0.0
1.3
10.3
16.1
0.0
16.1
18.3
12.3
79.4
238.4
(0.9)
237.5
42.9
40.2
2.8
0.0
11.7
19.8
74.5
0.0
74.5
1.8
0.4
1.4
18.0
(3.1)5
13.3
30.1
(0.9)
29.2
0.5
0.0
(3.9)
0.0
0.0
775.0
229.2
77.3
116.1
2237.5
331.12.16
1.6
0.9
0.6
0.0
0.0
2.3
3.9
0.0
3.9
37.0
33.7
3.3
0.0
14.0
19.5
70.4
0.0
70.4
331.12.17 vs 31.12.16
(0.1)
(0.1)
0.0
0.1
0.0
0.1
0.0
0.0
0.0
5.9
6.5
(0.5)
0.0
(2.3)
0.3
4.1
0.0
4.1
1.4
0.2
1.2
19.1
(3.2)5
13.1
30.3
(2.7)
27.6
0.4
0.2
0.2
(1.1)
0.1
0.2
(0.2)
1.8
1.6
7.3
4.8
2.6
0.0
0.7
2.5
10.6
0.0
10.6
0.7
1.5
(0.8)
0.0
0.0
0.0
0.6
0.0
0.6
6.2
5.0
1.2
0.0
2.6
10.1
18.9
0.0
18.9
112.8
93.4
19.4
19.3
15.5
77.8
225.4
(2.7)
222.7
(1.7)
15.6
(1.6)
15.5
(0.1)
0.0
(1.3)
0.2
(2.8)
0.0
(2.8)
0.2
(1.0)
(3.2)
1.6
13.0
1.8
14.8
15.4
11.0
4.4
0.0
0.0
13.5
29.0
0.0
29.0
1.2
330.2
12.5
9.0
3.5
0.1
0.0
13.2
25.8
0.0
25.8
2.9
2.0
0.9
(0.1)
0.0
0.3
3.2
0.0
3.2
10.4
5.2
5.2
0.0
1.6
13.5
25.5
0.0
25.5
1.0
226.5
9.1
3.7
5.4
0.0
1.4
13.2
23.8
0.0
23.8
1.3
1.5
(0.2)
0.0
0.2
0.3
1.7
0.0
1.7
44.0
41.6
2.4
0.1
0.0
4.0
48.0
0.0
48.0
1.0
449.1
37.7
36.1
1.6
0.1
0.0
3.9
41.6
0.0
41.6
6.3
5.5
0.8
0.0
0.0
0.1
6.4
0.0
6.4
11 Includes settlement risk, credit valuation adjustments, equity exposures in the banking book and securitization exposures in the banking book. 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 includes deferred tax assets recognized for temporary differences (31 December 2017:
CHF 9.3 billion; 31 December 2016: CHF 10.9 billion), property, equipment and software (31 December 2017: CHF 8.8 billion; 31 December 2016: CHF 8.3 billion) and other items (31 December 2017: CHF 0.2
billion; 31 December 2016: 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. 7 Represents RWA held by the respective business division or Corporate Center unit. 8 Represents RWA held by Corporate Center – Group ALM that are directly
associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017,
these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio
requirement of 110%. Refer to “Equity attribution and return on attributed equity“ in this section for more information.
196
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Leverage ratio denominator
The fully applied leverage ratio denominator (LRD) increased by CHF 16 billion to CHF 886 billion as of 31 December 2017, primarily
driven by asset size and other increases of CHF 20 billion, partly offset by CHF 3 billion incremental netting and collateral mitigation
and currency effects of CHF 1 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
LLRD as of
31.12.16
638.1
107.6
104.7
37.7
(17.7)
Currency
effects
(2.4)
1.3
0.0
(0.5)
0.5
Incremental
netting and
collateral
mitigation
(2.2)
(0.8)
Asset size
and
other
11.3
(8.6)
20.2
(6.1)
3.1
LLRD as of
31.12.17
646.9
98.1
124.2
31.1
(14.1)
TTotal
11 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.
870.5
886.1
(3.0)
(1.1)
19.8
Securities
Currency effects mainly reflect the weakening of the US dollar
against the Swiss franc. The LRD movements described below
exclude currency effects.
financing
increased by
transactions
CHF 20 billion due to asset size and other movements, primarily
resulting from the rebalancing of our high-quality liquid assets
(HQLA) portfolio in Corporate Center – Group Asset and Liability
Management
(Group ALM) of CHF 16 billion, as well as
CHF 3 billion client-driven increases in the Investment Bank,
mainly related to higher prime brokerage receivables.
(SFTs)
On-balance sheet exposures (excluding derivative exposures
and SFTs) increased by CHF 11 billion. This was mainly driven by
a CHF 33 billion increase in trading portfolio assets, primarily in
our Investment Bank’s Equities business, mainly reflecting a
client-driven increase and higher equity markets. An increase in
lending by CHF 14 billion primarily reflects higher Lombard
lending balances in Wealth Management. These increases were
partly offset by a CHF 20 billion decrease in cash and balances
with central banks primarily in Corporate Center – Group ALM,
mainly due to higher funding consumption by the business
divisions, partly offset by net issuances of short-term and long-
term debt. Financial assets designated at fair value, available for
sale and held to maturity decreased by CHF 12 billion, mainly
resulting from the aforementioned rebalancing within our HQLA
portfolio held by Corporate Center – Group ALM, partly offset
by a CHF 7 billion client-driven increase in Corporate Client
Solutions within the Investment Bank. A CHF 2 billion decrease
in Corporate Center – Services mainly resulted from a net write-
down in the Group’s deferred tax assets (DTAs) following a
reduction in the US federal corporate tax rate after the
enactment of the Tax Cuts and Jobs Act in the US during the
fourth quarter of 2017, which was fully offset by lower
deduction items for DTAs.
resulting
Derivative exposures decreased by CHF 9 billion due to asset
size and other movements, primarily
from a
CHF 6 billion reduction in our Corporate Center – Non-core and
Legacy Portfolio, primarily reflecting trade terminations and
maturities, mainly related to interest rate and foreign exchange
contracts, and a CHF 3 billion net decrease in the Investment
Bank, mainly related to foreign exchange contracts in our
Foreign Exchange, Rates and Credit business, primarily reflecting
net maturities, partly offset by fair value changes resulting from
currency market movements. A decrease of CHF 2 billion related
to incremental netting and collateral mitigation benefits mainly
reflected improved netting of eligible cash variation margin.
Off-balance sheet items decreased by CHF 6 billion, primarily
due to terminations of committed credit facilities in the
Investment Bank’s Corporate Client Solutions business.
→ Refer to “Balance sheet, liquidity and funding management” in
the “Treasury management” section of this report for more
information on balance sheet movements
197
Risk, treasury and capital management
Capital management
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
OOn-balance sheet exposures
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
LLRD, phase-in
Additional items deducted from Swiss SRB tier 1 capital
LLRD, fully applied3
LRD held by CC – Group ALM on behalf of business
divisions and other CC units4
LLRD after allocation from CC – Group ALM to business
divisions and other CC units
Total IFRS assets
Difference in scope of consolidation1
Less: derivative exposures and SFTs2
OOn-balance sheet exposures
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
LLRD, phase-in
Additional items deducted from Swiss SRB tier 1 capital
LLRD, fully applied
WWealth
Management
WWealth
Management
Americas
PPersonal &
Corporate
Banking
AAsset
Management
IInvestment
Bank
CCC –
Services
123.0
0.0
(2.6)
120.4
2.9
1.2
3.6
67.1
(0.2)
(2.1)
64.8
5.2
1.0
0.8
135.6
0.0
(1.2)
134.4
1.8
0.0
11.9
128.0
71.8
148.0
128.0
71.8
148.0
45.9
1173.9
115.5
(5.1)
(2.0)
108.4
3.5
0.0
3.6
16.2
888.0
65.9
(0.2)
(2.0)
63.7
2.5
1.0
0.9
38.9
1186.9
139.9
0.0
(2.2)
137.7
2.7
0.0
11.9
115.5
68.1
152.2
115.5
68.1
152.2
CCC – Non-
core and
Legacy
Portfolio
CCC –
Group
ALM
245.7
0.1
(78.1)
167.8
5.8
76.1
0.1
46.2
(0.1)
(41.9)
4.2
9.4
1.3
0.0
249.9
14.9
249.9
14.9
TTotal
915.6
(12.1)
(256.6)
646.9
98.1
124.2
31.1
(12.6)
887.6
(1.5)
886.1
262.9
(0.3)
(130.6)
132.1
73.0
44.6
14.5
264.1
264.1
20.9
(0.1)
0.0
20.7
0.0
0.0
0.1
(12.6)
8.2
(1.5)
6.7
331.12.17
14.3
(11.6)
0.0
2.7
0.0
0.0
0.0
2.7
2.7
2.1
44.8
19.4
0.1
(124.4)
1.7
0.0
2283.6
66.8
1125.5
116.6
8886.1
31.12.16
12.0
(9.3)
0.0
2.7
0.0
0.0
0.0
2.7
2.7
242.3
(0.7)
(151.4)
90.2
77.5
42.9
20.6
231.2
231.2
31.12.17 vs 31.12.16
23.7
(0.2)
0.0
23.4
0.0
0.0
0.1
(13.2)
10.3
(4.5)
5.8
267.2
0.2
(60.6)
206.7
6.3
59.1
0.3
68.5
0.0
(63.3)
5.2
15.2
1.8
0.3
272.4
22.4
272.4
22.4
935.0
(15.5)
(281.4)
638.1
107.6
104.7
37.7
(13.2)
874.9
(4.5)
870.5
1.2
0.0
(0.1)
1.1
2.7
0.0
(0.1)
7.5
5.1
(0.6)
12.0
(0.6)
1.2
0.0
Total IFRS assets
Difference in scope of consolidation1
Less: derivative exposures and SFTs2
OOn-balance sheet exposures
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
LLRD, phase-in
Additional items deducted from Swiss SRB tier 1 capital
LLRD, fully applied
11 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 Represents LRD held by the respective business division or Corporate Center
unit. 4 Represents LRD held by Corporate Center – Group ALM that is directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of
attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality
liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity“ in this section for more information.
(19.4)
3.4
24.8
8.8
(9.5)
19.5
(6.6)
0.6
12.7
3.0
15.6
(2.8)
0.1
0.0
(2.7)
0.0
0.0
0.0
0.6
(2.1)
3.0
0.9
(21.5)
(0.1)
(17.5)
(38.9)
(0.5)
17.0
(0.2)
(22.3)
(0.1)
21.4
(1.0)
(5.8)
(0.5)
(0.3)
20.6
0.4
20.8
41.9
(4.5)
1.7
(6.1)
(4.3)
0.0
1.0
(3.3)
(0.9)
0.0
0.0
2.3
(2.3)
0.0
0.0
0.0
0.0
0.0
(22.5)
(22.5)
(7.5)
(7.5)
(4.2)
(4.2)
32.9
12.5
32.9
12.5
3.7
0.0
3.7
0.0
198
Equity attribution and return on attributed equity
Average attributed equity to business divisions and Corporate
Center increased by CHF 4.6 billion to CHF 52.8 billion in 2017,
primarily driven by the changes to the equity attribution
framework described below.
Change in equity attribution framework in 2017
In the first quarter of 2017, we implemented an updated equity
attribution framework, which reflects the revision of the too big
to fail provisions applicable to Swiss systemically relevant banks.
Effective 1 January 2017, the weighting used for the
attribution of tangible equity was changed from an equal driver
weighting of one-third each for average fully applied risk-
weighted assets (RWA), average fully applied leverage ratio
denominator (LRD) and risk-based capital (RBC) to 50% each for
RWA and LRD. Average fully applied RWA and LRD continue to
be converted to their common equity tier 1 (CET1) capital
equivalents based on capital ratios of 11% and 3.75%,
respectively, both of which exceed
regulatory
requirements. 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.
future
Under the revised framework, LRD and RWA held by
Corporate Center – Group Asset and Liability Management
(Group ALM) directly associated with activities that Corporate
Center – Group ALM manages centrally on behalf of the
business divisions and other Corporate Center units are allocated
to those business divisions and other Corporate Center units for
the purpose of equity attribution. This allocation 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%. Corporate Center – 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.
In addition to tangible equity, we continue to allocate equity
to our businesses to support goodwill and intangible assets.
However, following the aforementioned change in the first
quarter of 2017, we now also attribute to the business divisions
equity for goodwill and intangible assets resulting from the
acquisition of PaineWebber that until 1 January 2017 was held
centrally in Group items within Corporate Center – Services
under the previous framework.
We attribute all Basel III capital deduction items to Group
items. These deduction items include deferred tax assets, which
constitute the largest component of Group items, unrealized
gains from cash flow hedges and compensation- and own
shares-related components. Prior to 2017, Group items only
included an amount of attributed equity for certain capital
deduction items. The total amount of attributed equity now
equals average shareholders’ equity.
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
199
Risk, treasury and capital management
Capital management
Average attributed equity and attributed tangible equity
CHF billion
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center
of which: CC – Services
of which: Group items
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
AAverage equity attributed to business divisions and Corporate Center
Difference
Total attributed equity
For the year ended
Attributed tangible equity1,2
For the year ended
331.12.17
6.2
Prior framework
31.12.16
3.5
31.12.15
3.5
6.6
6.1
1.7
9.3
22.9
18.9
17.2
2.7
1.3
52.8
0.0
2.6
4.1
1.4
7.7
29.1
22.8
21.4
4.3
2.1
48.2
5.7
2.5
3.9
1.6
7.3
25.8
19.6
18.2
3.3
2.9
44.6
7.8
331.12.17
4.8
3.0
6.1
0.3
9.3
22.9
18.9
17.2
2.7
1.3
46.4
0.0
AAverage equity attributable to shareholders
11 Attributed tangible equity equals attributed equity less goodwill and intangible assets. 2 Attributed tangible equity is shown for the period for which Return on attributed tangible equity is available. This is a new
measure introduced in 2017, accordingly no comparative period information is available.
552.8
446.4
53.9
52.4
Return on (attributed) equity and return on (attributed) tangible equity1
In %
Reported
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
UBS Group3
Adjusted4
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Return on (attributed) equity
For the year ended
Prior framework
Return on
(attributed) tangible equity2
For the year ended
31.12.17
31.12.16
31.12.15
31.12.17
37.1
18.3
25.8
34.0
13.4
2.0
44.6
20.1
27.5
30.9
56.1
43.4
43.2
32.3
13.1
5.9
69.0
48.5
43.0
39.4
77.4
29.0
41.9
36.5
25.9
11.8
81.4
33.7
42.8
38.1
47.7
41.6
25.8
184.6
13.6
2.4
57.3
45.4
27.5
167.7
Investment Bank
UBS Group3
1 Return on attributed equity and return on attributed tangible equity shown for the business divisions. Return on equity attributable to shareholders and return on tangible equity shown for the UBS Group. Return
on attributed equity and return on attributed tangible equity for Corporate Center are not shown, as they are not meaningful. 2 This is a new measure introduced in 2017, accordingly no comparative period
information is available. 3 Returns for UBS Group are calculated on a post-tax basis, whereas the returns for the business divisions are calculated on a pre-tax basis. 4 Adjusted results are non-GAAP financial
measures as defined by SEC regulations.
16.0
16.3
31.3
11.8
19.6
3.4
4.0
7.8
200
UBS shares
UBS Group AG shares
Audited | As of 31 December 2017, IFRS equity attributable to
shareholders amounted to CHF 51,214 million, represented by
3,853,096,603 shares
increased by
issued. Shares
2,330,214 shares in 2017 due to 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)
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
for
other classes of shares and no preferential
shareholders. (cid:3)
rights
→ Refer to the “Corporate governance” section of this report for
more information on UBS shares
As of or for the year ended
331.12.17
31.12.16
% change from
31.12.16
3,853,096,603
132,301,550
3,720,795,053
3,850,766,389
138,441,772
3,712,324,617
0.28
0.27
51,214
6,398
44,816
13.76
12.04
17.94
0.86
0.84
53,621
6,556
47,065
14.44
12.68
15.95
0
(4)
0
(67)
(68)
(4)
(2)
(5)
(5)
(5)
12
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
Market capitalization (CHF million)2
11 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 as total shares
issued multiplied by the share price at the end of the period.
69,125
61,420
13
201
Risk, treasury and capital management
Capital management
Holding of UBS Group AG shares
Group Treasury holds UBS Group AG shares to hedge future
share delivery obligations related to employee share-based
compensation awards. In addition, the Investment Bank holds a
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
instruments. As of 31 December 2017, we held a total of
132,301,550 treasury shares (31 December 2016: 138,441,772),
or 3.4% (31 December 2016: 3.6%) of shares issued.
Share delivery obligations related to employee share-based
compensation awards
totaled 166 million shares as of
31 December 2017 (31 December 2016: 166 million). 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 exercise or vesting.
However, share delivery obligations related to certain options
and stock appreciation rights can also be satisfied by shares
issued out of conditional capital. As of 31 December 2017, the
number of UBS Group AG shares that could have been issued
out of conditional capital for this purpose was 128 million
(31 December 2016: 130 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 2017
February 2017
March 2017
April 2017
May 2017
June 2017
July 2017
August 2017
September 2017
October 2017
November 2017
December 2017
Treasury shares purchased
Number of shares
Average price in CHF
Number of shares (cumulative)
Average price in CHF
34,000,000
15.99
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
34,000,000
15.99
15.99
15.99
15.99
15.99
15.99
15.99
15.99
15.99
15.99
11 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. UBS’s pension and other post-employment
benefit funds purchased 904,558 UBS Group AG shares during the year and held 16,370,040 UBS Group AG shares as of 31 December 2017.
For the year ended
31.12.17
31.12.16
31.12.15
3,084,804
3,761,294
2,870,766
12,290
146,902
585
14,808
160,887
638
11,437
102,069
405
Trading volumes
1,000 shares
SIX Swiss Exchange total
SIX Swiss Exchange daily average
New York Stock Exchange total
New York Stock Exchange daily average
Source: Reuters
202
t
n
e
m
e
g
a
n
a
m
l
a
t
i
p
a
c
d
n
a
y
r
u
s
a
e
r
t
,
k
s
i
R
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
transferred across applicable borders without the need for
conversion, with identical shares traded on different stock
exchanges in different currencies.
During 2017, the average daily trading volume of UBS Group
AG shares was 12.3 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
market-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 trading, 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.
Ticker symbols UBS Group AG
Security identification codes
TTrading exchange
SIX Swiss Exchange
New York Stock Exchange
SSIX/NYSE
UBSG
UBS
BBloomberg
UBSG SW
UBS UN
RReuters
UBSG.S
UBS.N
ISIN
Valoren
CUSIP
CCH0244767585
224 476 758
CCINS H42097 10 7
Stock exchange prices1
SIX Swiss Exchange
New York Stock Exchange
High (CHF)
Low (CHF)
Period end (CHF)
High (USD)
Low (USD)
Period end (USD)
2018
February
January
2017
Fourth quarter 2017
December
November
October
Third quarter 2017
September
August
July
Second quarter 2017
First quarter 2017
2016
Fourth quarter 2016
Third quarter 2016
Second quarter 2016
First quarter 2016
2015
2014
2013
19.20
19.77
18.24
18.24
18.24
17.18
17.60
17.42
16.60
17.11
17.42
17.49
17.49
19.32
17.73
14.53
16.85
19.32
22.57
19.10
19.60
17.09
18.04
15.11
16.46
16.78
16.47
16.46
15.36
15.36
15.57
16.32
15.13
15.11
11.58
12.97
11.58
12.24
13.51
13.58
13.95
14.09
18.07
18.90
17.94
17.94
17.94
16.99
16.98
16.55
16.55
15.80
16.82
16.24
16.03
15.95
15.95
13.23
12.57
15.49
19.52
17.09
16.92
20.69
20.89
18.47
18.47
18.47
17.39
17.47
18.31
17.15
17.66
18.31
17.71
17.26
19.14
17.44
14.88
17.37
19.14
23.19
21.50
21.61
18.15
18.45
15.11
16.80
16.97
16.80
16.89
16.08
16.08
16.37
17.15
15.11
15.24
11.94
13.22
11.94
12.46
14.01
16.02
15.04
15.09
1 Based on the share price of UBS AG until 27 November 2014 and of UBS Group AG from 28 November 2014 onward.
18.97
20.32
18.39
18.39
18.39
17.18
17.01
17.15
17.15
16.44
17.43
16.98
15.95
15.67
15.67
13.62
12.96
16.02
19.37
17.05
19.25
203
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 GRI
Standards: Comprehensive option as evidenced in the EY assurance report at www.ubs.com/gri. The limited assurance by EY
also covered other relevant text and data in the UBS GRI Document.
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
governance, including the SIX Swiss Exchange’s Directive on
Information Relating to Corporate Governance, as well as the
standards established in the Swiss Code of Best Practice for
Corporate Governance, 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
corporate governance guidelines.
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
requirements. As a foreign private issuer with debt securities
listed on the NYSE, UBS AG also complies with the relevant
NYSE corporate governance standards. The discussion in this
section 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
206
Differences from corporate governance standards relevant
to US-listed companies
to
the NYSE
According
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 differences are discussed in the following
paragraphs.
Responsibility of the Audit Committee with regard to
independent auditors
Our Audit Committee is responsible for the compensation,
retention and oversight of the independent auditors. It assesses
the performance and qualification of the external auditors and
submits its proposal for appointment, reappointment or removal
of the independent auditors to the full BoD. As required by the
Swiss Code of Obligations, the BoD then submits its proposal to
the shareholders for their vote at the Annual General Meeting
(AGM). Under NYSE standards, the Audit Committee is also
responsible for the appointment of the independent auditors.
Discussion of risk assessment and risk management policies by
the Risk Committee
In accordance with the respective Organization Regulations of
UBS Group AG and UBS AG, the Risk Committee instead of the
Audit Committee oversees our risk principles and risk capacity
on behalf of the BoD. 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. Under NYSE standards, only the
Audit Committee supervises the internal audit function.
it
the
the other
responsibility of
Responsibility of the Compensation Committee for performance
evaluations of senior management of UBS Group AG
Under NYSE standards,
the
is
Compensation Committee to evaluate senior management
performance and determine and approve, as a committee or
its
together with
compensation. In line with Swiss law, our 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. The
shareholders elect
the Compensation
the members of
Committee at the AGM.
independent directors,
Proxy statement reports of the Audit Committee and the
Compensation Committee
NYSE listing standards would require the aforementioned
committees to submit their reports directly to shareholders.
However, under Swiss law, all our reports addressed to
the aforementioned
shareholders,
committees, are provided and approved by the BoD, which has
ultimate responsibility to the shareholders.
including
those
from
Shareholders’ votes on equity compensation plans
While the NYSE standards would require shareholder approval
for the establishment of and material revisions to all equity
compensation plans, Swiss law authorizes the BoD to approve
compensation plans. Swiss companies determine the nature and
components of capital in their articles of association, and each
increase in capital requires shareholder approval. This means
if equity-based
that shareholder approval
compensation plans
in capital. No
shareholder approval is required if shares for such plans are
purchased in the market.
is mandatory
increase
require an
→ 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
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
207
Corporate governance, responsibility and compensation
Corporate governance
Group structure and shareholders
Operational Group structure
Listed and non-listed companies belonging to the Group
As of 31 December 2017, the operational structure of the Group
comprised the business divisions Wealth Management, Wealth
Management Americas, Personal & Corporate Banking, Asset
Management, and the Investment Bank, as well as Corporate
Center with its units Corporate Center – Services (comprising the
Group functions Group Chief Operating Officer area, Group
Finance, Group Human Resources, Group Risk Control, Group
General Counsel area, Group Regulatory & Governance,
Communications & Branding and UBS and Society), Corporate
Center – Group Asset and Liability Management and Corporate
Center – Non-core and Legacy Portfolio. Effective 1 February
2018, Wealth Management and Wealth Management Americas
were combined into a unified business division called Global
Wealth Management.
The Group includes a number of consolidated entities, of which
only UBS Group AG has its shares listed.
UBS Group AG’s registered office is at Bahnhofstrasse 45,
CH-8001 Zurich, Switzerland. The shares of UBS Group AG are
listed on the SIX Swiss Exchange (ISIN: CH0244767585) and on
the NYSE (CUSIP: H42097107).
→ Refer to “UBS shares” in the “Capital management” section
from page 201 of this report for information on UBS Group AG’s
market capitalization and shares held by Group entities
→ Refer to “Note 28 Interests in subsidiaries and other entities” in
the “Consolidated financial statements” section from page 436
of this report for more information on the significant
subsidiaries of the Group
→ Refer to the sections under “Financial and operating
Significant shareholders
performance” from page 57 and to “Note 2 Segment reporting”
in the “Consolidated financial statements” section from page
348 of this report for more information
→ Refer to the “Our evolution” section from page 12 of this report
for more information
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
Financial Market Infrastructure (FMIO-FINMA). In particular, the
FMIO-FINMA sets forth that nominee companies that cannot
autonomously decide how voting rights are exercised are not
obligated to notify the company and the SIX if they reach,
exceed or fall below the threshold percentages.
In addition, pursuant to the Swiss Code of Obligations, we
must disclose in the notes to our financial statements the
identity of any shareholder with a holding of more than 5% of
the total share capital of UBS Group AG.
208
According to the FMIA disclosure notifications filed with UBS
Group AG and the SIX, the following entities held more than
3% of the total share capital of UBS Group AG as of
31 December 2017: BlackRock Inc., New York, disclosed a
holding of 5.01% of the total share capital of UBS Group AG on
29 December 2017; MFS Investment Management, Boston,
disclosed a holding of 3.05% on 10 February 2016; and Norges
Bank, Oslo, the central bank of Norway, disclosed a holding of
3.30% on 10 December 2014. With the exception of BlackRock
Inc., New York, with a disclosed holding of 5.02% of the total
share capital of UBS Group AG on 5 March 2018, the above
disclosures have not been subsequently superseded and no new
disclosures of significant shareholdings have been notified since
31 December 2017.
In accordance with the FMIA, the aforementioned holdings
are calculated in relation to the total share capital of UBS Group
AG reflected in its Articles of Association at the time of the
respective disclosure notification.
Shareholders who notified a significant shareholding in
accordance with the aforementioned requirements may or may
not be recorded in the UBS share register, and therefore they
may not necessarily appear in the table below. Information on
disclosures under the FMIA is available at www.six-exchange-
regulation.com/en/home/publications/significant-
shareholders.html.
The shareholders (acting in their own name or in their
capacity as nominees for other investors or beneficial owners)
listed in the table below were registered in the UBS share
register with 3% or more of the total share capital of UBS Group
AG as of 31 December 2017.
Cross-shareholdings
UBS Group AG has no cross-shareholdings in excess of a
reciprocal ownership 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
11 DTC (Cede & Co.), New York, “The Depository Trust Company,” is a US securities clearing organization.
331.12.17
31.12.16
31.12.15
11.16
6.64
4.11
9.43
6.62
3.88
9.14
6.14
3.60
(cid:3)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
209
Corporate governance, responsibility and compensation
Corporate governance
Capital structure
Issued ordinary share capital
At year-end 2017, UBS Group AG had 3,853,096,603 issued
shares with a par value of CHF 0.10 each, leading to a share
capital of CHF 385,309,660.30.
Under Swiss company law, shareholders must approve in a
shareholders’ 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 2017, our
shareholders were not asked to approve any capital increase.
Share capital increased during the year by 2,330,214 shares,
as shares were issued out of existing conditional capital due to
the exercise of employee options.
Issued share capital of UBS Group AG
AAs of 31 December 2016
Issue of shares out of conditional capital due to employee options exercised in 2017
AAs of 31 December 2017
SShare capital in CHF
NNumber of shares
Par value in CHF
385,076,639
233,021
385,309,660
3,850,766,389
2,330,214
3,853,096,603
0.10
0.10
0.10
Distribution of UBS shares
As of 31 December 2017
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
5,000,001–38,530,966 (1%)
1–2%
2–3%
3–4%
4–5%
Over 5%
Total registered
Unregistered3
Total shares issued
Shareholders registered
Shares registered
Number
% of shares issued
Number
26,007
123,604
73,920
6,438
524
83
30
2
1
0
1
21
230,612
%
11.3
53.6
32.1
2.8
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1,460,688
58,321,655
208,480,350
151,912,554
154,010,127
172,747,303
349,217,167
109,797,617
88,559,109
0
158,270,547
685,945,874
100.0
2,138,722,9912
1,714,373,612
3,853,096,603
0.0
1.5
5.4
3.9
4.0
4.5
9.1
2.8
2.3
0.0
4.1
17.8
55.5
44.5
100.0
1 On 31 December 2017, Chase Nominees Ltd., London, entered as a trustee / nominee, was registered with 11.16% 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 6.64% 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, 410,395,903 shares did not carry voting rights. 3 Shares not entered in the UBS share register as of
31 December 2017.
210
Conditional share capital
At year-end 2017, the following conditional share capital was
available to UBS Group AG’s BoD:
– a maximum 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, to be issued through the voluntary or
mandatory exercise of conversion rights and / or warrants
granted in connection with the issuance of bonds or similar
financial instruments on national or international capital
markets. This conditional capital allowance was approved at
the Extraordinary General Meeting (EGM) held on 26
November 2014. The BoD has not made use of such
allowance.
issued
– a maximum of CHF 12,766,462.20
represented by
127,664,622 fully paid registered shares with a par value of
CHF 0.10 each, to be issued upon exercise of employee
options
the
management and of the BoD of UBS Group AG and its
subsidiaries. This conditional capital allowance was approved
by the shareholders at the same EGM in 2014.
→ Refer to article 4a of the Articles of Association of UBS Group
AG for more information on the terms and conditions of the
to employees and members of
issue of shares out of existing conditional capital. The Articles
of Association are available at www.ubs.com/governance
Conditional capital of UBS Group AG
AAs of 31 December 2017
Employee equity participation plans
Conversion rights / warrants granted in connection with bonds
TTotal
MMaximum number of shares to
be issued
127,664,622
Year approved by Extraor-
dinary General Meeting
2014
380,000,000
507,664,622
2014
%% of shares issued
3.31
9.86
13.18
Authorized share capital
Ownership
UBS Group AG had no authorized capital available on
31 December 2017.
Changes in capital
to shareholders amounted
In accordance with International Financial Reporting Standards,
to
Group equity attributable
CHF 51.2 billion as of 31 December 2017 (2016: CHF 53.6
billion; and 2015: CHF 55.3 billion). UBS Group AG
shareholders’ equity was represented by 3,853,096,603 issued
shares as of 31 December 2017 (2016: 3,850,766,389 shares;
and 2015: 3,849,731,535 shares).
→ Refer to “Statement of changes in equity” in the “Consolidated
financial statements” section from page 318 of this report, and
our annual reports 2016 and 2015 available under “Annual
reporting” at www.ubs.com/investors, for more information on
changes in shareholders’ equity over the last three years
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 shareholders registered in the UBS share
register and cannot be assumed to be representative of UBS Group
AG’s entire investor base or the actual beneficial ownership. Only
shareholders registered 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 2017, 1,728,327,088 UBS Group AG
shares carried voting rights, 410,395,903 shares were entered in the
share register without voting rights, and 1,714,373,612 shares were
not registered in the UBS share register. All shares were fully paid up
and eligible for dividends. There are no preferential rights for
shareholders, and no other classes of shares are issued by UBS
Group AG.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
211
Corporate governance, responsibility and compensation
Corporate governance
Shareholders, legal entities and nominees: type and geographical distribution
AAs of 31 December 2017
Individual shareholders
Legal entities
Nominees, fiduciaries
Total registered shares
Unregistered shares
TTotal
AAmericas
of which: USA
AAsia Pacific
EEurope, Middle East and Africa
of which: Germany
of which: UK
of which: rest of Europe
of which: Middle East and Africa
SSwitzerland
Total registered shares
Unregistered shares
TTotal
SShareholders registered
Number
225,511
4,855
246
%
97.8
2.1
0.1
230,612
100.0
IIndividual shareholders
LLegal entities
NNominees
TTotal
Number
5,779
5,118
5,127
12,196
4,175
4,386
3,415
220
%
2.5
2.2
2.2
5.3
1.8
1.9
1.5
0.1
Number
171
95
124
256
27
10
214
5
202,409
87.8
4,304
%
0.1
0.0
0.1
0.1
0.0
0.0
0.1
0.0
1.9
Number
111
105
22
72
6
6
59
1
41
%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Number
6,061
5,318
5,273
12,524
4,208
4,402
3,688
226
%
2.6
2.3
2.3
5.4
1.8
1.9
1.6
0.1
206,754
89.7
225,511
97.8
4,855
2.1
246
0.1
230,612
100.0
At year-end 2017, UBS owned 132,301,551 UBS Group AG
registered shares, which corresponded to 3.43% of the total share
capital of UBS Group AG. At the same time, we had acquisition and
disposal positions relating to 148,166,748 and 198,285,873 voting
rights of UBS Group AG, corresponding to 3.85% and 5.15% of
the total voting rights of UBS Group AG, respectively. Of the
disposal positions, 4.93% consisted of voting rights on shares
deliverable
in respect of employee awards. The calculation
methodology for the acquisition and disposal positions 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.
Employee share ownership
Employee share ownership is encouraged and enabled in a variety
of ways. One example is our Equity Plus Plan. This is a voluntary plan
that provides eligible employees with the opportunity to purchase
UBS Group AG shares at market value and receive, at no additional
cost, one notional UBS Group AG share for every three shares
purchased. If the shares purchased are held for three years and the
employee remains in employment, the notional shares vest. Another
example is the Equity Ownership Plan (EOP). This is a mandatory
deferral plan for all employees with total compensation greater than
CHF 300,000. These employees receive at least 60% of their
deferred performance award under the EOP in notional shares. 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. To encourage
our employees to develop and manage the business in a way that
delivers sustainable returns, EOP awards granted to GEB members
and other senior employees will only vest if both Group and
business division performance conditions are met.
shares outstanding
As of 31 December 2017, current UBS employees held an
estimated 6% of UBS
(including
approximately 4% in unvested / blocked actual and notional
shares from our compensation programs). These figures are
based on known shareholding information from employee
participation plans, personal holdings with UBS and selected
individual retirement plans. At the end of 2017, an estimated
36% of all employees held UBS shares with the firm’s employee
participation plan platform.
→ Refer to the “Compensation” section from page 258 of this
report for more information
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” on the following page.
We have no participation certificates outstanding.
212
IIndividual shareholders
Number of shares
10,525,257
8,905,338
21,763,450
38,509,849
12,491,164
16,644,427
8,740,699
633,559
345,179,084
415,977,640
0
415,977,640
%
0.3
0.2
0.6
1.0
0.3
0.4
0.2
0.0
9.0
10.8
10.8
LLegal entities
Number of shares
77,542,826
64,017,846
69,848,519
24,878,365
579,599
2,161,855
21,917,846
219,065
417,528,445
589,798,155
0
%
2.0
1.7
1.8
0.6
0.0
0.1
0.6
0.0
10.8
15.3
NNominees
Number of shares
354,052,813
353,756,503
9,117,835
748,615,167
16,296,379
646,433,414
85,875,374
10,000
21,161,381
1,132,947,196
0
589,798,155
15.3
1,132,947,196
%
9.2
9.2
0.2
19.4
0.4
16.8
2.2
0.0
0.5
29.4
29.4
SShares registered
Number
415,977,640
589,798,155
1,132,947,196
2,138,722,991
1,714,373,612
3,853,096,603
TTotal
Number of shares
442,120,896
426,679,687
100,729,804
812,003,381
29,367,142
665,239,696
116,533,919
862,624
783,868,910
2,138,722,991
1,714,373,612
3,853,096,603
%
10.8
15.3
29.4
55.5
44.5
100.0
%
11.5
11.1
2.6
21.1
0.8
17.3
3.0
0.0
20.3
55.5
44.5
100.0
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Our shares are listed on the NYSE as global registered shares.
As such, they can be traded and transferred across applicable
borders, without the need for conversion, with identical shares
traded on different stock exchanges in different currencies.
beneficial 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 “UBS shares” in the “Capital management” section from
→ Refer to “Shareholders’ participation rights” in this section for
page 201 of this report for more information
more information
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.
At the AGM 2018, UBS’s BoD intends to propose to
shareholders a dividend of CHF 0.65 per share to be paid out of
the capital contribution reserve, subject to shareholder approval.
In addition, the BoD has approved a share repurchase program
of up to CHF 2 billion over the next three years, of which up to
CHF 550 million may be purchased in 2018.
Transferability, voting rights and nominee registration
limitations on the
We do not apply any restrictions or
transferability 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,
As of 31 December 2017, there were no contingent capital
securities or convertible bonds outstanding requiring the
issuance of new shares.
→ Refer to the “Capital management” section from page 183 of
this report for more information on our outstanding capital
instruments
As of 31 December 2017, there were 41,096,583 employee
options outstanding, including stock appreciation rights. Options
and stock appreciation rights equivalent to 11,761,722 shares
were in the money and exercisable. Option-based compensation
plans are sourced by either purchasing UBS Group AG shares in
the market or issuing new shares out of conditional capital. As
mentioned above, as of 31 December 2017, 127,664,622
unissued shares in conditional share capital were available for
this purpose.
→ Refer to “Conditional share capital” in this section for more
information
→ Refer to “Note 27 Employee benefits: variable compensation” in
the “Consolidated financial statements” section from page 428
of this report for more information on outstanding options and
stock appreciation rights
213
Corporate governance, responsibility and compensation
Corporate governance
Shareholders’ participation rights
We are committed to shareholder participation in our decision-
making process. Around 230,000 shareholders are directly
registered in the UBS share register and some 140,000 US
shareholders are registered via nominee companies.
Registered shareholders are personally invited to the general
meetings of shareholders. Together with the invitation materials
to the general meeting, they will receive a one-time password
and a QR code to log in to our new online voting platform,
where they can enter their voting instructions or order an
admission card for the general meeting.
Shareholders who decide not to receive the comprehensive
invitation materials are informed of the upcoming general
meeting by a short letter containing a one-time password, a QR
code and a reference to www.ubs.com/agm, where all
information for the upcoming general meeting is available.
Relations with shareholders
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 may issue instructions to support,
reject or abstain for each individual item on the meeting agenda,
either by giving instructions to an independent proxy in
accordance with article 15 of the Articles of Association (AoA) or
by appointing another registered shareholder of their choice to
vote on their behalf. Alternatively, registered shareholders may
issue their voting
independent proxy
instructions to the
electronically through our online voting platform. Nominee
companies normally submit the proxy material to the beneficial
owners and forward the collected votes to the independent
proxy.
→ Refer to article 15 of the Articles of Association of UBS Group
AG for more information on the issuing of instructions to
independent voting right representatives. The Articles of
Association are available at www.ubs.com/governance
We regularly inform all our shareholders about our activities and
performance and other developments.
Statutory quorums
→ Refer to “Information policy” in this section for more
information
The annual general meeting of shareholders (AGM) offers
shareholders the opportunity to raise any questions to the Board
of Directors (BoD) and Group Executive Board, 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.
Shareholders can exercise their voting rights conferred by the
shares only if they are registered in our share register with voting
rights. To register, shareholders must confirm that they have
acquired UBS Group AG shares in their own name and for their
own account. Nominee companies and trustees are required to
sign an agreement confirming their willingness to disclose, upon
our request, individual beneficial owners holding more than
0.3% of all issued UBS Group AG shares.
Motions, including the election and re-election of BoD members
and the election 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 general 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 restrictions or exclusions of shareholders’ preemptive rights.
The AoA 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.
Shareholders 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.
214
Convocation of general meetings of shareholders
Registrations in the share register
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
explanation of each motion is made available to every registered
shareholder at least 20 days ahead of the scheduled general
meeting. The meeting 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
individually 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 specific issue they put forward.
Placing of items on the agenda
Pursuant to our AoA, shareholders
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 meeting of
shareholders.
individually or
At the beginning of February of each year, the invitation to
submit such proposals is published 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 explanation. Such requests
must be submitted to the BoD 50 days before the general
meeting of shareholders, including a statement from the
depository bank confirming the number of shares held by the
requesting shareholder and that these shares are blocked from
sale until the end of the general meeting of shareholders. The
BoD formulates opinions on the proposals, which are published
together with the motions.
The share register of UBS Group AG is an internal, non-public
register subject to statutory confidentiality, secrecy, privacy and
data protection regulations, which are imposed on UBS Group
AG to protect shareholders registered therein. In general, third
parties and shareholders have no inspection rights with regard
to data related to other shareholders. Disclosure of private data
is permitted only in specific and limited instances. In line with
the Swiss Federal Act on Data Protection, the disclosure of
private data is only allowed with the consent of the registered
shareholder and in cases where there is an overriding private or
public interest or if explicitly provided by Swiss law. The law
contains specific reporting duties, such as in relation to
significant shareholders (refer to the “Significant shareholders”
section of this report for more information). Disclosure may also
be required or requested by a court of a competent jurisdiction,
by any regulatory body that regulates the conduct of UBS Group
AG or by other statutory provisions.
The general rules for entry into our Swiss share register with
voting rights as described in article 5 of our AoA 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 shareholder, our
share register generally closes two business days before a
shareholder meeting. Our independent proxy agent processes
voting instructions from shareholders with voting rights as long
as technically possible, generally also until two business days
before a shareholder meeting. Such technical closure of our
share register only facilitates the determination of the actual
issued a voting
voting rights of every shareholder that
instruction. Irrespective of the technical closure, shares that are
registered in our share register are never immobilized and are
freely tradable at any time – irrespective of any issued voting
instructions.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
215
Corporate governance, responsibility and compensation
Corporate governance
Board of Directors
The Board of Directors (BoD) of UBS Group AG, under the
leadership of the Chairman of the BoD (Chairman), consists of
six to 12 members as per our Articles of Association (AoA).
laws,
The BoD decides on the strategy of the Group upon
recommendation by the Group Chief Executive Officer (Group
CEO) and is responsible for the overall direction, supervision and
control of the Group and its management, as well as for
supervising compliance with applicable
rules and
regulations. The BoD exercises oversight over UBS Group AG
and its subsidiaries and is responsible for establishing a clear
Group governance framework to provide effective steering and
supervision of the Group, taking into account the material risks
to which UBS Group AG and its subsidiaries are exposed. The
BoD has ultimate responsibility for the success of the Group and
for delivering sustainable shareholder value within a framework
of prudent and effective controls. It also approves all financial
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
supervision 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 4 May 2017, Michel Demaré, David Sidwell,
Reto Francioni, Ann F. Godbehere, William G. Parrett, Isabelle
Romy, Robert W. Scully, Beatrice Weder di Mauro and Dieter
Wemmer were re-elected as members of the BoD, and Julie G.
Richardson was elected for her 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. Additionally, ADB Altorfer Duss &
Beilstein AG was elected independent proxy agent. Following
their election, the BoD appointed Michel Demaré as Vice
Chairman and David Sidwell as Senior Independent Director of
UBS Group AG.
On 8 December 2017, the BoD announced that Jeremy
Anderson, former Chairman of KPMG’s Global Financial Services
Practice, would be nominated for election to the UBS Group AG
and UBS AG BoD at the forthcoming annual general meetings.
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
mandates in non-listed companies. Mandates in companies that
are controlled by us or that control us are not subject to this
limitation. In addition, members of the BoD may hold no more
than 10 mandates at UBS’s request and 10 mandates in
associations, charitable organizations, foundations, trusts, and
employee welfare foundations. On 31 December 2017, no
member of the BoD reached the thresholds described in article
31 of our AoA.
The following biographies provide information on the BoD
members and the Group Company Secretary. In addition to
information on mandates, the biographies include information
on memberships or other activities or functions, as required by
the SIX Swiss Exchange Corporate Governance Directive.
No member of the BoD carries out operational management
tasks within UBS and all members of the BoD are therefore non-
executive members.
All members of UBS Group AG’s BoD are also members of
UBS AG’s BoD, and committee membership is the same for both
entities. The Senior Independent Director function relates only to
UBS Group AG.
In 2017, UBS AG’s BoD had two committees: the Audit
Committee and the Risk Committee.
216
Axel A. Weber
German, born 1957
Michel Demaré
David Sidwell
Swiss and Belgian, born 1956
American (US) and British, born 1953
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
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
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
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
between 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
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.
in
Other activities and functions
– Board member of the Swiss Bankers Association
– Trustees Board member 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
– Board member of the International Monetary Conference
– Member of the European Financial Services Round Table
– Member of the European Banking Group
– Member of the International Advisory Panel, Monetary
Authority of Singapore
– Member of the Group of Thirty, Washington, DC
– Chairman of the Board of Trustees of DIW Berlin
– Advisory Board member of the Department of Economics,
University of Zurich
– Member of the Trilateral Commission
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 management positions in Belgium, France,
the US and Switzerland. Between 1997 and 2002, Mr.
Demaré was CFO of the Global Polyolefins and Elastomers
in the
division. He began his career as an officer
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
– Board member of Vodafone Group Plc (as of 1 February
2018)
– Vice Chairman of the Board of Syngenta (until end of
December 2017)
– 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 (until end of December 2017)
– Advisory Board member of the Department of Banking and
Finance, University of Zurich
217
Corporate governance, responsibility and compensation
Corporate governance
Reto Francioni
Swiss, born 1955
Ann F. Godbehere
William G. Parrett
British and Canadian, 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
Functions at UBS Group AG
Chairperson of the Compensation Committee / member 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
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 management 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
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 Rio Tinto plc (chairman of the audit
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
– Chairman of the Board of UBS Americas Holding LLC (as of
– Board member of Rio Tinto Limited (chairman of the audit
30 January 2018)
committee)
– Board member of the Eastman Kodak Company (chairman
– Board member of British American Tobacco plc
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 Thermo Fisher Scientific Inc. (chairman
of the audit committee)
– Chairman of the Board of Conduent Inc.
– 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
218
Julie G. Richardson
Isabelle Romy
American (US), born 1963
Swiss, born 1965
Function at UBS Group AG
Member of the Risk Committee
Functions at UBS Group AG
Member of the Audit Committee / member of the
Governance and Nominating Committee
Robert W. Scully
American (US), born 1950
Function at UBS Group AG
Member of the Risk Committee
in equity
specializing
investments
Professional history and education
Julie G. Richardson was elected to the BoD of UBS AG and
UBS Group AG at the 2017 AGM. She has been a member
of the Risk Committee since 2017. Ms. Richardson was a
Partner and Head of the New York Office of Providence
Equity Partners from 2003 to 2012, a global private equity
firm
in media,
communications, education and information companies. She
acted as a senior advisor to the partnership until 2014. From
1998 to 2003, Ms. Richardson served as Vice Chairman of
JPMorgan Chase & Co.’s Investment Banking division and
Head of
its Global Telecommunications, Media and
Technology group. She started her career with Merrill Lynch
in 1986, where she worked until 1998, in her last position
as Managing Director Media and Communications
Investment Banking. Ms. Richardson graduated with a
bachelor’s degree in business administration from the
University of Wisconsin-Madison.
Other activities and functions
– Board member of The Hartford Financial Services Group,
Inc. (chairman of the audit committee)
– Board member of Yext (chairman of the audit committee)
– Board member of Arconic Inc. (until February 2018)
– Board member of Vereit, Inc. (chairman of the
compensation 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 partner 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 professor 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.
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 Froriep Legal AG
– Vice Chairman of the Sanction Commission of SIX Swiss
Exchange
– Member of the Fundraising Committee of the Swiss
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
National Committee for UNICEF
School
– Supervisory Board member of the CAS program Financial
Regulation of the University of Bern and University of
Geneva
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
219
Corporate governance, responsibility and compensation
Corporate governance
Beatrice Weder di Mauro
Dieter Wemmer
Markus Baumann
Swiss and Italian, born 1965
Swiss and German, born 1957
Swiss, born 1963
Functions at UBS Group AG
Member of the Audit Committee / member of the Corporate
Culture and Responsibility Committee
Function at UBS Group AG
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, including 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
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 was Chief
Financial Officer (CFO) of Allianz SE from 2013 to 2017. 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 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
mathematics in 1985.
Other activities and functions
– Member of the CFO Forum
– Member of the Systemic Risk Working Group of the ECB
and the BIS
– Member of the Berlin Center of Corporate Governance
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 Corporate Culture and
Responsibility Committee in 2017. She was member of the
Risk Committee from 2013 to May 2017. She has been a
professor of economics, economic policy and international
macroeconomics at the Johannes Gutenberg University of
Mainz since 2001. Currently she is a distinguished fellow at
INSEAD in Singapore. Ms. Weder di Mauro has served as
non-executive director on the boards of globally leading
companies
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 economist 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.
in development
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
220
Elections and terms of office
Shareholders elect each member of the BoD individually, as well
as the Chairman and the members of the Compensation
Committee, every year based on proposals from the BoD.
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. In accordance with the Swiss Code of Best Practice for
Corporate Governance, we seek appropriate diversity among the
members of the BoD, including gender diversity, as well as
appropriate professional backgrounds and experience.
→ Refer to “Skills, expertise and training of the Board of
Directors” in this section for more information
Organizational principles and structure
Following each AGM, the BoD meets to appoint one or more
Vice Chairmen, a Senior
Independent Director, the BoD
committee members other than the Compensation Committee
members, 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 2017, a total of 23
BoD meetings and calls were held, 14 of which were attended
by GEB members. Average participation in BoD meetings and
calls was 99%. In addition to the BoD meetings attended by the
GEB, the Group CEO partly attended the meetings of the BoD
without GEB participation. The average duration of the meetings
and calls was 175 minutes. In 2017, the frequency and length of
meetings were the same for UBS Group AG and UBS AG.
Additionally, for UBS Group AG six ad hoc meetings and calls
were held, two of which were without the GEB.
At every BoD meeting, each committee chairperson provides
the BoD with an update on current activities of his or her
committee 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. The last self-assessment
determined that the BoD and its committees are functioning
effectively and efficiently. The self-assessment of the BoD
committees for 2017 will be concluded in spring 2018. At least
every three years, the BoD assessments include an appraisal by
an external expert. The latest, concerning 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,
published at www.ubs.com/governance. Each committee meets
as often as its business requires, but at least four times a year
each for the Audit Committee, the Risk Committee and the
Compensation Committee, and twice a year each for the
Corporate Culture and Responsibility Committee and the
Governance and Nominating Committee. Topics of common
interest or affecting more than one committee are discussed at
joint committee meetings. The Audit Committee and Risk
Committee hold at least four joint meetings a year. The
Compensation Committee and Risk Committee periodically hold
joint meetings. During 2017, a total of six joint committee
meetings were held for UBS Group AG (five joint committee
meetings were held for UBS AG).
Board of Directors
Members on
31 December 2017
Meeting attendance
without GEB2
Meeting and call
attendance with GEB3
Key responsibilities include:
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Axel A. Weber, Chairman
Michel Demaré
David Sidwell
Reto Francioni
Ann F. Godbehere
William G. Parrett
Julie G. Richardson1
Isabelle Romy
Robert W. Scully
Beatrice Weder di Mauro
Dieter Wemmer
9/9
9/9
9/9
9/9
9/9
9/9
7/7
9/9
9/9
9/9
8/9
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
89%
14/14
14/14
14/14
14/14
14/14
14/14
11/11
14/14
14/14
14/14
13/14
100%
100% The BoD has ultimate responsibility for the(cid:124)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(cid:124)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%
100%
100%
100%
100%
93%
1 Julie G. Richardson was elected to the BoD at the AGM 2017. 2 Additionally, four unscheduled calls and meetings took place in 2017. 3 Additionally, two unscheduled meetings took place in 2017.
221
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 experience in banking and risk management.
The Audit Committee itself does not perform audits but
monitors 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
consolidated annual and 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
considers appropriate.
the
expertise,
qualifications,
Periodically, and at least annually, the Audit Committee
assesses
effectiveness,
independence and performance of the external auditors and
their lead audit partner, in order to support the BoD in reaching
a decision in relation 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 2017, the Audit Committee held eight committee
meetings and 11 calls with an average participation rate of
98%. On average the duration of each of the meetings and calls
was approximately 115 minutes. In 2017, 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 some of the
meetings were attended by the Group CEO. Occasionally, the
committee invited external subject matter experts to present on
selected topics. The committee met once with FINMA. 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 committees of more than two other public
companies. 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,
such
provided
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 him such an exemption.
that all BoD members determine
that
Audit Committee
Members on
31 December 2017
Meeting and
call attendance
Key responsibilities include:
William G. Parrett (chair)
Michel Demaré
Ann F. Godbehere
Isabelle Romy
Beatrice Weder di Mauro
19/19
18/19
19/19
18/19
17/19
100% The function of the Audit Committee is to serve as an independent and objective body with oversight of:
95%
100%
95%
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
222
Compensation Committee
The Compensation Committee consists of four independent BoD
members as indicated in the table below. In addition to the key
responsibilities indicated in the same table, the Compensation
Committee reviews the compensation disclosures included in
this report.
During 2017, the Compensation Committee held seven
meetings 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 the Chairman, the Group CEO and generally
external advisors. The chair of the committee met with
regulators as appropriate.
→ Refer to “Our compensation governance framework” and “Total
Reward Principles” in the “Compensation” section from pages
278 and 260, respectively, of this report for more information
on the Compensation Committee’s decision-making procedures
Corporate Culture and Responsibility Committee
As of 31 December 2017, the Corporate Culture and
Responsibility Committee consisted of the Chairman and three
independent BoD members as listed in the table. The Group
CEO and the Head UBS and Society are permanent guests of the
Corporate Culture and Responsibility Committee, while senior
regional representatives (chairmen or Presidents) attend two of
the meetings as guests. During 2017, six meetings were held
with a participation rate of 100%. On average the duration of
each of the meetings was approximately 70 minutes.
→ Refer to the “UBS and Society” section from page 238 of this
report for more information
Compensation Committee
Members on
31 December 2017
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 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 individual 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 from 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 2017
Axel A. Weber (chair)
Reto Francioni
William G. Parrett
Beatrice Weder di Mauro1
Meeting attendance
Key responsibilities include:
6/6
6/6
6/6
4/4
100%
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%
100%
1 Following the AGM in May, Beatrice Weder di Mauro became a member of the Corporate Culture and Responsibility Committee and was no longer a member of the Risk Committee.
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
223
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Corporate governance, responsibility and compensation
Corporate governance
Governance and Nominating Committee
As of 31 December 2017, the Governance and Nominating
Committee consisted of the Chairman and three independent
members as listed in the table. During 2017, seven 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. All meetings of the Governance and
Nominating Committee were attended by the Group CEO.
Risk Committee
As of 31 December 2017, the Risk Committee comprised five
independent BoD members as listed in the table. During 2017,
the Risk Committee held nine committee meetings and three
calls with a participation rate of 100%. On average the duration
of each of the meetings and calls was approximately 225
minutes. In 2017, 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. Occasionally, the
committee invited external subject matter experts to present on
selected topics. The committee met once with the FRBNY and
once with FINMA. The chair met once each with the FCA, the
PRA, FINMA and the FRBNY.
Governance and Nominating Committee
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.
Usually, the Group CEO and the Group General Counsel attend
the meetings. Occasionally, the committee invited external legal
counsel to present on selected topics. As of 31 December 2017,
David Sidwell chaired the Special Committee with Michel
Demaré, William G. Parrett and Isabelle Romy as additional
members. During 2017, two committee meetings were held
with an average participation rate of 88%. On average the
duration of each of the meetings was 60 minutes. In 2017, the
frequency and length of meetings were the same for both UBS
Group AG and UBS AG.
Meeting and
call attendance
Key responsibilities include:
8/8
8/8
8/8
8/8
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
Members on
31 December 2017
Axel A. Weber (chair)
Michel Demaré
Isabelle Romy
David Sidwell
Risk Committee
Members on
31 December 2017
Meeting and
call attendance
Key responsibilities include:
David Sidwell (chair)
Reto Francioni
Julie G. Richardson1
Robert W. Scully
Beatrice Weder di Mauro2
Dieter Wemmer
12/12
12/12
9/9
12/12
3/3
12/12
100% The function of the Risk Committee is to oversee and support the BoD in fulfilling its duty to supervise and set an
100%
100%
100%
100%
100%
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
1 Julie G. Richardson was elected to the BoD at the AGM 2017. 2 Following the 2017 AGM in May, Beatrice Weder di Mauro became a member of the Corporate Culture and Responsibility Committee and was no
longer a member of the Risk Committee.
224
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.
communication with
The Chairman coordinates tasks within the BoD, calls BoD
meetings and sets their agendas. He presides over all general
meetings of shareholders and works with the committee
chairpersons to coordinate the work of all BoD committees.
Together with the Group CEO, the Chairman is responsible for
effective
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 Pillars,
Principles and Behaviors.
→ Refer to the “Our employees” section from page 252 of this
report for more information on our Pillars, Principles and
Behaviors
In 2017, the Chairman met on a regular basis with core
supervisory authorities, including FINMA and the Swiss National
Bank, in Switzerland, the FRBNY and the Office of the
Comptroller of the Currency in the US, and the PRA and the FCA
in
important supervisory
authorities, in regions such as Asia Pacific, EMEA and the US,
were scheduled on an ad hoc or needs-driven basis.
the UK. Meetings with other
Roles and responsibilities of the Vice Chairmen and the
Senior Independent Director
The BoD appoints one or more Vice Chairmen and a Senior
Independent Director. If the BoD appoints more than one Vice
Chairman, one of them must be independent. Both the Vice
Chairman and the Senior Independent Director support the
Chairman with his responsibilities and authorities and provide him
advice. They facilitate Group-wide, in conjunction with the
Chairman and the Governance and Nominating Committee, good
corporate governance, balanced leadership and control within the
Group, the Board and the committees. Michel Demaré has been
appointed as Vice Chairman, and David Sidwell has been
appointed as Senior Independent Director. The Vice Chairman is
required to lead and has led meetings of the BoD in the temporary
absence of the Chairman. Together with the Governance and
Nominating Committee, he is tasked with the ongoing monitoring
and the annual evaluation of the Chairman. Furthermore, he
represents UBS on behalf of the Chairman in meetings with
internal or external stakeholders. The Senior Independent Director
enables and supports communication and the flow of information
among the independent BoD members. At least twice a year, he
organizes and leads a meeting of the independent BoD members
In 2017, two
without the participation of the Chairman.
independent BoD meetings were held for UBS Group AG and UBS
AG with a participation of 100% and an average duration of
approximately 140 minutes. The Senior Independent Director also
relays to the Chairman any issues or concerns raised by the
independent BoD members and acts as a point of contact for
shareholders and stakeholders seeking 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 management
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
independent. For this purpose, independence is determined in
accordance with the FINMA Circular 2017 / 1 “Corporate
governance – banks,” the New York Stock Exchange rules, and the
rules and regulations of other securities exchanges on which the
UBS Group AG shares are listed, if any, applying the strictest
standard.
In 2017, our BoD met the standards of the Organization
Regulations for the percentage of directors that are considered
independent under the criteria described above. Due to our
Chairman’s full-time employment by UBS Group AG, he is not
considered independent. No other BoD member has a significant
business connection to UBS or any of its subsidiaries.
All relationships and transactions with UBS Group AG’s
independent 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
relationships and transactions with BoD members’ associated
companies are conducted at arm’s length.
→ Refer to “Note 32 Related parties” in the “Consolidated financial
statements” section from page 448 of this report for more
information
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
225
Corporate governance, responsibility and compensation
Corporate governance
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
Regulations. The BoD decides on the strategy of the Group upon
recommendations by the Group CEO and exercises ultimate
supervision over management, whereas the GEB, headed by the
Group CEO, has executive management responsibility. The
functions of Chairman of the BoD and Group CEO are assigned
to two different people, leading to 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.
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,
including the latter document’s “Annex B – Key approval
authorities.”
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 exposure, risk profile, strategy and geographic reach.
We asked our Board members to rate their four strongest
competencies out of the following 12 categories:
– banking (wealth management, asset management, personal
and corporate banking)
– investment banking, capital markets
– insurance
– finance, audit, accounting
– risk management
– human resources management, including compensation
– legal, compliance
– technology, cyber security
– regulatory experience, central bank
– corporate responsibility and sustainability
– experience as chief executive officer or chairman
– executive board leadership experience (e.g., as chief financial
officer, chief risk officer or chief operating officer)
The Governance and Nominating Committee reviews these
categories and ratings annually to confirm that the BoD
continues to possess the most relevant experience and
competencies to perform BoD duties.
For 2017, competencies in all 12 categories were represented
in our BoD. Particularly strong levels of experience and expertise
existed in the areas of:
– finance, audit, accounting
– risk management
– financial services
Furthermore, 8 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.
→ Refer to “Risk governance” in the “Risk management and
control” section from page 117 of this report for information on
our risk governance framework
Terms of office
Geographic diversity1
Gender
Experience and competencies2
3 < 3 years
4 3–6 years
2 7–9 years
2 > 9 years
46% Switzerland
18% Europe
36% USA
64% male
36% female
Financial services:
a
b
c
8
Finance, audit and risk management:
d
e
15
Technical and functional know-how:
f
g
h
i
j
12
Leadership:
k
l
8
a) banking (personal and corporate, wealth and asset management) –
b) investment banking, capital markets – c) insurance – d) finance, audit, accounting –
e) risk management – f) HR management – g) legal, compliance – h) technology, cyber security –
i) regulatory experience, central bank – j) corporate responsibility and sustainability –
k) CEO/chairman – l) executive board leadership (e.g., CFO, CRO or COO)
1 In the case of two nationalities the domicile is counted. 2 The bars represent the main strengths of the BoD, up to a maximum of four competencies per member.
226
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, which are made
available to the BoD. The Group CEO and other GEB members
also regularly update the BoD on important issues at BoD
meetings. The BoD receives a monthly performance update. This
report highlights and discusses financial results, capital, funding,
liquidity, risk, regulatory and legal developments, as well as
performance against plan and forecasts for the remainder of the
year.
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 addressed – routed through
the Group Company Secretary – to the Chairman.
The BoD
is supported
in discharging
its governance
responsibilities by our internal audit function, which, among
other things, assesses the reliability of financial and operational
information and the effectiveness of processes for compliance
with legal, regulatory and statutory requirements.
The Head of Group Internal Audit (GIA) reports directly to the
Chairman. In addition, the internal audit organization has a
functional reporting line to the Audit Committee in line with its
responsibilities as set forth in our Organization Regulations. The
Audit Committee annually assesses and approves
the
appropriateness of GIA’s annual audit plan and annual audit
objectives, and monitors GIA’s discharge of its annual audit
objectives, including being informed of the results of the annual
audit plan and the status of the annual audit objectives. The
Audit Committee is in regular contact with the Head of GIA. GIA
issues quarterly reports that provide 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. Further, GIA
issues an annual activity report providing an assessment of its
activities, processes, audit plan and resourcing requirements and
other important developments affecting GIA. The activity report
is provided to the Chairman of the BoD and to the Audit
Committee, and is an element for their assessment of GIA’s
effectiveness.
→ Refer to “Group Internal Audit” in this section for more
information
→ Refer to “Internal risk reporting” in the “Risk management and
control” section on page 122 of this report for information on
reporting to the BoD
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
227
Corporate governance, responsibility and compensation
Corporate governance
Group Executive Board
The Board of Directors (BoD) delegates the management of the
business to the Group Executive Board (GEB).
Members of the Group Executive Board
On 14 December 2017, we announced the following changes to
the GEB. Martin Blessing was appointed President Wealth
Management, Axel P. Lehmann as President Personal &
Corporate Banking and President UBS Switzerland and Sabine
Keller-Busse as Group Chief Operating Officer. The Group Chief
Operating Officer area was expanded to include the Group
Human Resources function. Jürg Zeltner stepped down from the
GEB at year-end. The changes were made effective on 1 January
2018.
On 22 January 2018, we announced the creation of a unified
Global Wealth Management division. Martin Blessing, President
Wealth Management, and Tom Naratil, President UBS Americas
and Wealth Management Americas, were appointed co-
Presidents of Global Wealth Management as of 1 February
2018.
The biographies on the following pages provide information
about the GEB members in office on 31 December 2017. In
addition to information on mandates, the biographies include
memberships and other activities or functions, as required by the
SIX Swiss Exchange Corporate Governance Directive.
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 membership in a listed company and five additional
mandates in non-listed companies. Mandates in companies that
are controlled by UBS or that control UBS are not subject to this
limitation. In addition, GEB members may not hold more than
10 mandates at a time at the request of the company and eight
mandates in associations, charitable organizations, foundations,
trusts and employee welfare foundations. On 31 December
2017, no member of the GEB reached the aforementioned
thresholds.
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 the GEB are also members of UBS AG’s
Executive Board, with the exception of Mr. Lehmann. Similar 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 UBS AG’s and the Group’s
strategy and regulatory requirements.
Currently, no specific diversity policy is required, or applied,
with respect to the composition of the GEB and UBS AG’s
Executive Board.
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
the
implementation of risk management 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 2017, the
GEB held 17 meetings and two GEB offsite meetings. In 2017,
the frequency of meetings for both UBS Group AG and UBS AG
was the same.
establishing
supervising
and
for
→ 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
stakeholders. Group ALCO proposes the framework for capital
management, capital allocation, funding and liquidity risk and
proposes limits and targets for the Group to the BoD for
approval. It oversees the balance sheet management of the
its business divisions and Corporate Center. The
Group,
Organization Regulations additionally specify which powers of
the GEB are delegated to the Group ALCO. In 2017, the Group
ALCO held 10 meetings for UBS Group AG and UBS AG.
Management contracts
We have not entered into management contracts with any
companies or natural persons that do not belong to the Group.
228
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 various
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.
Other activities and functions
– Board member of UBS Switzerland AG
– Chairman of the Board of Directors of UBS Business
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
Function at UBS Group AG
President Personal & Corporate Banking and President UBS
Switzerland until 31 December 2017, as of 1 January 2018
President Wealth Management and as of 1 February 2018
co-President Global Wealth Management
Professional history and education
Martin Blessing was appointed co-President of Global
Wealth Management of UBS Group AG and UBS AG as of
February 2018. Prior to this, he was President Wealth
Management effective January 2018. He held the positions
of President Personal & Corporate Banking of UBS Group AG
and President UBS Switzerland as well as President of the
Executive Board of UBS Switzerland AG from September
2016 to December 2017. He became a member of the GEB
in September 2016. Before joining UBS, he worked for 15
years for Commerzbank AG, from 2008 to April 2016 as
Chief Executive Officer. Before, he held various senior
management positions; from 2004 to 2008, he was Head of
Corporate Banking and from 2006 onward also responsible
for IT & Operations. From 2001 to 2004, he was Head of
Private Clients. Before joining Commerzbank, from 2000 to
2001 he was Chief Executive Officer of Advance Bank, a
subsidiary of Dresdner Bank AG. From 1997 to 2000, he
acted as Dresdner Bank’s joint Head Private Clients. From
1989 to 1996, he worked for McKinsey & Company, the last
two years as Partner. Martin Blessing holds an MBA from
the University of Chicago and in 1987 graduated from the
University of St. Gallen with a degree
in business
administration.
Other activities and functions
– Executive Board member of Baden-Baden Entrepreneur
Function at UBS Group AG
Group Chief Risk Officer
Professional history and education
Christian Bluhm became a member of the GEB and was
appointed Group Chief Risk Officer of UBS Group AG and
UBS AG in January 2016. He joined UBS 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 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 mathematics and
informatics from the University of Erlangen-Nuremberg and
received his PhD in mathematics in 1996 from the same
university.
in Munich
Other activities and functions
– Board member of UBS Business Solutions AG
– Board member of UBS Switzerland AG
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
– Board member of the Fondazione Lugano per il Polo
Talks
Culturale, Lugano
– Board member of the Global Apprenticeship Network
– Member of the Institut International d’Etudes Bancaires
– Member of the Saïd Business School Global Leadership
Council, University of Oxford
229
Corporate governance, responsibility and compensation
Corporate governance
Markus U. Diethelm
Kirt Gardner
Sabine Keller-Busse
Swiss, born 1957
American (US), born 1959
Swiss and German, born 1965
Function at UBS Group AG
Group General Counsel
Function at UBS Group AG
Group Chief Financial Officer
Professional history and education
Kirt Gardner became a member of the GEB and was
appointed 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 leadership 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 economics 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
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
investigations 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
acquisitions. 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
– Chairman of the Swiss Advisory Council of the American
Swiss Foundation
– Member of the Foundation Council of the UBS
International Center of Economics in Society
– Member of the Professional Ethics Commission of the
Association of Swiss Corporate Lawyers
– Member of the Supervisory Board of the Fonds de Dotation
LUMA / Arles
Function at UBS Group AG
Group Head Human Resources until 31 December 2017,
Group Chief Operating Officer as of 1 January 2018
Professional history and education
Sabine Keller-Busse was appointed Group Chief Operating
Officer of UBS Group AG and UBS AG and President of the
Executive Board of UBS Business Solutions AG as of January
2018. Ms. Keller-Busse was Group Head Human Resources
from August 2014 to December 2017. She became a
member of the GEB in January 2016. 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 Partner since 2001. 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
– Vice-Chairman of the Board of Directors 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
230
Ulrich Körner
Axel P. Lehmann
Swiss and German, born 1962
Swiss, born 1959
Tom Naratil
American (US), born 1961
Functions at UBS Group AG
President Asset Management and President UBS Europe,
Middle East and Africa
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
responsible for the entire Swiss client business as CEO Credit
Suisse Switzerland. Mr. Körner received a PhD in business
administration from the University of St. Gallen and served
for several years as an auditor at Price Waterhouse and as a
management 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 AG, Zurich
– Member of the UBS Optimus Foundation Board
– 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
Functions at UBS Group AG
Group Chief Operating Officer until 31 December 2017, as
of 1 January 2018 President Personal & Corporate Banking
and President UBS Switzerland
Professional history and education
Axel P. Lehmann was appointed President Personal &
Corporate Banking of UBS Group AG and President UBS
Switzerland as of January 2018, in addition to taking over as
President of the Executive Board of UBS Switzerland AG. He
became a member of the GEB and was appointed Group
Chief Operating Officer of UBS Group AG and UBS AG in
January 2016. He was a member of the BoD of UBS AG from
2009 to 2015 and of UBS Group AG from 2014 to 2015 and
was a member of both the Risk Committee and the
Governance and Nominating Committee. Mr. Lehmann
became 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. From 2008 to 2015, he was Chief
Risk Officer with additional responsibilities for Group IT,
Regional Chairman for Europe, Middle East and Africa as
well as 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 company’s Group Management Board since 2000 with
responsibility
for group-wide business development
functions. In 1996, he joined Zurich as a member of the
Executive Committee Switzerland, and previously, he was
head of corporate planning and controlling at SwissLife, Vice
President of the Institute of Insurance Economics 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 Advanced Management
Program of the Wharton School.
Functions at UBS Group AG
President Wealth Management Americas and President UBS
Americas until 31 January 2018 and as of 1 February 2018
co-President Global Wealth Management and President UBS
Americas
Professional history and education
Tom Naratil became co-President of Global Wealth
Management of UBS Group AG and UBS AG in February
2018. In January 2018, he became CEO of UBS Americas
Holding LLC. He was appointed President UBS Americas of
UBS Group AG and UBS AG in January 2016. He previously
served as President Wealth Management Americas from
2016 to 2018. 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.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
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
Other activities and functions
– Board member 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
– Adjunct professor and Chairman of the Board of the
Nursing at Villanova University
Institute of Insurance Economics at the University of St.
Gallen
– Member of the HSG Advisory Board of the University of St.
Gallen
– Member of the Swiss-American Chamber of Commerce
Chapter Doing Business in USA
231
Corporate governance, responsibility and compensation
Corporate governance
Andrea Orcel
Italian, born 1963
Kathryn Shih
British, born 1958
Jürg Zeltner
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 until 31 December 2017
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
management 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 beginning 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.
Professional history and education
Kathryn Shih became a member of the GEB and was
appointed President UBS Asia Pacific of UBS Group AG and
UBS AG 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 over 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 was 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
master’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.
– 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. He stepped
down from the GEB and his role of President Wealth
Management at the end of December 2017. 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
administration 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
Other activities and functions
– Board member of UBS Limited
– Board member of UBS Americas Holding LLC
232
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 employment benefits and may be eligible to be
considered for a discretionary performance award based on their
contribution during the time worked.
In case of a change of control, we may, at our discretion,
accelerate 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 from page
258 for more information
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
233
Corporate governance, responsibility and compensation
Corporate governance
Auditors
Audit is an integral part of corporate governance. While
safeguarding their independence, the external auditors closely
coordinate their work with Group Internal Audit. The Audit
Committee, and ultimately the Board of Directors (BoD),
supervises the effectiveness of audit work.
→→ 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 2017,
Ernst & Young Ltd (EY) were re-elected as auditors for the Group
for a one-year term of office. EY assume virtually all auditing
functions 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
incumbency 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 2017, the Audit Committee held eight meetings and
one call with the external auditors. The Audit Committee
assesses the performance, effectiveness and independence of
the external auditors on an annual basis. The assessment is
based on interviews with senior management as well as survey
Fees paid to external independent auditors
feedback from stakeholders across the bank. Assessment criteria
include quality of service delivery, quality and competence of the
audit team, value added as part of the audit, insightfulness and
the overall relationship with EY. Based on its own analysis and
the assessment results, the Audit Committee concluded that
EY’s audit has been effective.
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 provide audit opinions in connection with capital
increases independently 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 28.9 million in 2017
(CHF 26.0 million in 2016) 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 services classified as audit in 2017
included several engagements for which EY were mandated at
the request of FINMA.
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 fees
All other fees
Total non-audit
1 Of the total audit and non-audit fees of CHF 80,935 thousand for UBS Group AG consolidated, CHF 61,021 thousand relates to UBS AG consolidated.
31.12.17
31.12.16
52,487
12,962
65,4491
12,037
6,371
5,034
632
1,542
1,906
15,4861
49,585
9,214
58,799
7,685
2,893
4,177
615
1,747
1,051
10,484
234
→
Audit-related work comprises assurance and related services
that are traditionally performed by the auditor, such as attest
services related to financial reporting, internal control reviews,
performance standard reviews and consultation concerning
financial accounting and reporting standards.
Tax work involves services performed by professional staff in
includes tax compliance and tax
EY’s tax division and
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
services authorized under blanket preapprovals.
Group Internal Audit
Group Internal Audit (GIA) performs the internal auditing
function for the Group, and in 2017 operated with an approved
headcount of 390 full-time equivalent employees. It is an
independent and objective function that supports the Group in
achieving its strategic, operational, financial and compliance
objectives, and
its governance
responsibilities.
in discharging
the BoD
GIA independently, objectively and systematically assesses
the:
– effectiveness of processes to define strategy and risk appetite
as well as the overall adherence to the approved strategy
– effectiveness of governance processes
– effectiveness of risk management, including whether risks are
appropriately identified and managed
– effectiveness of internal controls, specifically whether they are
commensurate with the risks taken
– soundness of the risk and control culture
– effectiveness and sustainability of remediation activities,
originating from any source
– reliability and
integrity of
financial and operational
information, i.e., whether activities are properly, accurately
and completely recorded, and the quality of underlying data
and models, and
– effectiveness of processes to comply with legal, regulatory
and statutory requirements (such as the provisions of the
Articles of Association), as well as with internal policies
(including the Organization Regulations) and contracts, i.e.,
assessing whether such requirements are met, and the
adequacy of processes to sustainably meet them
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 regularly informed of such
issues.
In addition, GIA assures whether issues with moderate to
significant impact have been successfully remediated. This
responsibility applies to issues identified by all sources: business
management (first line of defense), control functions (second
line of defense), GIA (third line of defense), external auditors and
regulators. GIA also cooperates closely with risk control
functions and
legal advisors on
investigations into major control issues.
internal and external
To maximize GIA’s independence from management, the
Head of GIA reports to the Chairman of the BoD and to the
Audit Committee, which assesses annually whether GIA has
sufficient resources to perform its function, as well as its
independence and performance. In the Audit Committee’s
assessment, GIA is sufficiently resourced to fulfill its mandate
and complete its auditing objectives. GIA’s role, position,
responsibilities and accountability 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, premises and personnel, and
must be provided with all information and data that it needs to
fulfill its auditing duties. The Audit Committee 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.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
235
Corporate governance, responsibility and compensation
Corporate governance
Information policy
We provide regular information to our shareholders and to the
financial community.
Financial disclosure principles
We fully support transparency and consistent and informative
disclosure. 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 appropriate, 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
reporting periods
– Simplicity that allows readers to gain a good understanding
of the performance of our businesses
– Relevance by focusing not only on what is required by
regulation or statute but also on what is relevant to our
stakeholders and
– Best practice that leads to improved standards
Consistent with our financial reporting and disclosure
principles, we continue to benchmark disclosures in our financial
reports against recommendations issued by the Enhanced
Disclosure Task Force in 2012. We regard the improvement of
our disclosures as an ongoing commitment.
Financial reports for UBS Group AG will be published as
follows
First quarter 2018
Second quarter 2018
Third quarter 2018
23 April 2018
24 July 2018
23 October 2018
The Annual General Meeting of shareholders of UBS
Group AG will take place as follows
2018
2019
3 May 2018
2 May 2019
→ Refer to the corporate calendar at www.ubs.com/investors for
future financial report publication and other key dates,
including UBS AG’s financial report publication dates
We meet with institutional investors worldwide throughout
the year and regularly hold results presentations, attend and
present at investor conferences and, from time to time, host
investor days. When appropriate, investor meetings are hosted
by senior management and are always attended by members of
our Investor Relations team. We use various technologies such as
webcasting, audio links and cross-location videoconferencing to
widen our audience and maintain contact with shareholders
globally.
We make our publications available to all shareholders
simultaneously to provide them with equal access to our
financial information.
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 overview of the
Group’s activities during the year as well as key financial
information. Shareholders can also request UBS Group AG’s
quarterly financial reports, or download all our financial
publications electronically at www.ubs.com/investors.
→ Refer to www.ubs.com/investors for a complete set of
published reporting documents and under “Events &
presentations” for a selection of senior management industry
conference presentations
→ Refer to the “Information sources” section on page 480 of this
report for more information
→ Refer to “Corporate information” and “Contacts” in the
introductory part of this report for more information
236
Financial reporting policies
We report our Group’s results at the end of every quarter,
including a breakdown of results by business division and
disclosures or key developments relating to risk management
and control, capital, 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
statements 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 from page 325
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
accounting standards or interpretations lead to a material
change in the Group’s reported results, our results are restated
for previous periods as required by applicable accounting
standards. These restatements 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
information, 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
management, 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 December 2017. 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 from
page 303 of this report for more information
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
237
→
Corporate governance, responsibility and compensation
UBS and Society
UBS and Society
UBS is committed to creating long-term positive impact for our
clients, employees, investors and society. In doing so, we aim to
continually improve our efficiency and effectiveness in protecting
the environment, respecting human rights and ensuring
responsible behavior in all aspects of our operations.
We want to be the financial provider of choice for clients
wishing to drive capital toward investments that support the
achievement of
(UN) Sustainable
the United Nations’
Development Goals (SDGs) and the transition to a low-carbon
economy. Our cross-divisional organization UBS and Society
focuses our firm on this direction.
UBS and Society covers our activities and capabilities related
to sustainable
investing, philanthropy, environmental and
human rights policies governing client and supplier relationships,
our environmental footprint and community investment.
We intend to make sustainable performance the standard
across our firm and part of every client conversation. We work
with a long-term focus on providing appropriate returns to all of
our stakeholders in a responsible manner. To underline our
commitment to UBS and Society, we provide transparent targets
and report on progress made against them wherever possible.
To this end, we assess our progress against the following aims.
We aim to be
A leader in sustainable investing (SI) for private and institutional clients
as demonstrated by size of SI assets under management (AuM) and goals, for which UBS:
– Has set ambitious internal targets to increase AuM for core SI products and mandates
– Has set a target of USD 5 billion of client assets invested into new impact investments by the end of 2021
A recognized innovator and thought leader in philanthropy
as shown by key stakeholder – employees, clients and society – engagement, and work to support positive social impact, for which UBS:
– Aims to achieve 40% of employees volunteering by the end of 2020, of which 40% of volunteer hours will be skills based
– Combines expertise with capital and networks to increase social impact, as the partner of choice for philanthropists
– Pioneers new ways to bring substantial funding to the SDGs
An industry leader in sustainability
by retaining favorable positions in key environmental, social and governance (ESG) ratings and driving optimization in areas that are important to ESG
investors, wherein UBS:
– Supports the transition to a low-carbon economy as laid out in our climate change strategy
238
(cid:55)(cid:36)(cid:53)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:53)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:91)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:53)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:91)
(cid:47)(cid:67)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:67)(cid:68)(cid:78)(cid:71)(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:82)(cid:67)(cid:84)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:71)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:69)(cid:81)(cid:80)(cid:88)(cid:71)(cid:84)(cid:85)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:42)(cid:81)(cid:89)(cid:2)(cid:89)(cid:71)(cid:2)(cid:70)(cid:81)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)
(cid:42)(cid:81)(cid:89)(cid:2)(cid:89)(cid:71)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:42)(cid:81)(cid:89)(cid:2)(cid:89)(cid:71)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)
(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)
(cid:41)(cid:87)(cid:75)(cid:70)(cid:71)(cid:78)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)
(cid:53)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:50)(cid:74)(cid:75)(cid:78)(cid:67)(cid:80)(cid:86)(cid:74)(cid:84)(cid:81)(cid:82)(cid:91)
(cid:37)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:37)(cid:78)(cid:71)(cid:67)(cid:84)(cid:2)(cid:82)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:80)(cid:71)(cid:69)(cid:71)(cid:85)(cid:85)(cid:67)(cid:84)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:68)(cid:81)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:85)(cid:2)(cid:71)(cid:85)(cid:85)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:89)(cid:74)(cid:71)(cid:80)(cid:2)(cid:86)(cid:67)(cid:69)(cid:77)(cid:78)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:15)(cid:70)(cid:67)(cid:91)(cid:2)(cid:69)(cid:74)(cid:67)(cid:78)(cid:78)(cid:71)(cid:80)(cid:73)(cid:71)(cid:85)(cid:16)
(cid:114)(cid:2)(cid:53)(cid:86)(cid:67)(cid:77)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:114)(cid:2)(cid:39)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:81)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)
(cid:114)(cid:2)(cid:39)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78)(cid:2)(cid:72)(cid:81)(cid:81)(cid:86)(cid:82)(cid:84)(cid:75)(cid:80)(cid:86)
(cid:57)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)
(cid:75)(cid:80)(cid:80)(cid:81)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)
(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:67)(cid:70)(cid:70)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:85)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:67)(cid:78)(cid:2)(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:84)(cid:80)(cid:85)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:84)(cid:75)(cid:88)(cid:71)(cid:2)(cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:71)(cid:86)(cid:86)(cid:71)(cid:84)(cid:16)
(cid:114)(cid:2)(cid:53)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:114)(cid:2)(cid:47)(cid:67)(cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:67)(cid:68)(cid:78)(cid:71)(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:57)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:2)(cid:86)(cid:67)(cid:75)(cid:78)(cid:81)(cid:84)(cid:15)(cid:79)(cid:67)(cid:70)(cid:71)(cid:2)(cid:67)(cid:70)(cid:88)(cid:75)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:67)(cid:78)(cid:78)(cid:2)(cid:85)(cid:86)(cid:67)(cid:73)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:82)(cid:74)(cid:75)(cid:78)(cid:67)(cid:80)(cid:86)(cid:74)(cid:84)(cid:81)(cid:82)(cid:91)(cid:2)
(cid:78)(cid:75)(cid:72)(cid:71)(cid:2)(cid:69)(cid:91)(cid:69)(cid:78)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:80)(cid:71)(cid:86)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)
(cid:87)(cid:84)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:80)(cid:71)
(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:85)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:75)(cid:84)(cid:2)
(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)
(cid:81)(cid:67)(cid:78)(cid:85)(cid:16)
(cid:82)(cid:74)(cid:75)(cid:78)(cid:67)(cid:80)(cid:86)(cid:74)(cid:84)(cid:81)(cid:82)(cid:75)(cid:69)(cid:2)(cid:73)(cid:81)(cid:67)(cid:78)(cid:85)(cid:16)
(cid:114)(cid:2)(cid:50)(cid:74)(cid:75)(cid:78)(cid:67)(cid:80)(cid:86)(cid:74)(cid:84)(cid:81)(cid:82)(cid:91)(cid:2)(cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91)
(cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91)
(cid:114)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:49)(cid:82)(cid:86)(cid:75)(cid:79)(cid:87)(cid:85)(cid:2)(cid:40)(cid:81)(cid:87)(cid:80)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:57)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:2)(cid:86)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:71)(cid:70)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:2)(cid:88)(cid:81)(cid:78)(cid:87)(cid:80)(cid:86)(cid:71)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:78)(cid:81)(cid:69)(cid:67)(cid:78)(cid:2)
(cid:69)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:14)(cid:2)(cid:72)(cid:81)(cid:69)(cid:87)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:71)(cid:70)(cid:87)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:71)(cid:80)(cid:86)(cid:84)(cid:71)(cid:82)(cid:84)(cid:71)(cid:80)(cid:71)(cid:87)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:16)
(cid:114)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:72)(cid:72)(cid:67)(cid:75)(cid:84)(cid:85)
UBS and Society’s goals are implemented in three ways: how
we do business, how we support clients and how we support
communities.
corporate culture. The CCRC also monitors and reviews societal
trends and other developments on a forward-looking basis and
assesses their potential relevance to the Group.
→ Refer to “Download center” at www.ubs.com/ubsandsociety
for further documents pertinent to sustainability at UBS
→ Refer to “Annual reporting” at www.ubs.com/investors for the
UBS 2017 Global Reporting Initiative (GRI) Document containing
key sustainability information
How we do business
Strong, well-understood principles and policies are
the
foundation for empowering our employees 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 societal topics and in collaborating with other firms
and industry bodies to set high standards in and beyond our
industry.
Governance
Our Board of Directors’ (BoD) Corporate Culture and Responsibility
Committee (CCRC) approves UBS and Society’s overall strategy and
monitors the current state and implementation 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 societal performance and
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
The Group Chief Executive Officer (Group CEO) proposes the
UBS and Society strategy and annual objectives to the CCRC,
supervises their execution and informs the Group Executive
Board (GEB) and CCRC, as appropriate. Reporting to the Group
CEO,
is UBS’s senior-level
representative for sustainability issues. The Group CEO and the
Head UBS and Society are permanent guests of the CCRC.
the Head UBS and Society
Chaired by the Head UBS and Society, the UBS and Society
Operating Committee is responsible for the execution of UBS
and Society strategy across divisions and regions. Chaired by the
Group Chief Risk Officer, the Global Environmental & Social Risk
Committee defines an environmental and social risk (ESR)
framework and independent controls that align UBS’s ESR
appetite with that of UBS and Society. The business divisions are
responsible
for and
executing the UBS and Society annual objectives in their division
as they relate to client relationships, product development,
investment management, distribution and risk management.
→→ Refer to “Board of Directors” in the “Corporate governance”
for developing, providing
resources
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
239
Corporate governance, responsibility and compensation
UBS and Society
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 supports a culture
where ethical and responsible behavior is part of our everyday
operations. All employees have to confirm annually that they
have read the Code and other associated key documents and
policies. In 2017, we continued our educational program about
the Code, including a mandatory conduct and culture training
module.
The CCRC oversees the annual review of the Code by the
GEB and the BoD. Following the 2016 / 2017 review, the current
Code was published in mid-2017.
→ Refer to the Code of Conduct and Ethics of UBS at
www.ubs.com/code for more information
The Code incorporates key components of UBS and Society,
notably managing environmental and social risks, investing
sustainably 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 within our UBS and
Society constitutional document.
Stakeholder relations and employee engagement
The activities we describe in this section are designed to identify
the key points at which UBS is able to exert a positive impact on
society and the environment. Our regular engagement with a
wide range of stakeholders and many significant external
organizations and initiatives, supports us in this important
process.
Every year, we conduct a materiality assessment, as defined
by the guidelines of the Global Reporting Initiative (GRI), the
most widely used sustainability reporting framework, to collate
stakeholder views on key topics pertaining to our firm’s
financial, economic, social and environmental performance. In
2017, the assessment was supported by a major online survey,
which was completed by nearly 1,600 stakeholders (with clients
making up nearly half of this amount). The results are captured
in a GRI-based materiality matrix that covers 26 topics, the top-
rated being client protection, combating financial crime, conduct
and culture, financial stability and resilience, and digital
innovation and cyber security.
For the first time, we also included a question on the SDGs in
the survey. The SDGs are a set of 17 non-legally binding goals,
which aim to end poverty, protect the planet, and ensure
prosperity for all by 2030, as part of a global sustainable
development agenda. Stakeholders were asked which SDGs UBS
should contribute most to, and the most frequent response was
quality education, followed by climate action.
in
Awareness and expertise play an
implementing our goals. UBS promotes
its employees’
understanding of the goals and actions of UBS and Society
through a wide range of training and awareness-raising activities
and performance management. For example, in 2017, our
program on sustainable investing was delivered to around 3,500
employees in our wealth management businesses. In addition,
employee volunteering activities across all regions help raise
awareness of UBS and Society and our sustainability goals.
important
role
→→ Refer to the “Our employees” section of this report for more
information on our firm’s culture and employees
Advancing sustainability in the financial sector – UBS’s key activities in 2017
Initiative
Focus topic
Role / activity of UBS
Key outcome of initiative in 2017
Financial Stability Board (FSB) Task
Force on Climate-related Financial
Disclosures (TCFD)
Climate change
Member of TCFD and feedback provider
Commitment to review and align UBS
disclosure with TCFD recommendations
Recommendations to companies to
disclose the impacts of climate change on
their activities and strategy
Alliance of CEO Climate Leaders
Climate change
UN Environment Programme Finance
Initiative (UNEP FI)
Climate change
Joint statement by our CEO and the alliance
members to urge G20 governments to act on
the recommendations of the TCFD
Continued support for the TCFD
recommendations
Collaborates in developing approaches to
help banks disclose their exposures to
climate-related risks and opportunities, as
envisioned by the TCFD
Scenario analysis and stress testing
approach under development
240
Advancing sustainability in the financial sector – UBS’s key activities in 2017 (continued)
Initiative
Focus topic
Role / activity of UBS
Key outcome of initiative in 2017
Swiss Energy and Climate Summit
Climate change
Premium partner
Key annual Swiss SME event on climate
and energy topics
Natural Capital Finance Alliance
Natural capital
Project partner to pilot test drought scenarios
in bank portfolios
Member of technical advisory panel of the
Advancing Environmental Management
Project
Drought stress testing tool and report
developed
Database and multi-regional input-output
analysis to assess natural capital
dependencies
G20 Green Finance Study Group
(GFSG)
Green finance
Presented stress testing approach at GFSG
workshop in Beijing
Swiss Sustainable Finance (SSF)
Sustainable finance
Member of SSF board
Synthesis report, as well as background
papers on various topics, presented and
acknowledged at G20 leaders’ summit in
Hamburg
Major events and projects to promote
sustainable finance in Switzerland
Association for Environmental
Management and Sustainability in
Financial Institutes (VfU)
Sustainable finance
Member of VfU board
Host and co-organizer of annual VfU / UNEP
FI flagship roundtable
Major events and projects to advance
sustainable finance in Germany, Austria
and Switzerland
Sustainability Accounting Standards
Board (SASB)
Sustainable finance
UBS Asset Management represented on
SASB Institutional Advisory Group and
participated in various committees on metrics
First reports by group of US public
companies issued in accordance with SASB
→
Thun Group of Banks
Human rights
Convener of Group
International Capital Market
Association (ICMA)
Green and social
bonds
Member of ICMA and on ICMA board
Paper on the implications of UN Guiding
Principles 13b and 17 and stakeholder
event to discuss the paper
Guidance for the governance of the Green
Bond Principles and Social Bond Principles
Organisation for Economic Co-
operation and Development (OECD)
Due diligence
Member of advisory group of OECD
Responsible Business Conduct (RBC) project
Publication of the OECD RBC guidance for
institutional investors
Policy Outlook (POLO) platform
Sustainability
regulation
Co-convener of platform
Platform’s second annual roundtable
(convened by UBS)
WWF Banking on World Heritage
Sites
UNESCO (natural)
world heritage sites
Participant in WWF-organized workshops and
speaker on launch event panel
Reporting paper (includes UBS best
practice case study)
Roundtable on Sustainable Palm Oil
(RSPO)
Natural capital /
palm oil
Member of RSPO financial institutions task
force and on RSPO complaints panel
Panel speaker at RSPO EU Roundtable 2017
and the RSPO Roundtable (RT 15 in
Indonesia)
Review of the updated RSPO Principles and
Criteria
Banking Environment Initiative (BEI)
Soft Commodities Compact
Soft commodities
Member of BEI Soft Commodities Compact
implementation group
Bi-monthly meetings
241
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Corporate governance, responsibility and compensation
UBS and Society
Environmental and social risk assessments
CCases referred for assessment1
bby region
Americas
Asia Pacific
Europe, Middle East and Africa
Switzerland
bby business division
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center2
For the year ended
331.12.17
2,170
31.12.16
2,671
31.12.15
2,192
% change from
31.12.16
(19)
305
604
253
395
556
341
295
520
257
1,008
1,379
1,120
485
22
795
7
852
9
429
20
1,226
2
971
23
396
20
980
0
776
20
(23)
9
(26)
(27)
13
10
(35)
250
(12)
(61)
11 Transactions and client onboarding requests referred to the environmental and social risk function. 2 Relates to procurement / sourcing of products and services.
Management of environmental and social risks
We apply an ESR framework to identify and manage potential
adverse impacts on the environment and to human rights, as
well as the associated environmental and social risks to which
our clients’ and our own assets are exposed. UBS’s
comprehensive ESR standards are aligned with the principles
expressed in the UBS and Society constitutional document,
govern client and supplier relationships, and are enforced firm-
wide.
We have set ESR standards
in product development,
investments, financing and for supply chain management
decisions. As part of our due diligence process we engage with
clients and suppliers 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. In 2017, we introduced new guidelines for companies in
the fishing industry and require them to demonstrate that they
are not involved in illegal, unreported and unregulated fishing.
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
identifying clients,
transactions or suppliers potentially in breach of our standards,
or otherwise subject to significant environmental and human
rights controversies. We use advanced data analytics on
companies associated with such risks, integrated into our web-
based compliance tool, before we enter into a client or supplier
relationship or transaction. This significantly enhances our ability
to identify potential risk. In 2017, 2,170 referrals were assessed
by our ESR unit, of which 80 were rejected or not further
pursued, 395 were approved with qualifications and 18 were
pending. Measures to optimize the control framework led to a
19% year-on-year decline in such referrals.
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,
indigenous peoples’ rights
We will only do business under
stringent criteria in the following
areas:
– Soft commodities: palm oil, soy,
timber, fish and seafood
– Power generation:
coal-fired power plants, large
dams, nuclear power
– Extractives: hydraulic fracturing,
oil sands, arctic drilling, coal
mining, precious metals,
diamonds
242
Climate change
In 2017, the Financial Stability Board’s
(FSB) Task Force on Climate-related
Financial Disclosures (TCFD) published its
recommendations to help investors better
price climate-related risks and to support
a smooth transition to a low-carbon
economy. The recommendations are
applicable to all sectors and cover an
organization’s governance, strategy and
risk management, as well as metrics and
targets related to climate change risks
and opportunities. UBS, along with 230
other organizations worldwide, affirmed
its commitment to support the voluntary
recommendations. We plan to further
align our disclosure within the five-year
pathway outlined by the TCFD and
collaborate within the industry to close
gaps.
Governance
Our climate change strategy is overseen
by the CCRC as part of the UBS and
Society governance. This oversight role of
the CCRC has been embedded in the
Organization Regulations of UBS Group
AG since March 2018. Within the
parameters set by the CCRC, climate-
related opportunities are overseen by the
UBS and Society Operating Committee
and climate change risks by the Global
ESR Committee. The CCRC regularly and
critically reviews the assessments and
steps taken by these management bodies
toward executing the climate change
strategy.
Strategy
We believe the transition to a low-carbon
economy is vital and we are focused on
supporting our clients in preparing for
success in an increasingly carbon-
constrained world. As a leading global
financial services provider, we do this in
four different ways:
– We seek to protect our assets from
climate change risks by limiting our risk
appetite for carbon-related assets and
by estimating our firm’s vulnerability to
climate change risks using scenario-
based stress testing approaches and
other forward-looking portfolio
analyses. So far, no material risk on our
balance sheet has been identified.
– We support our clients’ efforts to
assess, manage and protect themselves
from climate-related risks by offering
innovative products and services in
investment, financing and research.
We have developed several products
that allow clients to identify the
weighted carbon intensity of their
investments and / or to align them
with the Paris Agreement.
– We mobilize private and institutional
capital toward investments that
facilitate climate change mitigation
and adaptation and we support the
transition to a low-carbon economy as
a corporate advisor and / or with our
lending capacity.
– We continue to reduce our greenhouse
gas (GHG) emissions and increase the
firm’s share in renewable energy.
Risk management
Protecting our own assets:
We have limited our risk appetite for
carbon-related assets, for example, in the
areas of coal mining and coal-fired power
plants, as well as forestry and agriculture.
In order to manage our own, and our
clients’, risk derived from both the
physical and transition risks associated
with climate change, we have performed
both top-down balance sheet stress
testing and targeted, bottom-up analysis
of specific sector exposures. In doing so,
we identified challenges ranging from the
suitability of climate scenarios for banking
risk modeling to data availability. To
address these challenges, we have
committed to work toward alignment and
knowledge-sharing within the industry.
Sixteen banks, including UBS, and the UN
Environment Programme Finance Initiative
(UNEP FI) have partnered to
collaboratively develop analytical tools
that will help banks disclose their
exposures to climate-related risks and
opportunities, as envisioned by the TCFD.
Protecting our clients’ assets:
We offer innovative products and
services, including, for example,
capabilities in Asset Management for
equity portfolio managers to examine the
carbon
footprint of their portfolios, the launch of
an innovative Climate-Aware rules-based
fund and an engagement strategy around
climate-related topics. We also offer our
research capacity on climate change
issues to our clients.
Mobilizing private and institutional
capital:
We mobilize capital to support
environmental and social issues, including
the transition to a low-carbon economy.
For example, Wealth Management aims
to include a sustainable investing
optionality in its mandate offerings for
private clients and we have committed to
join other major institutions in an initiative
to create an investing and philanthropic
platform focused on addressing funding
gaps for the SDGs. Asset Management
established a comprehensive approach to
environmental and social factors and to
corporate governance across investment
disciplines. 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 efficiency,
waste and biofuels, and transport sectors.
We also strive to be the preferred
strategic financial partner for transactions
relating to Switzerland’s Energy Strategy
2050.
Reducing our direct climate change
impact:
We set quantitative targets and continue
to reduce UBS’s Group-wide GHG
emissions and increase our share in
renewable energy in line with our
commitment to RE100, a global initiative
that encourages multinational companies
to make a commitment to using 100%
renewable power by 2020. This will
reduce the firm’s GHG footprint by 75%
by 2020 compared with 2004 levels.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
243
Corporate governance, responsibility and compensation
UBS and Society
Climate-related metrics 2017
Protecting our own assets
Financial impact from climate-related
risks and opportunities
Carbon-related assets
No significant financial risk on our balance sheet identified in past stress tests. A group of 16 banks, including
UBS, and UNEP FI have partnered to refine methodologies for risk and opportunities
CHF 6.5 billion, or 2.8% of total net credit exposure1
Products and services supporting a
lower-carbon economy
Protecting our clients’ assets and mobilizing private and institutional capital
CHF 72 billion, or 2.3% of UBS clients’ total invested assets2
Total deal value in equity or debt capital market services related to climate change mitigation and adaptation:
CHF 43.3 billion, and CHF 5.4 billion in financial advisory services
Four strategic transactions in support of Switzerland’s Energy Strategy 2050
Support of 82% of climate-related shareholder resolutions3
Reducing our own climate change impact
Greenhouse gas emissions
GHG footprint4: 148 kilotons CO2e
Target to reduce our GHG footprint by 75%, by 2020 (based on 2004 levels)
Weighted carbon intensity of the Climate Aware equities strategy: 117.45 t CO2e per million of USD revenue
(44% lower than its benchmark, the FTSE Developed World Index)
1 As of 31 December 2017. Total net credit exposure across Personal & Corporate Banking and the Investment Bank, includes traded and banking products, net of allowances, provisions and hedges. As recommended by the TCFD,
carbon-related assets are defined as assets tied to the energy and utilities sectors Global Industry Classification Standard. Non-carbon-related assets, such as renewables, water utilities and nuclear power, are excluded. For grid
utilities, the national grid mix is applied. 2 Invested assets of products such as sustainably managed properties and infrastructure, and renewable energy companies. 3 Of the proposals we supported, all were voted against the
recommendation provided by the issuer. 4 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and GHG offsets (gross GHG emissions include: direct GHG emissions by UBS; indirect GHG
emissions associated with the generation of imported / purchased electricity (grid average emission factor), heat or steam and other indirect GHG emissions associated with business travel, paper consumption and waste disposal).
A breakdown of our GHG emissions (scope 1, 2, 3) is available in our GRI Document at www.ubs.com/ubsandsociety.
Legend: CO2e = equivalent CO2 emissions
In-house environmental management
We manage our environmental program
through an
environmental management system, in accordance with the ISO
14001 standard, while our environmental indicators (energy,
travel and paper) and GHG emissions data is externally verified
on the basis of ISO 14064 standards. In addition, in 2017 we
received our first ISO 50001 certification (energy management)
for European locations.
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 commuting reduction.
In 2017, we further reduced UBS’s GHG emissions by 11%,
or 10% per full-time employee, year on year. We recorded a
total reduction of 59% from baseline year 2004. We reduced
our energy consumption 5% compared with 2016 and 19%
compared with 2012. Of UBS’s worldwide electricity
consumption, 56% was sourced from renewable energy.
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 2017, remediation measures were
requested for 23% of suppliers of newly sourced goods and
services with potentially high impact to improve their adherence
to UBS’s RSCM standards.
244
1
2
4
3
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
CDP
Sustainalytics
MSCI
Oekom
FTSE4Good Index
Euromoney Private Banking Global
Award 2017
Euromoney Private Banking Global
Award 2017
The Banker Investment Banking Awards
2017
Climate change
ESG performance
ESG performance
ESG performance
ESG performance
Philanthropic advice
SRI / Social impact investing
Climate A List
Leader score within our industry
97th percentile ranking
A rating
Top three among primary peer group2
Corporate responsibility prime status
Index member
Winner
Winner
Corporate social responsibility (CSR)
Winner – Most innovative investment bank for CSR
The Banker Global Private Banking
Awards 2017
Philanthropy services globally
Winner – Best private bank for philanthropy services
globally
GRESB Real Estate, Debt and
Infrastructure assessments
Sustainability performance of real asset portfolios
worldwide
Submitted 22 funds across all three GRESB assessments
Ten funds (with total AuM of over CHF 33.1 billion)
awarded five-star ratings, with seven funds ranking first in
their respective peer groups
Principles for Responsible Investing
Assessment Report 2017
Property and infrastructure
Received A+ grades
Pensions and Investments World Pension
Summit 2017
Innovation and investment awards
UK National Employment Savings Trust (NEST) awarded
for UBS Climate Aware
European Fund Launch of the Year
award
Received for UBS Climate Aware
Bloomberg New Energy Finance
Renewable energy and cleantech financing
Ranked third in league table on public markets
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Lord Mayor’s Dragon Awards (UK)
Community investment
Corporate Engagement Awards (UK)
Community investment
National CSR Awards (UK)
Community investment
Winner – Accelerator Award 2017 for social
entrepreneurship program
Gold winner – Best community involvement during a CSR
program
Runner-up in the Best Partnership in the Community
category
Commonwealth CSR Award (Taiwan)
Community investment
Winner
1 All information provided is as of 31 December 2017. 2 As defined in the UBS Compensation Report 2017.
245
Corporate governance, responsibility and compensation
UBS and Society
Ratings and recognitions
In 2017, UBS continued to gain industry recognition for its
commitment to improving performance under ESG criteria and
for its efforts in offering clients world-class expertise and
sustainable products. In 2017, our firm also maintained its
leadership position in the Diversified Financial Services and
Capital Markets industry group of the DJSI, the most widely
recognized sustainability rating, for the third year running. The
DJSI evaluates companies’ sustainability practices and recognizes
the best performers. The RobecoSAM Industry Group Leader
Report notes that UBS continues to lead in its industry on
sustainability efforts, which are directed through UBS and
Society. It highlights the large choice of sustainable investment
solutions UBS offers to its clients, such as impact funds, long-
term theme funds, renewable energy and cleantech financing,
green bonds, eco-mortgages and energy check-ups for small
and medium-sized enterprises (SMEs).
Other major achievements include MSCI ESG Research
upgrading UBS to an A rating, Sustainalytics ranking UBS as an
industry leader and CDP awarding UBS a position on the Climate
A List.
How we support our clients
We strive to systematically incorporate the economic impacts of
ESG issues into the products and services we provide to clients.
We support corporate and institutional clients who want to
generate positive environment and social impact using our
corporate advisory expertise or by directing capital through our
lending or
investment capacity. We assist private and
institutional clients in their desire to invest in accordance with
their own social and environmental objectives and we are
proactive in discussing these issues with them. As a preferred
partner for global philanthropists, we work toward achieving the
UN’s ambitious SDGs. Our experts and in-house foundation offer
clients unique access to social and financial innovation and
philanthropic advice, as well as tailored program design, co-
funding and co-development opportunities.
Sustainable investments
As of 31 December 2017, sustainable investments increased to
over CHF 1.1 trillion, representing nearly 35% of our total
invested assets, compared with CHF 976 billion as of the end of
2016. Major increases in relative terms were observed for our
investments in the integration and third-party categories, which
increased 95% and 43%, respectively, compared with 2016.
More details can be found in the “Sustainable investments”
table further below.
246
Key sustainable investing products and services in 2017 (select)1
Product / service
The Rise Fund
Business division
Key features
Wealth Management
(WM), Wealth
Management
Americas (WMA)
– USD 325 million raised
– Invests in seven sectors – education, financial services, health care, infrastructure,
energy, food and agriculture, and IT – with a dual mandate: generating competitive
financial returns and measurable positive societal outcomes
Rethink Impact Fund
WMA
OrbiMed Asia Partners III
WM
UBS Long Term Themes Equity Fund
UBS Long Term Themes Portfolio SMA
WM, Asset
Management (AM)
Climate Aware
UBS Clean Energy Infrastructure
Switzerland 2
Global Impact Fund
US Sustainable Equity Fund
SI-focused UBS Manage solutions
AM
AM
AM
AM
WM
– USD 75 million raised
– Direct-access social impact private equity fund that invests in early- to growth-stage,
high-impact companies, primarily in the United States. The fund focuses on four
themes: health care, economic opportunity, environmental sustainability, and
education
– USD 85 million raised
– Growth investments in health care companies in China and India, focusing on
biopharmaceuticals, medical technology and health care services
– USD 1.5 billion held in Long Term Themes Fund and mandates
– Invests in companies that are solution providers for challenges such as water scarcity,
emerging market infrastructure and health care, waste management and recycling
– Innovative rules-based equities strategy to address carbon risk in portfolios
– Launched in September 2017, with capital commitments of CHF 200 million as of the
end of 2017
– Solution for institutional investors seeking an exposure to the renewable energy and
energy infrastructure space with focus in Switzerland
– Exposure to global equity markets in stocks with material exposure to impact
categories like climate change or health that are also sustainable stocks, i.e., those
selected based on strong ESG analysis and traditional valuation discipline
– Combines price-to-intrinsic value investment philosophy with careful consideration of
companies’ sustainability profiles
– Several investment mandate solutions investing in instruments with a high
sustainability rating (to the extent possible)
– Launched for market France
ESG Portfolio Analyzer
WMA
– Provides transparency and analysis of ESG topics in client portfolios
UBS Sustainability Analytics
WM, Personal &
Corporate Banking
(P&C)
– Enables clients to achieve full transparency by screening their portfolio for potentially
harmful industry exposure and, if appropriate, to make exclusions to protect it
against reputational risks
Philanthropy Advisory
WM, WMA
– A total of approximately 370 ultra high net worth individuals or philanthropists
UBS Optimus Foundation
CC
attended UBS Philanthropy Forums in the Americas, Asia and Switzerland
– Advisory services for over 400 clients
– CHF 59.5 million raised in donations / CHF 58.5 million grants to partners approved
– Pioneering Educate Girls Development Impact Bond (DIB): on track to meet its
enrollment and education targets
– World’s first large-scale DIB launched (Maternal and Newborn DIB)
Social Investment Toolkit
WM
– Guide for social entrepreneurs with eight modules ranging from impact story to
creating an investor pitch (developed with Ashoka)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
247
Corporate governance, responsibility and compensation
UBS and Society
Key sustainable investing products and services in 2017 (select)1 (continued)
Product / service
Business division Key features
Program-related investment
WM, CC (UBS
Optimus
Foundation,
Community
Affairs)
– Investments in the form of a loan, enabling donors to regain the initial investment plus
a rate of return and allowing philanthropic capital to be recycled
– Loans for the UBS UK Donor-Advised Foundation and UBS Optimus Foundation UK
successfully completed with two charities. Product offering being made available to
clients
UBS Unique ETF
WM
– Invests in companies based on 19 equality standards, including gender balance, equal
compensation and work–life-balance, policies, transparency and accountability
– Donation of 5% of management fee to a portfolio of SDG5-related projects managed
by the UBS Optimus Foundation
Voting (on behalf of clients)
AM
– Provided instructions (based on AM’s corporate governance principles) to vote on
Green and sustainable bonds
Investment Bank
(IB)
100,069 separate resolutions at 9,877 company meetings
– Seven green and sustainable bond transactions supported
LGBT Career Equality and Military Veterans
indices
IB, WMA
– Companies selected include leaders in giving opportunities and support to veterans and
have top scores in the Human Rights Campaign Corporate Equality Index
Global Sustainability Leaders index
IB, WMA
– Companies selected include leaders with regard to the UN Global Compact principles
Renewable energy and cleantech financing
IB
– Participation in significant renewables and cleantech deals globally, for both established
utilities clients and innovative growth stage companies
2
Energy check-up for SMEs
P&C
– UBS SME efficiency bonus for energy reduction plan with overall energy savings of
78,590 MWh / a, equivalent to the annual energy consumption of approximately 4,000
single-family homes
PPrreeffeerrrreedd ssttrraatteeggiicc ppaarrttnneerr ffoorr advisory and
financing transactions related to
Switzerland’s Energy Strategy 2050
P&C
– Supports energy utilities in raising capital on international capital markets to progress
their quest for renewable energy
– Four strategic transactions executed for Switzerland’s Energy Strategy 2050
1 All information provided is as of 31 December 2017. 2 Information provided is as of 31 December 2016.
in
this area. Within
Impact and TPG’s The Rise Fund), thereby establishing UBS as a
key player
listed markets, Asset
Management’s long-term themes strategy was launched, and a
number of new third-party solutions were added to strengthen
the platform. A variety of educational initiatives were rolled out,
as raising awareness among financial advisors remains a critical
focus to support the growth of the SI business.
regularly
Our global CIO
translates key societal and
environmental concerns into investment themes as part of its
Longer Term Investments series and global Research-based
Advice. In 2017, some notable examples of this were the World
Economic Forum 2017 white paper on mobilizing private wealth
for public good, the development of the first 100% sustainable
investing cross-asset portfolio, gender lens wealth, business with
impact or the social innovator toolkit, a guide for social
entrepreneurs.
Wealth Management aims to systematically include an SI
optionality in its mandate offerings and to provide clients with
impact
fund
investing products and sustainable mutual
InvestingTM
solutions. Enhanced UBS Manage Sustainable
offerings with 100% (excluding liquidity) sustainable and impact
investments went live in early January 2018. These offerings are
based on our global Chief Investment Office’s (CIO) UBS House
View. In 2017, it further expanded its SI optionality to core
affluent and high net worth clients by launching a dedicated
offering for French clients. Wealth Management also arranges
platforms, roundtables and networking events for our clients to
exchange ideas and gather know-how.
Wealth Management Americas expects to see considerable
growth in SI assets. A key focus for Wealth Management
Americas is the expansion of its solutions platform. In 2017, two
impact investment deals were successfully closed (Rethink
248
1
2
Asset Management is committed to integrating sustainability
into its entire investment approach. We are convinced that
sustainable and impact investing can add value to portfolios
within the same risk / return profile. Investment strategies
customized to address particular sustainability objectives, such as
reducing carbon risk or tilting a portfolio toward specific
environmental, social or governance factors, in combination with
traditional financial and risk / return expectations are increasingly
popular. Over the
last decade, Asset Management has
developed capabilities to provide customized solutions to meet
the specific goals and needs of individual investors. It offers a
wide range of SI strategies across various asset classes,
integrating sustainability and impact into its entire mainstream
offerings, including in active equities, fixed income, hedge
funds, infrastructure and private equity, real estate and passive
strategies.
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
efficiency, waste and biofuels, and transport sectors. In 2017,
the total deal value in equity or debt capital market services
relating to these areas was CHF 43.3 billion, and CHF 5.4 billion
in financial advisory services.
Personal & Corporate Banking clients have access to
appropriate and relevant products from Asset Management and
Wealth Management that follow our Group-wide approach to
SI. We also support Swiss SMEs in their energy-saving efforts
and transition to a low-carbon economy. SMEs benefit from
initiatives such as energy check-ups or leasing bonuses (financial
contributions toward enhancing environmental performance) for
utility vehicles and production machines.
Having the financial expertise, networks and access to the
capital required to build or support innovative financial products,
we remain committed to introducing and funding innovative
financial solutions. Examples include: The Rise Fund, a major
private equity impact investment vehicle, and the substantial
funds raised for OrbiMed.
As of 31 December 2017, we also held green bonds in the
amount of CHF 565 million in our high-quality liquid assets
portfolios 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
CCore SI products and mandates
Integration3
Integration / RPI4
Impact investing5
Exclusionary screening6
Third-party7
NNorms-based screening8
TTotal sustainable investments
UUBS total invested assets
SI proportion of total invested assets (%)
GRI2
FS11
FS11
FS11
FS11
FS11
FS11
FS11
FS11
FS11
For the year ended
% change from
331.12.17
31.12.16
31.12.15
31.12.16
176.4
145.4
138.5
10.8
61.6
3.2
91.2
9.6
927.5
1,103.9
3,179
34.7
5.5
54.6
2.5
76.1
6.7
830.4
975.8
2,821
34.6
3.4
49.1
0.8
79.2
6.1
795.1
933.5
2,689
34.7
21
95
13
28
20
43
12
13
13
11 All figures are based on the level of knowledge as of January 2018. 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 Impact investments are targeted investments with a financial return and a
clear social and / or environmental return objective. 6 Includes customized screening services (single or multiple exclusion criteria). 7 SI
products from third-party providers applying either integration, impact investing and / or exclusionary approach. 8 Reporting scope
expanded in 2015 to include all actively managed discretionary segregated mandates. Duplication with other SI categories was subtracted to
avoid double counting.
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).
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
249
Corporate governance, responsibility and compensation
UBS and Society
Philanthropy
Building on our award-winning track record and 13 years of
experience, we have a global team of in-house experts in place
who specialize in all areas of philanthropy and strategic
charitable giving. 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 dedicated events and access a global network of like-
minded individuals with whom to collaborate and share their
ideas and knowledge.
→→ Refer to www.ubs.com/philanthropy for more information
UBS Optimus Foundation
The UBS Optimus Foundation is an award-winning grant-making
foundation that helps our clients use their wealth to drive
positive and sustainable social change for children. The
foundation connects clients with inspiring entrepreneurs, new
technologies and proven models that help improve the lives of
children in a variety of ways. It selects and continuously monitors
programs that
improve children’s health, education and
protection and that have the potential 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. In 2017, the Foundation’s work helped
improve the well-being of 2.1 million children globally.
Effective philanthropy is about more than simply funding
existing programs. It is also about long-term thinking. That is
why the Foundation also supports partners in building their
capacities, enabling them to reach more children more
effectively and efficiently, funds research to better understand
the issues that prevent children from thriving, and undertakes
advocacy efforts with partners to promote wider adoption and
scaling of the most promising programs.
→ Refer to www.ubs.com/optimus for more information
How we support our communities
At UBS, we recognize that our long-term success depends on
the health and prosperity of the communities of which we are a
part. Our approach is to build sustainable and successful
partnerships with non-profit organizations and social enterprises
to help our contributions have a lasting impact. Our Community
Affairs programs seek to overcome disadvantage through long-
term investment in education and entrepreneurship in the
communities within which we operate.
We provide focused financial and human support, including
through the use of skills-based employee volunteering programs
and client participation where appropriate. Our employees are at
the heart of the program delivery and act as role models for
young people and as mentors for social entrepreneurs. UBS
provides employees with up to two days of paid leave for
volunteering annually.
250
We play a role in the stewardship of a healthy social and
financial future for our communities, working in partnership
with clients, as well as the public and philanthropic sectors.
Examples include:
– Promoting and strengthening the vocational education
system and providing access also to disadvantaged youth.
Within SwissSkills, a new public-private partnership, UBS
volunteers delivered meaningful advice at job fairs across
Switzerland.
– UBS
Investment
Japan’s Rural
the Community &
Environment (RICE) project, with over 7,000 primary school
children having
received environmental education and
undertaken biodiversity research.
in
– Partnering with the Bridge Academy secondary school in
London, a national exemplar of business partnership in
education driving social mobility through excellent and
inclusive education, rooted in the local community.
– Project Entrepreneur, an initiative to increase the number of
female-founded high-growth companies in the US, with over
1,500 women entrepreneurs trained, and currently expanding
to include more accelerator participants and additional
resources and startup services for venture competition
applicants and alumni.
Since 2014, our impact reporting has incorporated the
London Benchmarking Group’s standard model. UBS operates
according to a global framework to deliver community and
business impacts, through a regionally devolved model, allowing
for effective evaluation, while aligning programs to address local
community issues and meet local business priorities. We are
continuing to enhance and develop this framework, which,
together with global coordination of reporting, allows us to
effectively evaluate and focus our programs. In 2017, UBS made
direct cash contributions totaling CHF 39 million, including
support through its affiliated foundations in Switzerland and the
UBS Anniversary Education Initiative. Over 89% of UBS’s
Community Affairs grants were made in the areas of education
and entrepreneurship. 31% of our employees volunteered in our
communities compared with 30% in 2016. Additionally, UBS
contributed a total of CHF 5.5 million to the UBS Optimus
Foundation.
Our Community Affairs program benefited 126,279 young
people and entrepreneurs across all of the regions in which we
operate.
UBS Global Visionaries
In 2017, we merged the best of our Social Innovators program
into the UBS Global Visionaries program to strengthen our
support for social entrepreneurs. The program aims to support
social entrepreneurs who are shaping our future and connect
them to our employees, partners and clients to jointly change
the society we live in.
→
UBS and Society key performance indicators in 2017
How we do business
2004
2,170
new business or client cases referred to environmental and social risk unit
80
rejected
1,677
approved
395
approved with
qualifi cations
•••
18
pending
Remediation measures
requested for 23%
of(cid:124)suppliers of newly sourced
goods and(cid:124)services with
potentially high impacts
How we support
our clients
How we support
our communities
59%
reduction of UBS
GHG emissions
2017
75%
reduction
target
2020
126,279
benefi ciaries reached
globally, from 134
community partners
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
CHF 44.5 million
direct cash contributions,
including support through its
affi liated foundations in
Switzerland and the UBS
Anniversary Education
Initiative, and funds to the
UBS Optimus Foundation.
3,179 UBS total invested assets
(in CHF billion)
1,104 = 35% Total sustainable investments
927 Norms-based screening
20,140
employees volunteered
168,226
hours on community projects
176 Core SI products and mandates
UBS Optimus Foundation
CHF 59.5 million raised in donations
CHF 58.5 million grants to partners approved
2.1million children reached
251
Corporate governance, responsibility and compensation
Our employees
Our employees
Overarching aims and objectives
Build engagement and strengthen our corporate culture
– Invest in large-scale culture programs across the organization
– Measure, foster and recognize culture-building behaviors
Remain an employer of choice for people at all career stages
– Maintain attractiveness to external talent and a highly motivated workforce
– Focus on internal mobility and provide long-term career prospects
Strengthen our diverse and inclusive workplace
– Aspiration to increase the ratio of women in management roles to one-third
– Support activities focused on increasing the inclusiveness of our culture
Effectively ddevelop, manage and retain our talent
– Provide a wide range of learning opportunities to meet the needs of employees at all levels
– Prepare current and future leaders for enhanced responsibilities and leadership excellence
Our employees’ skills, experience and commitment are key to
delivering on our business strategy. Our human resource (HR)
strategy therefore seeks to hire, develop and engage talented
employees at all levels who have the diverse backgrounds and
capabilities to advise our clients, develop new products, manage
risk and adapt to evolving regulations. We invest in our
employees and promote initiatives that build engagement and a
cohesive, collaborative culture.
Building our culture
then, we have
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 and execute our
strategy, shaping how we work together and influencing
everything we do. Since
focused on
strengthening our culture and embedding our core values more
deeply into the identity of the firm. In 2017, we continued with
our firm-wide culture-building program, working closely with
senior managers from all divisions, functions and regions. A key
initiative remains our very successful Group Franchise Awards
(GFA) program, which we implemented in 2016 to recognize
culture-building behavior. The GFA program allows us to track
cross-business collaboration and develop ideas for simplifying
our processes. The program has maintained strong momentum
in terms of both the number and the quality of submissions from
across the entire firm.
Attracting and recruiting talent
A positive, cohesive culture is both advanced and sustained
through individuals who share our vision and core values.
We source such 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
employees at all levels to leverage existing skills and develop
new ones. In 2017, we introduced a new, in-house-built tool
that matches employee career preferences with open roles and
helps identify high-quality internal candidates. Having long-term
career prospects with us is an important driver of career
satisfaction for existing employees and it attracts external talent.
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
252
Externally, we source candidates directly and through
employee referrals, job boards, social media, advertisements and
external recruitment agencies. In 2017, we launched our
employer value proposition (EVP) globally, which explains what
we stand for as an employer and what differentiates us. Our EVP
is aligned with our corporate strategy, the three keys to success
and our brand. As an employer of choice, we received more
than 730,000 applications in 2017 and hired a total of 9,881
external candidates at all career stages.
Throughout 2017, we continued to hire employees and see
growth in our Business Solutions Centers (BSCs) in the US,
Switzerland, India, China and Poland. All UBS Corporate Center
functions are represented in our BSCs; this co-location of teams
enhances collaboration and efficiencies. At year-end, offshore
and nearshore employees accounted for approximately 21% of
our global Corporate Center workforce.
Hiring and training entry level talent is a priority for all
business divisions. In 2017, we hired 394 new university
graduates into our graduate talent programs, as well as 578
In Switzerland, we hired 294
interns for various roles.
apprentices for business and IT roles, and 171 trainees into our
bank entry programs 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
Top-employer honors in 2017
Switzerland’s Most Attractive Employers (Universum): ranked second by business students
Global Ideal Employers, Global Female Ideal Employers (eFinancialCareers): top 10
Bloomberg Financial Services Gender-Equality Index member
Ideal Employers (eFinancialCareers): Asia top 5; Europe top 10; North America top 20
– World’s Most Attractive Employers (Universum): global top 50
–
–
–
–
– Working Mother 100 Best Companies (Working Mother, US)
–
–
Best Places to Work for LGBT Equality (Human Rights Campaign, US)
The Times Top 100 Graduate Employers (The Times, UK)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
253
Corporate governance, responsibility and compensation
Our employees
Diversity and inclusion
Workforce diversity is a business imperative for us. In our
experience, teams with diversity in gender, race, age, ethnicity,
education, background, disability, sexual orientation and other
aspects better understand and relate to our equally diverse
clients’ needs. Likewise, diversity of thought, opinion and
experience helps us make better decisions and drives innovation,
while an inclusive work environment attracts high-quality people
and makes the firm a better place to work. Our HR policies and
procedures underscore our commitment to a diverse and
inclusive workplace, with equal opportunities for all employees.
We are committed to hiring, retaining and promoting more
women across the firm. In 2017, we continued to build on our
aspiration to increase the ratio of women in management roles
to one-third. We embedded management accountability at all
levels for supporting this goal and continued to develop and
refine career support, HR processes and technology solutions to
help us better retain women at all career stages. In order to
better understand and address the motivations of voluntary
senior leavers, we undertook a landmark global attrition study in
mid-2017, surveying nearly 2,000 former employees. Results are
being examined at a divisional level and actions are being
defined.
The UBS Career Comeback Program is an initiative we
launched in Switzerland and the US in 2016 and extended to the
UK in 2017. The program supports professionals who wish to
return to corporate jobs after a career break and features on-
the-job experience, classroom learning and mentoring. The
program has proven successful: so far, Career Comeback has
given 65 women and two men the opportunity to relaunch their
careers.
In addition to our strategic initiatives, every year we support
numerous activities in each business division and region focused
on increasing the inclusiveness of our culture through coaching
and education, for example, to raise awareness of and reduce
unconscious bias. Integral to this effort are our employee
networks, which regularly host events on gender, culture, life
stage, sexual orientation and other topics. In 2017, we
sponsored 43 employee networks globally, with more than
17,000 members.
→ Refer to www.ubs.com/diversity for more information
331.12.17
20,770
19,944
8,959
11,097
5,274
5,662
161
20,427
61,253
As of
31.12.16
20,522
19,695
7,539
10,746
5,206
5,373
167
20,581
59,387
31.12.15
20,816
19,897
7,539
10,505
5,373
4,957
176
21,238
60,099
% change from
31.12.16
1
1
19
3
1
5
(4)
(1)
3
Personnel by region
Full-time equivalents
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
of which: UK
of which: rest of Europe
of which: Middle East and Africa
Switzerland
TTotal
254
(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:36)(cid:91)(cid:2)(cid:74)(cid:71)(cid:67)(cid:70)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:14)(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:25)
(cid:2)
(cid:20)(cid:22)(cid:14)(cid:18)(cid:18)(cid:18)
(cid:19)(cid:26)(cid:14)(cid:18)(cid:18)(cid:18)
(cid:19)(cid:20)(cid:14)(cid:18)(cid:18)(cid:18)
(cid:2)(cid:2)(cid:24)(cid:14)(cid:18)(cid:18)(cid:18)
(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:18)
(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)
(cid:20)(cid:19)(cid:14)(cid:18)(cid:21)(cid:20)(cid:2)
(cid:27)(cid:14)(cid:18)(cid:22)(cid:23)(cid:2)
(cid:19)(cid:19)(cid:14)(cid:22)(cid:21)(cid:22)(cid:2)
(cid:20)(cid:19)(cid:14)(cid:18)(cid:22)(cid:25)
(cid:25)(cid:14)(cid:27)(cid:25)(cid:18)
(cid:19)(cid:21)(cid:14)(cid:18)(cid:24)(cid:20)
(cid:22)(cid:14)(cid:20)(cid:18)(cid:25)
(cid:22)(cid:14)(cid:26)(cid:21)(cid:26)
(cid:22)(cid:14)(cid:23)(cid:25)(cid:20)
(cid:24)(cid:14)(cid:26)(cid:24)(cid:20)
(cid:25)(cid:14)(cid:24)(cid:22)(cid:26)
(cid:19)(cid:21)(cid:14)(cid:21)(cid:27)(cid:27)
(cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)
(cid:35)(cid:85)(cid:75)(cid:67)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:386)(cid:69)
(cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:14)
(cid:47)(cid:75)(cid:70)(cid:70)(cid:78)(cid:71)(cid:2)(cid:39)(cid:67)(cid:85)(cid:86)
(cid:67)(cid:80)(cid:70)(cid:2)(cid:35)(cid:72)(cid:84)(cid:75)(cid:69)(cid:67)
(cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)
(cid:47)(cid:67)(cid:78)(cid:71)
(cid:40)(cid:71)(cid:79)(cid:67)(cid:78)(cid:71)
(cid:19)(cid:2)(cid:37)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:67)(cid:85)(cid:75)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:82)(cid:71)(cid:84)(cid:85)(cid:81)(cid:80)(cid:2)(cid:10)(cid:89)(cid:81)(cid:84)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:72)(cid:87)(cid:78)(cid:78)(cid:2)(cid:86)(cid:75)(cid:79)(cid:71)(cid:2)(cid:81)(cid:84)(cid:2)(cid:82)(cid:67)(cid:84)(cid:86)(cid:2)(cid:86)(cid:75)(cid:79)(cid:71)(cid:11)(cid:2)(cid:75)(cid:85)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:70)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:74)(cid:71)(cid:67)(cid:70)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:10)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:2)
(cid:81)(cid:80)(cid:78)(cid:91)(cid:11)(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:20)(cid:18)(cid:14)(cid:19)(cid:26)(cid:22)(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:22)(cid:26)(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:21)(cid:25)(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:26)(cid:20)(cid:20)(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:25)(cid:23)(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)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:2)(cid:80)(cid:87)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:24)(cid:20)(cid:14)(cid:23)(cid:23)(cid:26)(cid:2)(cid:67)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(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:25)(cid:14)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:85)(cid:86)(cid:67)(cid:72)(cid:72)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:37)(cid:67)(cid:84)(cid:70)(cid:2)
(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)
Developing and managing our workforce
We expect our leaders to be champions for our strategy and
culture as well as effective managers and advocates for their
employees. We develop current and future leaders through a
leadership program suite that spans from first-level
line
managers to senior leadership levels. Programs like our Senior
Leadership Experience for our most senior executives and the
Senior Leadership Program for managing directors help define
our expectations for leadership excellence, build confidence in
our strategy and increase commitment to the firm’s three keys
to success.
A skilled workforce to execute our business strategy is crucial
to our success. We provide
learning and development
opportunities to all our employees to support them in enhancing
their knowledge and skills at all ages and career stages. For
example, we offer development programs, business education
and role-specific training. Furthermore, as one of the top
UBS University
educators of entry level talent in Switzerland, we train more
than 1,800 young people each year, including apprentices,
interns and high school and university graduates. In 2017, our
permanent employees participated in approximately 765,500
development activities,
training on
compliance, business and other topics. This was an average of
12.2 training sessions, or 2.3 training days, per employee.
including mandatory
Our key talent programs prepare high-potential employees
for line management or senior leadership roles. Training for
in Wealth
client-facing staff
Management degree program and a rigorous training program
for aspiring financial advisors in the US.
included a Master
in 2017
All employees and managers are also asked to consider
development activities and career planning in regular, two-way
discussions. At UBS, development includes experience, exposure
and education. Line managers are expected to actively support
both development and internal mobility, as they are key factors
for professional growth, engagement and retention.
Managing performance
Effective people management is key to sustaining a high-
performing organization. Our annual performance reviews
assess both performance and behavior. Measuring what was
achieved and how those results were achieved underscores the
importance of the firm’s Behaviors for individual and Group
success, and both ratings are considered in development, reward
and promotion decisions.
Rewarding performance
Our compensation philosophy is to align the interests of our
employees with those of our clients and investors, building on
our three keys to success – our Pillars, Principles and Behaviors.
Our Total Reward Principles establish a framework that balances
sustainable performance and prudent risk-taking with a focus on
conduct and sound risk management practices.
→ Refer to the “Compensation” section of this report for more
information
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Knowledge is what sets us apart and
keeps us flexible and competitive, as a
firm and as individuals. Learning plays a
crucial role and that is why at UBS we
create an environment where employees
can grow and develop. At the center is
our new corporate university – UBS
University, a one-stop shop for all learning
and development at UBS. Its offering
ranges from online and in-person training
to help all employees and line managers
develop their professional skills, to highly
specialized training and certification
programs for specific business areas and
support for continuous, lifelong learning.
In total, we offer more than 2,400
e-learning and classroom-based trainings.
255
Corporate governance, responsibility and compensation
Our employees
Gender distribution by employee category1
By headcount, as of 31.12.17
Male
Female
Total
Officers (Director and
above)
Officers (other officers)
Employees
TTotal
Number
17,986
5,651
23,637
%
76
24
100
Number
13,046
8,716
21,762
%
60
40
100
Number
7,129
10,030
17,159
%
42
58
100
NNumber
38,161
24,397
62,558
%%
61
39
100
11 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 62,558 as of 31 December 2017, which
excludes staff from UBS Card Center, Hotel Seepark Thun, Wolfsberg and the Widder Hotel.
2016, we have regularly surveyed all our permanent employees
to capture their feedback on how we are doing as a firm. In
2017, we conducted two surveys, in which 74% and 80% of
eligible employees, respectively, participated. In both surveys, a
significant majority of respondents agreed that they are proud to
work at UBS and would recommend the firm to family and
friends. They think the firm has a positive work environment and
the learning and career opportunities offered are continuously
improving for employees at all levels. Our ongoing ambition
remains 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 maintain overall engagement
ratings in the top quartile.
Grievances and whistleblowing protection
We are committed to maintaining high legal, regulatory and
ethical standards. We have long-standing procedures in every
region to help us resolve employee grievances, and employees
are strongly encouraged to speak with their line manager or HR
about any concerns. Our global whistleblowing policy and
procedures offer multiple channels for staff to raise concerns,
either openly or anonymously, about any suspected breaches of
laws, regulations, rules or other legal requirements, or of our
Code, policies or 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
formal employee representation groups, all of which are in
Europe. The UBS Employee Forum for Europe represents 16
countries and considers pan-European issues that may affect our
performance, operations or prospects. Similar regional and
country level groups discuss topics such as business transfers,
pensions, workplace conditions, health and safety, and
redundancies. Collectively, these groups represent approximately
50% of our global workforce.
Our responsibilities
We aim to be a high-quality employer, with our values
embedded in all of our people management practices. We offer
competitive benefits to all employees that include insurance,
pension, retirement and personal leave. These benefits often go
beyond legal requirements or market practice, and we regularly
review them to confirm that they meet our employees’ needs.
For example, in 2017 we enhanced our Family Care Leave policy
in the US and Puerto Rico to offer employees four paid weeks of
leave per year to care for a relative with a serious health
condition. We also increased our paternity leave options in
Switzerland in 2017. In addition to the current 10-day paid
leave, new fathers can either take up to four weeks of unpaid
leave or reduce their workload to 80% for up to six months. At
UBS, all new parents can take paid time off after the birth or
adoption of a child. Our parental leave policies meet the legal
standards in all locations and exceed them in most. We also
arrangements,
support
including
telecommuting, part-time
job sharing and partial
retirement.
working
flexible
roles,
A wide range of resources are available to help employees
navigate work-life issues and personal challenges. For example,
assistance programs
region offer support and
counseling for challenges such as illness, conflict, bereavement,
psychological health and elderly care. In addition, we have
redeployment and outplacement programs in every region, as
well as clear policies and processes for handling redundancies.
in every
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 employees and external staff.
→ Refer to www.ubs.com/healthandsafety for more information
Employees have a voice in shaping our culture
We want our employees to be engaged and to share their views
on the status quo and our culture. We also want to give them
the opportunity to have an impact on the firm’s future. Since
256
Our workforce at a glance 1
34%
in the Americas
34%
in Switzerland
7,970
13,062
7,648
13,399
More than 50%
in Switzerland have
worked here
10+ years
4,572
6,862
18%
in EMEA
14%
in Asia Pacifi c
4,207
4,838
Total employees (FTE)
61,253
1,866 more than a year ago (FTE)
62,558 employees (by headcount) 2
Offi ce locations in
51
countries worldwide
Citizens of 134 countries
More than 150
languages spoken
Our workforce
has employees
of all ages
19% under 30 years old
59% 30 – 50 years old
22% over 50 years old
41is the average age 9 is the average years of service
61%
are men
(38,161)
39%
are women
(24,397)
1Calculated as of 31.12.17 on a headcount basis of 62,558 unless specifi ed to be on a full-time equivalent (FTE) basis, where we include proportionate numbers of part-time employees.
2 Employees only. In addition, 32,140 external staff (by headcount) were active at the end of 2017 and 2,774 FTEs were employed through third parties on short-term contracts to fi ll positions
on an interim basis.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
257
Advisory vote
Corporate governance, responsibility and compensation
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.
Throughout 2017, the BoD
Compensation Committee continued to
oversee the compensation framework and
ensure that reward balances performance
with prudent risk-taking while also
creating alignment with our shareholders
and other stakeholders. I am pleased to
present our Compensation Report for
2017, which provides further information
about our compensation philosophy and
approach.
2017 performance
We delivered excellent financial results,
maintained our strong capital positon and
achieved our net cost reduction target in
2017.
Our adjusted1 profit before tax increased
16% to CHF 6.2 billion. Net profit
attributable to shareholders was CHF 1.1
billion, compared with CHF 3.2 billion in
2016, as it reflected a CHF 2.9 billion net
write-down of deferred tax assets (DTAs).
The enactment of the US Tax Cuts and
Jobs Act in the fourth quarter of 2017
reduced the tax rate from 35% to 21%,
thereby reducing the value of previously
recognized US DTAs.
Excluding the DTA write-down, net profit
attributable to shareholders would have
increased by 22% year over year. The
DTA write-down had no impact on our
ability to return capital to shareholders
and had a negligible impact on fully
applied CET1 capital.
The Group Executive Board (GEB)
performance award pool, including the
Group CEO, was CHF 74.2 million, an
increase of 3.1%. As a percentage of the
adjusted Group profit before tax, the GEB
performance award pool was 1.2%, well
below the cap of 2.5%.
2017 compensation philosophy and
framework
Our compensation philosophy aligns the
interests of our investors, clients and
employees. Our approach to
compensation has remained largely
unchanged since we introduced our
current Total Reward framework in 2012.
The consistency of our approach
continues to strengthen our culture of
sustainable performance, accountability
and appropriate risk-taking. In addition, it
provides clarity in compensation
discussions with our employees as well as
with our shareholders.
Our variable compensation includes
significant mandatory deferral for
employees, thus creating alignment
between our employees’ and
stakeholders’ interests and reinforcing
that compensation is appropriately linked
to longer-term sustainable performance.
We believe UBS has one of the most
rigorous deferral regimes in the industry
with a deferral period over five years, or
longer for certain regulated employees.
We maintained a strong capital position
with a fully applied CET1 capital ratio of
13.8% and an improved CET1 leverage
ratio of 3.7% while maintaining our post-
stress CET1 capital ratio above the 10%
objective. The BoD intends to propose a
dividend of CHF 0.65 per share, an
increase of 8% compared with 2016. In
addition, UBS will initiate a share
repurchase program of up to CHF 2
billion over three years, commencing with
up to CHF 550 million in 2018.
2017 performance award pool and
expenses
Based on the 2017 Group and business
division results, the total performance
award management pool was CHF 3.1
billion, an increase of 6% compared with
the prior year. The Compensation
Committee considers a range of financial
factors, including risk-adjusted profit and
capital strength, as well as affordability,
risk profile and a focus on returns to
shareholders, when determining the
performance award pool. Revaluations of
DTAs do not reflect the underlying
performance of the business and are not
within management’s control; therefore
consistent with prior years (when their
impact has been positive), they have not
affected the funding of the performance
award pool.
1 Please refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
258
Following the Compensation Committee’s
review of our principles and framework,
enhancements were made to further align
our approach with our long-term strategy
and shareholder and client interests, as
well as to remain competitive and comply
with regulatory requirements. For
example, to remain competitive, we have
raised the cap for immediate cash
performance awards to CHF 2 million.
With regard to share ownership
requirements, we substantially increased
the requirements for the Group CEO
(1,000,000 shares) and for the other GEB
members (500,000 shares).
Culture and behaviors
We remain focused on further
strengthening our culture to foster and
sustain our competitive position. We
continue to emphasize behaviors as part
of our culture, and we reward not only
what results were achieved but also how
they were achieved.
We recognize and encourage positive
behavior and culture carriers through our
Group Franchise Awards (GFA) program,
which fosters conduct that exemplifies
our Behaviors. The GFA program aims to
incentivize the collaboration and
cooperation between employees as well
as to recognize employees’ ideas and
suggestions on how to improve processes
and efficiency.
Further, we continue to operate a robust
Incidents & Consequences process that
includes reflecting disciplinary actions and
control incidents in deliberations for
promotions and performance awards.
This includes a multi-year review of
incidents to consider behaviors over a
longer time horizon.
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.
We consider pay fairness an integral part
of our compensation philosophy and we
maintain practices designed to achieve
appropriate pay across diverse groups,
including gender.
Annual General Meeting 2018
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)
2018 on 3 May 2018, we will seek your
support on the following compensation-
related items:
Ann F. Godbehere
Chair of the Compensation
Committee of the Board of
Directors
–
–
–
–
the maximum aggregate amount of
compensation for the BoD for the
period from AGM 2018 to AGM 2019
the maximum aggregate amount of
fixed compensation for the GEB for
2019
the aggregate amount of variable
compensation for the GEB for 2017
shareholder endorsement in an
advisory vote for the Compensation
Report
Ann F. Godbehere
Chair of the Compensation Committee of
the Board of Directors
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
259
1
Advisory vote
Corporate governance, responsibility and compensation
Compensation
2017 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 three keys to success – our Pillars, Principles and Behaviors.
Our Total Reward Principles establish a framework that balances
sustainable 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 therefore links the interests of our employees with
those of our stakeholders and encourages our employees to
focus on our clients, create sustainable value and achieve the
highest standards of performance. Moreover, we reward
behavior that helps build and protect the firm’s reputation –
specifically integrity, 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.
Our Total Reward Principles
Our Total Reward Principles apply 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 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 embrace a culture of integration and collaboration within the firm. Our approach to compensation fosters
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 stakeholders expect from us
260
Our Total Reward approach
At UBS we have a holistic approach to compensation. Our Total
Reward approach consists of fixed compensation (base salary
and role-based allowances, if applicable), performance awards
(immediate cash performance award and for employees with
total compensation exceeding CHF
/ USD 300,000 Equity
Ownership Plan and Deferred Contingent Capital Plan), pension
contribution and benefits. Performance awards, where
applicable, are determined based on a number of factors,
individual
including Group, business division,
performance, and awarded
local
employment conditions and at the discretion of the firm.
team and
line with applicable
in
Our Total Reward is structured to support sustainable results.
A substantial portion of our performance award is deferred and
vests over a period of five years, or longer for certain regulated
employees. This deferral regime aligns employee and investor
interests, and supports our capital base and the creation of
sustainable shareholder value.
Performance award
(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:89)(cid:67)(cid:84)(cid:70)
(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:71)(cid:80)(cid:85)(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:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)
(cid:38)(cid:71)(cid:72)(cid:71)(cid:84)(cid:84)(cid:71)(cid:70)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:73)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:37)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:50)(cid:78)(cid:67)(cid:80)(cid:2)
(cid:39)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:49)(cid:89)(cid:80)(cid:71)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:2)(cid:50)(cid:78)(cid:67)(cid:80)
(cid:43)(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:50)(cid:71)(cid:80)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:2)
(cid:68)(cid:71)(cid:80)(cid:71)(cid:386)(cid:86)(cid:85)
(cid:79)
(cid:84)
(cid:71)
(cid:86)
(cid:15)
(cid:84)
(cid:71)
(cid:73)
(cid:80)
(cid:81)
(cid:46)
(cid:79)
(cid:84)
(cid:71)
(cid:86)
(cid:15)
(cid:84)
(cid:71)
(cid:86)
(cid:84)
(cid:81)
(cid:74)
(cid:53)
(cid:36)(cid:67)(cid:85)(cid:71)(cid:2)(cid:85)(cid:67)(cid:78)(cid:67)(cid:84)(cid:91)(cid:17)
(cid:386)(cid:90)(cid:71)(cid:70)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:71)(cid:80)(cid:85)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)
Illustrative overview
The performance award process consists of pool funding determination, allocation and delivery and, if applicable, deferral to align
reward with sustainable performance as outlined in the chart below. This process also includes additional specific pay-for-
performance safeguards for our Group Executive Board (GEB) members.
Performance award
Pool funding determination
Allocation
Deliver and defer
Performance award pool is determined by
considering risk-adjusted and sustainable
performance, including:
Performance awards are allocated to employees
based on Group, business division, team and
individual performance recognizing what was
achieved and how it was achieved, including:
Performance awards are delivered through
a deferral to align employee interests with investor
interests:
– Overall performance including quality of earnings and
capital strength
– Returns to investors
– Risk profile and adjustments
– Progress on strategic initiatives
– Affordability
– Market competitiveness / position
– Client focus
– Financial results and capital management
– Risk management
– People and talent development
– Principles and Behaviors
– Substantial amounts of performance awards are deferred
– At least 50% deferred for Key Risk Takers
– Long-term deferral of up to five years, or longer for certain
regulated employees
– Shareholder- and debt holder-aligned vehicles
– No leverage in compensation plans
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Additional GEB pay-for-performance safeguards:
– Cap on individual performance awards and total
– Allocations based on a performance assessment
GEB performance award pool
considering quantitative and qualitative measures that
includes Group / business division and / or region per-
formance including our Pillars, Principles and Behaviors
– Performance assessment includes evaluation by
a control function
– At least 80% of awards are at risk of forfeiture
– Cap on immediate cash performance award
– Share ownership requirements
– Six-month notice period in employment contracts
– No hedging strategies allowed
– Binding votes on aggregate GEB compensation
– Advisory vote on the Compensation Report
261
Advisory vote
Corporate governance, responsibility and compensation
Compensation
2017 performance and compensation funding
Our performance in 2017
We delivered excellent 2017 financial results. Adjusted1 profit
before tax increased 16% to CHF 6.2 billion and reported profit
before tax increased 29% to CHF 5.3 billion, reflecting higher
operating income and a reduction in operating expenses. We
also achieved our CHF 2.1 billion net cost reduction target while
investing for growth.
Net profit attributable to UBS Group AG shareholders was
CHF 1.1 billion, and included a CHF 2.9 billion net write-down
of deferred tax assets (DTAs) following the enactment of the US
Tax Cuts and Jobs Act in the fourth quarter of 2017, which
reduced the federal corporate tax rate from 35% to 21%. This
resulted primarily in a reduction of the potential future value of
previously recognized US tax losses. Excluding this net DTA
write-down, net profit attributable to shareholders would have
increased 22% to CHF 3.9 billion. Our 2017 adjusted return on
1
tangible equity excluding DTAs was 13.8%.
Our capital position remained strong. As of 31 December
2017, our fully applied common equity tier 1 (CET1) capital ratio
remained stable at 13.8% and our fully applied CET1 leverage
ratio improved from 3.5% to 3.7%. We increased our fully
applied total loss-absorbing capacity by CHF 9.1 billion to
CHF 78.3 billion.
For the financial year 2017, the Board of Directors intends to
propose a dividend of CHF 0.65 per share, an increase of 8% on
the prior year. We will also initiate a share repurchase program
of up to CHF 2 billion over the next three years, commencing
with up to CHF 550 million in 2018.
11 Please refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
Adjusted profit before tax
CHF million
Adjusted return on tangible equity
excluding DTAs1
in %
Total loss-absorbing capacity
CHF billion
16%
250 bps
13%
8,000
4,000
0
20.0
6,194
5,341
13.8
10.0
11.3
0
69.2
78.3
80
40
0
2016
2017
2016
2017
2016
2017
1 Calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax expense / benefit, such as the net write-down due to the US Tax Cuts and Jobs Act enacted in the fourth quarter of 2017,
divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as fully applied CET1 capital.
1
262
Our Wealth Management business reported adjusted profit
before tax of CHF 2.8 billion, an increase of 15% compared with
2016, driven by increases in all income lines coupled with
effective cost control. Net new money was CHF 51.1 billion,
reflecting an annual growth rate of 5.2%.
Wealth Management Americas reported adjusted profit
before tax of USD 1.3 billion, an increase of 8% compared with
2016. Operating income increased mainly on higher net interest
and recurring net fee income. Operating expenses increased
mainly due to higher financial advisor compensation reflecting
changes announced in 2016 to our compensation model. Strong
inflows from same store advisors were more than offset by
lower net recruiting, consistent with changes in the operating
model, resulting in net new money outflows of USD 7.2 billion.
Personal & Corporate Banking reported adjusted profit before
tax of CHF 1.7 billion, a decrease of 4% compared with 2016,
mostly due to lower net interest income reflecting the negative
rate environment in Switzerland and higher funding costs, as
well as higher expenses related to strategic and regulatory
initiatives. Net new business volume growth for personal
banking was a record 4%.
Our Asset Management business reported adjusted profit
before tax of CHF 525 million, a decrease of 5% compared with
2016, primarily reflecting lower operating income. Invested
assets reached a nine-year high of CHF 776 billion. Net new
money inflows excluding money market flows totaled CHF 48.1
billion for the year.
Adjusted profit before tax in the Investment Bank remained
broadly unchanged at CHF 1.5 billion. Lower revenues in Foreign
Exchange, Rates and Credit, mainly resulting from reduced client
activity due to continued low market volatility, were broadly
offset by increased revenue in Equity Capital Markets and in
Equity Derivatives. The adjusted return on attributed equity for
the Investment Bank was 16%.
Corporate Center reported an adjusted loss before tax of
CHF 1.6 billion compared with CHF 2.1 billion in 2016, mainly
reflecting reduced expenses.
→ Refer to “Group performance” in the “Financial and operating
performance” section of this report for more information
1
1
1
1
Performance award pool funding
Our performance award pool funding framework is based on
business performance, which
is measured across multiple
dimensions as outlined below.
Contribution to create a sustainable shareholder value
Market
position
and trends
Overall
performance
Create
sustainable
shareholder
value
Returns to
investors
Affordability
(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:82)(cid:84)(cid:81)(cid:386)(cid:78)(cid:71)
Strategic
initiatives
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
objectives, including capital growth as well as risk-weighted
assets 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
reduction initiatives.
Our
compensation philosophy
focuses on balancing
performance with prudent risk-taking and retaining talented
employees. To achieve this, as performance increases, we reduce
our overall performance award funding percentage. In years of
strong performance, this prevents excessive compensation,
increased proportion of profit before
resulting
performance award being available
to
shareholders or growing the Group’s capital. In years where
the performance award pool will
performance declines,
generally decrease, however funding rates may increase.
for distribution
in an
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
263
Advisory vote
Corporate governance, responsibility and compensation
Compensation
The performance award pool funding process starts with the
accrual of a percentage of each business division’s risk-adjusted
profit before performance award. In determining the final pool,
we also consider progress on our strategic objectives, quality of
earnings, affordability,
investors and market
competitiveness. Business division performance is adjusted for
items that do not represent underlying performance (for
example gains or losses on the sale of a property or a business).
The Compensation Committee may exclude further items,
returns
to
including litigation and regulatory costs arising from matters that
predate current management.
→ Refer to “Group performance” in the “Financial and operating
performance” section of this report for more information on
adjusted results
An illustrative overview with more details on the process is
presented in the chart below.
Performance award pool funding process – illustrative overview
Financial
performance
1
Risk adjustment
Quantitative and qualitative adjustments
Consultation of
Group CEO with
the business
division Presidents
Compensation
Committee / BoD
governance and
decision
Adjusted
business division
financial
performance
2
Risk-adjusted
business
division
performance
award pool
3
4
5
Business
division
KPIs
Qualitative,
risk and
regulatory
assessment
Relative
performance
vs peers
Market
position
and trends
Recommended
performance
award pools
Final
performance
award pool
1
2
3
4
5
Adjusted business division
financial performance
The starting point for the funding process is the adjusted business division financial performance excluding items that are not reflective of the
underlying performance
Risk-adjusted business
division performance
award pool
Predetermined business division-specific 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) support 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
per formance award pools
The business division performance award pool determination process, based on quantitative and qualitative assessments, results in a recommen-
dation from the Group CEO (after consultation with the business division Presidents) to the Compensation Committee for consideration
Final performance
award pool
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
verifies 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
264
2017 performance award pool and expenses
Performance award pool and expenses
The performance award pool, which includes performance-
based variable awards for 2017, was CHF 3.1 billion, reflecting
an increase of 6% compared with 2016. Consistent with prior
years, where the impact of deferred tax assets (DTA) was
positive, the funding of the performance award pool was not
affected as DTAs do not reflect the underlying business
performance and are not within management’s control.
Performance award expenses for 2017 increased by 4% to
CHF 3.1 billion. This increase reflects the change in the
performance award pool for 2017, partially offset by lower
expenses related to the amortization of awards from prior years.
The “Performance award pool and expenses” chart on this page
compares the performance award pool with performance award
expenses.
→ Refer to the “Our deferred variable compensation plans for
2017” section of this report for more information
CHF billion
2.9
(0.7)
Awards for
performance
year deferred
to future
periods2
(including
accounting
adjustments)
6%1
3.0
0.8
Amortization
of prior-year
awards
2.2
Award
expenses for
performance
year
3.1
0.7
2.4
Amortization
of prior-year
awards
Award
expenses for
performance
year
3.1
(0.7)
Awards for
performance
year deferred
to future
periods2
(including
accounting
adjustments)
Performance
award pool
2016
Performance
award expenses
Performance
award pool
2017
Performance
award expenses
4%
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.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
265
Advisory vote
Corporate governance, responsibility and compensation
Compensation
2017 compensation for the Group CEO and the other GEB
members
Base salary, role-based allowance, pensions and benefits
Performance assessment
Annual performance awards for the Group CEO and other GEB
members are based on the GEB compensation determination
process as illustrated on the next page and, in aggregate,
subject to shareholder approval at the AGM.
We assess the GEB members’ performance against a number
of quantitative and qualitative 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 functions, they are assessed on the performance of the
Group and the function they oversee. These quantitative
measures together with qualitative measures
(Pillars and
Principles) account for 65% of the assessment. Behaviors
account for 35% of the assessment. The “Overview of the
quantitative and qualitative performance assessment measures”
table in this section outlines the measures on which the
performance assessment is based.
The weighting between Group, business division, regional
and functional KPIs varies depending on a GEB member’s role. A
significant weight is given to Group KPIs for all GEB members.
The performance assessment
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 performance
achieved relative to the prior year, the strategic plan,
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
setting the compensation for the Group CEO, except that the
Group CEO gives no recommendation on his own award.
The total amount of the awards for the Group CEO and
other GEB members 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 performance awards for each GEB member will only be
confirmed upon shareholder approval at the AGM.
Each Group Executive Board (GEB) member receives a fixed base
is reviewed annually by the Compensation
salary, which
Committee. The Group CEO’s annual base salary for 2017 was
CHF 2.5 million and has remained unchanged since his
appointment in 2011. The other GEB members received a salary
of CHF 1.5 million (or local currency equivalent), also 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).
Therefore, 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. It consists of a cash portion and a blocked
UBS share award, which is granted annually. Such an allowance
represents a shift in the compensation mix between fixed and
variable compensation and not an
total
compensation.
increase
in
Pension contributions and benefits for GEB members are in
line with local practices for other employees. No enhanced or
supplementary pension contributions are made for the GEB.
At the Annual General Meeting (AGM), shareholders are
asked to approve the maximum aggregate amount of fixed
compensation for the members of the GEB for the following
financial year.
→ Refer to the “Our compensation 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
266
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.
(cid:54)(cid:74)(cid:71)(cid:2)(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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:2)(cid:75)(cid:85)(cid:2)(cid:75)(cid:80)(cid:88)(cid:81)(cid:78)(cid:88)(cid:71)(cid:70)(cid:2)(cid:67)(cid:86)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)(cid:85)(cid:86)(cid:67)(cid:73)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(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:80)(cid:70)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:69)(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:70)(cid:71)(cid:69)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:15)(cid:79)(cid:67)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:71)(cid:85)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:85)(cid:14)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:84)(cid:71)(cid:88)(cid:75)(cid:71)(cid:89)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:88)(cid:67)(cid:78)(cid:2)(cid:68)(cid:91)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:38)
(cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:85)(cid:71)(cid:86)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:50)(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:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)
(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:70)(cid:71)(cid:69)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:14)(cid:2)
(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:17)(cid:2)(cid:81)(cid:84)(cid:2)(cid:72)(cid:87)(cid:80)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:82)(cid:71)(cid:84)(cid:15)
(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:14)(cid:2)(cid:70)(cid:71)(cid:82)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:81)(cid:78)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)
(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85)(cid:2)(cid:88)(cid:71)(cid:84)(cid:85)(cid:87)(cid:85)(cid:2)(cid:82)(cid:78)(cid:67)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:15)(cid:81)(cid:80)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(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:54)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)
(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:75)(cid:69)(cid:2)(cid:82)(cid:78)(cid:67)(cid:80)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:50)(cid:75)(cid:78)(cid:78)(cid:67)(cid:84)(cid:85)(cid:14)(cid:2)
(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:36)(cid:71)(cid:74)(cid:67)(cid:88)(cid:75)(cid:81)(cid:84)(cid:85)
(cid:36)(cid:71)(cid:74)(cid:67)(cid:88)(cid:75)(cid:81)(cid:84)(cid:85)(cid:2)(cid:67)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:21)(cid:23)(cid:7)(cid:14)(cid:2)(cid:89)(cid:74)(cid:75)(cid:78)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:79)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:24)(cid:23)(cid:7)(cid:2)(cid:75)(cid:85)(cid:2)(cid:85)(cid:82)(cid:78)(cid:75)(cid:86)(cid:2)(cid:67)(cid:69)(cid:84)(cid:81)(cid:85)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)
(cid:54)(cid:74)(cid:71)(cid:2)(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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:28)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:38)(cid:2)(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(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:86)(cid:74)(cid:71)(cid:2)
(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:84)(cid:71)(cid:88)(cid:75)(cid:71)(cid:89)(cid:85)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:85)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:81)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:50)(cid:75)(cid:78)(cid:78)(cid:67)(cid:84)(cid:85)(cid:14)(cid:2)
(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:36)(cid:71)(cid:74)(cid:67)(cid:88)(cid:75)(cid:81)(cid:84)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:2)(cid:74)(cid:81)(cid:89)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:71)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)
(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85)
(cid:54)(cid:74)(cid:71)(cid:2)(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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:28)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:38)(cid:2)(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(cid:2)(cid:71)(cid:88)(cid:67)(cid:78)(cid:87)(cid:67)(cid:86)(cid:71)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(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:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:71)(cid:86)(cid:71)(cid:84)(cid:79)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:78)(cid:78)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:84)(cid:71)(cid:88)(cid:75)(cid:71)(cid:89)(cid:85)
(cid:86)(cid:74)(cid:71)(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:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)
(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:85)
(cid:57)(cid:74)(cid:71)(cid:80)(cid:2)(cid:70)(cid:71)(cid:86)(cid:71)(cid:84)(cid:79)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:82)(cid:67)(cid:91)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:85)(cid:14)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:2)(cid:72)(cid:67)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85)(cid:2)(cid:75)(cid:80)(cid:28)
(cid:115)(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:80)(cid:70)(cid:2)(cid:67)(cid:72)(cid:72)(cid:81)(cid:84)(cid:70)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)
(cid:115)(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:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:115)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(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:88)(cid:85)(cid:2)(cid:82)(cid:71)(cid:71)(cid:84)(cid:85)
(cid:115)(cid:2)(cid:69)(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:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:84)(cid:71)(cid:80)(cid:70)(cid:85)
(cid:115)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:82)(cid:67)(cid:84)(cid:67)(cid:79)(cid:71)(cid:86)(cid:71)(cid:84)(cid:85)(cid:2)(cid:70)(cid:71)(cid:71)(cid:79)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:78)(cid:71)(cid:88)(cid:67)(cid:80)(cid:86)
(cid:40)(cid:75)(cid:80)(cid:67)(cid:78)(cid:2)(cid:69)(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:70)(cid:71)(cid:69)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:85)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:70)(cid:71)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:111)(cid:85)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:79)(cid:79)(cid:71)(cid:80)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:10)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:79)(cid:67)(cid:77)(cid:71)(cid:85)(cid:2)(cid:80)(cid:81)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:79)(cid:79)(cid:71)(cid:80)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)
(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: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:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:82)(cid:81)(cid:85)(cid:71)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:38)(cid:28)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:38)(cid:2)(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)
(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:2)(cid:69)(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:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)
(cid:115)(cid:2)(cid:86)(cid:81)(cid:73)(cid:71)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:2)
(cid:69)(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:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:79)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:85)
(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:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:67)(cid:73)(cid:73)(cid:84)(cid:71)(cid:73)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:75)(cid:85)(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:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:88)(cid:67)(cid:78)
(cid:2)
(cid:85)
(cid:85)
(cid:71)
(cid:69)
(cid:81)
(cid:84)
(cid:82)
(cid:73)
(cid:80)
(cid:75)
(cid:77)
(cid:67)
(cid:79)
(cid:15)
(cid:80)
(cid:81)
(cid:75)
(cid:85)
(cid:75)
(cid:69)
(cid:71)
(cid:38)
(cid:71)
(cid:71)
(cid:86)
(cid:86)
(cid:75)
(cid:79)
(cid:79)
(cid:81)
(cid:37)
(cid:2)
(cid:80)
(cid:81)
(cid:75)
(cid:86)
(cid:67)
(cid:85)
(cid:80)
(cid:71)
(cid:82)
(cid:79)
(cid:81)
(cid:37)
(cid:2)
(cid:70)
(cid:80)
(cid:67)
(cid:2)
(cid:38)
(cid:81)
(cid:36)
(cid:2)
(cid:71)
(cid:74)
(cid:86)
(cid:2)
(cid:72)
(cid:81)
(cid:2)
(cid:71)
(cid:78)
(cid:81)
(cid:52)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
267
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Overview of the quantitative and qualitative performance assessment measures
The table below presents the quantitative and qualitative measures for performance assessment of the Group CEO and GEB
members.
Quantitative measures
Group
A range of fi nancial metrics including adjusted Group return on tangible equity, adjusted Group profi t before tax, CET 1 targets
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
Qualitative measures
Specifi c functional KPIs for Corporate Center GEB members
Pillars
Capital strength
Establishes and maintains capital. Generates effi ciencies and deploys our capital more effi ciently and effectively
Effi ciency and effectiveness
Contributes to the development and execution of our strategy and success across all business lines, functions and regions.
Considers market conditions, relative performance and other factors
Risk management
Reinforces risk management through an effective control framework. Captures the degree to which risks are self-identifi ed and
focuses on the individual’s success to comply with all the various regulatory frameworks. Helps shape the fi rm’s relationship
with regulators through ongoing dialog
Principles
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 reinforces 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.
268
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 presence and the extent to which they compete
against us for talent. The Compensation Committee also
levels and
considers our peers’ strategies, practices, pay
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 2017, the primary peer group remained unchanged and
consisted of:
Bank of America
Credit Suisse
Julius Baer
Deutsche Bank
Morgan Stanley
The DCCP contributes to the Group’s total loss-absorbing
capacity, 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 year
with an adjusted Group loss before tax during the vesting
period. This means that 100% of the award is subject to risk of
forfeiture.
For the GEB member whose role is considered an SMF,
additional provisions apply that are described in the paragraph
“UK Senior Managers and Certification Regime”.
The Compensation Committee has
that
performance conditions for all GEB members’ awards due to
vest in March 2018 have been satisfied and thus the awards will
vest in full.
confirmed
→ Refer to the “Our deferred variable compensation plans for
2017” section of this report for more information
→ Refer to the “Our compensation for employees other than GEB
members” section of this report for more information on MRTs
and SMFs
Goldman Sachs
Standard Chartered
→ Refer to “Vesting of outstanding awards granted in prior years
Barclays
BlackRock
BNP Paribas
Citigroup
HSBC
JPMorgan Chase
This group is broadened for the purposes of business division
benchmarking and for the review of specific roles, as
appropriate.
2017 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, which is capped to defer a higher
portion and thus further aligns GEB members’ and shareholders’
interests. To remain competitive, we have revised the cash cap
to CHF / USD 2 million (or local currency equivalent) without
impacting the overall pay levels for all relevant employees
including GEB members. Any amount above this cap is granted
in notional shares under the Equity Ownership Plan (EOP).
Further we have increased the share ownership requirements for
GEB members as explained later in this section.
For the performance year 2017, 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
performance 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 (AT1) capital instruments that vest after five years.
subject to performance conditions” in the “Supplemental
information” section of this report for more information
Share ownership requirements: aligning GEB members’
interests with those of our shareholders
To further strengthen the alignment of our GEB members’
interests with those of our shareholders, we have substantially
increased our share ownership requirements. The revised policy
requires the Group CEO to hold a minimum of 1,000,000 UBS
shares (up from 500,000) and other GEB members to hold a
minimum of 500,000 UBS shares (up from 350,000). 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 ownership thresholds. At
the end of 2017, the GEB members met these increased share
ownership requirements, except for those appointed during
2016, who need to build up and meet the required share
ownership level by 2021.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
269
Advisory vote
Corporate governance, responsibility and compensation
Compensation
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 2017, the Group’s adjusted profit before tax was CHF 6.2
billion and the total GEB performance award pool was CHF 74.2
million (CHF 71.9 million in 2016). The performance award pool
as a percentage of adjusted Group profit before tax was 1.2%,
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 (or
two times for the GEB member who is also an MRT). For 2017,
performance awards for GEB members and the Group CEO
were, on average, 3.5 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
contracts for GEB members are subject to a notice period of six
months. A GEB member leaving the firm before the end of a
performance year may be considered for a performance award
based on their contribution during that performance year and in
line with the approach described in this report. Such awards are
subject to approval of the BoD, which may decide not to grant
any awards.
270
2017 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 over a period
of five years1, with at least 50% granted under the EOP and the remaining 30% under the DCCP. The chart below is an illustrative
example.
Payout of performance award¹
Key features
Pay for performance and safeguards
30%
Notional additional tier 1 (AT1) capital instruments
30% of the performance award is granted under the
Deferred Contingent Capital Plan (DCCP). The award
vests after five 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, where
regulation permits, 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
Dividend equivalents, where regulation permits, are subject
to the same terms as the underlying EOP award
17%
The award is subject to continued employment and
harmful acts provisions
17%
Up to 20% of the performance award is paid out in cash2
immediately, subject to a cash cap of CHF / USD 2 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 the
individual’s performance assessment against a number of
quantitative and qualitative measures
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
supporting appropriate risk management with safeguards
to discourage inappropriate risk-taking:
– potential realized pay cannot exceed the award granted
(other than for market movements and returns); no upward
leverage, such as multiplier factors. The final deferred
payout can be forfeited up to 100% in cases where perfor-
mance 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
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
DCCP
30%
EOP
at
least
50%
20%
Cash
up to
20%
Base
salary3
2017
2018
2019
2020
2021
2022
2023
Share
retention
1,000,000 UBS shares for the Group CEO
500,000 UBS 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
1
blocked shares. 3 May include role-based allowances that have been made in line with market practice in response to regulatory requirements.
2
3
271
Advisory vote
Corporate governance, responsibility and compensation
Compensation
2017 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
targets were set to reflect the strategic priorities determined by
the Chairman and the BoD, including risk-adjusted profitability,
capital position and adjusted return on tangible equity, as well
as a range of qualitative measures to assess the quality and
sustainability of the performance. Quantitative and qualitative
measures account for 65% of Mr. Ermotti’s performance
assessment while the remaining 35% is based on behavioral
measures. The table on the following page summarizes the
metrics used to assess Mr. Ermotti’s performance as Group CEO
for 2017.
The BoD recognized that under Mr. Ermotti’s continuing
strong leadership, the Group delivered excellent financial results,
maintained its strong capital position and successfully concluded
the CHF 2.1 billion net cost reduction program. Overall
performance exceeded plan despite
significant market
headwinds, including low market volatility, negative interest rate
environment and high funding costs.
Adjusted1 profit before tax increased by 16% to CHF 6.2
billion and net profit attributable to UBS Group AG shareholders
was CHF 1.1 billion, including a CHF 2.9 billion net write-down
of deferred tax assets (DTAs) following the enactment of the US
Tax Cuts and Jobs Act in the fourth quarter of 2017. Excluding
this DTA write-down, net profit attributable to shareholders
would have increased by 22% to CHF 3.9 billion. UBS’s adjusted
return on tangible equity for 2017 was 13.8% excluding the
effects of deferred tax expense / benefit and DTAs.
The BoD also considered Mr. Ermotti’s focus on maintaining
UBS’s capital position with a fully applied CET1 capital ratio of
13.8%, above our 13% target, and an improved fully applied
CET1 leverage ratio of 3.7%, ahead of the Swiss systemically
relevant bank fully-applied requirement of 3.5% as of 1 January
2020. Further, he also maintained our post-stress CET1 capital
ratio above the 10% objective, and optimized capital usage by
business divisions and legal entities. Under Mr. Ermotti’s
stewardship, the Group
loss-absorbing
increased
capacity to CHF 78.3 billion.
its total
The BoD also acknowledged Mr. Ermotti’s
strong
performance relative to qualitative goals in 2017, including
overseeing the delivery of significant cost savings while at the
same time the bank is investing in technology and innovative
platforms to drive growth in the future and differentiate our
business in the digital age.
Mr. Ermotti continued to promote talent development and
effectively led initiatives which have improved internal and
particularly cross divisional mobility. He continued to improve
diversity at senior levels toward our long term aspiration to
increase the ratio of women in management roles to one-third.
In addition, Mr. Ermotti continues to successfully drive the
organization to be client-centric and focus on increased client
satisfaction. Aligned with this priority, he demonstrated a strong
personal commitment and engagement to deliver innovative and
high quality client services and products.
The BoD recognizes Mr. Ermotti’s clear tone from the top in
setting and demanding the highest standards with respect to
both a strong risk culture and behaviors. Sustained progress has
been achieved in further anchoring our culture and behavior
program across
firm, and Mr. Ermotti successfully
spearheaded initiatives to promote cross-business engagement
and collaboration, and support a culture where constructive
challenge is embraced and encouraged.
the
Reflecting his achievements in 2017, the BoD approved the
proposal by the Compensation Committee to grant Mr. Ermotti
a performance award of CHF 11.4 million, bringing his total
compensation for the year (excluding benefits and contributions
to his retirement benefit plan) to CHF 13.9 million. The
performance award is subject to shareholder approval as part of
the aggregate GEB 2017 variable compensation and will be
delivered with 52% deferred in EOP over years 3 to 5 and 30%
in DCCP after 5 years, subject to the achievement of certain
performance and other forfeiture conditions. The remaining
18% (CHF 2 million) will be delivered in immediate cash.
→ Refer to the “Our deferred variable compensation plans for
2017” section of this report for more information
11 Please refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
272
Performance assessment for the Group CEO
The chart below illustrates the 2017 assessment of the Group CEO performance. For additional details on the assessment, please
refer to the description on the previous page.
Weightings Quantitative measures
2016 results
2017 results
Assessment Vs Plan
100%
Adjusted Group profi t before tax
CHF 5,341 million
CHF 6,194 million
Adjusted Group return on
tangible equity excluding DTAs1
Capital management
CET1 capital ratio, fully applied
CET1 leverage ratio, fully applied
Post-stress CET1 ratio, fully applied²
11.3%
13.8%
3.53%
>10%
Qualitative measures
Achievements
13.8%
13.8%
3.69%
>10%
65%
Pillars
Capital Strength
Efficiency and Effectiveness
Risk Management
Principles
Client Focus
Excellence
Sustainable Performance
Overall performance met expectations, given:
– Maintained strong capital position and achieved capital ratios while optimizing usage by business divisions and
legal entities
– Performance exceeded plan despite significant market headwinds, including low market volatility, negative interest rate
environment and high funding costs
– Delivery of significant cost savings while at the same time the bank is investing in technology and innovative platforms
to drive growth in the future and differentiate its business in the digital age
Overall performance exceeded expectations, given:
– Promoted talent development and led initiatives to improve internal and cross divisional mobility
– Continued to improve diversity at senior levels
– Successfully drives the organization to be client-centric and focus on increased client satisfaction, strong personal
commitment and engagement to deliver innovative and high quality client services and products
35%
Behaviors
Integrity
Collaboration
Challenge
Overall performance exceeded expectations, given clear tone from the top and:
– Set and demanded the highest standards with respect to both a strong risk culture and behaviors
– Sustained progress in further anchoring the culture and behavior program across the firm
– Spearheaded initiatives to further promote cross-business engagement and collaboration, and support a culture
where constructive challenge is embraced and encouraged
1 Calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax expense / benefit, such as the net write-down due to the US Tax Cuts and Jobs Act enacted in the fourth quarter of 2017,
divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as fully applied CET1 capital. 2 CET1 post-stress objective is to maintain ratio above 10%.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
273
1
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Total compensation for GEB members for the performance
year 2017
The GEB performance awards are subject to approval by the BoD
based on the assessment of quantitative and qualitative
performance measures and, in aggregate, subject to shareholder
approval. The aggregate performance award pool for the GEB
was CHF 74.2 million for 2017, an increase of 3.1% compared
with the prior year. This increase of 3.1% compares with a 16%
increase in adjusted profit before tax and a 6% increase in the
overall performance award pool of the firm.
At the AGM 2018, shareholders will vote on the aggregate
2017 total variable compensation for the GEB.
Audited |
Total compensation for GEB members
CHF, except where indicated 1
Name, function
Sergio P. Ermotti, Group CEO
(highest-paid)
Sergio P. Ermotti, Group CEO
(highest-paid)
Aggregate of all GEB
members9,10,11
FFor the
year
Base salary2
Contribution
to retirement
benefit plans3
Benefits4
TTotal fixed
compensation
Immediate
cash5
Annual
performance
award under
EOP6
Annual
performance
award under
DCCP7
TTotal
variable
compensa-
tion
TTotal fixed
and vari-
able com-
pensation8
22017
2,500,000
261,181
41,261
2,802,442
2,000,000
5,980,000
3,420,000
11,400,000
14,202,442
22016
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
22017
21,459,305
2,439,414
1,842,848
25,741,566
14,550,000
37,355,000
22,245,000
74,150,000
99,891,566
22016
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
11 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 2017, the number of shares has been determined by dividing the amount by CHF 17.999 or USD 19.234,
the average closing price of UBS shares over the last ten trading days in February 2018. For EOP awards for the performance year 2016, the number of shares was determined by dividing the amount by CHF 15.75
or USD 15.67, the average closing price of UBS shares over the last ten trading days in February 2017. Starting with performance year 2017, the GEB member who is also an MRT is no longer permitted to receive
dividend payments on EOP awards. Accordingly the number of shares for this GEB member was determined by dividing the amount by the share price used for other EOP awards, adjusted for the expected dividend
yield over the vesting period, which represents the fair value of the non-dividend bearing awards. 7 The amounts reflect the amount of the notional additional tier 1 (AT1) capital instrument excluding future
notional interest. For DCCP awards for the performance year 2017, the notional interest rate is set at 5.85% for awards denominated in US dollars and 2.30% for awards denominated in Swiss francs. 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. Starting with performance year 2017, the
GEB member who is also an MRT is no longer permitted to receive interest payments on DCCP awards. Accordingly the amounts reflect the fair value of the granted non-interest bearing awards. 8 Excludes the
portion related to the legally required employer’s social security contributions for 2017 and 2016, which are estimated at grant at CHF 5,181,559 and CHF 5,131,867, respectively, of which CHF 893,257 and CHF
856,796, 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 2017 and on 31 December 2016. 10 2016 includes compensation for Lukas Gähwiler for eight months in office as a GEB member. 11 Excludes salaries and employer’s
contribution paid for 2016 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 2017.
Fixed and variable compensation for GEB members1
CHF million, except where indicated
Total for the year ended 2017
%
Amount
Not deferred
Amount
Total compensation
Amount3
Number of beneficiaries
Fixed compensation3,4
Cash-based
Equity-based
Variable compensation
Immediate cash5
Equity Ownership Plan (EOP)6
96
12
21
20
2
74
15
37
100
22
21
2
78
15
39
36
21
20
2
15
15
0
%
38
100
20
Deferred2
Amount
60
0
0
0
60
0
37
%
62
0
80
(cid:3)
Total for the
year ended
2016
Amount
94
13
22
20
2
72
11
39
Deferred Contingent Capital Plan (DCCP)6
1 The figures relate to all GEB members in office in 2017. 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 Authority Rulebook. 6 For the GEB member who is also an MRT, the awards starting with performance year 2017 are no longer permitted to include dividend
and interest payments. Accordingly the amounts reflect for EOP the fair value of the non-dividend bearing awards and for DCCP the fair value of the granted non-interest bearing awards.
22
23
22
22
0
274
2017 compensation for the Board of Directors
Chairman of the BoD
Independent BoD members
Under the leadership of the Chairman, Axel A. Weber, the Board
of Directors (BoD) determines, among other things, the strategy
for the Group based on recommendations by the Group CEO,
exercises ultimate supervision over management and appoints all
Group Executive Board (GEB) members.
communication with
The Chairman presides over all general meetings of
shareholders and the BoD, and works with the committee
chairpersons to coordinate the work of all BoD committees.
Together with the Group CEO, the Chairman is responsible for
effective
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 strengthen and
promote our culture through the three keys to success – our
Pillars, Principles and Behaviors.
The Chairman’s total compensation is contractually fixed at
CHF 5.7 million, excluding benefits and pension
fund
contributions. His total compensation for 2017, which is
unchanged from last year, consisted of a cash payment of
CHF 3.5 million and a share component of CHF 2.2 million
delivered in 122,229 UBS shares at CHF 17.999 per share. The
shares are blocked from distribution for four years. Accordingly,
his
fund
contributions for his service as Chairman for the full year 2017,
was CHF 6,033,565.
including benefits and pension
reward,
total
→ Refer to “Board of Directors” in the “Corporate governance”
section of this report for more information on the
responsibilities of the Chairman
The share component aligns the Chairman’s pay with the
Group’s long-term performance. The Chairman’s employment
terms or
agreement does not provide
supplementary contributions to pension plans. Benefits for the
Chairman are in line with local practices for UBS employees. The
Compensation
Chairman’s
compensation annually, taking
into consideration fee or
compensation levels for comparable roles outside the firm.
Committee
severance
approves
the
for
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 Chairman 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
closing 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 Annual General Meeting (AGM) for shareholder approval
the aggregate amount of BoD
including
compensation of the Chairman, which applies until the
subsequent AGM.
remuneration,
The “Remuneration details and additional information for
independent BoD members” table shows the remuneration for
each independent BoD member for the period from AGM 2017
to AGM 2018. The fixed base fees are unchanged from the
2016 / 17 period.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
275
Advisory vote
Corporate governance, responsibility and compensation
Compensation
2017 / 2018 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.
2017
2018
2019
2020
2021
2022
Audited |
Total payments to BoD members
CHF, except where indicated
Aggregate of all BoD members
For the year
2017
2016
Total1
13,133,565
13,219,569
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 2017 is estimated at grant at CHF
664,074 and for 2016 at CHF 662,740.
(cid:3)
Audited |
Compensation details and additional information for non-independent BoD members
CHF, except where indicated
Name, function1
Axel A. Weber, Chairman
For the year
2017
2016
Base salary
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
72,384
108,388
Total5
6,033,565
6,069,569
1 Axel A. Weber was the only non-independent member in office on 31 December 2017 and on 31 December 2016, respectively. 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 2017 is
estimated at grant at CHF 367,999 and for 2016 at CHF 368,695. The legally required social security contributions paid by the non-independent BoD members are included in the amounts shown in this table, as
appropriate.
(cid:3)
276
Audited |
Remuneration details and additional information for independent BoD members
CHF, except where indicated
e
e
t
t
i
m
m
o
C
t
i
d
u
A
M
M
n
o
i
t
a
s
n
e
p
m
o
C
e
e
t
t
i
m
m
o
C
M
M
M
M
C
C
M
M
M
M
C
C
M
M
M
M
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
g
n
i
t
a
n
m
o
N
i
d
n
a
e
c
n
a
n
r
e
v
o
G
e
e
t
t
i
m
m
o
C
k
s
i
R
M
M
M
M
M
M
C
C
M
M
M
M
M
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
William G. Parrett,
member
Julie G. Richardson,
member
Isabelle Romy,
member
Robert W. Scully,
member
Beatrice Weder di
Mauro, member
Dieter Wemmer,
member
Joseph Yam,
former member
TTotal 2017/2018
Additional
payments2
250,000
250,000
250,000
250,000
FFor the period
AGM to AGM
22017/2018
Base fee
325,000
Committee
retainer(s)
400,000
22016/2017
325,000
22017/2018
325,000
22016/2017
22017/2018
22016/2017
22017/2018
22016/2017
22017/2018
22016/2017
22017/2018
22016/2017
22017/2018
22016/2017
22017/2018
22016/2017
22017/2018
325,000
325,000
325,000
325,000
325,000
325,000
325,000
325,000
–
325,000
325,000
325,000
325,000
325,000
22016/2017
325,000
22017/2018
325,000
22016/2017
22017/2018
215,000
–
22016/2017
325,000
400,000
500,000
500,000
350,000
350,000
500,000
500,000
450,000
450,000
200,000
–
300,000
300,000
200,000
200,000
250,000
400,000
200,000
160,000
–
250,000
Share
percentage4
50
Number of
shares5,6
31,864
50
50
50
50
50
50
50
50
50
50
–
50
50
50
100
50
50
50
50
–
50
36,407
35,133
40,141
22,060
25,205
26,962
30,806
25,328
28,939
17,157
–
20,426
23,338
17,157
29,917
18,792
27,072
17,157
14,002
–
21,471
TTotal3
975,000
975,000
1,075,000
1,075,000
675,000
675,000
825,000
825,000
775,000
775,000
525,000
––
625,000
625,000
525,000
525,000
575,000
725,000
525,000
375,000
––
575,000
7,100,000
TTotal 2016/2017
Legend: C = Chairperson of the respective Committee, M = Member of the respective Committee
11 Ten independent BoD members were in office on 31 December 2017. Julie G. Richardson was elected and Joseph Yam stepped down at the AGM on 4 May 2017. Ten independent BoD members were in office on
31 December 2016. On Dieter Wemmer’s request, his remuneration had 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 2017 to the
AGM 2018 is estimated at grant at CHF 296,075 and which for the period from the AGM 2016 to the AGM 2017 was estimated at grant at CHF 294,045. 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 2017, UBS shares, valued at CHF 17.999 (average closing price of UBS shares at the SIX Swiss Exchange over the last 10 trading days of
February 2018), were granted with a price discount of 15%. These shares are blocked for four years. For 2016, UBS shares, valued at CHF 15.75 (average closing 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. 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.
7,150,000
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
(cid:3)
277
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Our compensation governance framework
Chairman of the BoD and the Group CEO attended all meetings
and calls. 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 Compensation
Committee may also invite other executives to join the meeting 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
subject to approval 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
Compensation 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 31 December 2017, the Compensation Committee
members were Ann F. Godbehere, who chairs the committee,
Michel Demaré, Reto Francioni and William G. Parrett.
External advisors
The Compensation Committee may retain external advisors to
support it in fulfilling its duties. In 2017, HCM International Ltd.
provided independent advice on compensation matters. HCM
International Ltd. holds no other mandates with UBS. The
compensation consulting firm Willis Towers Watson provided
the Compensation Committee with data on market trends and
to GEB and BoD
benchmarks,
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.
including
relation
in
The Risk Committee’s role in compensation
The Risk Committee, a committee of the BoD, works closely with
the Compensation Committee to reinforce that our approach to
compensation reflects proper risk management and control. The
Risk Committee
risk
management and risk control principles and receives regular
briefings on how risk is factored into the compensation process.
in
It also monitors Group Risk Control’s
compensation and
the
compensation process.
risk-related aspects of
sets appropriate
supervises and
involvement
reviews
→ Refer to www.ubs.com/governance for more information
Board of Directors and Compensation Committee
The Board of Directors (BoD) is ultimately responsible for
approving 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
supports the BoD in its duties to set guidelines on compensation
and benefits, to approve certain compensation and to scrutinize
executive compensation. It is responsible for the governance and
oversight of our compensation process and practices, including
considering the alignment between pay and performance and
that our compensation system does not encourage inappropriate
risk-taking. Our Compensation Committee consists of four
independent BoD members who are elected annually by the
shareholders at the Annual General Meeting (AGM).
Among other responsibilities, the Compensation Committee,
on behalf of the BoD:
– reviews our Total Reward Principles
– reviews and approves the design of the compensation
framework
– 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 Group Executive
Board (GEB) members to the BoD, which approves the total
compensation of each GEB member
– together with
the Chairman of
the BoD, establishes
performance targets, evaluates performance and proposes the
compensation 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
The Compensation Committee meets at least four times a year.
In 2017, the Compensation Committee held seven meetings and
two conference calls. All meetings were fully attended. The
278
Compensation Committee 2017 / 2018 key activities and timeline
This table provides an overview of the Compensation Committee’s key scheduled activities from AGM 2017 to AGM 2018.
Strategy, policy and governance
Revised Total Reward Principles
Three 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
June
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
July
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Sept
Oct
Nov
Dec
Jan
Feb
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Compensation governance
The table below provides an overview of compensation governance by specific role.
Recipients
Compensation recommendations developed by
Approved by
Chairman of the BoD
Chairperson of the Compensation Committee
Compensation Committee1
Independent BoD members
(remuneration system and fees)
Compensation Committee and Chairman of the BoD
BoD1
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.
Communicated by
Compensation Committee
Chairman of the BoD
Chairman of the BoD
Group CEO
Line manager
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
279
Advisory vote
Corporate governance, responsibility and compensation
Compensation
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
compensation 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
fixed
that prospective approval
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 contribution 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 commitment to our
shareholders having their say on pay.
the
for
For the performance year 2017, shareholders approved at the
AGM 2016 a maximum aggregate fixed compensation amount
of CHF 28,500,000 for the members of the GEB, including base
salaries, role-based allowances in response to the EU Capital
Requirements Directive
IV), estimated standard
contribution to retirement benefit plans, other benefits and a
buffer. The aggregate fixed compensation paid in 2017 to the
GEB members did not exceed the approved amount for 2017.
→ Refer to “Total compensation for GEB members” in the “2017
compensation for the Group CEO and other GEB members”
(CRD
IV
section of this report
→ Refer to “Provisions of the Articles of Association related to
compensation” in the “Supplemental information” section of
this report for more information
Say on pay – compensation-related votes at the AGM 2017
AGM 2017 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
performance year
Shareholders approved
CHF 71,900,000 for the financial year
20161, 2, 3
88.9%
CHF 71,900,000
AGM 2017 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 31,500,000 for the financial year
2018
91.4%
To be disclosed in the
Compensation Report
2018
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 shareholder 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 AGM 2017 to the AGM 20181,2
89.1%
CHF 13,133,565
Shareholders approved the UBS Group
AG Compensation Report 2016 in an
advisory vote
88.4%
1 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 the Annual Report 2016. 2 Excludes the
portion related to the legally required employer’s social security contributions. 3 Twelve GEB members were in office on 31 December 2016.
280
Our compensation for employees other than GEB members
Base salary
Employees’ fixed compensation reflects their level of skill, role
and experience, as well as
local market practice. Fixed
compensation generally consists of a base salary and, if
applicable, a role-based allowance. Base salaries are usually paid
monthly or fortnightly. We offer our employees competitive base
salaries which vary between functions and locations. Since 2011,
salary increases have been limited. Salary increases will continue
to be granted to employees who were promoted, have scarce or
in-demand skill sets, delivered a very strong performance or took
on increased responsibilities.
Overall, we focus on total compensation. For example, 2017
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,
affordability, our performance and our commitment to deliver
sustainable returns to our shareholders. UBS is committed to
ensuring women and men are paid equitably, and we have
robust practices in place intended to ensure compensation and
career opportunities reflect our commitment.
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 compensation.
Pensions, benefits, and employee share purchase program
We offer certain benefits to our employees such as health
insurance 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. However, 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
apply 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 a maximum of 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 performance
award. The level of the award, where applicable, depends on
the firm’s overall performance, the employee’s business division
performance, as well as individual performance and behavior,
reflecting their overall contribution to the firm’s results. 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 conditions for vesting of certain
deferred compensation plan grants.
In addition to the firm’s Principles around client focus,
excellence and sustainable performance, on an individual level,
Behaviors related to integrity, collaboration and challenge are
part of the performance management approach. Therefore,
when assessing performance, we take into account not only
what was achieved, but also how those results were achieved.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
281
1
2
3
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Benchmarking
Because of the diversity of our businesses, our choice of
benchmark companies focuses on the comparability of business
division, 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
long-term
To reinforce our culture and our approach to manage risk and to
emphasize the importance we place on the sustainability of
results, we deliver our variable compensation through a deferral
rather than a
incentive plan. This aligns our
employees’ and stakeholders’ interests and appropriately links
compensation to
longer-term sustainable performance. A
portion of performance awards above a total compensation of
CHF / USD 300,000 is deferred in UBS notional shares and / or
UBS notional instruments over a period of five years, or longer
for certain regulated employees.
We regularly review our principles and compensation
framework to remain competitive and aligned with stakeholders.
For 2017, we made no changes to our overall framework, e.g.,
EOP and DCCP terms and conditions; however, our deferral
rates for all employees have been refined to better align with
market practice.
The deferred amount increases at higher marginal rates in line
with the value of the performance award. The portion of the
performance award paid out in immediate cash is capped. To
remain competitive, we have revised the cap to CHF / USD 2
million (or the equivalent in other currencies) without impacting
the overall pay levels. 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 Group Executive Board (GEB) level is 3.5 years.
The potential realized pay cannot exceed the award granted
other than for market movements and returns of the
instruments. Therefore, our compensation plans have no upward
leverage, such as multiplier factors, and consequently do not
encourage excessive risk-taking. We believe UBS has a deferral
regime with one of the longest vesting periods in the industry.
→ Refer to the “Our deferred variable compensation plans for
2017” section of this report for more information
→ Refer to “Note 27 Employee benefits: variable compensation” in
the “Consolidated financial statements” section of this report
for more information
282
Other variable compensation components
To support hiring and retention, particularly at senior levels, we
may offer certain other compensation components. These
include:
– Replacement payments
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 compensate employees
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
previous employers, 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,
candidates 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
responsibility may go up to the Board of Directors (BoD)
Compensation Committee, depending 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 severance 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
TTotal sign-on payments1
of which: Key Risk Takers 2
TTotal replacement payments3
of which: Key Risk Takers 2
TTotal guarantees3
of which: Key Risk Takers 2
TTotal severance payments1,4
TTotal 2017
oof which: expenses
recognized in 2017 5
of which: expenses
to be recognized in
2018 and later
TTotal 2016
NNumber of beneficiaries
34
25
96
52
37
20
222
15
8
17
11
17
7
222
19
17
79
41
20
13
0
43
19
65
26
13
0
271
22017
149
15
278
27
39
9
2,205
2016
145
10
221
14
17
0
2,637
of which: Key Risk Takers
17
11 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 2017. 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 2017 or 2016 4 Severance payments include legally obligated
and standard severance. 5 Expenses before post-vesting transfer restrictions.
2
6
2
0
4
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
283
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Compensation for financial advisors in Wealth
Management Americas
In line with market practice for US wealth management
businesses, the compensation for financial advisors in Wealth
Management Americas is comprised of production payout and
deferred compensation awards. Production payout, paid
monthly, is primarily based on compensable revenue. Financial
advisors may also qualify for deferred compensation awards,
which vest over various time periods of up to 10 years. The
awards are based on strategic performance measures, including
production, length of service with the firm and net new
business. Production payout rates and deferred compensation
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
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 2017, 719
employees were classified 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 rate 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.
Key Risk Takers (KRTs) are globally defined as those employees
who, by the nature of their roles, have been determined to
materially set, commit or control significant amounts of the
Group Managing Directors (GMDs) receive part of their
annual performance award under the DCCP and EOP with the
same vesting conditions as for KRTs.
Fixed and variable compensation for Key Risk Takers1
CHF million, except where indicated
AAmount
%%
AAmount
TTotal for the year ended 2017
NNot deferred
TTotal compensation
Amount4
Number of beneficiaries
FFixed compensation4,5
Cash-based
Equity-based
VVariable compensation
Immediate cash6
Equity Ownership Plan (EOP)7
1,324
100
707
435
408
27
889
371
319
33
31
2
67
28
24
806
435
408
27
371
371
0
%%
61
100
42
DDeferred2
AAmount
519
0
0
0
519
0
319
%%
39
0
58
Total for the
year ended
20163
Amount
1,138
649
386
357
29
752
233
322
Deferred Contingent Capital Plan (DCCP)7
11 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 2017. 2 Based on the specific plan vesting
and reflects the total value at grant which may differ from the accounting expenses. 3 2016 figures as reported in our Annual Report 2016. 4 Excludes benefits and employer's contribution to retirement benefits
plan. 5 Includes base salary and role-based allowances. 6 Includes allocation of vested but blocked shares, in line with UK Prudential Regulation Authority remuneration code. 7 Starting with performance year
2017 KRTs who are also MRTs, are no longer permitted to receive dividend and interest payments. Accordingly the amounts reflect for EOP the fair value of the non-dividend bearing awards and for DCCP the fair
value of the granted non-interest bearing awards.
199
199
197
15
0
284
Material Risk Takers
UK Senior Managers and Certification Regime
For entities that are regulated in the EU, we identify individuals
who are deemed to be Material Risk Takers (MRTs) based on the
respective EU Commission Regulation, the Capital Requirements
Directive (CRD) and the guidelines on sound remuneration
policies issued by the European Banking Authority (EBA). This
group consists of senior management, risk takers, selected staff
in control or support functions and certain employees whose
total compensation is above a specified threshold. For 2017, UBS
identified a group of 623 MRTs in the UK and 59 MRTs across
our other EU entities.
Variable compensation awarded to MRTs is subject to specific
requirements from local regulators based on the EBA guidelines
such as a maximum variable to fixed compensation ratio.
Further, generally 50% of their upfront performance award is
delivered in UBS shares that vest immediately but are blocked for
12 months, as well as minimum deferral requirements between
40% and 60%.
Any notional shares granted to MRTs under the EOP and
notional DCCP awards for their performance in 2017 are subject
to a six-month blocking period post vesting and do not pay out
dividends or interest.
Since 2015, performance awards granted to UK MRTs have
been subject to clawback provisions for a period of up to seven
years from the date of grant. In line with the EBA guidelines,
clawback has also been introduced from 2018 in other EU
jurisdictions as applicable. Under these provisions, the firm may
claim repayment of both the immediate and the vested deferred
element of any performance award if an individual is found to
have contributed substantially to significant financial losses for
the Group, a material downward restatement of disclosed
results, or engaged in misconduct and/or failed to take expected
actions that 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
allowance reflects the market value of a specific role and is fixed,
non-forfeitable compensation. Unlike salary, a
role-based
allowance is paid only as long as the employee is in a specific
role. Importantly, the role-based allowance represents a shift in
the compensation mix between fixed and variable compensation
and not an increase in total compensation. Similar to 2016, the
2017 role-based allowances consisted of an immediate cash
portion and, where applicable, a blocked UBS share award.
The Senior Managers and Certification Regime (SMCR) of the UK
PRA and FCA
specified
that
responsibilities, performing certain significant functions and / or
those in certain other identified categories be designated as
Senior Management Functions (SMFs).
individuals with
requires
SMFs are subject to specific compensation requirements,
including longer deferral as well as longer blocking and
clawback periods. The deferral period for SMFs is seven years,
with the deferred performance awards vesting
in equal
installments between years 3 and 7. Additionally, these awards
are subject to a 12-month blocking period post vesting. The
clawback policy for SMFs permits clawback 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 clawback period). All SMFs are also identified as
MRTs and as such subject to the same prohibitions on dividend
and interest payments.
Control functions and Group Internal Audit
the performance of
these businesses, but on
Our control functions, Risk Control (including Compliance),
Finance and Legal, must be independent in order to monitor risk
effectively. Therefore, we determine
their compensation
independently from the revenue producers that they oversee,
supervise or support. Their performance award pool is not based
the
on
performance of the Group as a whole. In addition, we consider
other factors, such as how effectively the function has
performed, and our market position. Decisions on individual
compensation for the senior managers of the control functions
are made by the function heads and approved by the Group
CEO. Decisions on individual compensation 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.
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
285
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Our deferred variable compensation plans for 2017
Deferred compensation
Deferred compensation is delivered through two plans: (i) the
Equity Ownership Plan (EOP), which primarily aligns employee
interest with those of our shareholders, and (ii) the Deferred
Contingent Capital Plan (DCCP), which aligns employee interest
with the interests of bondholders.
The average deferral period is 4.4 years for Group Executive
Board (GEB) members and 3.5 years for employees below GEB
level. To further promote sustainable performance our deferred
compensation components include malus conditions. Malus
conditions enable the firm to forfeit unvested deferred awards
Overview of our deferred variable compensation plans
under certain circumstances, including performance and harmful
acts provisions. Additionally, deferred awards granted to our
most senior employees and to Highly Paid Employees (employees
with a total compensation exceeding CHF / USD 2.5 million) are
subject to performance conditions. Under the EOP and DCCP,
employees who are not Material Risk Takers (MRTs) may receive
annual dividend equivalents / notional interest payments. EBA
guidelines, starting with performance year 2017, no longer
permit MRTs to receive dividend or interest payments on
instruments awarded as deferred variable remuneration.
Benefi ciaries
GEB members, Key Risk Takers and all employees with total compen-
sation greater than CHF / USD 300,000
GEB members, Key Risk Takers and all employees with total compen-
sation greater than CHF / USD 300,000
Equity Ownership Plan
Deferred Contingent Capital Plan
Deferral mix1
(between EOP and DCCP)
Vesting schedule1
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: 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
GEB members and all other employees: vests in full after 5 years
√
√
√
√
√
GEB members, GMDs, Key Risk Takers (including Highly Paid Employ-
ees) and SMFs: number of UBS shares delivered at vesting depends
on the achievement of both Group and respective business division
performance conditions2
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 3 (eligible for dividend equivalents4)
Notional instruments and interest4
1 Senior Management Functions have extended deferral periods, with the deferred performance awards vesting in equal installments between years 3 and 7. 2 Includes Asset Management employees who are Group
1
Managing Directors (GMDs) or Key Risk Takers (including Highly Paid Employees). 3 Notional funds for Asset Management employees. 4 Material Risk Takers are ineligible for dividends, including dividend
3
equivalents and interest, including notional interest on their unvested performance awards.
2
4
286
Equity Ownership Plan
total
compensation greater
The Equity Ownership Plan (EOP) is a mandatory deferral plan for
all employees with
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 dividend equivalents where
regulation permits. For performance year 2017, we granted EOP
awards to 5,127 employees.
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
more closely with industry standards.
(GMDs), Key Risk Takers
EOP awards granted to GEB members, Group Managing
Directors
(including Highly Paid
Employees) and Senior Management Functions (SMFs) will only
vest if both Group and business division performance conditions
are met. The Group performance is measured based on the
average adjusted return on tangible equity (RoTE) over the
performance period. Our assessment for vesting purposes
excludes the effect of deferred tax assets (DTAs) as these are not
reflective of the underlying performance of the Group, do not
impact our ability to return capital to shareholders and are not
within management control. Further, the recognition of DTAs
which were positive in the past, has never had an impact on the
performance award vesting. Business division performance is
measured on the basis of the business division’s average
adjusted return on attributed equity (RoAE). For Corporate
Center employees, it is measured on the basis of the average
operating businesses RoAE.
1
1
3
3
2
2
4
4
The primary measure to determine vesting of EOP awards is
the average adjusted RoTE. If the average adjusted 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 condition has also been met. If the average
adjusted RoTE is 0% or negative, the installment will be fully
forfeited
individual
regardless of any business division’s
performance. If the average adjusted 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
condition is met.
If
The secondary measure to determine vesting of EOP awards is
business division RoAE.
the business division RoAE
performance threshold (refer to the table on the next page) is
in accordance with the
met, the EOP award will vest
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 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
conditions have been met.
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. The adjusted RoTE
threshold of 8% promotes sustainable performance by keeping
variable compensation of earlier years at a prudently established
level of risk.
→ Refer to the “Supplemental information” section of this report
for more information on vesting of outstanding awards granted
in prior years subject to performance conditions
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
287
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Illustrative example for EOP performance conditions
The final amount due to vest under the EOP will depend, in a
first step, on the degree to which the adjusted RoTE is achieved.
In a second step, the business division RoAE performance
thresholds have to be satisfied. The award may forfeit up to
100% based on the adjusted RoTE performance. The remaining
award is further subject to 100% forfeiture if the business
division RoAE is 0% or negative, or up to 40% if the business
division RoAE is between 0% and the business division
performance threshold.
Example:
– EOP award granted: CHF 90,000 in equity
– EOP award at vesting date: CHF 100,000 in equity due to
market movements and returns (+11%)
– Adjusted RoTE threshold: 8%; three-year average Group
performance: 4%
– Business division RoAE threshold: 20%; three-year average
business division performance: 10%
Market movements
and returns
10k
(50k)
90k
90k
(10k)
Maximum
amount
Forfeited
amount
Maximum
forfeiture
amount:
100%
50% (–50k)
reduction
due to
adjusted
RoTE
50k
40k
20% (–10k)
reduction due
to divisional
RoAE
Amount in
equity at
grant date
Amount in
equity at
vesting date
Amount vesting
based on Group
performance
Final amount
vesting based on
business division
performance,
delivered in equity
Performance conditions for EOP awards granted in February 2018
As part of the strategic planning process, the Compensation
Committee annually sets the adjusted RoTE threshold and each
business division’s RoAE performance threshold for the following
calendar year. The performance thresholds are set taking into
consideration past performance as well as the forward-looking
three-year strategic plan and any changes in the attributed
equity framework. Once set, the performance thresholds remain
in place for all EOP performance vesting installments for that
particular award year. For GEB members, the award vests in
equal installments after years 3, 4 and 5. For GMDs, KRTs
including Highly Paid Employees, the award vests in equal
installments after years 2 and 3.
GEB / SMF1
GMDs, Key Risk Takers (including Highly Paid Employees)
Vesting after
3 years (installment 1)
4 years (installment 2)
5 years (installment 3)
2 years (installment 1)
3 years (installment 2)
Applicable performance period
2018, 2019 and 2020
2019, 2020 and 2021
2020, 2021 and 2022
2018 and 2019
2018, 2019 and 2020
1 Senior Management Functions have extended deferral period, with the deferred performance awards vesting in equal installments between years 3 and 7 (including DCCP).
Group RoTE performance threshold
Average adjusted Group RoTE
Business division RoAE performance thresholds
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center1
1 For Corporate Center employees, average operating businesses RoAE performance threshold.
288
≥8%
≥25%
≥15%
≥25%
≥10%
≥15%
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%. For
performance year 2017, we granted DCCP awards to 5,100
employees.
Employees are awarded notional additional tier 1 (AT1)
capital instruments, which can be settled in the form of either a
cash payment or a perpetual, marketable AT1 capital
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 support 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 certain harmful acts, or
in most cases trigger forfeiture where employment has been
terminated.
Under the DCCP, employees who are not MRTs may receive
discretionary annual notional interest payments. The notional
interest rate for grants in 2018 was 2.30% for awards
for awards
denominated
denominated in US dollars. These interest rates are based on the
current market rates for similar AT1 capital instruments. Notional
interest will be paid out annually, subject to review and
confirmation by the Group.
francs and 5.85%
in Swiss
Over the last five years, CHF 2,106 million of DCCP was
issued, contributing to the Group’s total loss-absorbing capacity.
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 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
DDeferred Contingent Capital Plan (DCCP)
331.12.17
2,106
1,670
31.12.16
2,271
1,380
31.12.15
1,903
991
of which: high-trigger loss-absorbing additional tier 1 capital
of which: high-trigger loss-absorbing tier 2 capital 2
912
DCCP contribution to the total loss-absorbing capacity ratio (%)3
0.9
11 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 2017 and as of 31 December 2016. Based on the former Swiss SRB
framework for 31 December 2015. DCCP instruments qualifying as tier 2 capital are eligible for regulatory capital purposes until 30 December of the year prior to maturity. 3 Impact as of 31 December 2015 was
calculated for the former Swiss SRB total capital ratio.
435
0.9
891
1.0
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
289
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Supplemental information
Performance awards granted for the 2017 performance year
The “Variable compensation” table below shows the amount of
variable compensation awarded
the
the number of
performance year 2017,
together with
to employees
for
beneficiaries for each type of award granted. In the case of
deferred awards, the final amount paid to an employee depends
on performance conditions 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.
Variable compensation1
CHF million, except where indicated
Non-deferred cash
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Asset Management EOP
Expenses recognized
in the IFRS income
statement
22017
2016
2,047
1,817
392
235
132
25
373
214
133
26
TTotal variable compensation – performance award pool
2,439
2,191
Expenses deferred to
future periods4
22017
2016
0
590
323
241
27
590
0
671
372
266
34
671
Adjustments4
22017
2016
0
65
0
54
65 5
54 5
0
0
0
0
65
Total
22017
2016
Number of beneficiaries
2016
22017
2,047
1,817
45,664
47,581
1,048
1,098
623
373
51
639
399
60
4,922
4,483
4,891
439
4,818
4,388
4,785
428
54
3,095
2,916
45,671
47,603
266
191
148
Variable compensation – other2
Wealth Management Americas: Financial advisor
compensation3
TTotal variable compensation including WMA FA
compensation
11 Expenses under “Variable compensation – other” and “Wealth Management Americas: Financial advisor compensation” are not part of UBS’s performance award pool. 2 Comprised of replacement payments,
forfeiture credits, severance payments, retention plan payments and interest expense related to the Deferred Contingent Capital Plan. 3 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. 4 Estimate. The actual amount to be expensed in future periods may vary,
e.g., due to forfeitures. 5 Represents estimated post-vesting transfer restriction and forfeiture discounts. 6 Included in expenses deferred to future periods is an amount of CHF 78 million (2016: CHF 98 million) in
interest expense related to the Deferred Contingent Capital Plan. 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.
6,822
3,025
1,294
5,613
3,538
6,895
7,025
2,695
5,152
3,499
1,637
6,745
((78)6
(98)6
(12)
(44)
513
262
804
162
330
0
0
290
Performance award expenses in the 2017 performance year
Amortization of deferred compensation
Performance award expenses include all immediate expenses
related to 2017 compensation awards and expenses deferred to
2017 related to awards made in prior years. The chart
“Amortization of deferred compensation” shows the amount at
the end of 2017 of unrecognized awards to be amortized in
subsequent years. This was CHF 1.3 billion as of 31 December
2017 and CHF 1.6 billion as of 31 December 2016.
The “GEB and KRTs 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 29 December
2017. For notional funds, it is determined using the latest
available market price for the underlying funds at year-end
2017, and for deferred cash plans, it is determined based on the
outstanding amount of cash owed to award recipients.
The “GEB and KRTs ex-post explicit and implicit adjustments
to deferred compensation in 2017” table on the next page
shows the value of actual ex-post explicit and
implicit
adjustments to outstanding deferred compensation in the
financial year 2017. 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 2017, based on the
approximately 7.7 million shares forfeited during 2017, is a
reduction of CHF 138.5 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 2017.
→ Refer to “Note 27 Employee benefits: variable compensation” in
the “Consolidated financial statements” section of this report
for more information
CHF billion
(19%)
(18%)
(0.7)
0.6
(0.5)
1.6
(0.2)
1.3
Amortized
Forfeited
and other
adjustments
31.12.16
Unrecognized
awards to be
amortized,
including awards
granted in
1Q17 for the
performance
year 2016
Expected
amortization
of prior-year
awards in 2018
Annual
awards
granted,
including
awards
granted in
1Q18 for the
performance
year 2017
31.12.17
Unrecognized
awards to be
amortized,
including awards
granted in
1Q18 for the
performance
year 2017
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
291
Advisory vote
Corporate governance, responsibility and compensation
Compensation
GEB and KRTs deferred compensation1,2
CHF million, except where indicated
GGEB
Deferred Contingent Capital Plan6
Equity Ownership Plan (including notional
funds, if applicable)6
Discontinued deferred compensation plans5
KKRTs
RRelating to awards
for 2017
Relating to
awards for prior
years3
22
37
0
79
139
0
Total
101
176
0
of which: exposed to
ex-post explicit and / or
implicit adjustments
Total deferred
compensation
year-end 2016
Total amount of
deferred remuneration
paid out in 20174
100%
100%
100%
81
138
2
0
18
2
919
199
Deferred Contingent Capital Plan
Equity Ownership Plan (including notional
funds) 6
Discontinued deferred compensation plans6
TTotal GEB and KRTs
11 Based on specific plan vesting and reflecting the economic value of the outstanding awards, which may differ from the accounting expenses. Year to year reconciliations would also need to consider the impacts of
additional items including off-cycle awards, FX movements, population changes, and dividend equivalent reinvestments 2 Refer to “Note 27 Employee benefits: variable compensation” 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 Valued at distribution price and FX rate for
all awards distributed in 2017. 5 Senior Executive Equity Ownership Plan (SEEOP) and Incentive Performance Plan (IPP). 6 Starting with performance year 2017, GEB and KRT members who are also MRTs, are no
longer permitted to receive dividend and interested payments. Accordingly the amounts reflect for EOP the fair value of the non-dividend bearing awards and for DCCP the fair value of the granted non-interest
bearing awards.
1,496
0
1,372
2
1,177
0
310
2
319
0
100%
100%
100%
2,599
2,892
2,314
1,003
1,119
578
332
0
GEB and KRTs ex-post explicit and implicit adjustments to deferred compensation in 2017
CHF million
GEB
Deferred Contingent Capital Plan
Equity Ownership Plan (including notional funds, if applicable)
Discontinued deferred compensation plans
KRTs
Deferred Contingent Capital Plan
Equity Ownership Plan (including notional funds)
Discontinued deferred compensation plans
Ex-post explicit adjustments1
31.12.17
31.12.16
Ex-post implicit adjustments
to unvested awards2
31.12.17
31.12.16
0
0
0
(7)
(6)
0
0
0
0
(3)
(5)
0
0
25
0
0
209
0
0
4
0
0
42
0
Total GEB and KRTs
1 Ex-post explicit adjustments are calculated as units forfeited during the year, valued at the share price on 31 December 2017 (CHF 17.94) and 31 December 2016 (CHF 15.95) for UBS shares. For the notional
funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in 2017 and 2016. For the DCCP, the fair value at grant of the forfeited awards during the year is
reflected. 2 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 2017 and 2016.
(13)
234
(8)
46
292
Total personnel expenses for 2017
As of 31 December 2017, there were 61,253 employees (on a
full-time equivalent basis). The “Personnel expenses” table
below shows our total personnel expenses for 2017. It includes
salaries, pension contributions and other personnel costs, social
security contributions and variable compensation. Variable
compensation includes cash performance awards paid in 2018
for the 2017 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 context of the compensation framework at the
date of grant.
The performance award pool
the value of
performance awards granted relating to the 2017 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
reflects
reconcile the performance award pool to the expenses
recognized in the Group’s financial statements prepared in
accordance with International Financial Reporting Standards
(IFRS):
– reduction for the unrecognized future amortization (including
accounting adjustments) of unvested deferred awards
granted in 2018 for the performance year 2017
– addition for the 2017 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 expenses in both 2016
and 2017.
→ Refer to “Note 6 Personnel expenses” and “Note 27 Employee
benefits: variable compensation” in the “Consolidated financial
statements” section of this report for more information
Personnel expenses
CHF million
SSalaries1
Non-deferred cash
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Asset Management EOP
of which: Other performance awards
TTotal variable compensation – performance awards2
of which: guarantees for new hires
Replacement payments3
Forfeiture credits
Severance payments4
Retention plan and other payments
Deferred Contingent Capital Plan: interest expense
TTotal variable compensation – other2
CContractors
SSocial security
PPension and other post-employment benefit plans5
WWealth Management Americas: financial advisor compensation2,6
RRelated to the
performance year 2017
6,037
2,047
392
235
132
25
0
2,439
17
13
0
111
25
0
148
451
755
710
3,025
Expenses recognized in the IFRS income statement
RRelated to prior
performance years
0
(25)
676
337
304
31
4
651
19
58
(105)
0
37
109
99
0
43
0
962
TTotal expenses
recognized in
2017
6,037
Total expenses
recognized in
2016
6,230
Total expenses
recognized in
2015
6,282
2,022
1,068
572
437
55
4
1,775
1,197
699
428
65
6
1,980
1,230
722
429
67
12
3,090
2,972
3,210
36
71
(105)
111
62
109
248
451
798
710
30
86
(73)
217
74
113
418
420
747
670
3,986
3,697
38
76
(86)
157
117
81
346
365
820
808
3,552
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
OOther personnel expenses
TTotal personnel expenses7
11 Includes role-based allowances. 2 Refer to “Note 27 Employee benefits: variable compensation” 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 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 that are subject to vesting requirements. 7 Includes net restructuring
expenses of CHF 534 million, CHF 751 million and CHF 460 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015, respectively. Refer to “Note 30 Changes in organization and
disposals” in the “Consolidated financial statements” section of this report for more information.
14,110
15,889
15,720
15,981
1,780
546
570
565
600
25
293
Advisory vote
Corporate governance, responsibility and compensation
Compensation
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
percentage of the awards that vest in 2018.
Equity Ownership Plan (EOP) 2012 / 2013, EOP 2013 / 2014,
EOP 2014 / 2015 and EOP 2015 / 2016
Performance conditions
Performance achieved
Adjusted return on tangible equity1 and divisional return on
attributed equity
The Group and divisional performance conditions have been satisfied. For the EOP
2012 / 2013, the third and final installment for the Group Executive Board (GEB)
members vests in full. For the EOP 2013 / 2014, the second 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 the GEB
members and the second installment for all other employees covered under the
plan vest in full. For the EOP 2015 / 2016, the first installment for all other
employees covered under the plan vests in full
% of installment vesting
100%
1 The assessment for vesting purposes excludes the effect of deferred tax assets (DTAs). Further, DTAs, when positive, have never had an impact on the performance award vesting.
Deferred Contingent Capital Plan (DCCP) 2012 / 2013
Performance conditions
Performance achieved
% of installment vesting
Common equity tier 1 (CET1) capital ratio, viability event and
additionally for GEB, Group adjusted profit before tax
The performance conditions have been satisfied. The DCCP 2012 / 2013 vests in
full
100%
Discontinued deferred compensation plans
The table below lists discontinued compensation plans that had outstanding balances as of 31 December 2017. 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 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more
Eligible employees
Instrument
Performance conditions
Vesting period and other
conditions
Status as of March
2018
Expired (some
options / SARs
remain exercisable)
Expired (some
options 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
information
Plan
Key Employee Stock Appreciation
Rights Plan (KESAP) and Key
Employee Stock Option Plan (KESOP)
Years
granted
2002–2009
Selected employees
(approximately
17,000 employees
between 2002 and
2009)
Share-settled
stock
appreciation
rights (SARs) or
stock options
None
Senior Executive Stock Option Plan
(SESOP)
2002–2009
Stock options
None
GEB members and
members of the
Group Managing
Board
294
1
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
296
297
298
298
299
300
300
300
295
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Audited |
Share and option ownership / entitlements of GEB members1
Name, function
Sergio P. Ermotti, Group Chief Executive Officer
Martin Blessing, Co-President Global Wealth Management
Christian Bluhm, Group Chief Risk Officer
Markus U. Diethelm, Group General Counsel
Kirt Gardner, Group Chief Financial Officer
Sabine Keller-Busse, Group Chief Operating Officer
Ulrich Körner, President Asset Management and
President UBS EMEA
Axel P. Lehmann, President Personal & Corporate Banking
and President UBS Switzerland
Tom Naratil, Co-President Global Wealth Management and
President UBS Americas
Andrea Orcel, President Investment Bank
Kathryn Shih, President UBS Asia Pacific
Jürg Zeltner, former President Wealth Management
TTotal
oon
31 December
22017
Number of
unvested
shares / at risk2
1,632,464
Number of
vested shares
460,377
TTotal number of
shares
2,092,841
Potentially
conferred
voting
rights in %
0.121
Potentially
conferred
voting
rights in %4
0.000
NNumber of
options3
0
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
1,365,537
65,761
265,515
0
1,631,052
65,761
0
131,520
0
589,659
538,520
264,718
142,646
244,676
200,272
881,979
797,165
156,180
0
1,047,311
838,193
1,328,113
1,203,535
581,546
567,777
976,001
881,976
0
0
0
194,000
154,820
61,652
38,581
176,602
120,897
95,597
95,597
277,978
277,978
422,298
352,634
251,439
184,220
0
0
1,075
1,075
7,899,928
1,941,018
6,535,621
1,514,211
0
131,520
0
783,659
693,340
326,370
181,227
421,278
321,169
977,576
892,762
434,158
277,978
1,469,609
1,190,827
1,579,552
1,387,755
581,546
567,777
977,076
883,051
9,840,946
8,049,832
0.097
0.004
0.000
0.008
0.000
0.045
0.041
0.019
0.011
0.024
0.019
0.057
0.053
0.025
0.017
0.085
0.071
0.091
0.083
0.034
0.034
0.057
0.053
0.569
0.479
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
281,640
412,917
0
0
74,599
143,869
42,628
64,164
398,867
620,950
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.016
0.025
0.000
0.000
0.004
0.009
0.002
0.004
0.023
0.037
11 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 2017” section of this report for more information on the plans.
3 Refer to “Note 27 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
(cid:3)
296
Audited |
Total of all vested and unvested shares of GEB members1,2
SShares on 31 December 2017
9,840,946
1,941,018
1,796,694
1,825,372
1,992,458
1,465,516
819,888
TTotal of which: vested
of which: vesting
2018
2019
2020
2021
2022
SShares on 31 December 2016
8,049,833
1,514,211
1,267,603
1,750,024
1,762,463
1,132,150
623,381
11 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 2017” section of this report for more information.
2017
2018
2019
2020
2021
(cid:3)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
297
Advisory vote
Corporate governance, responsibility and compensation
Compensation
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
William G. Parrett, member
Julie G. Richardson, member2
Isabelle Romy, member
Robert W. Scully, member
Beatrice Weder di Mauro, member
Dieter Wemmer, member
Joseph Yam, former member2
TTotal
oon 31 December
22017
NNumber of shares held
642,100
Voting rights in %
0.037
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
22016
22017
635,751
290,694
254,287
154,672
205,540
76,772
51,567
232,263
201,457
106,916
104,385
0
––
94,376
91,038
29,917
0
126,809
99,737
14,002
0
––
109,938
1,768,521
0.038
0.017
0.015
0.009
0.012
0.004
0.003
0.013
0.012
0.006
0.006
–
–
0.005
0.005
0.002
0.000
0.007
0.006
0.001
0.000
–
0.007
0.102
0.104
11 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2017 and 2016. 2 Julie G. Richardson was newly elected and Joseph Yam
stepped down from the BoD at the AGM on 4 May 2017.
1,753,700
22016
Audited |
Total of all blocked and unblocked shares of BoD members1
Total
of which:
unblocked
of which: blocked until
2018
2019
2020
2021
Shares on 31 December 2017
1,768,521
294,924
366,821
347,106
364,161
395,509
Shares on 31 December 2016
1 Includes shares held by related parties.
1,753,700
276,602
337,751
385,005
367,597
386,745
2017
2018
2019
2020
(cid:3)
(cid:3)
298
Audited |
Vested and unvested options of GEB members1
oon 31 December
TTotal
number of
options2
Number of
options3
Year of
grant
Vesting
date
Expiry
date
TTom Naratil, Co-President Global Wealth Management and President UBS Americas
22017
22016
KKathryn Shih, President UBS Asia Pacific
22017
22016
281,640
412,917
74,599
143,869
JJürg Zeltner, former President Wealth Management
22017
22016
42,628
64,164
181,640
100,000
131,277
181,640
100,000
74,599
69,270
74,599
42,628
7,105
7,105
7,103
223
42,628
2008
2009
2007
2008
2009
2008
2007
2008
2008
2007
2007
2007
2007
2008
01.03.2011
01.03.2012
01.03.2010
01.03.2011
01.03.2012
01.03.2011
01.03.2010
01.03.2011
01.03.2011
01.03.2008
01.03.2009
01.03.2010
02.03.2009
01.03.2011
28.02.2018
27.02.2019
28.02.2017
28.02.2018
27.02.2019
28.02.2018
28.02.2017
28.02.2018
28.02.2018
28.02.2017
28.02.2017
28.02.2017
02.03.2017
28.02.2018
Strike
price
CHF 35.66
CHF 11.35
CHF 73.67
CHF 35.66
CHF 11.35
CHF 35.66
CHF 73.67
CHF 35.66
CHF 35.66
CHF 67.00
CHF 67.00
CHF 67.00
CHF 67.08
CHF 35.66
11 Includes all options held by GEB members, including those held by related parties. 2 No conversion rights outstanding. 3 Refer to “Note 27 Employee benefits: variable compensation” in the “Consolidated
financial statements” section of this report for more information.
(cid:3)
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
299
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Audited |
Loans granted to GEB members1
In line with article 38 of the Articles of Association of UBS Group
AG, Group Executive Board (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
CHF, except where indicated 2
Name, function
Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2017)
Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2016)
Aggregate of all GEB members4
involve more than the normal risk of collectability nor contain
any other unfavorable features for the firm. The total amount of
such loans must not exceed CHF 20 million per GEB member.
on 31 December
Loans3
2017
22016
2017
2016
8,240,000
8,286,193
37,442,914
37,137,347
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 unused uncommitted credit facilities of CHF 4,952,596 in 2017 that
had been granted to two GEB members, and of CHF 2,430,050 in 2016 that had been granted to one GEB member.
(cid:3)
Audited |
Loans granted to BoD members1
In line with article 33 of the Articles of Association of UBS Group
AG, loans to independent Board of Directors (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, neither involving more
than the normal risk of collectability nor containing 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 indicated 2
Aggregate of all BoD members
on 31 December
2017
2016
Loans3,4,5
3,524,370
3,653,370
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 2,924,370 for William G. Parrett in
2017 and CHF 600,000 for Reto Francioni and CHF 3,053,370 for William G. Parrett in 2016. 5 Excludes an unused uncommitted credit facility of CHF 243,698 that had been granted to one BoD member in 2017
and CHF 254,448 in 2016.
Audited |
Compensation paid to former BoD and GEB members1
CHF, except where indicated 2
Former BoD members
Aggregate of all former GEB members3
Aggregate of all former BoD and GEB members
For the year
Compensation
Benefits
2017
2016
2017
2016
2017
2016
0
0
336,789
0
336,789
0
0
0
44,636
44,381
44,636
44,381
(cid:3)
TTotal
0
0
381,425
44,381
381,425
44,381
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 payments in 2017 to two former GEB members and a payment in 2016 to one former
GEB member.
(cid:3)
300
Provisions of the Articles of Association related to compensation
Under the say-on-pay provisions in
Switzerland, shareholders of Swiss-listed
companies 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: In line with article 43 of the
Articles of Association of UBS Group AG,
the Annual General Meeting (AGM) shall
approve the proposals of the BoD in
relation to the maximum aggregate
amount of compensation 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
additional 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: In line with
articles 45 and 46 of the Articles of
Association of UBS Group AG,
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
compensation 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: In
line with article 46 of the Articles of
Association of UBS Group AG, 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
y
t
i
l
i
b
i
s
n
o
p
s
e
r
,
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
301
Advisory vote
Corporate governance, responsibility and compensation
Compensation
Ernst & Young Ltd
Aeschengraben 9
P.O. Box
CH-4002 Basel
Phone
Fax
www.ey.com/ch
+41 58 286 86 86
+41 58 286 86 00
To the General Meeting of
UBS Group AG, Zurich
Basel, 8 March 2018
Report of the statutory auditor on the remuneration report
We have audited the compensation report dated 8 March 2018 of UBS Group AG for the year ended
31 December 2017. The audit was limited to the information according to articles 14 – 16 of the Ordinance
against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in the
following tables labeled “audited” of the compensation report: Total compensation for GEB members, Total
payments to BoD members, Compensation details and additional information for non-independent BoD
members, Remuneration details and additional information for independent BoD members, Loans granted to
GEB members, Loans granted to BoD members and Compensation paid to former BoD and GEB members.
Board of Directors’ responsibility
The Board of Directors is responsible for the preparation and overall fair presentation of the compensation
report in accordance with Swiss law and the Ordinance. The Board of Directors is also responsible for
designing the compensation system and defining individual compensation packages.
Auditor’s responsibility
Our responsibility is to express an opinion on the compensation report. We conducted our audit in
accordance with Swiss Auditing Standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the
compensation report complies with Swiss law and articles 14 – 16 of the Ordinance.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the
compensation report with regard to compensation, loans and credits in accordance with articles 14 – 16 of
the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatements in the compensation report, whether due to fraud or error. This audit also
includes evaluating the reasonableness of the methods applied to value components of compensation, as
well as assessing the overall presentation of the compensation report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Opinion
In our opinion, the compensation report for the year ended 31 December 2017 of UBS Group AG complies
with Swiss law and articles 14 – 16 of the Ordinance.
Ernst & Young Ltd
Marie-Laure Delarue
Licensed audit expert
(Auditor in charge)
Bruno Patusi
Licensed audit expert
302
Consolidated
financial
statements
304
Table of contents
306 Management’s report on internal control over financial
307
308
309
reporting
Report of the independent registered public accounting
firm on internal control over financial reporting
Report of the independent registered public accounting
firm on the consolidated financial statements
Statutory auditor’s report on the audit of the
consolidated financial statements
314 UBS Group AG consolidated financial statements
314
314
315
317
318
323
Primary financial statements
Income statement
Statement of comprehensive income
Balance sheet
Statement of changes in equity
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
348
353
353
354
354
355
355
356
360
2
4
5
6
7
8
9
Balance sheet notes: assets
10
Due from banks and loans (held at amortized cost)
Allowances and provisions for credit losses
Derivative instruments and hedge accounting
Financial assets available for sale and held to
maturity
Property, equipment and software
Goodwill and intangible assets
Other assets
Balance sheet notes: liabilities
17
Due to banks and customers
Financial liabilities designated at fair value
Debt issued held at amortized cost
Provisions and contingent liabilities
Other liabilities
385 Additional information
385
22
23
Fair value measurement
Restricted and transferred financial assets
Offsetting financial assets and financial liabilities
24
25 Measurement categories, credit risk and maturity
analysis of financial instruments
Pension and other post-employment benefit plans
Employee benefits: variable compensation
Interests in subsidiaries and other entities
Business combinations
Changes in organization and disposals
Operating leases and finance leases
Related parties
Invested assets and net new money
Currency translation rates
Events after the reporting period
35
36 Main differences between IFRS and Swiss GAAP
361
361
361
362
369
369
370
372
373
373
373
374
376
384
403
406
408
413
428
436
444
445
447
448
451
452
452
453
11
12
13
14
15
16
18
19
20
21
26
27
28
29
30
31
32
33
34
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
305
Management’s assessment of internal control over financial
reporting as of 31 December 2017
UBS management has assessed the effectiveness of UBS’s
internal control over financial reporting as of 31 December 2017
based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control – Integrated Framework (2013 Framework). Based on
this assessment, management believes that, as of 31 December
2017, UBS’s internal control over financial reporting was
effective.
The effectiveness of UBS’s internal control over financial
reporting as of 31 December 2017 has been audited by Ernst &
Young Ltd, UBS’s independent registered public accounting firm,
as stated in their report appearing on page 307, which expresses
an unqualified opinion on the effectiveness of UBS’s internal
control over financial reporting as of 31 December 2017.
Reports of the statutory auditor / independent registered
public accounting firm
The accompanying reports of the independent registered public
accounting firm on the consolidated financial statements (refer
to page 308) and internal control over financial reporting (refer
to page 307) of UBS Group AG are included in our filing on 9
March 2018 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 309 to 313)
of UBS Group AG, in addition to the abovementioned reports, is
included in our Annual Report 2017 available on our website
and filed on 9 March 2018 with all other relevant non-US
exchanges.
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 financial reporting is designed to provide reasonable
assurance regarding 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
transactions and
fairly
reflect
detail, accurately and
dispositions of assets;
– provide reasonable assurance that transactions are recorded
as necessary to permit preparation and fair presentation of
financial statements, and that receipts and expenditures of
the company 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
financial reporting may not prevent or detect misstatements.
Also, projections 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.
306
Ernst & Young Ltd
Aeschengraben 9
P.O. Box
CH-4002 Basel
Phone +41 58 286 86 86
Fax
+41 58 286 86 00
www.ey.com/ch
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of UBS Group AG
Opinion on Internal Control over Financial Reporting
We have audited UBS Group AG and subsidiaries’ internal control over financial reporting as of 31 December 2017,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, UBS Group AG
and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of 31
December 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of UBS Group AG and subsidiaries as of 31 December, 2017 and
2016, and the related consolidated income statements, statements of comprehensive income, changes in equity and
cash flows for each of the three years in the period ended 31 December 2017, and the related notes and our report
dated 8 March 2018 expresses an unqualified opinion thereon.
Basis for Opinion
UBS Group AG’s management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
UBS Group AG’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) 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.
its
inherent
Because of
financial reporting may not prevent or detect
misstatements. Also, projections 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.
internal control over
limitations,
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Ernst & Young Ltd
Basel, 8 March 2018
307
Ernst & Young Ltd
Aeschengraben 9
P.O. Box
CH-4002 Basel
Phone
Fax
www.ey.com/ch
+41 58 286 86 86
+41 58 286 86 00
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of UBS Group AG
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of UBS Group AG and subsidiaries (the
Company) as of 31 December 2017 and 2016, and the related consolidated income statements,
statements of comprehensive income, changes in equity and cash flows, for each of the three years in the
period ended 31 December 2017, and the related notes (collectively referred to as the “financial
statements”).
In our opinion, the financial statements present fairly, in all material respects, the
consolidated financial position of the UBS Group AG and subsidiaries as of December 31, 2017 and
2016, and the consolidated results of their operations and their cash flows for each of the three years in
the period ended December 31, 2017, in conformity with International Financial Reporting Standards, as
issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), UBS Group AG and subsidiaries’ internal control over financial
reporting as of 31 December 2017, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),
and our report dated 8 March 2018, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility
is to express an opinion on the Company‘s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the US federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures include examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Ernst & Young Ltd
We have served as the Company‘s auditor since 1998.
Basel, 8 March 2018
1
308
Ernst & Young Ltd
Aeschengraben 9
P.O. Box
CH-4002 Basel
Phone:
Fax:
www.ey.com/ch
+41 58 286 86 86
+41 58 286 86 00
To the General Meeting of
UBS Group AG, Zurich
Basel, 8 March 2018
Statutory auditor’s report on the audit of the consolidated financial
statements
Opinion
We have audited the consolidated financial statements of UBS Group AG and its subsidiaries (the Group),
which comprise the consolidated balance sheets as of 31 December 2017 and 2016, and the consolidated
income statements, statements of comprehensive income, changes in equity and cash flows for each of the
three years in the period ended 31 December 2017, and notes to the consolidated financial statements,
including a summary of significant accounting policies in note 1.
In our opinion, the accompanying consolidated financial statements give a true and fair view of the
consolidated financial position of the Group as at 31 December 2017 and 2016, and the consolidated results
of its operations and its cash flows for each of the three years in the period ended 31 December 2017 in
accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law.
Basis for opinion
We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss
Auditing Standards. Our responsibilities under those provisions and standards are further described in the
Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the
Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements of the current period. These matters were addressed in the context
of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters. For each matter below, our description of how our audit
addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the
consolidated financial statements section of our report, including in relation to these matters. Accordingly, our
audit included the performance of procedures designed to respond to our assessment of the risks of material
misstatement of the consolidated financial statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for our audit opinion on the
accompanying consolidated financial statements.
309
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Page 2
Deferred tax asset valuation
Area of focus We focused on this area because there is significant judgment exercised when
determining the valuation of Deferred Tax Assets (“DTAs”) given the significant amount of
tax net operating loss carryforwards (net operating losses or “NOLs”) the Group has
available and the impact of the Tax Cuts and Jobs Act (“TCJA”) in the United States.
DTAs can be recognized to the extent it is probable they will be utilized to offset taxable
profits within the loss carryforward period or be used against deductible temporary
differences. The estimate of future taxable income is based on the strategic plan which is
then allocated to the tax-paying entities in the various jurisdictions. The recognition of
deferred tax assets is therefore sensitive to changes in the strategic plan as well as to
assumptions made in the allocation of future taxable income.
See note 8 to the financial statements.
Our audit
response
We obtained an understanding of the TCJA. We evaluated the design and tested the
operational effectiveness of the Group’s key controls over accounting for the impact of the
TCJA. We assessed the impact that the reduction in the federal corporate rate had on
deferred taxes and the Group’s disclosures in note 8.
We obtained an understanding, evaluated the design and tested the operational
effectiveness of the Group’s key controls over the recognition and measurement of DTAs
and the assumptions used in estimating the Group’s future taxable income.
We assessed the completeness and accuracy of the data used for the estimations of
future taxable income. This included auditing of computations of the models applied to the
recognition process for DTAs and testing the control framework around the models.
We involved EY specialists to assess the key economic assumptions embedded in the
strategic plan. We compared key inputs used by the Group to forecast future taxable
income to externally available data, the Group’s historical data and performance and
assessed the sensitivity of the outcomes to reasonably possible changes in assumptions.
We assessed the completeness and accuracy of the data used in the determination of the
legal entity allocation, the assumptions applied by the Group, and the accuracy of the
computation of the legal entity allocations.
We also assessed whether the Group’s disclosure regarding the application of judgment
in estimating recognized and unrecognized DTAs appropriately reflects the Group’s
deferred tax position (within note 8).
310
Page 3
Legal provision & contingencies
Area of focus
We focused on this area because the Group operates in a legal and regulatory
environment that is exposed to significant litigation and similar risks arising from
disputes and regulatory proceedings. Such matters are subject to many uncertainties
and the outcome may be difficult to predict. These uncertainties inherently affect the
amount and timing of potential outflows with respect to the provisions which have
been established and other contingent liabilities. Overall, the legal provision
represents the Group’s best estimate for existing legal matters that have a probable
and estimable impact on the Group’s financial position.
See note 20 to the financial statements.
Our audit response We obtained an understanding, evaluated the design and tested the operational
effectiveness of the Group’s key controls over the legal provision and contingencies
process.
We assessed the methodologies on which the provision amounts are based,
recalculated the provisions, and tested the completeness and accuracy of the
underlying information. We read the legal analyses supporting the judgmental
aspects impacted by legal interpretations. We obtained correspondence directly from
external legal counsel to corroborate the information provided by the Group and
followed up directly with external counsel as deemed necessary.
We also assessed the Group’s provisions and contingent liabilities disclosure (within
note 20).
IT Controls relevant to financial reporting
Area of focus
We focused on this area because the Group is highly dependent on its IT systems
for business processes and financial reporting. The Group continues to invest in its
IT systems to meet client needs and business requirements including the
effectiveness of its logical access and change management IT controls.
Our audit response
In assessing the reliability of electronic data processing, we included specialized IT
auditors as part of our audit team. Our audit procedures focused on the IT
infrastructure and applications relevant to financial reporting including evaluation of
the design and testing of the operating effectiveness of key IT general controls and
IT automated controls.
Our audit procedures related to logical access included testing of user access
management, privileged user access, periodic access right recertifications and user
authentication controls.
311
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Page 4
Valuation of complex or illiquid trading portfolio assets and liabilities, financial assets and liabilities
and derivative financial instruments held at fair value
Area of focus
We focused on this area because of the complexity and judgments and assumptions
over the fair valuation of financial assets and liabilities with significant unobservable
inputs.
We have continued to focus on market developments in fair value methodologies
and specifically on the Group’s higher estimation uncertainty (“HEU”) products,
Credit Valuation Adjustment (“CVA”) / and Funding Valuation Adjustment (“FVA”).
See note 22 to the financial statements.
Our audit response We obtained an understanding, evaluated the design and tested the operating
effectiveness of the key controls over the financial instrument valuation processes,
including controls over market data inputs into valuation models, model governance,
and valuation adjustments.
We tested a sample of the valuation models and the inputs used in those models,
using a variety of techniques, including comparing inputs to available market data.
We selected a sample of positions and independently determined estimated values
and compared the values to the Group’s recorded values.
In addition, we evaluated the methodology and inputs used by the Group in
determining funding and credit fair value adjustments on uncollateralized derivatives
and fair value option liabilities.
We also assessed the Group’s disclosure (within note 22).
Other information in the annual report
The Board of Directors is responsible for the other information in the Annual Report. The other information
comprises all information included in the Annual Report, but does not include the consolidated financial
statements, the unconsolidated financial statements of UBS Group AG , the compensation report (pages 274
–277 and page 300), disclosures denoted with an audited “signpost”, and our auditor’s report thereon.
Our opinions on the consolidated financial statements, the standalone financial statements of UBS Group AG
and the compensation report do not cover the other information in the annual report and we do not express
any form of assurance conclusion thereon other than the disclosures denoted with an audited “signpost”.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information in the Annual Report and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. We have nothing to report
in this regard.
312
Page 5
Responsibility of the Board of Directors for the consolidated financial statements
The Board of Directors is responsible for the preparation of the consolidated financial statements that give a
true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as
the Board of Directors determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the
Group or to cease operations, or has no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Swiss law, ISAs, and Swiss Auditing Standards and will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements is located at
the website of EXPERTsuisse: http://www.expertsuisse.ch/en/audit-report-for-public-companies. This
description forms part of our auditor’s report.
Report on other legal and regulatory requirements
In accordance with article 728a paragraph 1 item 3 CO and the Swiss Auditing Standard 890, we confirm
that an internal control system exists, which has been designed for the preparation of consolidated financial
statements in accordance with the instructions of the Board of Directors.
We recommend that the consolidated financial statements submitted to you be approved.
Ernst & Young Ltd
Marie-Laure Delarue
Licensed Audit Expert
(Auditor in Charge)
Ira S.Fitlin
Certified Public Accountant (U.S.)
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
313
Consolidated financial statements
UBS Group AG consolidated financial
statements
Primary financial statements
Note
3
3
3
11
4
3
5
6
7
14
15
8
9
9
For the year ended
331.12.17
14,193
(7,665)
6,528
(128)
6,400
17,186
4,972
509
29,067
15,889
6,808
1,033
70
23,800
5,268
4,139
1,128
76
1,053
31.12.16
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
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
0.28
0.27
0.86
0.84
1.68
1.64
Audited |
Income statement
CHF million, except per share data
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 non-controlling interests
NNet profit / (loss) attributable to shareholders
Earnings per share (CHF)
Basic
Diluted
314
Statement of comprehensive income
CHF million
Comprehensive income attributable to shareholders
NNet profit / (loss)
OOther comprehensive income that may be reclassified to the income statement
FForeign 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
FFinancial 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
CCash 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
OOther comprehensive income that will not be reclassified to the income statement
DDefined benefit plans
Gains / (losses) on defined benefit plans, before tax
Income tax relating to defined benefit plans
Subtotal defined benefit plans, net of tax
OOwn 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
TTotal other comprehensive income that will not be reclassified to the income statement, net of tax
TTotal other comprehensive income
TTotal comprehensive income attributable to shareholders
Table continues on the next page.
TTotal other comprehensive income that may be reclassified to the income statement, net of tax
(1,237)
For the year ended
331.12.17
31.12.16
31.12.15
1,053
3,204
6,203
(748)
21
196
(530)
99
15
(206)
14
(7)
(86)
45
(826)
160
(621)
277
11
288
(312)
(1)
(313)
(25)
251
126
(84)
292
240
5
(372)
25
28
(73)
246
(1,082)
170
(666)
(447)
(876)
52
(824)
(120)
5
(115)
(939)
(1,263)
(210)
(1,386)
1,817
(140)
(90)
(2)
(231)
175
1
(292)
44
8
(63)
544
(1,182)
128
(509)
(804)
316
(18)
298
298
(506)
5,698
315
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Statement of comprehensive income (continued)
Table continued from previous page.
CHF million
For the year ended
31.12.17
31.12.16
31.12.15
Comprehensive income attributable to non-controlling interests
Net profit / (loss)
76
82
183
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
0
0
0
352
0
352
0
0
0
352
352
428
0
0
0
271
0
271
0
0
0
271
271
352
(12)
2
(10)
(95)
0
(95)
6
(1)
5
(90)
(99)
83
1,128
(911)
(1,237)
326
218
3,286
(1,116)
(447)
(669)
2,170
6,386
(605)
(814)
208
5,781
316
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 that 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
TTotal 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
TTotal liabilities
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
EEquity attributable to shareholders
Equity attributable to non-controlling interests
TTotal equity
TTotal liabilities and equity
Note
331.12.17
31.12.16
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
87,775
13,739
12,393
77,240
130,707
35,363
118,227
23,434
319,568
58,933
8,665
9,166
1,018
8,829
6,398
9,844
29,706
915,642
7,533
1,789
15,255
30,463
116,133
30,247
408,999
54,202
139,551
3,133
57,064
864,371
385
25,942
(2,133)
32,752
(5,732)
51,214
57
51,271
915,642
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
317
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Statement of changes in equity
CHF million
BBalance as of 1 January 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 – foreign currency translation
Changes to legal structure / reorganization: increase in UBS Group AG’s ownership interest in UBS AG
BBalance 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
32,590
Treasury
shares
(1,393)
Retained
earnings
22,134
Share
capital
372
0
(1,538)3
797
4783
(596)
1
33
858
9
(2,760)2
1
1,029
31,164
(37)
(1,693)
13
385
0
(1,401)3
796
493
(682)
(2)
5
861
28
(3,164)2
43
6,502
6,203
298
868
29,504
(44)
2,265
3,204
(824)
(115)
BBalance as of 31 December 2016
385
28,254
(2,249)
31,725
318
Other comprehensive
income recognized
directly in equity,
net of tax1
(3,093)
of which:
foreign currency
translation
(5,406)
of which:
financial assets
available for sale
228
of which:
cash flow
hedges
2,084
Non-controlling
interests
3,760
Total equity
attributable to
shareholders
50,608
0
(1,538)
200
479
33
858
9
Total equity
54,368
0
(1,538)
200
479
33
858
9
(2,760)
(124)
(2,884)
(804)
(804)
(150)
(4,047)
(231)
(231)
(220)
(5,857)
(63)
(63)
7
172
(509)
(509)
63
1,638
(447)
(447)
292
292
(73)
(73)
(666)
(666)
(4,494)
(5,564)
98
972
1
0
0
5,698
6,203
(804)
298
0
1,724
55,313
0
(1,401)
115
46
5
861
28
(3,164)
0
0
(1)
1,817
3,204
(447)
(824)
(115)
0
53,621
0
83
183
(10)
5
(95)
(1,724)
1,995
(83)
(1,583)
0
352
82
271
682
1
0
0
5,781
6,386
(814)
304
(95)
0
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
319
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Statement of changes in equity (continued)
CHF million
BBalance as of 31 December 2016
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
28,254
Treasury
shares
(2,249)
Retained
earnings
31,725
Share
capital
385
0
(908)3
960
643
(845)
1
19
721
21
(2,229)2
0
1,027
1,053
288
(313)
BBalance as of 31 December 2017
385
25,942
(2,133)
32,752
11 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 (2016: CHF 0.60 ordinary cash dividend and CHF
0.25 special cash dividend; 2015: CHF 0.50 ordinary cash dividend and CHF 0.25 special cash dividend) 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
based on the sum of the net monthly movements.
320
Other comprehensive
income recognized
directly in equity,
net of tax1
(4,494)
of which:
foreign currency
translation
(5,564)
of which:
financial assets
available for sale
98
of which:
cash flow
hedges
972
Total equity
attributable to
shareholders
53,621
Non-controlling
interests
682
Total equity
54,302
0
(908)
114
65
19
721
21
(2,229)
0
0
0
(210)
1,053
(1,237)
288
(313)
0
51,214
0
(908)
114
65
19
721
21
(2,306)
0
(993)
18
218
1,128
(1,237)
288
(313)
352
51,271
(77)
(993)
17
428
76
352
57
(1,237)
(1,237)
(530)
(530)
(86)
(86)
(621)
(621)
(5,732)
(6,095)
12
351
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
321
Consolidated financial statements
UBS Group AG shares issued and treasury shares held
Number of shares
Shares issued
Balance at the beginning of the year
Issuance of shares
BBalance at the end of the year
Treasury shares
Balance at the beginning of the year
Acquisitions
Disposals
BBalance at the end of the year
Conditional share capital
As of 31 December 2017, 127,664,622 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
December 2017 for conversion rights and warrants granted in
connection with the issuance of bonds or similar financial
instruments.
For the year ended
331.12.17
31.12.16
3,850,766,389
3,849,731,535
2,330,214
1,034,854
3,853,096,603
3,850,766,389
138,441,772
54,828,640
(60,968,862)
132,301,550
98,706,275
90,448,847
(50,713,350)
138,441,772
322
Statement of cash flows
CHF million
Cash flow from / (used in) operating activities
Net profit / (loss)
NNon-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 / joint ventures and impairment of associates
Deferred tax expense / (benefit)
Net loss / (gain) from investing activities
Net loss / (gain) from financing activities
Other net adjustments
NNet 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
NNet 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
NNet cash flow from / (used in) investing activities
Table continues on the next page.
For the year ended
331.12.17
31.12.16
31.12.15
1,128
3,286
6,386
1,033
70
128
(68)
3,264
(203)
2,132
(513)
(3,184)
(7,654)
7,432
(21,847)
7,268
(2,479)
(14,224)
(12,700)
(9,477)
(1,015)
(50,911)
(102)
336
(1,593)
68
(8,448)
14,917
(77)
5,100
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
(8,441)
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
323
Consolidated 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
NNet cash flow from / (used in) financing activities
Total cash flow
CCash 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
CCash 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 paper 3
Additional information
Net cash flow from / (used in) operating activities includes:
Interest received in cash
Interest paid in cash
For the year ended
331.12.17
31.12.16
31.12.15
24,141
(730)
(2,229)
49,506
(43,299)
(781)
26,608
121,138
(19,203)
265
102,200
87,700
12,452
2,049
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
12,445
6,568
12,228
6,129
11,144
5,270
Dividends on equity investments, investment funds and associates received in cash4
11 Includes dividends received from associates. 2 CHF 2,434 million, CHF 2,662 million and CHF 3,963 million of cash and cash equivalents (mainly reflected in Due from banks) were restricted as of 31 December
2017, 31 December 2016 and 31 December 2015, respectively. Refer to Note 23 for more information. 3 Money market paper is included in the balance sheet under Trading portfolio assets (31 December 2017:
CHF 131 million, 31 December 2016: CHF 75 million, 31 December 2015: CHF 795 million), Financial assets available for sale (31 December 2017: CHF 23 million, 31 December 2016: CHF 430 million,
31 December 2015: CHF 129 million) and Financial assets designated at fair value (31 December 2017: CHF 1,894 million, 31 December 2016: CHF 959 million, 31 December 2015: CHF 0 million). 4 Includes
dividends received from associates (2017: CHF 51 million, 2016: CHF 50 million, 2015: CHF 114 million) reported within Cash flow from / (used in) investing activities.
1,790
1,595
2,120
Changes in liabilities arising from financing activities
CHF million
Balance as of 1 January 2017
Cash flows
Non-cash changes
of which: foreign currency translation
of which: fair value changes
of which: other
Balance as of 31 December 2017
Debt issued
103,649
of which:
short-term
26,178
of which:
long-term
77,472
35,903
24,141
11,762
(1)
422
634
634
(635)
(211)
Financial liabilities
designated at fair
value
55,017
(5,556)
4,740
593
4,147
Total
158,666
30,348
4,739
1,016
4,147
(424) 1
0
(424) 1
0
(424)
139,551
50,953
88,599
54,202
193,753
1 Includes the effect of fair value hedges on long-term debt issued. Refer to Note 1a item k and Note 19 for more information.
324
Notes to the UBS Group AG consolidated financial statements
Note 1 Summary of significant accounting policies
a) Significant accounting policies
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 8 March 2018, the Financial
Statements 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
presented in Swiss francs (CHF), which is also the functional
currency of UBS Group AG and of UBS AG’s Head Office and its
Swiss-based operations.
Disclosures provided in the “Risk, treasury and capital
management” 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
assumptions 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 assumptions, 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:
– fair value of financial instruments (refer to item 3f in this Note
and to Note 22)
– allowances and provisions for credit losses (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)
– consolidation of structured entities (refer to item 1 in this
Note and to Note 28).
1) Consolidation
a. Consolidation principles
The Financial Statements comprise the financial statements of
the parent company (UBS Group AG) and its subsidiaries,
presented as a single economic entity, whereby intercompany
transactions and balances have been eliminated. UBS
consolidates all entities that it controls, including controlled
structured entities (SEs), 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 its own returns.
Where an entity is governed by voting rights, control is
generally indicated by a direct shareholding of more than one-
half of the voting rights.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
325
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
The classes of SEs with which UBS is involved include:
– Securitization structured entities are established to issue
securities to investors that are backed by assets held by the SE
and whereby (i) significant credit risk associated with the
securitized 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 entities are
securitization definition. All
classified as SEs.
– Client
investment
structured entities are established
predominantly 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
investment 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 investment. In addition,
UBS has interests in a number of funds created 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 are
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
the entity,
rights held
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 circumstances to determine whether the Group has
power over another entity; that is, the current ability to direct
the relevant activities of an entity when decisions about those
activities need to be made. Factors such as the purpose and
design of
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,
including 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 required 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-
sponsored SEs for a variety of reasons, including allowing clients
to obtain or be exposed to particular risk profiles, to provide
funding or to sell or purchase credit risk. An SE is an entity that
has been designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity. Such
entities generally have a narrow and well-defined objective and
include those historically referred to as special purpose entities,
as well as 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
established, the entity is considered to be an SE.
326
Note 1 Summary of significant accounting policies (continued)
UBS’s
internal
2) Segment reporting
As of 31 December 2017, UBS‘s businesses were organized
globally into five business divisions: Wealth Management,
Wealth Management Americas, Personal & Corporate Banking,
Asset Management and the Investment Bank, all of which were
supported by Corporate Center. The five business divisions
qualify as reportable segments for the purpose of segment
reporting and, together with Corporate Center, reflect the
management structure of the Group. Corporate Center – 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
Center (with its units: Services, Group Asset and Liability
Management (Group ALM), Non-core and Legacy Portfolio) is
presented separately in internal management reports to the
Group Executive Board, which is considered the “chief operating
decision maker” pursuant to IFRS 8, Operating Segments.
accounting
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 carried out at internally agreed rates and are
reflected in the operating results of the reportable segments.
Revenue-sharing agreements 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 balance 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 Corporate
Center – Group ALM, and the net interest margin is reflected in
the results of each reportable segment.
policies, which
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 other segments on a basis
different to that on which the corresponding costs or revenues
are allocated. For example, certain assets that are reported in
Corporate Center – Services or Corporate Center – Group ALM
may be retained on the balance sheet of these components of
Corporate Center notwithstanding that the costs or revenues
associated with these assets may be entirely or partly allocated
to the segments. Similarly, certain assets are reported in the
business divisions, whereas the corresponding costs or revenues
are entirely or partly allocated to Corporate Center – Services
and Corporate Center – Group ALM.
Non-current assets disclosed for segment reporting purposes
represent assets that are expected to be recovered more than
twelve months after the reporting date, excluding financial
instruments, deferred tax assets, post-employment benefits and
rights arising under insurance contracts.
→ Refer to Notes 1c and 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
settlement date accounting to all regular way purchases and
sales of financial instruments.
In transactions in which UBS acts as a transferee, to the
extent that the transfer of a financial asset does not qualify for
derecognition by the transferor, UBS does not recognize the
transferred asset as its asset.
UBS also acts in a fiduciary capacity, which results in the
holding or placing of assets on behalf of individuals, trusts,
retirement benefit plans and other institutions. Unless the
recognition criteria are satisfied, these assets are not recognized
on UBS’s balance sheet. Consequently, the related income is
excluded from these Financial Statements.
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, for financial instruments not measured at fair value
through profit or loss, directly attributable transaction costs.
After initial recognition, UBS classifies, measures and presents its
financial assets and liabilities in accordance with IAS 39,
Instruments: Recognition and Measurement as
Financial
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
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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.
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 instruments other than derivatives (refer to
item 3c in this Note), interest on derivatives designated as hedging
instruments in certain types of hedge accounting relationships and forward
points on certain short duration 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.
The presentation of fair value changes on derivatives that are designated
and effective hedging instruments differs depending on the type of hedge
relationship (refer to item 3k in this Note for more information).
Financial assets held for trading (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.
Amounts arising from exchange-traded derivatives (ETD) and certain over-
the-counter (OTC) derivatives cleared through central clearing
counterparties that 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.
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
market paper and traded corporate and bank loans), equity instruments,
and assets held under unit-linked investment contracts.
Designated at fair value
through profit or loss
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 is
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 financial
assets:
– 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.
– Certain 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.
–
–
Loans and receivables
(amortized cost)
328
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, certain asset-backed securities managed by Corporate Center
– Group ALM, as well as investment fund holdings and strategic and
commercial equity investments.
Measured at fair value with unrealized gains and losses reported in Other
comprehensive income, net of applicable income taxes, until such
investments are sold, collected or otherwise disposed of, or until any such
investment 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.
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.
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.
This classification mainly includes debt securities held as HQLA and
managed by Corporate Center – Group ALM.
Measured at amortized cost using the effective interest rate method less
allowances for credit losses (refer to items 3c and 3g in this Note).
Significant items included
Measurement and presentation
Financial liabilities
classification
Held for trading
Designated at fair value
through profit or loss
– Obligations to deliver financial instruments, such as debt and equity
instruments, that UBS has sold to third parties, but does not own
(short positions).
– All derivatives with a negative replacement value, except those that
are designated and effective hedging instruments.
UBS designated at fair value through profit or loss the following financial
liabilities:
–
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.
–
–
Amortized cost
This classification includes:
– Demand and time deposits, retail savings / deposits, cash collateral on
securities lent, non-structured fixed-rate bonds, subordinated debt,
certificates of deposit, covered bonds.
– Cash collateral payables on derivative instruments.
Measurement of trading liabilities follows the same principles as for held
for trading assets, and measurement of liabilities designated at fair value
through profit or loss follows the same principles as for 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 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).
Amounts due under unit-linked investment contracts are presented as
Other liabilities.
Measured at amortized cost using the effective interest rate method.
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.
Amounts arising from ETD and certain OTC derivatives cleared through
central clearing counterparties that 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
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
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
transferred if the counterparty has received the contractual right
to the cash flows of the pledged assets, as may be evidenced,
for example, 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.
the
retained,
transferred
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
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 transactions 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
transferred, UBS derecognizes the financial asset if control over
the asset is surrendered, and the rights and obligations retained
following the transfer are recognized separately as assets and
liabilities, 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
settlement of a derivative contract, which
in
the associated positive and negative
derecognition of
replacement values.
results
→ Refer to Note 24 for more information
interest
c. Interest income and expense
Interest income or expense is determined by reference to a
financial instrument‘s amortized-cost basis calculated using the
effective interest rate (EIR) method. UBS also uses this method to
determine the
income and expense for financial
instruments
(excluding derivatives) measured at fair value
through profit or loss. Interest income or expense on financial
instruments measured at amortized cost, debt instruments
measured at fair value through profit or loss and available-for-
sale financial assets are presented within Net interest income. In
addition, Net interest income includes the interest income and
expense on derivatives designated as hedging instruments in
effective hedge relationships and forward points on certain short
duration foreign exchange contracts.
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
amortized 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,
liabilities,
excluding derivatives, is included in Interest expense, except
when interest rates are negative, in which case it is included in
Interest income. Dividend income on all financial assets is
included in Interest income.
interest expense on financial
→ Refer to item 3k in this Note and 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, usually 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 a
practical ability to sell or pledge the asset.
330
Note 1 Summary of significant accounting policies (continued)
Financial liabilities
UBS derecognizes a financial liability from its balance sheet
when it is extinguished, that is, 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
/ reverse
Securities borrowing
into on a
repurchase transactions are generally entered
collateralized basis. In such transactions, UBS typically borrows
or lends equity and debt securities in exchange for securities or
cash collateral.
lending and repurchase
/
These transactions are treated as collateralized financing
transactions where the securities transferred / received are not
derecognized or recognized on balance sheet. Securities
transferred / 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,
recognized and a
received
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 securities received in
reverse repurchase or securities borrowing transactions triggers
the recognition of a trading liability.
cash
the
is
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
fair value are
instruments measured at
categorized into one of three fair value hierarchy levels. Level 1
financial instruments are those for which fair values can be
derived from quoted prices in active markets. Level 2 financial
instruments are those for which fair values must be derived
using valuation techniques for which all significant inputs are, or
are based on, observable market data. Level 3 financial
instruments are those for which fair values can only be derived
on the basis of valuation techniques for which significant inputs
are not based on observable market data.
Critical accounting estimates and judgments
The use of valuation techniques, modeling assumptions and
estimates of unobservable market inputs require significant
judgment and could affect the amount of gain or loss recorded
for a particular position. Valuation techniques that rely more
heavily on unobservable inputs require a higher level of
judgment to calculate a fair value than those entirely based on
observable inputs.
Valuation techniques, including models, that are used to
determine fair values are periodically reviewed and validated by
qualified 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
instruments held.
relevant to the fair value of financial
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
judgment involved in the development of estimates and the
selection of assumptions are 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 presented in Note 22d. The Group
provides a sensitivity analysis of the estimated effects arising
from changing significant unobservable inputs in Level 3
financial
reasonably possible alternative
assumptions within Note 22g.
instruments
to
→ Refer to Note 22 for more information
331
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
applying the original effective interest rate to the impaired
carrying value of the loan.
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 impairment is reversed only when the credit
quality has improved to such an extent that there is reasonable
assurance of timely collection of principal and interest in
accordance with
the
instrument, or the equivalent value thereof. A write-off is made
when all or part of a financial asset is deemed uncollectible 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.
the original contractual
terms of
Collective allowances and provisions
Collective allowances and provisions are calculated for portfolios
with similar credit risk characteristics, taking into account
historical
loss experience and current conditions. The
methodology and assumptions used are reviewed regularly to
reduce any differences between estimated and actual loss
experience. For all of its portfolios, UBS also assesses whether
there have been any unforeseen developments that might result
in impairments that 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 cannot 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.
g. Allowances and provisions for credit losses
A claim is impaired and an allowance or provision for credit
losses is recognized when objective evidence demonstrates that
a loss event has occurred after the initial recognition and that
the loss event has an impact on the future cash flows that can
be reliably estimated (incurred loss approach). UBS considers a
claim to be impaired if it will be unable to collect all amounts
due on it based on the original contractual terms due to credit
deterioration of the issuer or counterparty. 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 the
carrying value of a financial asset. 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
timing and amount of
impairment losses.
the
Counterparty-specific allowances and provisions
Loans are evaluated individually for impairment if objective
evidence 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, interest income is accrued by
332
Note 1 Summary of significant accounting policies (continued)
h. Restructured 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
restructuring to avoid default include special interest rates,
postponement of interest or principal payments, debt / equity
repayments,
the
swaps, modification of
subordination or amendment of loan maturity. There is no
change in the EIR following a renegotiation.
schedule of
in Other comprehensive
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
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 impairment loss was recorded. Increases in
excess of that amount are reported in Other comprehensive
income.
→
If a loan is restructured with preferential conditions (i.e., new
or modified terms and conditions are agreed upon that do not
meet the normal market criteria for the quality of the obligor
and the type of loan), it is classified as defaulted. It will remain
so until the loan is collected, written off or non-preferential
the preferential
conditions are granted
conditions.
supersede
that
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, resulting in the original loan being
derecognized and a new loan being recognized.
taken
to date against
If a loan is derecognized in these circumstances, the new
loan is measured at fair value at initial recognition. Any
is
allowance
derecognized and
loan.
is not attributed
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.
the original
the new
loan
to
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
presumption 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
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 its
counterparties, and (ii) intends either to settle on a net basis or
to realize the asset and settle the liability simultaneously. Netted
positions
for example, certain derivatives and
repurchase and reverse repurchase transactions with various
counterparties, exchanges and clearing houses.
include,
to
the
realize
they may be
the asset and settle
In assessing whether UBS intends to either settle on a net
basis, or
liability
simultaneously, emphasis is placed on the effectiveness of
operational settlement mechanics in eliminating substantially all
credit and liquidity exposure between the counterparties. This
condition precludes offsetting on the balance sheet for
substantial amounts of UBS’s financial assets and liabilities, even
though
to enforceable netting
subject
arrangements. For OTC derivative contracts, balance sheet
offsetting is generally only permitted in circumstances in which a
market settlement mechanism exists via an exchange or central
clearing
that effectively accomplishes net
settlement through a daily exchange of collateral via a cash
margining process. For repurchase arrangements and securities
financing
transactions, balance sheet offsetting may be
permitted only to the extent that the settlement mechanism
eliminates, or results in insignificant, credit and liquidity risk, and
processes the receivables and payables in a single settlement
process or cycle.
counterparty
→ Refer to Note 24 for more information
k. Hedge accounting
The Group uses derivative and non-derivative instruments to
manage exposures to interest rate and foreign currency risks,
including exposures arising from forecast transactions. Qualifying
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).
333
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
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
effectiveness 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 criteria 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 exposure 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 accounting
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 from derivatives designated as hedging instruments in
effective fair value hedge relationships is presented within Interest
income from loans and deposits and Interest expense on debt
issued, within Net interest income. Interest from derivatives
designated as hedging instruments in effective cash flow hedge
relationships that is reclassified from other comprehensive income
when the hedged transaction affects profit or loss is presented
within Interest income from derivative instruments designated as
cash flow hedges.
→ Refer to Note 3 for more information
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
attributable 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
334
item.
If the hedge accounting relationship
the hedged
is
terminated 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
portfolio hedge of interest rate risk, the equivalent change in fair
value is reflected within Other assets or Other liabilities. If the
portfolio hedge relationship is terminated for reasons other than
the derecognition 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 forecast 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 forecast
transactions occur and affect profit or loss. If the forecast
transactions 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
recognized 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
recognized 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., realized
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
Note 1 Summary of significant accounting policies (continued)
instruments. An embedded derivative
l. Embedded derivatives
Derivatives may be embedded in other financial instruments
(host contracts). For example, they could be represented by the
conversion feature embedded in a convertible bond. Such hybrid
instruments arise predominantly from the issuance of certain
structured debt
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 contract 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
instruments (refer to item 3b in this Note for more information),
in which case bifurcation of an embedded derivative component
is not required.
m. Financial liabilities
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
variable specific to a party to the contract. 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, also does not affect the amortized cost accounting
treatment 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
activity, fair value hedge accounting is applied to fixed-rate debt
instruments 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
market-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.
Financial liabilities designated at fair value
UBS uses the fair value option to designate certain issued debt
instruments as financial liabilities designated at fair value
through profit or loss, on the basis that such financial
instruments include embedded derivatives and / or are managed
on a fair value basis (refer to item 3b in this Note for more
information).
n. Own credit
From 1 January 2016 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 and will not be
reclassified to the income statement in future periods.
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 statement in Credit loss expense / recovery.
When a client draws on a commitment, the resulting loan is
classified as a (i) trading asset, consistent with the associated
derivative loan commitment, (ii) financial asset designated at fair
loan
value
commitment designated at fair value through profit or loss or as
a (iii) loan, when the associated loan commitment is accounted
for as other loan commitment.
loss, consistent with
through profit or
the
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 instrument. 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.
335
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
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 payment 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.
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
categories: (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.
the exception of performance-linked
Fees earned from services that are provided over a certain
period of time are recognized ratably over the service period,
fee
with
components with specific performance criteria. Such fees are
recognized when, as of the reporting date, the performance
benchmark has been met and when collectibility is reasonably
assured.
fees or
Fees earned from providing transaction-type services are
recognized 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 that 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
presented 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) Share-based and other deferred compensation plans
Share-based compensation plans
UBS has established share-based compensation 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 conditions. 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
336
and is adjusted to reflect actual outcomes. Where the service
period is shortened, for example in the case of employees
restructuring programs or mutually agreed
affected by
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
length-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. For equity-settled awards, forfeiture
events resulting from breach of a non-vesting condition do not
result in an adjustment to expense.
instruments,
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
restrictions in effect beyond the vesting date, and non-vesting
conditions. For equity-settled
is
determined at the date of grant and is not remeasured unless its
terms are modified 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 cumulative expense recognized
equals the cash distributed.
fair value
→ Refer to Note 27 for more information
Other compensation plans
UBS has established deferred compensation plans that are
settled in cash or financial instruments other than UBS equity,
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 certain age and length-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 recognized 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
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
resulting from remeasurements recorded immediately in Other
comprehensive income. If the fair value of the plan assets is
higher than the present value of the defined benefit obligation,
the recognition of the resulting net defined benefit asset is
limited to the present value of economic benefits available in the
in future
form of refunds from the plan or reductions
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 discount 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 balances. Life expectancy is
determined by reference to published mortality tables. The
discount rate is determined by reference to the rates of return
investments of appropriate
on high-quality
currency and term at the measurement date. The assumption for
salary increases reflects the long-term expectations for salary
growth and takes into account historical salary development by
age groups, expected inflation and expected supply and demand
fixed-income
in the labor market. A sensitivity analysis for reasonable possible
movements in each significant assumption for UBS‘s post-
employment 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
rendered services in exchange for such contributions. This is
generally in the year of contribution. Prepaid contributions are
recognized 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 insurance benefits
to certain retirees in the US and the UK. The expected costs of
these benefits are recognized over the period of employment
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
liabilities that will result in taxable or deductible amounts in
future periods and are measured using the applicable tax rates
and laws that have been enacted or substantively enacted by the
end of the reporting period and which 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 evidence that sufficient taxable profit will be
available against which the unused tax losses can be utilized.
337
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
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
litigation 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.
The net investment in an associate is impaired if there is
objective evidence of a loss event and the carrying value of the
investment in the associate is below its recoverable amount.
→ Refer to Note 28 for more information
for
for
indication
10) Property, equipment and software
Property, equipment and software includes own-used properties,
leasehold improvements, information technology hardware,
externally purchased and internally generated software, as well
as communication and other similar equipment. Property,
equipment and software is carried at cost less accumulated
depreciation and impairment losses and is reviewed at each
reporting date
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 necessary 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 economic 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
economic life of asset (typically ≤ 20 years)
→ Refer to Note 14 for more information
tax
Deferred
liabilities are
temporary
differences between the carrying amounts of assets and
liabilities in the balance sheet that reflect the expectation that
certain items will give rise to taxable income in future periods.
recognized
for
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 unrealized gains or losses on financial
instruments that are classified as available for sale, (iii) for
changes in fair value of derivative instruments 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 treasury
shares. Amounts relating to points (ii), (iii), (iv) and (v) are
recognized 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,
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 situation where recent losses have been
incurred, convincing evidence that there will be sufficient future
profitability is required.
if necessary,
revised
to
If profit forecast assumptions in future periods deviate from
the current outlook, the value of UBS’s deferred tax assets may
be affected. Any increase or decrease in the carrying amount of
deferred tax assets would primarily be recognized through the
income statement but would not affect cash flows.
338
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 or when
indicators of impairment exist, UBS assesses whether there is any
indication that goodwill is impaired. If such indicators exist, UBS is
required to test the goodwill for impairment. Irrespective of whether
there is any indication of impairment, UBS tests goodwill for
impairment annually. UBS considers the segments, as reported in
Note 2a, as separate cash-generating units, since this is the level at
which the performance of investments 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 recoverable 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
intangible items arising from business combinations and certain
purchased trademarks and similar items. Intangible assets are
recognized 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 reporting date,
intangible assets are reviewed for
indications of impairment. 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 that 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.
The Group recognizes provisions for litigation, regulatory and
similar matters 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 nevertheless 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
expectation has been raised that the restructuring will be carried
out, either
the plan or
through
announcements to affected employees.
commencement of
for
recognized
Provisions are
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.
lease contracts
if
Provisions for employee benefits are recognized mainly in
respect of service anniversaries and sabbatical leave.
Provisions are recognized at the best estimate of the
consideration 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.
Provisions that are similar in nature are aggregated to form a
class, while the remaining provisions, including those of less
significant amounts, are presented under Other provisions.
Provisions are presented separately on the balance sheet and,
when they are no longer considered uncertain in timing or
amount, are reclassified to Other liabilities – Other.
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, in which case no provision is
recognized and no contingent liability is reported. Contingent
liabilities are also disclosed 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
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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
litigation, 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 matters. Management regularly reviews all
the available information regarding such matters, including legal
advice, which is a significant 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
foreign 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 transaction. 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
translation differences on
becomes
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.
impaired. However,
Upon consolidation, assets and liabilities of foreign operations
are translated into Swiss francs (CHF), UBS’s presentation
currency, 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
shareholders are
recognized directly in Foreign currency translation within Equity,
which forms part of Total equity attributable to shareholders,
whereas the foreign currency translation differences attributable
to non-controlling interests are shown within Equity attributable
to non-controlling interests.
to
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
reclassified to the income statement as part of the gain or loss
on disposal. 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 reclassified 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
Net profit is split into Net profit attributable to shareholders and
Net profit attributable to non-controlling interests (including net
profit attributable to preferred noteholders, if any). Similarly,
Equity is split into Equity attributable to shareholders and Equity
(including equity
interests
attributable
attributable to preferred noteholders, if any).
to non-controlling
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
settlement, 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 derivatives, with changes in fair value
reported in the income statement as Net trading income.
340
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
classified as operating leases. UBS is not a lessee in any material
finance leases.
long-term
include non-cancelable
Lease contracts classified as operating leases where UBS is the
lessee
leases of office
buildings in most UBS locations. Operating lease rentals payable
are recognized as an expense on a straight-line basis over the
lease term, which commences with control of the physical use of
the property. 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
unguaranteed 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
outstanding 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 inception of the arrangement whether the fulfillment of the
arrangement 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
Presentation of interest income and expense on derivatives
designated as hedging instruments
Effective 1 January 2017, UBS refined the presentation of
interest income and interest expense on derivatives designated
as hedging instruments in effective hedge relationships to align
the presentation with interest arising from designated hedged
items. As a result of this presentation change:
– Interest income from loans and deposits and Interest expense
on debt issued for the year ended 31 December 2017 were
each CHF 530 million lower, with no change to Net interest
income.
– Interest income from derivative instruments designated as
cash flow hedges, previously included within Interest income
from loans and deposits, is now separately disclosed within
Note 3.
Prior-period information has not been restated, as the effect
was not material.
→ Refer to Note 3 for more information
Amendments to IAS 7, Statement of Cash Flows
UBS adopted amendments to IAS 7, Statement of Cash Flows, in
2017 and now separately discloses the drivers of changes in
financial liabilities arising from financing activities, including
changes arising from cash flows and non-cash changes, in its
statement of cash flows.
→ Refer to the statement of cash flows for more information
→ Refer to the “Balance sheet, liquidity and funding
management” section of this report for information on
liabilities and funding management
Amendments to IAS 12, Income Taxes
In 2017, UBS adopted amendments to IAS 12, Income Taxes,
that clarify how to account for deferred tax assets related to
debt instruments measured at fair value. The adoption of these
amendments did not have a material impact on the Group’s
financial statements.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
341
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
c) International Financial Reporting Standards and Interpretations to be adopted in 2018 and later and other changes
IFRS 9 classification and
For UBS, the most significant
measurement changes on transition are due to the following:
– financial assets that will no longer qualify for amortized cost
accounting under IFRS 9 will be classified at fair value through
profit or loss because their cash flow characteristics do not
satisfy the solely payments of principal and interest criteria
(e.g., auction
securities and certain brokerage
receivables);
rate
– lending arrangements that no longer qualify for amortized
cost accounting under IFRS 9 will be classified at fair value
through profit or loss because the business model within
which they are managed does not have an objective to hold
financial assets in order to collect the contractual cash flows
(e.g., certain Investment Bank lending arrangements);
– equity instruments classified as available for sale under IAS 39
will be classified at fair value through profit or loss under
IFRS 9; and
– financial liabilities will be newly designated under IFRS 9 at
fair value through profit or loss, from amortized cost
accounting, to align with conclusions reached for associated
financial assets that will be measured at fair value through
profit or loss (e.g., brokerage payables).
IFRS 9 classification and measurement requirements for
financial liabilities are unchanged from IAS 39, 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. UBS early adopted the own
credit presentation change from 1 January 2016.
Expected credit losses
IFRS 9 introduces an approach for determining impairment
based on forward-looking expected credit losses (ECLs), which is
intended to result in an earlier recognition of credit losses
compared with the existing incurred-loss impairment approach
for financial instruments in IAS 39, and the loss-provisioning
approach for financial guarantees and loan commitments in IAS
37, Provisions, Contingent Liabilities and Contingent Assets. The
new impairment model applies to financial assets measured at
amortized cost, debt instruments measured at fair value through
OCI, lease receivables, and financial guarantee contracts and
loan commitments that are not measured at fair value through
profit or loss.
Effective from 2018
integrated
Changes in segment reporting
Effective 1 February 2018, UBS
its Wealth
Management and Wealth Management Americas business
divisions into a single Global Wealth Management business
division, which is managed on an integrated basis, with a single
set of key performance
indicators, performance targets,
operating plan and management structure. Consistent with this,
the operating results of Global Wealth Management will be
presented and assessed on an integrated basis in internal
management reports to the Group Executive Board, which is
considered the “chief operating decision maker” pursuant to
IFRS 8, Operating Segments. Consequently, beginning from the
first quarter of 2018, Global Wealth Management qualifies as an
operating and reportable segment for the purposes of segment
reporting and will be presented alongside Personal & Corporate
Banking, Asset Management, the
Investment Bank, and
Corporate Center (with its units Services, Group Asset and
Liability Management (Group ALM) and Non-core and Legacy
Portfolio).
IFRS 9, Financial Instruments
IFRS 9, Financial Instruments is effective from 1 January 2018
and will be applicable from UBS’s first quarter 2018 reporting.
IFRS 9 reflects the classification and measurement, impairment
and hedge accounting phases of the IASB’s project to replace
IAS 39, Financial Instruments: Recognition and Measurement. In
addition, UBS will early adopt the Amendment to IFRS 9,
Prepayment Features with Negative Compensation, issued in
October 2017, which allows the Group to continue to apply
amortized cost accounting to Swiss private mortgages and
corporate loans that provide for two-way compensation if a
prepayment occurs.
Classification and measurement
IFRS 9 requires all financial assets, except equity instruments, to
be classified at amortized cost, at fair value through other
comprehensive income (OCI) or at fair value through profit or
loss, based on the business model for managing the respective
financial assets and their contractual cash flow characteristics. If
a financial asset meets the criteria to be measured at amortized
cost or at fair value through OCI, it can be designated at fair
value through profit or loss 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
statement under any
gains or
to
circumstances, while all other equity
instruments will be
accounted for at fair value through profit or loss.
income
losses
the
342
Note 1 Summary of significant accounting policies (continued)
Expected credit losses will be recognized on the following basis:
– A maximum of 12-month ECLs are required to be recognized
from initial recognition, reflecting the portion of lifetime cash
shortfalls that will result if a default occurs in the 12 months
after the reporting date (or a shorter period if the expected
life is less), weighted by the risk of that default occurring.
Respective instruments are referred to as instruments in stage
1.
initial
recognition,
– Lifetime ECLs are required to be recognized if a significant
increase in credit risk (SICR) is detected subsequent to the
instrument’s
lifetime cash
shortfalls that will result from all possible default events over
the expected life of a financial instrument, weighted by the
risk of default occurring. Respective instruments are referred
to as instruments in stage 2. Where an SICR is no longer
observed, the instrument will move back to stage 1.
reflecting
– Lifetime ECLs are always recognized for credit-impaired
financial instruments, referred to as instruments in stage 3.
The IFRS 9 determination of whether an instrument is credit
impaired will follow substantially the same principles used to
determine whether an instrument is impaired under IAS 39,
i.e., is based on the occurrence of one or more loss events.
However, the ECL for credit-impaired financial instruments
under IFRS 9 may differ mainly due to additional forward-
looking considerations required under IFRS 9. Credit-impaired
exposures may include positions for which no loss has
occurred or no allowance has been recognized, for example
because they are expected to be fully recoverable through the
collateral held. Instruments that are no longer credit impaired
move back to stage 2 or stage 1.
– Changes in lifetime ECLs since initial recognition are also
recognized for instruments that are purchased or originated
credit impaired.
The methodology applied will calculate an individual probability-
weighted unbiased ECL in line with the complexity, structure and
risk profile of relevant portfolios. The following principal factors will
be applied: probability of default (PD), loss given default (LGD),
exposure at default (EAD) and discounting of cash flows to the
reporting date, alongside an evaluation of a range of possible
outcomes, forecasts of future economic conditions and information
on past events and current conditions.
PDs and LGDs used in the ECL calculation will be point in time
(PIT) based and consider a range of scenarios (upside, baseline,
mild downside, downside) to capture material non-linearity and
asymmetries, and scenario weights will be applied to reflect a
likelihood of their occurrence.
UBS will measure ECL over the maximum contractual period it
is exposed to credit risk, taking into account contractual
extension, termination and prepayment options. For certain
credit card facilities without a defined contractual end date,
which are callable on demand and where the drawn and
undrawn portions are managed as one unit, the period over
which UBS is exposed to credit risk exceeds the contractual
notice period and therefore this longer period is used within the
ECL calculation.
Qualitative and quantitative criteria are used to determine
whether the credit risk on a particular
instrument has
significantly increased from its initial recognition. UBS will assess
changes in an instrument’s risk of default primarily based on a
comparison of the annualized forward-looking and scenario-
weighted lifetime PIT-based PDs at inception of the instrument
and the reporting date. Additional qualitative information is
considered, including internal indicators of credit risk such as
days-past-due information, external market indicators of credit
risk and general economic conditions, to detect significant
increases in credit risk.
IFRS 9 does not provide an explicit definition of default. For
the purpose of measuring expected credit losses, UBS will apply
a definition of default that is consistent with the definition used
in capital calculations and by internal credit risk management.
Overall, the level of credit losses is expected to increase under
IFRS 9 alongside additional income statement volatility due to
the use of forward-looking assumptions and the application of
the SICR approach.
Hedge accounting
IFRS 9 also includes an optional revised hedge accounting
model, which further aligns the accounting treatment with the
risk management practices. As permitted by the standard, UBS
will not adopt
IFRS 9 hedge accounting
International
requirements pending
Accounting Standards Board’s project on macro hedge
accounting strategies.
completion of
the optional
the
However, new mandatory hedge accounting disclosures will
be adopted on 1 January 2018 as required, providing additional
information on UBS’s hedging strategies by hedged risk and
hedge type.
Transition
In line with transitional provisions in IFRS 9, UBS will recognize
an estimated pre-tax transition impact of CHF 0.7 billion, as well
as a tax credit of CHF 0.1 billion, resulting in a net reduction of
CHF 0.6 billion in UBS’s IFRS consolidated equity. Approximately
half of this amount is attributable to the classification and
measurement changes, arising predominantly from the change
in measurement basis of certain financial assets that no longer
qualify for amortized cost accounting due to their cash flow
characteristics. The remainder of the reduction results from
recognizing expected credit losses on all in-scope transactions,
with the majority of the impact driven by the private and
commercial mortgage portfolio
in Switzerland within the
Group’s Personal & Corporate Banking division. As permitted by
IFRS 9, UBS will not restate prior-period data.
343
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
Presentation
Presentation of interest income: In line with consequential
amendments to IAS 1, Presentation of Financial Statements,
from 1 January 2018, UBS will present
income
calculated using the effective interest method on assets that are
subsequently measured at amortized cost and debt instruments
that are measured at fair value through OCI separately in the
income statement.
interest
IFRS 9, alongside consequential changes to
Presentation of balance sheet: Effective with UBS’s first quarter
2018 reporting, UBS will make a series of presentational
changes to the IFRS balance sheet reflecting the implementation
of
improve
comparability with prior periods. The primary changes include:
– IAS 39-specific asset categories such as “Financial assets held
to maturity” and “Financial assets available for sale” will be
superseded by the new categories “Financial assets measured
at amortized cost” and “Financial assets measured at fair
value through other comprehensive income (FVOCI).”
– A new category “Financial assets at fair value not held for
trading” will be created to accommodate in particular
financial assets previously designated at fair value, all of
which are to be mandatorily classified at fair value through
profit or loss given the assets are managed on a fair value
basis.
– Brokerage receivables and Brokerage payables designated at
fair value will be presented as separate line items, whereas
they are presented within Other assets and Other liabilities,
respectively, as of 31 December 2017.
– Other assets and Other liabilities will be split between
measured at amortized cost, measured at fair value through
profit or loss and other non-financial assets and liabilities.
– Cash collateral on
securities borrowed and Reverse
repurchase agreements will be combined into a single line,
“Receivables from securities financing transactions”. Similarly,
Cash collateral on securities lent and Repurchase agreements
will be combined into a single line, “Payables from securities
financing transactions”.
– Financial liabilities designated at fair value will be split into
two lines, “Debt issued designated at fair value” and “Other
financial liabilities designated at fair value”.
The table on the next page illustrates the new balance sheet
presentation of assets and liabilities in comparison with our
current presentation. The presentation of the components of
equity will not change, and therefore for illustration purposes
total liabilities and equity are presented in a single line in the
table on the next page. To support comparability, we will
present prior-period information for periods ending before 1
January 2018 in this revised structure, beginning with the first
quarter 2018 financial report. This table does not reflect any of
the effects of adoption from the classification and measurement
requirements of IFRS 9, Financial Instruments, which are only
applicable for the periods ending after 1 January 2018. As
permitted by the standard, we will not restate prior periods for
classification and measurement or ECL changes with the
adoption of IFRS 9.
344
Note 1 Summary of significant accounting policies (continued)
2018 balance sheet presentation changes
CHF million
Assets
Cash and balances at central banks
Loans and advances to banks (formerly: Due from banks)
Receivables from securities financing transactions (new line)
Cash collateral on securities borrowed (newly included in Receivables from securities financing transactions)
Reverse repurchase agreements (newly included in Receivables from securities financing transactions)
Cash collateral receivables on derivative instruments
Loans and advances to customers (formerly: Loans)
Financial assets held to maturity (superseded)
Other financial assets measured at amortized cost (new line)
Total financial assets measured at amortized cost
Financial assets at fair value held for trading (formerly: Trading portfolio assets)
of which: assets pledged as collateral that may be sold or repledged by counterparties
Derivative financial instruments (formerly: Positive replacement values)
Brokerage receivables (new line, formerly included within Other assets)
Financial assets at fair value not held for trading (new line)
Financial assets designated at fair value
Total financial assets measured at fair value through profit or loss
Financial assets available for sale (superseded)
Financial assets measured at fair value through other comprehensive income (new line)1
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets (new line)
Total non-financial assets
Other assets (superseded)
Total assets
Liabilities
Amounts due to banks
Payables from securities financing transactions (new line)
Cash collateral on securities lent (newly included in Payables from securities financing transactions)
Repurchase agreements (newly included in Payables from securities financing transactions)
Cash collateral payables on derivative instruments
Customer deposits (formerly: Due to customers)
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost (new line)
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading (formerly: Trading portfolio liabilities)
Derivative financial instruments (formerly: Negative replacement values)
Brokerage payables designated at fair value (new line, formerly included within Other liabilities)
Financial liabilities designated at fair value (superseded)
Debt issued designated at fair value (new line)
Other financial liabilities designated at fair value (new line)
Total financial liabilities measured at fair value through profit or loss
Provisions
Other non-financial liabilities (new line)
Total non-financial liabilities
Other liabilities (superseded)
Total liabilities
Total liabilities and equity
1 Consists of debt instruments.
31.12.17
Presentation in the
2017 financial statements
31.12.17
Revised presentation
applicable beginning 2018
87,775
13,739
12,393
77,240
23,434
319,568
9,166
130,707
35,363
118,227
n/a
58,933
8,665
1,018
8,829
6,398
9,844
29,706
915,642
7,533
1,789
15,255
30,247
408,999
139,551
30,463
116,133
n/a
54,202
3,133
57,064
864,371
915,642
87,775
13,739
89,633
23,434
318,509
36,861
569,950
126,144
35,363
118,227
n/a
58,933
303,304
8,665
1,018
8,829
6,398
9,844
7,633
33,722
915,642
7,533
17,044
30,247
408,999
139,551
36,337
639,711
30,463
116,133
n/a
49,502
16,223
212,322
3,133
9,205
12,338
864,371
915,642
345
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
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. The amendments clarify 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 payments settled net of
withholding tax as well as the accounting consequences
resulting from a modification of share-based payments from
cash-settled
these
amendments will not have a material impact on the Group’s
financial statements.
to equity-settled. The adoption of
IFRIC
issued
IFRIC 22, Foreign Currency Transactions and Advance
Consideration
In December 2016, the IFRS Interpretations Committee of the
IASB
Interpretation 22, Foreign Currency
Transactions and Advance Consideration (IFRIC 22), which
clarifies that in circumstances when an advance consideration is
received or paid before recognizing an associated asset, expense
or income, the exchange rate to be used on initial recognition of
the related asset, expense or income is the rate determined as of
the date of transaction – i.e., the date of initial recognition of
the non-monetary asset or non-monetary liability arising from
the receipt or payment of advance consideration. UBS is required
to apply IFRIC 22 from 1 January 2018. The adoption of this IFRS
Interpretation will not have a material impact on Group’s
financial statements.
Effective from 2019
IFRS 16, Leases
In January 2016, the IASB issued IFRS 16, Leases, which replaces
IAS 17, Leases and is mandatorily effective as of 1 January 2019.
The standard substantially changes how lessees must account
for operating lease commitments, requiring a lease liability 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. UBS expects to report an increase in
assets and liabilities from adoption as of 1 January 2019 in line
with its disclosure of undiscounted operating lease commitments
as set out in Note 31.
IFRS 15, Revenue from Contracts with Customers
UBS will adopt IFRS 15, Revenue from Contracts with Customers,
which replaces IAS 18, Revenue for periods beginning on 1
January 2018.
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 recognize revenue as
performance obligations are satisfied. In particular, 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 associated with the variable
consideration is subsequently resolved.
IFRS 15 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 on a modified retrospective basis
that does not require comparatives to be restated. Instead, the
cumulative effect of initially applying the standard will be
recognized as an adjustment to the opening balance of retained
earnings. The transition adjustment will not be material.
IFRS 15 will result in a deferral of some performance-based
fees in Asset Management and research revenues in the
Investment Bank. However, the impact on Group’s revenues is
not expected to be material.
UBS will also present certain fee and commission income and
expense on a gross basis, rather than net basis, if UBS is acting
as a principal. Fee and commission income will be reported in
the income statement separately from Fee and commission
expense. The supporting note disclosure for fee and commission
income will be enhanced to provide more information on the
nature, amount, timing and uncertainty of revenues and cash
flows from contracts with customers.
IAS 28, Investments in Associates and Joint Ventures
In October 2017, the IASB issued an amendment to IAS 28,
Investments in Associates and Joint Ventures that clarified that
IFRS 9 must be applied when accounting for long-term interests
in an associate or joint venture to which the equity method of
accounting is not applied. The amendment is mandatorily
effective for accounting periods beginning on or after 1 January
2019. However, UBS will early adopt this amendment from
1 January 2018 to align with the mandatory application date of
IFRS 9, and expects that it will have no material impact on the
Group’s financial statements.
346
Note 1 Summary of significant accounting policies (continued)
IASB
IFRIC
IFRIC 23, Uncertainty over Income Tax Treatments
In June 2017, the
Interpretation 23,
issued
Uncertainty over Income Tax Treatments (IFRIC 23), which
addresses how uncertain tax positions should be accounted for
under IFRS. Under this interpretation, IFRIC 23 requires that,
where acceptance of the tax treatment by the relevant tax
authority is considered probable, it should be assumed as an
accounting recognition matter that treatment of the item will
ultimately be accepted. Therefore, no tax provision would be
required in such cases. However, if acceptance of the tax
treatment is not considered probable, the entity is required to
(i.e., a
reflect that uncertainty using an expected value
probability-weighted approach) or the single most likely amount.
IFRIC 23
is mandatorily effective for accounting periods
beginning on or after 1 January 2019 and any resulting change
to the tax provisions should be recognized in retained earnings.
UBS
impact of this
interpretation, which is not expected to have a material effect
on the Group’s financial statements.
in the process of assessing the
is
Amendments to IAS 19, Employee Benefits
In February 2018, the IASB issued amendments to IAS 19,
Employee Benefits, which address the accounting when a plan
amendment, curtailment or settlement occurs during the
reporting period. The amendments require entities to use the
updated actuarial assumption to determine current service cost
and net interest for the remainder of the annual reporting
period after such an event. The amendments also clarify how the
requirements for accounting for a plan amendment, curtailment
or settlement affect the asset ceiling requirements. The
amendments are effective prospectively for plan amendments,
curtailments or settlements that occur on or after 1 January
2019, with earlier application permitted. UBS does not intend to
early adopt this amendment.
Annual Improvements to IFRS Standards 2015–2017 Cycle
In December 2017, the IASB issued Annual Improvements to
IFRS Standards 2015–2017 Cycle, which resulted in amendments
to IFRS 3, Business Combinations, IFRS 11, Joint Arrangements,
IAS 12, Income Taxes and IAS 23, Borrowing Costs. The
amendments are mandatorily effective as of 1 January 2019.
UBS expects that the adoption of these amendments will not
have a material impact on the Group’s financial statements.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
347
Consolidated financial statements
Note 2a Segment reporting
The operational structure of the Group as of 31 December 2017
was 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 clients booked in the US.
Personal & Corporate Banking
Personal & Corporate Banking provides comprehensive financial
products and services to private, corporate and institutional
clients in Switzerland and is among the leading players in the
private and corporate loan market in Switzerland, with a well-
collateralized and conservatively managed lending portfolio.
Its business is central to UBS’s universal bank delivery model
in Switzerland. Personal & Corporate Banking works with the
wealth management, investment bank and asset management
businesses to help clients receive the best products and solutions
for their specific financial needs. Personal & Corporate Banking
is also an important source of growth for the other business
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.
is a
Asset Management
Asset Management
large-scale and diversified asset
manager, with an onshore presence in 23 countries. It offers
investment capabilities and investment styles across all major
traditional and alternative asset classes, as well as platform
solutions and advisory support, to
institutions, wholesale
intermediaries and wealth management clients around the
world.
Investment Bank
The Investment Bank provides investment advice, financial
solutions and capital market access in over 35 countries, with
principal offices in all major financial centers. It serves corporate,
institutional and wealth management clients across the globe
and partners with UBS’s wealth management, personal and
corporate banking and asset management businesses.
The business division is organized into Corporate Client
Solutions and Investor Client Services and also includes UBS
Securities Research.
Corporate Center
Corporate Center provides services to the Group through the
reporting units Corporate Center – Services and Group Asset
and Liability Management (Group ALM). Corporate Center also
includes the Non-core and Legacy Portfolio unit.
Services consists of the Group Chief Operating Officer area
(Group Corporate Services, Group Human Resources, Group
Operations, Group Sourcing and Group Technology), Group
Finance (excluding Group ALM), Group Legal, Group Risk
Control, Group Communications & Branding, Group Regulatory
& Governance, and UBS and Society.
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 matching
assets and liabilities within the context of the Group’s liquidity,
funding and capital targets and constraints. Group ALM serves
all business divisions and other Corporate Center units through
three main risk management areas, and its risk management is
fully integrated into the Group’s risk governance framework.
Non-core and Legacy Portfolio manages legacy positions from
businesses exited by the Investment Bank, and is overseen by a
committee chaired by the Group Chief Risk Officer.
348
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 2017
Net interest income
Non-interest income
Allocations from CC Group ALM
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from CC and other BDs
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
2,088
5,285
256
7,629
(4)
7,625
2,354
594
2,372
2,294
1,561
6,676
115
8,353
(4)
8,349
5,173
644
1,282
1,262
1,916
1,772
181
3,869
(19)
3,850
836
290
1,133
1,227
(32)
2,058
18
2,044
0
2,044
716
231
514
551
1,194
6,891
(344)
7,740
(90)
7,651
2,949
662
2,769
2,676
(348)
75
120
(153)
0
(153)
3,785
4,247
(8,281)
(8,345)
3
2
13
1
10
1,004
7
5,330
2,295
41
7,141
1,208
0
2,272
1,578
3
1,466
578
12
6,402
1,249
7
762
(914)
126
(137)
(264)
(276)
0
(276)
34
26
(13)
142
0
0
47
(322)
23
48
(83)
(11)
(11)
(22)
43
114
224
194
6,528
22,667
0
29,195
(128)
29,067
15,889
6,808
0
0
0
1,033
0
381
(403)
70
23,800
5,268
4,139
1,128
123,003
67,071
135,556
14,269
262,931
20,875
245,737
46,200
915,642
Additions to non-current assets
89
27
15
1
3
1,573
0
0
1,707
1 Impairments of financial assets available for sale for the year ended 31 December 2017 totaled CHF 15 million, of which CHF 13 million was recorded in Asset Management. 2 Refer to Note 15 for more
information. 3 Refer to Note 30 for information on restructuring expenses.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
349
Consolidated 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
1,932
4,975
389
7,296
(5)
7,291
2,349
640
2,348
2,256
1,347
6,320
118
7,785
(3)
7,782
4,819
570
1,235
1,221
1,892
1,768
332
3,990
(6)
3,984
845
285
1,080
1,186
(33)
1,957
7
1,931
0
1,931
727
241
506
530
1,006
6,953
(260)
7,699
(11)
7,688
3,082
805
2,765
2,675
(322)
183
36
(102)
0
(102)
3,801
4,145
(8,164)
(8,204)
2
2
15
1
21
944
4
5,343
1,948
50
6,675
1,107
0
2,224
1,760
4
1,479
452
12
6,684
1,004
21
747
(849)
589
(295)
(512)
(219)
0
(219)
31
17
(49)
110
0
0
(1)
3
84
(110)
(23)
(13)
(36)
66
732
280
225
6,413
21,944
0
28,357
(37)
28,320
15,720
7,434
0
0
0
985
0
1,078
(218)
(1,114)
91
24,230
4,090
805
3,286
CHF million
For the year ended 31 December 2016
Net interest income
Non-interest income
Allocations from CC Group ALM
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from CC and other BDs
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
115,539
65,882
139,912
12,028
242,302
23,669
267,200
68,485
935,016
Additions to non-current assets
26
4
23
1
3
1,759
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.
350
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 2015
Net interest income
Non-interest income
Allocations from CC Group ALM
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from CC and other BDs
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
1,825
5,859
471
8,155
0
8,155
2,532
637
2,289
2,209
1,067
6,213
104
7,384
(4)
7,381
4,579
822
1,209
1,193
1,890
1,603
421
3,913
(37)
3,877
873
264
1,077
1,180
(34)
2,077
15
2,057
0
2,057
729
232
502
523
1,573
7,526
(211)
8,889
(68)
8,821
3,220
841
2,817
2,731
(340)
435
145
241
0
241
3,903
4,483
(8,215)
(8,245)
5
3
17
2
26
868
3
5,465
2,689
51
6,663
718
0
2,231
1,646
8
1,474
584
24
6,929
1,892
21
1,059
(818)
730
378
(832)
277
0
277
30
22
(57)
96
0
0
(5)
21
(101)
(114)
(195)
(8)
(203)
116
806
379
313
6,732
23,990
0
30,722
(117)
30,605
15,981
8,107
0
0
0
920
0
1,301
282
(1,503)
107
25,116
5,489
(898)
6,386
119,850
60,993
141,164
12,874
253,486
22,566
237,517
94,369
942,819
Additions to non-current assets
6
4
14
1
18
1,851
0
1
1,895
1 Impairments of financial assets available for sale for the year ended 31 December 2015 totaled CHF 1 million, all in Wealth Management. 2 Refer to Note 15 for more information. 3 Refer to Note 30 for
information on restructuring expenses.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
351
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
performance is evaluated. These allocations involve assumptions
and judgments that management considers to be reasonable,
and may be refined to reflect changes
in estimates or
management structure. The main principles of the allocation
methodology are that client revenues are attributed to the
domicile of the client and trading and portfolio management
revenues are attributed to the country where the risk is
managed. This revenue attribution is consistent with the
mandate of the regional Presidents. Certain revenues, such as
those related to Corporate Center – Non-core and Legacy
Portfolio, are managed at a Group level. These revenues 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 2017
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 2016
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 2015
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
Total operating income
Total non-current assets
CHF billion
Share %
CHF billion
Share %
12.0
11.4
4.7
6.0
6.9
(0.4)
29.1
41
39
16
21
24
(1)
100
7.2
6.7
0.8
1.9
6.4
0.0
16.2
44
41
5
12
40
0
100
Total operating income1
Total non-current assets
CHF billion
Share %
CHF billion
Share %
11.5
11.0
4.2
6.1
6.9
(0.5)
28.3
41
39
15
22
24
(2)
100
7.4
7.0
0.7
1.8
6.0
0.0
15.9
47
44
4
11
38
0
100
Total operating income1
Total non-current assets
CHF billion
Share %
CHF billion
Share %
11.2
10.5
5.1
6.8
7.2
0.4
30.6
37
34
17
22
24
1
100
7.1
6.7
0.5
1.7
5.9
0.0
15.2
47
44
3
11
39
0
100
1 The geographical allocation of Total operating income has been restated to reflect a refinement in the allocation methodology.
352
Income statement notes
Note 3 Net interest and trading income
CHF million
Net interest and trading income1
Net interest income
of which: Wealth Management
of which: Wealth Management Americas
of which: Personal & Corporate Banking
of which: Asset Management
Net trading income
of which: Wealth Management
of which: Wealth Management Americas
of which: Personal & Corporate Banking
of which: Asset Management
Total net interest and trading income
of which: Investment Bank
of which: Corporate Client Solutions
of which: Investor Client Services
of which: 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
Net interest income
Interest income
Interest income from loans and deposits2,3,4
Interest income from securities financing transactions5
Interest income from trading portfolio6
Interest income from financial assets and liabilities designated at fair value
Interest income from financial assets available for sale and held to maturity6
Interest income from derivative instruments designated as cash flow hedges2
Total
Interest expense
Interest expense on loans and deposits7
Interest expense on securities financing transactions8
Interest expense on trading portfolio9
Interest expense on financial assets and liabilities designated at fair value
Interest expense on debt issued2
Total
Net interest income
For the year ended
31.12.16
31.12.17
6,528
2,344
1,679
2,086
(14)
4,972
694
332
376
(10)
11,499
4,282
1,065
3,217
(270)
(42)
(157)
6,413
2,331
1,467
2,199
(24)
4,948
667
372
333
(5)
11,361
4,277
822
3,455
(256)
(89)
(104)
(71)
(62)
31.12.15
6,732
2,326
1,174
2,270
(17)
5,742
708
362
343
12
12,474
5,186
1,001
4,185
110
(3)
426
553
(313)
8,625
896
3,071
194
391
8,461
1,542
2,565
548
260
818
14,193
1,375
1,444
1,506
864
2,478
7,665
6,528
9,570
1,136
2,465
361
253
13,787
13,177
826
1,233
1,614
841
2,858
7,373
6,413
476
976
1,670
730
2,592
6,445
6,732
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 value 10
321
3,494
1,928
5,742
(127)
3,701
1 Net interest and trading income presented for business divisions and Corporate Center units includes allocations from Corporate Center – Group ALM. 2 Effective 1 January 2017, the presentation of interest
income and interest expense on derivatives designated as hedging instruments in effective hedge relationships was refined. Refer to Note 1b for more information. 3 Includes interest income on impaired loans
and advances of CHF 12 million for 2017, CHF 21 million for 2016 and CHF 16 million for 2015. 4 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. 5 Includes interest income on securities borrowed and reverse repurchase agreements and negative interest, including fees, on securities lent and repurchase
agreements. 6 Includes dividend income. 7 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.
8 Includes interest expense on securities lent and repurchase agreements and negative interest, including fees, on securities borrowed and reverse repurchase agreements. 9 Includes expense related to dividend
payment obligations on trading liabilities. 10 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.
597
2,812
1,562
4,972
2,574
(3,920)
188
3,332
1,428
4,948
(191)
(1,362)
353
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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, joint ventures and subsidiaries
Net gains / (losses) from disposals of subsidiaries1
Share of net profits of associates and joint ventures
Impairment charges related to 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
31.12.16
946
516
431
733
3,541
3,155
8,035
1,747
18,157
757
1,003
1,760
16,397
2,784
31.12.17
1,295
837
458
683
3,440
3,219
8,542
1,812
18,991
660
1,144
1,804
17,186
2,779
31.12.15
1,246
836
410
737
3,930
3,567
7,858
1,678
19,016
869
1,007
1,876
17,140
3,060
For the year ended
31.12.17
31.12.16
31.12.15
372
75
(7)
105
193
(15)
178
24
0
15
1892
509
(150)
106
(44)
346
(5)
342
25
125
(3)
154
599
264
169
433
252
(1)
251
28
378
26
(9)
1,107
1 Includes foreign exchange gains / (losses) reclassified from Other comprehensive income related to disposed foreign subsidiaries and branches. 2 Net gains / (losses) from disposals of subsidiaries and Other
include a net gain on sale of subsidiaries and businesses of CHF 153 million in Asset Management. Refer to Note 30 for more information. 3 Includes net rent received from third parties and net operating
expenses.
354
Note 6 Personnel expenses
CHF million
Salaries1
Variable compensation – performance awards2
of which: guarantees for new hires
Variable compensation – other2
of which: replacement payments 3
of which: forfeiture credits
of which: severance payments 4
of which: retention plan and other payments 5
Wealth Management Americas: Financial advisor compensation2,6
Contractors
Social security
Pension and other post-employment benefit plans7
Other personnel expenses
For the year ended
31.12.17
31.12.16
31.12.15
6,037
3,090
36
248
71
(105)
111
171
6,230
2,972
30
418
86
(73)
217
188
6,282
3,210
38
346
76
(86)
157
198
3,986
3,697
3,552
451
798
710
570
420
747
670
565
365
820
808
600
Total personnel expenses8
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 Includes interest expense related to Deferred Contingent Capital Plan awards. 6 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. 7 Refer to Note 26 for more information.
8 Includes net restructuring expenses of CHF 534 million, CHF 751 million and CHF 460 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015, respectively. Refer to Note 30 for
more information.
15,889
15,981
15,720
Note 7 General and administrative expenses
CHF million
Occupancy
Rent and maintenance of IT and other equipment
Communication and market data services
Administration1
Marketing and public relations
Travel and entertainment
Professional fees
Outsourcing of IT and other services
Provisions for litigation, regulatory and similar matters2
Other
For the year ended
31.12.17
31.12.16
31.12.15
890
560
610
600
411
416
1,202
1,566
420
132
935
511
626
713
467
423
1,234
1,637
795
93
930
510
611
718
486
460
1,354
1,743
1,087
208
Total general and administrative expenses3
1 Administration costs include net expenses related to the UK bank levy of CHF 17 million, CHF 123 million and CHF 166 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015,
respectively. 2017 included a CHF 82 million credit related to prior years. 2 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 53 million, CHF 13 million and CHF 10 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015,
respectively. 3 Includes net restructuring expenses of CHF 627 million, CHF 695 million and CHF 761 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015, respectively. Refer
to Note 30 for more information.
6,808
7,434
8,107
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
355
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
Income tax recognized in the income statement
An income tax expense of CHF 4,139 million was recognized for
the Group in 2017, which included a net Swiss tax expense of
CHF 485 million and a net non-Swiss tax expense of CHF 3,654
million.
The Swiss tax expense included a current tax expense of
CHF 448 million related to taxable profits earned by Swiss
subsidiaries, against which no losses were available to offset. In
addition, it included a deferred tax expense of CHF 37 million,
which reflected a net decrease in deferred tax assets (DTAs)
previously recognized in relation to tax losses carried forward
and temporary differences.
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)
356
For the year ended
31.12.17
31.12.16
31.12.15
448
37
427
3,227
4,139
459
635
353
(642)
805
239
330
476
(1,943)
(898)
The non-Swiss tax expense included a current tax expense of
CHF 427 million related to taxable profits earned by non-Swiss
subsidiaries and branches, against which no
losses were
available to offset. In addition, it included a deferred tax expense
of CHF 3,227 million, which reflected a net decrease in DTAs
previously recognized in relation to tax losses carried forward
and temporary differences and mainly related to the write-down
of US DTAs resulting from the reduction in the federal corporate
tax rate to 21% from 35% after the enactment of the Tax Cuts
and Jobs Act (TCJA) during the fourth quarter of 2017.
UBS considers the performance of its businesses and the
accuracy of historical forecasts and other factors in evaluating
the recoverability of its DTAs, including the remaining tax loss
carry-forward period, and its assessment of expected future
taxable profits in the forecast period used for recognizing DTAs.
Estimating future profitability is inherently subjective and is
particularly sensitive to future economic, market and other
conditions, which are difficult to predict.
For the year ended
31.12.17
31.12.16
31.12.15
5,268
2,057
3,211
1,106
211
168
(358)
(301)
591
(13)
4
(161)
2,824
67
4,139
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)
Note 8 Income taxes (continued)
The tax expense of CHF 4,139 million for 2017 was higher than
the tax expense of CHF 805 million in 2016, mainly as 2017
included a net write-down of DTAs of CHF 2,865 million
resulting from the aforementioned reduction in the US federal
corporate tax rate.
The components of operating profit before tax, and the
differences 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.
Non-Swiss tax rates differing from Swiss tax rate
To the extent that Group profits or losses arise outside
Switzerland, 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 applicable 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 DTAs. 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 DTAs were
previously recorded. Consequently, no current tax or deferred
tax expense arises in relation to those taxable profits. Therefore,
the tax expense calculated by applying the local rate on those
profits is reversed.
Non-taxable and lower taxed income
This item relates to profits for the year, which are either
permanently 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.
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
permanently 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
recognized 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
recognized as DTAs in the accounts.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
357
Consolidated financial statements
Note 8 Income taxes (continued)
Change in deferred tax valuation allowances
This item includes revaluations of DTAs previously recognized
resulting from reassessments of expected future taxable 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 DTAs.
Adjustments to deferred tax balances arising from changes in tax
rates
This item relates to remeasurements of DTAs 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 DTAs
recognized or, alternatively, changing the tax cost of additional
taxable
temporary differences and
therefore the deferred tax liability. This item primarily relates to
the net write-down of DTAs following a reduction in the US
federal corporate tax rate to 21% from 35% after the
enactment of the TCJA during the fourth quarter of 2017.
income
taxable
from
– a net tax benefit of CHF 359 million recognized in other
comprehensive income (OCI), which included a tax benefit of
CHF 160 million related to cash flow hedges (2016: benefit of
CHF 170 million), a tax expense of CHF 7 million related to
financial assets classified as available for sale (2016: benefit of
CHF 28 million), a tax benefit of CHF 196 million related to
foreign currency translation gains and losses (2016: expense
of CHF 84 million), a tax benefit of CHF 11 million related to
defined benefit plans (2016: benefit of CHF 52 million) and a
tax expense of CHF 1 million (2016: benefit of CHF 5 million)
related to own credit
– a tax benefit of CHF 21 million recognized in share premium
(2016: benefit of CHF 28 million)
– the effects of exchange rate changes on tax assets and
liabilities denominated in currencies other than Swiss francs,
which are included in foreign currency translation movements
in OCI.
Deferred tax assets and liabilities
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 and other items.
Income tax recognized directly in equity
Certain tax expenses and benefits were recognized directly in
equity, which included the following items:
The Group has DTAs related to tax loss carry-forwards and other
items as shown in the table below. As of 31 December 2017,
DTAs of CHF 1,231 million (31 December 2016: CHF 1,689
million) were recognized by entities that incurred losses in either
the current or preceding year based on projections of future
taxable profits. The valuation allowance reflects DTAs 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
Other
Total deferred tax liabilities
1 Less deferred tax liabilities as applicable.
31.12.17
Valuation
allowance
(11,191)
(975)
(222)
(58)
0
(695)
Gross
16,934
5,077
1,136
473
2,374
1,095
22,011
(12,166)
Recognized
5,743
4,102
914
414
2,374
400
9,844
18
34
53
31.12.16
Valuation
allowance
(16,430)
(1,388)
(208)
(118)
0
(1,062)
(17,818)
Gross
24,627
6,346
1,420
935
2,059
1,932
30,973
Recognized
8,197
4,958
1,211
817
2,059
870
13,155
24
20
44
358
Note 8 Income taxes (continued)
As of 31 December 2017, tax loss carry-forwards totaling CHF 46,232 million (31 December 2016: CHF 49,478 million), which are
not recognized as DTAs, 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
31.12.17
31.12.16
167
103
3,185
26,015
16,762
46,232
0
66
910
32,603
15,899
49,478
In general, Swiss tax losses can be carried forward for seven
years, US federal tax losses incurred before 31 December 2017
for 20 years and US federal tax
incurred after
31 December 2017 and also UK and Jersey tax losses for an
unlimited period.
losses
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 2017, no such
earnings 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 authorities indicated that they do not agree with this tax
return filing position, but the authorities have now advised UBS
that they accept that a transfer can occur and have also
accepted UBS’s proposed methods to calculate the amount of
losses to be transferred as adopted on the tax return filing
position.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
359
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
As of or for the year ended
31.12.17
31.12.16
31.12.15
1,053
3,204
6,203
1,053
0
1,053
3,204
0
3,204
6,203
0
6,203
3,716,174,261
3,719,764,322
3,690,375,879
Effect of dilutive potential shares resulting from notional shares, in-the-money options and warrants outstanding
120,540,272
104,244,665
90,898,386
Weighted average shares outstanding for diluted EPS
3,836,714,533
3,824,008,987
3,781,274,265
Earnings per share (CHF)
Basic
Diluted
Shares outstanding
Shares issued
Treasury shares
Shares outstanding
0.28
0.27
0.86
0.84
1.68
1.64
3,853,096,603
3,850,766,389
3,849,731,535
132,301,550
138,441,772
98,706,275
3,720,795,053
3,712,324,617
3,751,025,260
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
31.12.17
31.12.16
31.12.15
Potentially dilutive instruments
Employee share-based compensation awards
Other equity derivative contracts
Total
24,124,341
9,122,496
33,246,837
46,981,698
8,419,122
55,400,820
67,766,835
6,061,848
73,828,683
360
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.
31.12.17
31.12.16
13,741
13,159
(3)
(3)
13,739
13,156
144,431
18,717
115,059
38,837
1,069
2,113
142,197
19,765
104,999
36,481
986
2,494
320,225
306,921
(658)
319,568
333,306
(596)
306,325
319,481
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
Foreign currency translation
Other
Balance at the end of the year
Specific
allowances
587
Collective
allowances
12
Total
allowances –
due from banks
and loans
599
(115)
19
145
(7)
19
648
(2)
1
3
0
0
13
(117)
19
148
(7)
19
661
Allowances –
other assets
0
Provisions1
54
Total
31.12.17
653
0
0
0
0
18
19
0
0
(21)
0
0
33
(117)
20
128
(7)
37
713
Total
31.12.16
727
(145)
22
37
0
12
653
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
Other assets
Provisions
Balance at the end of the year
1 Represents provisions for loan commitments and guarantees.
Specific
allowances
3
645
648
Collective
allowances
0
13
13
Total
allowances
3
658
661
Allowances –
other assets
Provisions1
19
19
33
33
Total
31.12.17
3
Total
31.12.16
3
658
19
33
713
596
0
54
653
361
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 12 Derivative instruments and hedge accounting
Derivatives: overview
A derivative is a financial instrument for 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.
the
Over-the-counter (OTC) derivative contracts are usually traded
under a standardized International Swaps and Derivatives
Association (ISDA) master agreement between UBS and its
counterparties. Terms are negotiated directly with counterparties
and
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 derivative contracts, which may have a bearing on their
price and other relevant terms.
industry-standard
contracts have
The industry continues to promote the use of central
counterparties (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
regulated 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
measured 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, except
for interest on derivatives designated as hedging instruments in
effective hedge accounting relationships and forward points on
certain short duration foreign exchange contracts that are
recorded in Net interest income.
→ Refer to Note 1a items 3j and 3k 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
362
The Group uses various derivative instruments for both
trading and hedging purposes. Derivative product types as well
as valuation 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 indicate 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
balance 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
in the “Derivative
this component
instruments” table.
is also not
included
→ 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
managed 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 portions of “Market risk” in 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 exposure, the positive replacement values related
to a respective counterparty 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.
→ 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
Note 12 Derivative instruments and hedge accounting (continued)
Derivative instruments¹
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.
PRV2
0.1
35.4
8.5
0.0
0.0
44.0
2.7
0.2
0.0
2.8
17.2
23.8
6.1
0.0
0.0
47.1
0.0
3.4
5.8
6.9
6.2
22.2
Notional
values
related to
PRV3
22.1
539.2
558.1
22.7
31.12.17
NRV4
0.3
28.2
9.8
0.0
0.0
Notional
values
related to
NRV3
8.2
453.7
547.2
34.4
Other notional
values3,5
PRV2
2,321.1
7,530.2
455.6
155.4
0.1
45.2
12.6
0.0
0.2
31.12.16
Notional
values
related to
PRV3
NRV4
Notional
values
related to
NRV3
29.6
599.3
478.1
0.1
38.3
13.9
21.9
552.6
480.6
Other
notional
values3,5
2,242.8
7,064.2
326.4
96.2
4.5
45.4
0.0
0.2
1,142.1
38.4
1,043.6
10,462.2
58.0
1,152.4
52.5
1,059.6
9,729.6
85.2
2.2
4.3
91.8
681.4
1,275.5
427.0
4.7
3.0
0.8
0.0
3.8
17.8
21.8
5.8
0.1
0.0
94.4
3.9
0.1
98.3
691.6
1,098.4
397.6
5.6
1.2
1.2
0.4
3.7
0.2
0.0
3.9
21.8
43.2
11.1
0.0
0.0
116.9
3.3
2.9
123.1
3.9
0.9
0.0
4.8
135.2
4.3
0.1
139.6
715.6
1,220.8
530.3
19.0
42.0
11.0
650.9
1,115.0
513.7
6.1
2.9
0.1
0.0
6.0
2,388.5
45.5
2,193.3
0.4
76.1
2,469.6
72.1
2,285.6
6.1
0.0
71.2
76.6
232.6
0.0
5.5
8.2
6.9
6.1
0.0
100.4
125.0
261.2
51.9
31.0
380.3
26.7
486.6
82.9
0.0
3.6
3.7
3.8
6.9
18.0
0.0
76.5
49.6
142.5
0.0
4.8
5.8
4.6
6.9
0.0
69.0
92.8
155.8
33.0
21.6
268.6
22.1
317.6
54.5
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
363
Consolidated financial statements
Note 12 Derivative instruments and hedge accounting (continued)
Derivative instruments¹ (continued)
Table continued from the previous page.
Derivative instruments (continued)1
31.12.17
31.12.16
CHF billion
Commodity contracts
Over-the-counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts
Futures
Forward contracts
Options
Agency transactions7
Notional
values
related to
PRV3
2.9
8.5
11.3
9.4
1.0
NRV4
0.1
0.4
0.1
0.0
0.1
0.9
1.6
PRV2
0.1
0.2
0.3
0.2
0.0
0.9
1.7
Notional
values
related to
NRV3
Other notional
values3,5
PRV2
Notional
values
related to
PRV3
3.8
12.8
7.9
7.9
4.4
8.2
0.3
0.3
0.4
0.5
0.1
0.0
0.9
2.3
Notional
values
related to
NRV3
Other
notional
values3,5
2.7
13.4
9.9
4.6
5.3
9.1
0.0
NRV4
0.1
0.5
0.2
0.0
0.1
0.9
2.0
4.8
10.9
14.1
5.9
3.2
0.1
8.4
0.1
0.1
33.1
12.0
36.9
Total
Unsettled purchases of non-derivative
financial instruments8
Unsettled sales of non-derivative financial
instruments8
Total derivative instruments, based on IFRS
netting9
9,799.3
1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. The replacement values and related notional values of these derivatives
were not material for the periods presented. 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 2017 include CHF 0.0 billion related to derivative loan commitments (31 December 2016:
CHF 0.1 billion). No notional amounts related to these replacement values are included in the table. The maximum irrevocable amount related to these commitments was CHF 5.3 billion as of 31 December 2017
(31 December 2016: CHF 14.3 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.
10,555.0
4,062.6
3,878.3
3,859.6
4,084.0
118.2
116.1
153.8
158.4
10.9
14.8
13.0
18.4
39.0
11.5
35.9
8.7
0.1
0.1
9.7
0.1
0.2
0.1
9.1
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.
On a notional value basis, approximately 54% of OTC interest
rate contracts held as of 31 December 2017 (31 December
2016: 52%) mature within one year, 28% (31 December 2016:
29%) within one to five years and 18% (31 December 2016:
19%) 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
marketing of derivative products to customers to enable them to
take, transfer, modify or reduce current or expected risks.
Trading activities 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 objectives of
these activities are market-making, primarily on behalf of clients,
and ongoing hedging of trading book exposures.
364
Note 12 Derivative instruments and hedge accounting (continued)
Market-making activity, which is undertaken within the
Investment Bank, consists of buying and selling single-name
CDS, index CDS, loan CDS and related referenced cash
instruments to facilitate client trading activity. UBS also actively
utilizes CDS to economically hedge specific counterparty credit
risks in its accrual and traded loan portfolios (including off-
balance sheet loan commitments) 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
protection 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 instruments in addition to CDS, and in
connection with collateral arrangements in place. On a notional
value basis, approximately 23% of credit protection bought and
sold as of 31 December 2017 matures within one year (31
December 2016: 29%), approximately 65% within one to five
years (31 December 2016: 61%) and approximately 12% after
five years (31 December 2016: 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 2017
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 2016
of which: credit derivatives related to economic hedges
of which: credit derivatives related to market-making
Protection bought
Protection sold
PRV
0.6
0.2
0.0
0.0
0.0
0.8
0.7
0.0
PRV
1.6
0.2
0.0
0.1
0.0
2.0
1.4
0.5
NRV
1.1
0.9
0.0
0.8
0.0
2.9
2.4
0.5
Notional values
61.3
31.8
0.1
4.4
4.3
101.9
81.5
20.3
Protection bought
NRV
1.3
0.8
0.0
0.7
0.0
2.8
2.4
0.3
Notional values
91.4
38.4
1.5
5.5
2.9
139.7
111.7
28.0
PRV
1.1
0.9
0.0
0.1
0.0
2.0
1.6
0.5
PRV
1.3
0.5
0.0
0.0
0.0
1.9
1.5
0.4
NRV
0.6
0.2
0.0
0.0
0.0
0.9
0.8
0.0
Notional values
55.7
31.9
0.0
1.7
0.1
89.4
70.5
18.9
Protection sold
NRV
1.4
0.4
0.0
0.2
0.0
2.0
1.5
0.5
Notional values
81.3
38.3
1.1
2.1
0.1
122.9
96.2
26.7
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
365
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 2017
CHF billion
Broker-dealers
Banks
Central clearing counterparties
Other
Total 31 December 2016
Protection bought
Protection sold
PRV
0.2
0.3
0.1
0.3
0.8
PRV
0.4
0.9
0.3
0.4
2.0
NRV
0.2
0.7
1.1
0.9
2.9
Notional values
16.2
37.0
41.5
7.2
101.9
Protection bought
NRV
0.2
1.0
0.9
0.8
2.8
Notional values
20.9
60.8
47.2
10.9
139.7
PRV
0.2
0.5
1.0
0.3
2.0
PRV
0.2
0.8
0.8
0.2
1.9
NRV
0.1
0.4
0.1
0.2
0.9
Notional values
12.3
31.6
40.6
4.9
89.4
Protection sold
NRV
0.3
1.0
0.4
0.3
2.0
Notional values
16.1
52.6
47.1
7.1
122.9
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 parties
at the time of the transaction. However, nearly all transactions are
traded with reference to credit events that are applicable under
certain market conventions based on the type of reference entity to
which the transaction relates. Applicable credit events according to
market conventions include bankruptcy, failure to pay, restructuring,
obligation 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 published
credit ratings of the Group in the normal course of business. Based
on UBS’s credit ratings as of 31 December 2017, CHF 0.1 billion,
CHF 0.3 billion and CHF 1.2 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 forecast transactions.
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 corresponding
headings in this Note (fair value hedges, cash flow hedges and
hedges of net investments in foreign operations).
The Group has also executed various hedging strategies utilizing
derivatives for which hedge accounting has not been applied. These
economic hedges 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 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). The Group’s accounting policies for
derivatives designated and accounted for as hedging instruments or
economic hedges that do not qualify for hedge accounting are
described in Note 1a item 3k, where terms used in the following
sections are explained.
366
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
to
bonds, covered bonds and subordinated debt, due
in market
movements
interest rates. The fair values of
outstanding interest rate derivatives designated as fair value
hedges were assets of CHF 47 million and liabilities of CHF 2
million as of 31 December 2017 and assets of CHF 152 million
and liabilities of CHF 1 million as of 31 December 2016.
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
31.12.17
31.12.16
31.12.15
(20)
1
(19)
140
(144)
(4)
554
(552)
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 2017 were liabilities of CHF 32
million (31 December 2016: liabilities of CHF 44 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
31.12.17
31.12.16
31.12.15
(11)
4
(7)
(128)
116
(12)
(176)
147
(29)
Cash flow hedges of forecast 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 11 years. The table on the
following page shows forecast principal balances on which
expected interest cash flows arise as of 31 December 2017.
Amounts shown represent, by time bucket, average assets and
liabilities subject to forecast cash flows designated as hedged
items in cash flow hedge accounting relationships.
As of 31 December 2017, the fair values of outstanding
derivatives designated as cash flow hedges of forecast
transactions were CHF 30 million assets and CHF 2 million
liabilities (31 December 2016: CHF 68 million assets and
CHF 5 million liabilities).
Other comprehensive income from cash flow hedges, net of
tax was negative CHF 621 million, compared with negative CHF
666 million in 2016 and negative CHF 509 million in 2015. This
result included the reclassification of a pre-tax net gain from
Other comprehensive income to the income statement of CHF
826 million in 2017, compared with a pre-tax net gain of
CHF 1,082 million in 2016 and a pre-tax net gain of CHF 1,182
million in 2015, partly offset by a pre-tax net fair value gain
associated with the effective portion of derivative instruments
designated as cash flow hedges recognized in comprehensive
income of CHF 45 million in 2017, compared with a pre-tax net
gain of CHF 246 million in 2016 and a pre-tax net gain of CHF
544 million in 2015.
As of 31 December 2017, the cumulative net gains associated
with the effective portion of derivative instruments designated
as cash flow hedges reported in Equity were CHF 351 million (31
December 2016: CHF 972 million).
In 2017, a gain of CHF 8 million was recognized in Net
trading income due to hedge ineffectiveness, compared with a
gain of CHF 11 million in 2016 and a gain of CHF 150 million in
2015.
367
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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
52
3
50
74
4
70
49
2
47
49
2
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 2017, the positive
replacement values and negative replacement values of foreign
exchange (FX) derivatives (mainly FX swaps) designated as
hedging instruments in net investment hedge accounting
relationships were CHF 78 million and CHF 130 million,
respectively (31 December 2016: positive replacement values of
CHF 122 million and negative replacement values of CHF 79
million). As of 31 December 2017, the underlying hedged
structural exposures in several currencies amounted to CHF 8.2
billion (31 December 2016: CHF 7.5 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 2017 was
CHF 13 billion in total (31 December 2016: CHF 12.5 billion),
including CHF 8.1 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
financial assets and liabilities of foreign branches or subsidiaries
as hedging instruments in net investment hedge accounting
arrangements. 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 2017, the
nominal amount of non-derivative financial assets and liabilities
designated as hedging instruments in such net investment
hedges was CHF 1.4 billion and CHF 1.4 billion, respectively
(31 December 2016: CHF 1.5 billion non-derivative financial
assets and CHF 1.5 billion non-derivative financial liabilities).
Ineffectiveness of hedges of net investments in foreign
operations was not material in 2017, 2016 and 2015.
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
8
8
0
4
4
0
0
0
0
0
0
0
0
0
0
Total
12
12
0
1 Undiscounted cash inflows and cash outflows of interest rate swaps as of 31 December 2017 were not material as the majority of interest rate swaps designated in hedge accounting relationships are legally
settled on a daily basis.
368
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: USA
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: USA
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
31.12.17
31.12.16
7,000
6,569
299
821
8,120
546
8,665
216
(105)
111
8
11,650
7,779
1,845
1,554
15,048
628
15,676
309
(117)
193
96
31.12.17
31.12.16
7,476
4,833
1,682
669
1,689
9,166
7,416
4,688
1,708
867
1,873
9,289
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
Own-used
properties
Leasehold
improvements
IT hardware and
communication
Internally
generated
software
Purchased
software
Other
machines
and
equipment
Projects
in progress
31.12.17
31.12.16
7,732
48
(39)
(15)
(2)
7,723
4,300
167
(2)
(39)
(9)
(2)
4,414
3,469
21
(295)
136
(41)
3,291
2,132
199
8
(292)
5
(35)
2,017
1,521
118
(115)
45
4
1,574
1,027
179
4
(112)
(1)
6
1,103
3,037
1
(87)
1,220
(12)
4,159
1,542
347
7
(86)
0
(3)
1,807
408
49
(32)
(5)
1
421
233
61
1
(32)
0
3
266
866
14
(53)
27
(14)
840
594
61
1
(52)
0
(9)
595
1,125
1,353
0
(1,455)
0
1,023
0
0
0
0
0
0
0
18,159
1,604
(622)
(46)6
(65)
19,030
9,828
1,015
18
(614)
(5)6
(40)
10,201
17,847
1,788
(1,104)
(200)
(172)
18,159
10,153
959
26
(1,090)
(146)
(75)
9,828
Net book value
Net book value at the beginning 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 2017 relate to assets for which the recoverable amount was determined based on value-in-use. Recoverable amounts for these
impaired assets were not material as of 31 December 2017. 3 As of 31 December 2017, contractual commitments to purchase property in the future amounted to approximately CHF 0.3 billion (31 December
2016: approximately CHF 0.3 billion). 4 Includes CHF 28 million related to leased assets, mainly IT hardware and communication. 5 Consists of CHF 791 million related to Internally generated software, CHF 197
million related to Own-used properties and CHF 35 million related to Leasehold improvements. 6 Reflects reclassifications to Properties held for sale (CHF 40 million on a net basis) of properties sold in 2017.
1,125
1,0235
1,495
2,352
1,337
1,274
3,432
3,309
8,331
8,829
7,695
8,331
272
245
495
471
175
155
369
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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
considers the segments, as reported in Note 2a, as separate
cash-generating units (CGUs). The impairment test is performed
for each segment to which goodwill is allocated by comparing
the recoverable 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 2017, total goodwill
recognized on the balance sheet was CHF 6.2 billion, of which
CHF 1.3 billion, CHF 3.4 billion and CHF 1.4 billion was carried
by Wealth Management, Wealth Management Americas and
Asset Management, respectively. Based on the impairment
testing methodology described below, UBS concluded that the
goodwill balances as of 31 December 2017 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 discounted earnings attributable to shareholders from the
first three forecast years and the terminal value, adjusted for the
effect of the capital assumed to be needed over the next three
years and to support the perpetual growth implied by the long-
term growth rate. 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, as well as the implied perpetual capital growth.
in
is described
framework, which
The carrying amount for each segment is determined by
reference to the Group’s equity attribution framework. Within
this
the “Capital
management” section of this report, we attribute equity to the
businesses on the basis of their risk-weighted assets and
leverage ratio denominator, 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
framework is primarily used for purposes of measuring the
certain
the businesses and
performance of
management assumptions. Attributed equity equals the capital
that a segment requires to conduct its business and is
includes
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 calculating the
recoverable amounts of the respective CGU.
→ Refer to the “Capital management” section of this report for
more information on the equity attribution framework
Assumptions
linked to external market
Valuation parameters used within the Group’s impairment test
information, where
model are
applicable. The model used to determine the recoverable
amount is most sensitive to changes in the forecast earnings
available to shareholders in years one to three, to changes in the
discount rates and to changes in the long-term growth rate. The
applied long-term growth rate is based on long-term economic
growth rates for different 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 2016 and 2017.
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. Under all scenarios, reasonably possible changes in key
assumptions did not result in an impairment of goodwill or
intangible assets that would be material to the consolidated
financial statements or to the reported financial performance of
any of the business divisions.
If the estimated earnings and other assumptions in future
periods 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.
370
Note 15 Goodwill and intangible assets (continued)
Discount and growth rates
In %
Wealth Management
Wealth Management Americas
Asset Management
Investment Bank
Discount rates
Growth rates
31.12.17
9.0
9.0
9.0
11.0
31.12.16
9.0
9.0
9.0
11.0
31.12.17
1.7
2.4
2.4
2.4
31.12.16
1.7
2.4
2.4
2.4
Goodwill
Intangible assets
Customer
relationships,
contractual
rights and other
773
Total
Total
31.12.16
31.12.17
Infrastructure
739
64
(34)
6,311
37
(27)
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
Net book value at the end of the year
1 Impairment charges recorded in 2017 and 2016 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 0 million for 2017 and
CHF 3 million for 2016).
1,267
70
0
(15)
0
(29)
1,292
215
1,267
70
0
(15)
0
(29)
1,292
6,398
1,253
91
0
(1)
(75)
(1)
1,267
6,556
1,512
64
(34)
0
(35)
1,507
7,823
101
(61)
0
(174)
7,689
7,821
24
(3)
(75)
57
7,823
641
32
0
(15)
(3)
655
111
(27)
637
104
(139)
6,182
(2)
766
(33)
741
626
37
6,182
The table below presents goodwill and intangible assets by segment for the year ended 31 December 2017.
CHF million
Goodwill
Balance at the beginning of the year
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
Wealth
Management
Wealth
Management
Americas
Investment
Bank
Asset
Management
Corporate Center
– Services
1,303
37
(2)
8
1,346
40
47
(19)
(7)
2
63
3,571
36
1,401
(151)
3,420
152
17
(41)
0
(6)
121
(2)
34
41
(12)
(1)
28
(25)
6
1,382
4
(3)
0
1
9
(7)
2
Total
6,311
37
(27)
(139)
6,182
245
64
(19)
(70)
0
(5)
215
371
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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
2018
2019
2020
2021
2022
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
Settlement and clearing accounts
VAT and other tax receivables
Properties and other non-current assets held for sale
Assets of disposal group held for sale3
Other
Total other assets
63
49
42
11
11
35
5
215
31.12.16
9,828
3,087
471
1,213
526
818
1,010
516
292
111
5,137
2,427
25,436
31.12.17
19,080
2,553
565
1,337
577
781
1,013
716
359
95
0
2,630
29,706
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 30 for more information.
372
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 year 2,3
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 year 2,4
Repurchase agreements
Loan commitments and guarantees5
Total
31.12.17
7,533
408,999
188,580
161,828
47,391
11,200
31.12.16
10,645
423,672
194,044
170,729
52,716
6,184
416,532
434,317
31.12.17
31.12.16
34,162
5,811
2,937
3,921
2,671
49,502
37,266
1,350
2,967
4,317
3,049
375
9
29,831
10,150
4,101
2,972
2,875
49,930
36,347
1,992
2,671
4,663
4,210
395
29
54,202
55,017
of which: life-to-date own credit (gain) / loss
(141)
1 Includes investment fund unit-linked instruments issued. 2 Issued by the 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 2017 was unsecured (31 December 2016: more than 99% of the balance was unsecured). 4 More than 40% of the balance as of 31 December 2017 was unsecured (31 December
2016: 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.
195
As of 31 December 2017 and 31 December 2016, 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 payments 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
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
373
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
2018
2019
2020
2021
2022
2023–2027
Thereafter
Total
31.12.17
Total
31.12.16
3,339
16,428
19,767
1,350
5,660
7,010
872
4,418
5,290
401
1,297
1,697
571
1,883
2,455
90
330
420
797
18
816
52
194
246
74
0
74
7
48
55
511
4,983
5,494
345
27
372
3,610
6,497
10,107
10,653
41,167
51,820
9,505
42,757
52,262
136
263
399
1,502
879
2,382
1,768
987
2,755
20,187
7,826
5,536
1,772
2,510
5,866
10,506
54,202
55,017
1 Comprises instruments issued by the 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 year 2
Senior unsecured debt that contributes to total loss-absorbing capacity
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 year 2
Long-term debt3
31.12.17
23,831
23,532
3,590
50,953
32,268
32,256
27,233
4,112
16,555
5,187
2,383
8,286
700
8,345
87
66
31.12.16
20,207
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
88,599
77,472
Total debt issued held at amortized cost4
1 Debt with an original maturity of less than one year. 2 Issued by the legal entity UBS AG. Based on original contractual maturity without considering any early redemption features. 100% of the balance as of
31 December 2017 was unsecured (31 December 2016: 100% of the balance was unsecured). 3 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. 4 Net of bifurcated embedded derivatives, the fair value of which was not material for the periods presented.
139,551
103,649
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
accounting for interest rate risk as discussed in Note 1a item 3k
and Note 12. As a result of applying hedge accounting, the life-
to-date adjustment to the carrying value of debt issued was an
increase of CHF 34 million as of 31 December 2017 and an
increase of CHF 490 million as of 31 December 2016, reflecting
changes in fair value due to interest rate movements.
374
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
the subordinated debt
instruments outstanding as of 31 December 2017 pay a fixed
rate of interest.
issuing entity. All of
The table below shows the residual contractual maturity of
the carrying value of debt issued, split between fixed-rate and
floating-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.
→ 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
2018
2019
2020
2021
2022
2023-2027
Thereafter
Total
31.12.17
Total
31.12.16
0
0
0
0
0
0
0
0
0
0
38,470
0–6.6
21,158
3,975
2.4–4.0
4,818
7,964
0–4.9
3,926
0
0
0
4,107
0.1–1.4
0
0
59,628
8,793
11,891
4,107
805
747
0.4–3.8
0.6–2.9
1
806
0
746
2,186
0.1–2.8
293
2,479
60,434
9,540
14,370
2,940
0.1–3.0
976
3,916
8,022
1,580
4.0–4.0
0
1,912
7.6–7.6
3,492
4,535
0.1–3.4
2,535
7,070
10,562
0
0
0
0
7,073
4.8–8.8
7,073
15,723
0.1–4.1
2,162
17,885
24,958
7,570
5.8–7.1
7,570
7,570
7,771
7,570
7,771
18
56,115
42,724
1,223
31,125
15,937
0
8,985
11,554
1,241
96,225
70,215
2,855
0.2–4.3
0
2,855
11,666
29,791
23,843
5,966
35,756
1,820
25,663
139,551
103,649
1 Comprises debt issued by the legal entity UBS Group AG. 2 Comprises debt issued by the legal entity UBS AG. 3 Comprises debt issued by other direct subsidiaries of UBS Group AG and by subsidiaries of UBS
AG.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
375
Consolidated financial statements
Note 20 Provisions and contingent liabilities
a) Provisions
CHF million
Balance at the beginning of the year
Additions from acquired companies
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
3,261
Operational
risks1
50
0
15
(7)
(13)
0
0
(3)
43
0
682
(209)
(1,230)
0
0
(59)
2,444
Loan com-
mitments
and
guarantees
54
0
11
(32)
0
0
0
0
Restruc-
turing
498
0
220
(80)
(313)
0
0
(2)
Real
estate
142
Employee
benefits5
77
0
3
(2)
(12)
7
0
(5)
0
12
(21)
(1)
0
0
1
Other
91
7
45
(20)
(34)
0
0
1
Total
31.12.17
4,174
Total
31.12.16
4,164
7
988
(371)
0
1,433
(288)
(1,604)
(1,152)
7
0
(68)
(2)
10
10
3223
33
1344
68
89
3,133
4,174
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 Primarily consists of
personnel-related restructuring provisions of CHF 83 million as of 31 December 2017 (31 December 2016: CHF 150 million) and provisions for onerous lease contracts of CHF 235 million as of 31 December 2017
(31 December 2016: CHF 348 million). 4 Consists of reinstatement costs for leasehold improvements of CHF 92 million as of 31 December 2017 (31 December 2016: CHF 87 million) and provisions for onerous
lease contracts of CHF 41 million as of 31 December 2017 (31 December 2016: CHF 55 million). 5 Includes provisions for sabbatical and anniversary awards as well as provisions for severance that are not part of
restructuring provisions.
lease
Restructuring provisions primarily relate to onerous
contracts and severance payments. The use of onerous lease
provisions is driven by the maturities of the underlying lease
contracts. 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.
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
disputes and legal proceedings, including litigation, arbitration,
and regulatory and criminal investigations.
Such matters are subject to many uncertainties, and the
outcome 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
implications of
continuing to contest liability, even for those matters for which
the Group believes it should be exonerated. 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 matters 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
reputational
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 nevertheless
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 cannot be reliably estimated, a liability exists that is
not recognized even if an outflow of resources is probable.
Accordingly, no provision is established even if the potential
outflow of resources with respect to such 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
significance due to potential financial, reputational and other
effects. The amount of damages claimed, the size of a
transaction or other information is provided where available and
appropriate in order to assist users in considering the magnitude
of potential exposures.
376
Note 20 Provisions and contingent liabilities (continued)
to confidentiality obligations
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
outflow, we do not disclose that amount. In some cases we are
that preclude such
subject
disclosure. With respect to the matters for which we do not
state whether we have established a provision, either (a) we
have not established a provision, in which case the matter is
treated as a contingent 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
matters for which we have established provisions, we are able to
estimate the expected timing of outflows. However, the
aggregate amount of the expected outflows for those matters
for which we are able to estimate expected timing is immaterial
relative to our current and expected levels of liquidity over the
relevant time periods.
The aggregate amount provisioned for litigation, regulatory
and similar matters as a class is disclosed in the “Provisions”
table 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 contingent 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 substantially 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 Section 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
foreign exchange matters. As a
consequence, UBS AG pleaded guilty to one count of wire fraud
for conduct in the LIBOR matter, paid a fine and is subject to
probation through January 2020. A guilty plea to, or conviction
of, a crime could have material consequences for UBS.
Resolution of regulatory proceedings may require us to obtain
waivers of regulatory disqualifications to maintain certain
operations, may entitle regulatory authorities to limit, suspend or
terminate licenses and regulatory authorizations, and may
permit financial market utilities to limit, suspend or terminate
our participation in such utilities. Failure to obtain such waivers,
licenses,
limitation, suspension or termination of
or any
authorizations
have material
consequences for UBS.
participations,
relation
could
or
to
in
The risk of loss associated with litigation, regulatory and
similar matters is a component of operational risk for purposes
of determining 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
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
292
Wealth
Manage-
ment
Americas
425
30
(4)
(135)
24
207
158
(12)
(207)
(17)
348
Personal &
Corporate
Banking
78
Asset
Manage-
ment
5
Investment
Bank
616
CC –
Services
259
CC –
Non-core
and Legacy
Portfolio
1,585
CC –
Group
ALM
0
3
(1)
(2)
2
79
6
(9)2
(1)
0
1
8
(49)
(216)
(15)
345
248
(6)
(262)
1
240
0
0
0
0
0
229
(129)
(406)
(55)
Total
31.12.17
3,261
Total
31.12.16
2,983
682
(209)
(1,230)
(59)
856
(48)
(554)
25
1,224
2,444
3,261
1 Provisions, if any, for the matters described in this Note are recorded in Wealth Management (item 3), Wealth Management Americas (item 4), the Investment Bank (item 7) and Corporate Center – Non-core and
Legacy Portfolio (item 2). Provisions, if any, for the matters described in items 1 and 6 of this Note are allocated between Wealth Management and Personal & Corporate Banking, and provisions, if any, for the
matters described in this Note in item 5 are allocated between the Investment Bank, Corporate Center – Services and Corporate Center – Non-core and Legacy Portfolio. 2 In 2017, a release of CHF 5 million was
recognized in Provisions for litigation, regulatory and similar matters, with a corresponding increase in Other provisions.
377
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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 the 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
international
transfer
administrative assistance 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
the
has
administrative assistance proceedings and their procedural
rights, including the right to appeal. The requests are based on
data received from the German authorities, 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 additional countries to file
similar requests.
information based on requests for
inform affected clients about
taken steps
to
The Swiss Federal Administrative Court ruled in 2016 that in
the administrative assistance proceedings related to a French
bulk request, UBS has the right to appeal all final FTA client data
disclosure orders.
Since 2013, UBS (France) S.A. and UBS AG and certain former
employees have been under investigation in France for alleged
complicity in having illicitly solicited clients on French territory
and regarding the laundering of proceeds of tax fraud and of
banking and financial solicitation by unauthorized persons. In
connection with this investigation, the investigating judges
ordered UBS AG to provide bail (“caution”) of EUR 1.1 billion
and UBS (France) S.A. to post bail of EUR 40 million, which was
reduced on appeal to EUR 10 million.
In February 2016, the investigating judges notified UBS AG
and UBS (France) S.A. that they have closed their investigation.
In July 2016, UBS AG and UBS (France) S.A. received the
National Financial Prosecutor’s recommendation (“réquisitoire”).
In March 2017, the investigating judges issued the trial order
(“ordonnance de renvoi”) that charges UBS AG and UBS
(France) S.A., as well as various former employees, with illicit
solicitation of clients on French territory and with participation in
the laundering of the proceeds of tax fraud, and which transfers
the case to court. The trial schedule has not yet been
announced. In October 2017, the Investigation Chamber of the
Court of Appeals decided that UBS (France) S.A. shall not be
constituted as a civil party in the guilty plea proceedings against
the former UBS (France) S.A. Head of Front Office. UBS (France)
S.A. has appealed this decision to the French Supreme Court
(“Cour de cassation”).
378
In 2016, UBS was notified by the Belgian investigating judge
that it is under formal investigation (“inculpé”) regarding the
laundering of proceeds of tax fraud and of banking, financial
solicitation by unauthorized persons and serious tax fraud.
(SEC), which are
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
investigating
potential sales to US persons of bearer bonds and other
unregistered securities in possible violation of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA) and the registration
requirements of the US securities laws. UBS is cooperating with
the authorities in these investigations. In 2018, UBS was
informed by the US Attorney’s Office and the SEC that they have
closed their investigations and that they will not take any action.
UBS has, and reportedly numerous other financial institutions
have, received inquiries from authorities concerning accounts
relating 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 2017 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 provision that we have recognized.
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
purchaser and seller of US residential mortgages. A subsidiary of
UBS, UBS Real Estate Securities Inc. (UBS RESI), acquired pools of
residential 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
original principal balance.
UBS was not a significant originator of US residential loans. A
branch 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.
Note 20 Provisions and contingent liabilities (continued)
to
related
Lawsuits
contractual
representations and
warranties concerning mortgages and RMBS: When UBS acted
as an RMBS sponsor or mortgage seller, it generally made
certain representations relating to the characteristics of the
underlying loans. In the event of a material breach of these
representations, UBS was in certain circumstances contractually
obligated to repurchase the loans to which the representations
related or to indemnify certain parties against losses. In 2012,
certain RMBS trusts filed an action (Trustee Suit) in the US
District Court for the Southern District of New York (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.
Approximately 9,000 loans were at issue in a bench trial in the
SDNY in 2016, following which the court issued an order ruling
on numerous legal and factual issues and applying those rulings
to 20 exemplar loans. The court further ordered that a lead
master be appointed to apply the court’s rulings to the loans
that remain at issue following the trial. In October 2017, UBS
and certain holders of the RMBS in the Trustee Suit entered into
an agreement under which UBS has agreed to pay an aggregate
of USD 543 million into the relevant RMBS trusts, plus certain
attorneys’ fees. A portion of these settlement costs will be borne
by other parties that indemnified UBS. The agreement is subject
to the trustee for the RMBS trusts becoming a party thereto by 9
March 2018. The trustee for the RMBS trusts has evaluated the
proposed settlement under the agreement between UBS and the
RMBS holders and UBS has been in discussions with the trustee
about the terms on which it would become a party to a
settlement. Giving effect to a settlement of the Trustee Suit, UBS
considers claims relating to substantially all loan repurchase
demands to be resolved, and believes that new demands to
repurchase US residential mortgage loans are time-barred under
a decision rendered by the New York Court of Appeals.
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 subsequently provided a revised list of
transactions. UBS has provided information in response to this
subpoena. UBS has also received and responded to subpoenas
from the New York State Attorney General (NYAG) and other
state attorneys general relating to UBS’s RMBS business. In
2017, the NYAG identified a number of transactions that are the
focus of its inquiry. In addition, UBS responded 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 practices in connection with purchases and
sales of mortgage-backed securities in the secondary market
from 2009 through 2014. UBS
is cooperating with the
authorities in these matters.
Our balance sheet at 31 December 2017 reflected a provision
with respect to matters described in this item 2 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 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.
3. Madoff
In relation to the Bernard L. Madoff Investment Securities LLC
(BMIS) investment fraud, UBS AG, UBS (Luxembourg) S.A. (now
UBS Europe SE, Luxembourg branch) and certain other UBS
subsidiaries have been subject to inquiries by a number of
regulators, including the Swiss Financial Market Supervisory
(FINMA) and the Luxembourg Commission de
Authority
Surveillance du Secteur Financier
inquiries
concerned 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 faced severe
losses, and the Luxembourg funds are in liquidation. 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.
(CSSF). Those
In 2009 and 2010, the liquidators of the two Luxembourg
funds filed claims against UBS entities, non-UBS entities and
certain individuals, including current and former UBS employees,
seeking amounts aggregating approximately EUR 2.1 billion,
which includes amounts that the funds may be held liable to pay
the trustee for the liquidation of BMIS (BMIS Trustee).
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
379
Consolidated financial statements
Note 20 Provisions and contingent liabilities (continued)
A large number of alleged beneficiaries have filed claims
against UBS entities (and non-UBS entities) for purported losses
relating to the Madoff fraud. The majority of these cases have
been filed in Luxembourg, where decisions that the claims in
eight test cases were inadmissible have been affirmed by the
Luxembourg Court of Appeal, and the Luxembourg Supreme
Court has dismissed a further appeal in one of the test cases.
In the US, the BMIS Trustee filed claims 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. In
2014, the US Supreme Court rejected the BMIS Trustee’s motion
for leave to appeal decisions dismissing all claims except those
for the recovery of fraudulent conveyances and preference
payments.
In 2016, the Bankruptcy Court dismissed the
remaining claims against the UBS entities. The BMIS Trustee
appealed. In 2014, several claims, including a purported class
action, were filed in the US by BMIS customers against UBS
entities, asserting claims similar to those made by the BMIS
Trustee, and seeking unspecified damages. These claims have
either been voluntarily withdrawn or dismissed on the basis that
the courts did not have jurisdiction to hear the claims against the
UBS entities. In 2016, the plaintiff in one of those claims
appealed the dismissal. In February 2018, the United States
Court of Appeals for the Second Circuit affirmed the dismissal of
the plaintiff’s claim.
4. Puerto Rico
Declines since 2013 in the market prices of Puerto Rico
municipal bonds and of closed-end funds (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 USD 2.4 billion, of which claims with
aggregate claimed damages of USD 1.4 billion 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 allegations 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 former 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. In 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
defendant’s motion for summary judgment based on a forum
selection clause in the loan agreements. The Puerto Rico
Supreme Court reversed that decision and remanded the case
back to the trial court for reconsideration. On reconsideration
the trial court granted defendant’s motion and dismissed the
action.
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,
pursuant 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
Authority (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 conducting 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
consulting services. Plaintiffs alleged that defendants violated
their purported fiduciary duties and contractual obligations in
connection with the issuance and underwriting of USD 3 billion
of bonds by the System in 2008 and sought damages of over
USD 800 million. In 2016, the court granted the System’s
request to join the action as a plaintiff, but ordered that
plaintiffs must file an amended complaint. In 2017, the court
denied defendants’ motion to dismiss the amended complaint.
380
Note 20 Provisions and contingent liabilities (continued)
Beginning in 2012, two federal class action complaints, which
were subsequently consolidated, were filed against various UBS
entities, certain closed-end 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. In
2016, the court denied plaintiffs’ motion for class certification. In
March 2017, the US Court of Appeals for the First Circuit denied
plaintiffs’ petition seeking permission to bring an interlocutory
appeal challenging the denial of their motion for class
certification.
Beginning in 2015, certain agencies and public corporations of
the Commonwealth of Puerto Rico (Commonwealth) defaulted on
certain interest payments, in 2016, the Commonwealth defaulted
on payments on its general obligation debt (GO Bonds), and in
2017 the Commonwealth defaulted on payments on its debt
backed by the Commonwealth’s Sales and Use Tax (COFINA
Bonds) as well as on bonds issued by the Commonwealth’s
Employee Retirement System (ERS Bonds). The funds hold
significant amounts of both COFINA and ERS Bonds and the
defaults on interest payments are expected to adversely affect
dividends from the funds. 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 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 authorized to impose, and has imposed, a stay on
exercise of creditors’ rights. In May and June 2017, the oversight
board placed the GO, COFINA and ERS Bonds, among others, into
a bankruptcy-like proceeding under the supervision of a Federal
District Judge as authorized by the oversight board’s enabling
statute. These events, further defaults, any further legislative
action to create a legal means of restructuring Commonwealth
the
obligations or
Commonwealth’s
the
Commonwealth’s obligations may increase the number of claims
against UBS concerning Puerto Rico securities, as well as potential
damages sought.
impose additional oversight on
restructuring of
finances, or any
to
Our balance sheet at 31 December 2017 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
provisions that we have recognized.
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
precious metals and related structured products businesses.
Numerous authorities commenced
investigations concerning
possible manipulation of foreign exchange markets and precious
metals prices. In 2014 and 2015, UBS reached settlements with
the UK Financial Conduct Authority (FCA) and the US Commodity
Futures Trading Commission (CFTC) in connection with their
foreign exchange
issued an order
investigations, FINMA
concluding its formal proceedings relating to UBS’s foreign
exchange and precious metals businesses, and the Board of
Governors of the Federal Reserve System (Federal Reserve Board)
and the Connecticut Department of Banking issued a Cease and
Desist Order and assessed monetary penalties against UBS AG. In
addition, the DOJ’s Criminal Division (Criminal Division) terminated
the 2012 Non-Prosecution Agreement (NPA) with UBS AG related
to UBS’s submissions of benchmark interest rates and UBS AG
pleaded guilty to one count of wire fraud, paid a fine and is
subject to probation through January 2020. In January 2018, UBS
reached a settlement with the CFTC in connection with the
CFTC’s precious metals investigations. As part of that settlement,
UBS paid a USD 15 million civil monetary penalty. UBS has
ongoing obligations to cooperate with these authorities and to
undertake certain remediation. UBS has also been granted
conditional immunity by the Antitrust Division of the DOJ
(Antitrust Division) and by authorities in other jurisdictions in
connection with potential competition law violations relating to
foreign exchange and precious metals businesses. Refer to Note
20b in the “Consolidated financial statements” section of the
Annual Report 2016 for more information on regulatory actions
related to foreign exchange and precious metals and grants of
conditional immunity or leniency. Investigations relating to foreign
exchange and precious metals matters by certain authorities
remain ongoing notwithstanding these resolutions.
Foreign exchange-related civil litigation: Putative class actions
have been filed since 2013 in US federal courts and in other
jurisdictions against UBS and other banks on behalf of putative
classes of persons who engaged in foreign currency transactions
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 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
federal 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
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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,
beneficiaries 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
discretionary control over management of such ERISA plan, or
authorized 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 dismiss the case with prejudice. The plaintiffs have
appealed the dismissal. The appeals court heard oral argument
in June 2017.
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 was transferred to federal
court in New York. In March 2017, the court granted UBS’s (and
the other banks’) motions to dismiss the complaint. The plaintiffs
filed an amended complaint in August 2017.
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
purchased foreign exchange instruments from a defendant or
co-conspirator in the US. The complaint asserts claims under
federal and state antitrust laws. In response to defendants’
motion to dismiss, plaintiffs agreed to dismiss their complaint. In
April and June 2017, two new putative class actions were filed
in federal court in New York against UBS and numerous other
banks on behalf of different proposed classes of indirect
purchasers of currency, and a consolidated complaint was filed
in June 2017.
In 2015, UBS was added to putative class actions pending
against other banks in federal court in New York and other
jurisdictions on behalf of putative classes of persons who had
bought or sold physical precious metals and various precious
metal products and derivatives. The complaints in these lawsuits
assert claims under the antitrust laws and the CEA, and other
claims. In 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 sought to amend their complaints to add
new allegations about UBS, which the court granted. The
plaintiffs filed amended complaints in June 2017. In March
2017, the court in New York granted UBS’s motion to dismiss
the platinum and palladium action. In May 2017, plaintiffs in the
platinum and palladium action filed an amended complaint that
did not allege claims against UBS.
LIBOR and other benchmark-related regulatory matters:
Numerous government agencies, including the SEC, the CFTC,
the DOJ, the FCA, the UK Serious Fraud Office (SFO), the
Monetary Authority of Singapore (MAS), the Hong Kong
Monetary Authority (HKMA), FINMA, various state attorneys
general in the US and competition authorities in various
jurisdictions, have conducted or are continuing to conduct
investigations regarding potential improper attempts by UBS,
among others, to manipulate LIBOR and other benchmark rates
at certain times. In 2012, UBS reached settlements relating to
benchmark interest rates with the FSA, the CFTC and the
Criminal Division of the DOJ, and FINMA issued an order in its
proceedings with respect to UBS relating to benchmark interest
rates. In addition, UBS entered into settlements with the
European Commission (EC) and with the Swiss Competition
Commission (WEKO) regarding its investigation of bid-ask
spreads in connection with Swiss franc interest rate derivatives.
UBS has ongoing obligations to cooperate with the authorities
with whom we have reached resolutions and to undertake
certain remediation with respect to benchmark interest rate
submissions. 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 certain rates. However, UBS has not reached a final
settlement with WEKO as the Secretariat of WEKO has asserted
that UBS does not qualify for full immunity. Refer to Note 20b in
the “Consolidated financial statements” section of the Annual
Report 2016 for more information on regulatory actions relating
to benchmark rates and grants of conditional immunity or
leniency.
Investigations by certain governmental authorities
remain ongoing notwithstanding these resolutions.
in certain
LIBOR and other benchmark-related civil litigation: A number of
putative class actions and other actions are pending in the federal
courts in New York against UBS and numerous other banks on
behalf of parties who transacted
interest rate
benchmark-based derivatives. Also pending in the US and in other
jurisdictions 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 securities,
bonds pledged as collateral,
loans, depository accounts,
investments and other interest-bearing instruments. All of the
complaints allege manipulation, through various means, of various
benchmark interest rates, including USD LIBOR, Euroyen TIBOR,
Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR, USD and SGD SIBOR
and SOR, Australian BBSW and USD ISDAFIX, and seek unspecified
compensatory and other damages under varying legal theories.
382
Note 20 Provisions and contingent liabilities (continued)
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 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. Certain plaintiffs
appealed that decision to the Second Circuit in 2017. In 2018, the
district court denied certain plaintiffs' motions for class certification.
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. In 2017, the court also dismissed the other Yen LIBOR /
Euroyen TIBOR action in its entirety on standing grounds, as did the
court in the CHF LIBOR action. Also in 2017, the courts in the
EURIBOR and the SIBOR and SOR lawsuits dismissed the cases as to
UBS and certain other foreign defendants for lack of personal
jurisdiction. Plaintiffs in the CHF LIBOR and SIBOR and SOR actions
have filed amended complaints following the dismissals, which UBS
and other defendants have moved to dismiss. UBS and other
defendants in other lawsuits have also moved to dismiss the GBP
LIBOR and Australian BBSW actions. In 2016, UBS entered into an
agreement with representatives of a class of bondholders to settle
their USD LIBOR class action. The agreement has received
preliminary court approval and remains subject to final approval.
Since 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 court has
given preliminary approval of a settlement agreement under which
UBS would pay USD 14 million to settle the case in its entirety.
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,
and a consolidated complaint was filed in November 2017.
Following filing of these complaints, UBS and reportedly other
banks are responding to investigations and requests for information
from various authorities regarding US Treasury securities 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
encompassed by the settlements and orders referred to above, our
balance sheet at 31 December 2017 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 ultimately
prove to be substantially greater (or may be less) than the provision
that we have recognized.
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 distributing
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 other things, the existence of
a discretionary mandate and whether or not
the client
documentation contained a valid waiver with respect to distribution
fees.
Our balance sheet at 31 December 2017 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 provision that
we have recognized.
7. 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. The
SFC has previously indicated that it intended to take enforcement
action against UBS and certain employees in relation to certain of
these offerings. In March 2018, the SFC issued a decision notice in
relation to one of the offerings under investigation. The notice
provides for a fine of HKD 119 million and a suspension of UBS
Securities Hong Kong Limited’s ability to act as a sponsor for Hong
Kong listed initial public offerings for 18 months. UBS intends to
appeal the decision.
383
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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 liabilities 2
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
31.12.17
29,646
11,523
7,674
2,670
1,993
2,086
925
254
1,395
912
415
150
1,513
2,444
0
1,138
57,064
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
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.
384
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)
g) Level 3 instruments: sensitivity to changes in unobservable
Level 3 instruments: valuation techniques and inputs
input assumptions
h) Level 3 instruments: movements during the period
Financial instruments not measured at fair value
i)
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
transaction 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
identical 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 multiplied 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
valuation
including pricing models. Valuation
techniques involve the use of estimates, the extent of which
depends on the complexity of the instrument and the availability
technique,
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
willing 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 substantially similar and offsetting risk exposures
on the basis of the net open risks.
For transactions where the valuation technique used to
measure fair value requires significant inputs that are not based
on observable market data, the financial instrument is initially
recognized 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
385
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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.
their valuation
responsibilities, the businesses are required to consider the
availability and quality of external market data and to provide
justification and rationale for their fair value estimates.
In carrying out
Fair value estimates are validated by risk and finance control
functions, which are independent of the business divisions.
Independent price verification is performed by Finance through
benchmarking the business divisions’ fair value estimates with
observable market prices and other independent sources.
Controls and a governance framework are in place and are
intended 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 Control 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
386
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
Assets measured at fair value on a recurring basis
31.12.17
31.12.16
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial assets held for trading2
108,962
15,211
1,972
126,144
76,044
14,292
1,689
92,025
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
Financial assets designated at fair value
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
Precious metals and other physical commodities
Assets measured at fair value on a non-recurring basis
Other assets3
Total assets measured at fair value
11,935
37
0
7,223
0
79,274
10,492
918
7,974
3,346
1,839
194
186
755
0 12,854 10,500 1,319
58 6,638
0 1,356
6,114 3,521
470
397
591
8,563
552
3,847
501
9,632
571
174
0
368
105 79,565 50,913
8,459
69 11,316
0 11,820
591 7,287
681 2,037
63 9,698
215
685
65 51,375
74 9,123
458
116,221
1,549
118,227
434 155,428
2,549 158,411
1 43,913
2,266
0
207 46,748
16 21,541
1,727
0
135 44,049
2,816
550
189 47,143
675 22,232
1,727
0
8 57,703
278 57,988
0 2,562 1,313 3,875
222 76,092
729 18,003
8 2,277
263 75,607
1 17,274
0 2,269
23,032
34,481
1,419
58,933
39,641
23,632
2,079
65,353
22,062
3,900
765 20,702
9,385
0
0 43,799
0 25,961 39,439 4,361
15 16,860
0 21,467
0 16,875
0 2,043 1,195 3,238
758 10,143
0
205
118
377
173
489
291
1,071
0
187
40
329
644
240
684
756
3,000
5,157
507
8,665
6,299
8,891
486
15,676
2,733
121
0
0
146
133
1,060
70
3,880
16
0
9
115
0
384
2,866
1,189
185
3,880
546
5,444
450
646 4,939
0
51
0 3,381
71
204
0 5,894
12 5,596
177
126
0 3,381
611
336
4,563
0
0
4,563
4,583
0
0
4,583
0
140,015
54
171,125
42
5,489
95
316,629
5,060
131
132,062 202,377
56
5,248
6,860 341,298
387
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 22 Fair value measurement (continued)
Determination of fair values from quoted market prices or valuation techniques (continued)1
CHF million
Liabilities measured at fair value on a recurring basis
Trading portfolio liabilities
of which:
Government bills / bonds
Corporate and municipal bonds
Investment fund units
Equity instruments
Negative replacement values
of which:
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Commodity contracts
31.12.17
31.12.16
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
26,037
4,309
117
30,463
18,807
3,898
119
22,824
5,153
50
541
20,293
256
3,453
263
336
5,409
0
3,538
35
16
820
66 20,695
5,573
648
12 2,927
91
484
227
12,738
0 6,221
37 2,976
20
595
62 13,026
398
112,928
2,807
116,133
539 149,255
4,016 153,810
5 38,196
3,196
0
213 45,150
42 24,803
1,561
0
186 38,387
601
3,797
122 45,485
1,896 26,741
1,562
1
274 71,668
12 51,990
475 52,476
0 3,269 1,538 4,807
148 72,089
1 20,254 1,854 22,109
1 2,041
0 2,040
Financial liabilities designated at fair value
0
41,376
12,826
54,202
2
44,007
11,008
55,017
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
0 38,617 10,885 49,502
4,315
0
376
0
9
0
1,930
4
7
2,385
372
2
0 40,242 9,688 49,930
2 3,611 1,050 4,663
395
0
29
0
266
5
130
25
0
11,523
0
11,523
0
9,286
0
9,286
Liabilities measured at fair value on a non-recurring basis
5,213
Other liabilities3
15,143 246,150
Total liabilities measured at fair value
1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. The fair value of these derivatives was not material for the periods
presented. 2 Financial assets held for trading exclude 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.
5,213
19,347 211,660
1
212,323
1
170,138
0
15,750
0
26,435
0
0
388
Note 22 Fair value measurement (continued)
Valuation techniques
Valuation techniques are used to value positions for which a
market 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, relative 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 discount
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
observable market data. In such cases, the inputs selected are
based on historical experience and practice for similar or
analogous instruments, derivation of input levels based on
similar products with observable price levels and knowledge of
current market conditions and valuation approaches.
For more complex instruments and instruments not traded in
an active market, fair values may be estimated using a
combination of observed transaction prices, consensus pricing
services and relevant quotes. Consideration is given to the
nature of the quotes
indicative or firm) and the
relationship of recently evidenced market activity to the prices
(e.g.,
provided by consensus pricing services. UBS also uses internally
developed models, which are typically based on valuation
methods and techniques recognized as standard 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 correlation. 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
discounted 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
local governments. While most
instruments are standard fixed- or floating-rate securities, some
may have more complex coupon or embedded option features.
issued by state and
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 discounted 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
generally 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
referenced 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.
389
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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.
Valuation: loans are valued directly using market prices that
reflect recent transactions or quoted dealer prices where
available. Where no market price data is 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 insurance 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
redeemable units.
Valuation:
fund units are predominantly
exchange-traded, with readily available quoted prices in liquid
markets. Where market prices are not available, fair value may
be measured using net asset values (NAV), taking into account
any restrictions imposed upon redemption.
investment
Fair value hierarchy: listed units are classified as Level 1,
provided there is sufficient trading activity to justify active-
market classification, while other positions are classified as
Level 2. Positions for which NAV is not available or that 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 obligations (CDO) and are instruments generally issued
through the process of securitization of underlying interest-
bearing assets.
flows 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.
Fair value hierarchy: RMBS, CMBS and ABS are generally
classified as Level 2. However,
inputs are
unobservable, or if market or fundamental data is not available,
they are classified as Level 3.
if significant
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
that are not redeemable 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
investors 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,
instruments 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
Fair value hierarchy: collateral terms for these positions are
often not standard and therefore funding spread levels used for
valuation purposes cannot be observed in the market. As a
result, these positions are classified as Level 2 and Level 3.
390
Note 22 Fair value measurement (continued)
Valuation:
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
tailored specifically to the holder’s risk or investment appetite
with structured coupons or payoffs.
the
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.
risk management and
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
adjustments 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
valuation of collateralized derivatives reflect the funding terms
associated with the relevant collateral arrangement for the
instrument being valued. These collateral arrangements differ
across counterparties with respect to the eligible currency and
interest terms of the collateral. The majority of collateralized
derivatives are measured 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
discounted using the LIBOR (or equivalent) curve for the currency
of the instrument. As described in Note 22d, the fair value of
uncollateralized 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
estimating future interest cash flows and discounting those cash
flows using a rate that reflects the appropriate funding rate for
the position being measured. The yield curves used to estimate
future index levels and discount rates are generated using
market standard yield curve models using
interest rates
associated with current 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 contracts 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
reference to another observable comparable input parameter to
represent 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
validated 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
correlation 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.
391
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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 securitized 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 differences between cash and synthetic form.
Inputs include prepayment 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
reference name(s) are not actively traded and the correlation
tranche
cannot be directly mapped
instruments, these contracts are classified as Level 3. Asset-
backed credit derivatives follow the characteristics of the
underlying security and are therefore distributed across Level 2
and Level 3.
to actively
traded
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
characteristics, options on a number of underlying FX rates and
contracts, which have a
FX option
multi-dimensional
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 models 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 interdependency. Inputs to the
option valuation models include spot FX rates, FX forward
392
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 multi-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
forward 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 contracts traded in active and observable markets. OTC
FX option contracts classified as Level 3
include multi-
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 underlying 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 available 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 correlation 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.
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
significant 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
markets 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
forward, swap and option contracts on individual commodities
and on commodity indices.
Valuation: commodity forward and swap contracts are
measured using market standard models that use market
forward levels 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 baskets 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
typically classified as Level 2 because active forward and volatility
market data is 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 restrictions and other factors. Valuation adjustments are
an important component of fair value for assets and liabilities
that are measured using valuation techniques. Such adjustments
are applied to reflect uncertainties within the fair value
identified model
measurement process, to adjust for an
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
measure fair value requires significant inputs that are not based
on observable market data, the financial instrument is initially
recognized at the transaction price. The transaction price may
differ from the fair value obtained using a valuation technique,
initially
where any such difference
recognized in the income statement. These day-1 profit or loss
reserves are
reflected, where appropriate, as valuation
adjustments.
is deferred and not
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
underlying parameters become observable or when
the
transaction is closed out.
Deferred day-1 profit or loss related to financial assets
available for sale is released into Other comprehensive income
the underlying
when pricing of equivalent products or
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
For the year ended
31.12.17
31.12.16
31.12.15
371
242
(274)
(10)
329
421
254
(290)
(23)
9
371
480
268
(321)
(6)
421
393
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
credit recognized in Other comprehensive income will not be
reclassified
future periods.
income statement
Comparative period information was not restated.
the
to
in
Own credit is estimated using an own credit adjustment
(OCA) curve, 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
For the year ended
Included in
Other comprehensive income
31.12.17
31.12.16
Included in Net
trading income
31.12.15
21
(333)
(312)
18
(138)
(120)
As of
553
31.12.17
31.12.16
31.12.15
(195)
141
287
Consolidated financial statements
Note 22 Fair value measurement (continued)
Own credit
In addition to considering the valuation of the derivative risk
component, 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 purposes 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.
in the fair value of financial
The own credit presentation requirements of IFRS 9, Financial
Instruments, were adopted as of 1 January 2016. From this date
onward, changes
liabilities
designated at fair value through profit or loss related to own
credit have been 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, 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
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)
394
Note 22 Fair value measurement (continued)
inherent
Credit valuation adjustments
In order to measure the fair value of OTC derivative instruments,
including funded derivative instruments that are classified as
Financial assets designated at fair value, credit valuation
adjustments (CVA) are necessary to reflect the credit risk of the
counterparty
instruments. This amount
represents the estimated fair value of protection required to
hedge the counterparty 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.
in these
Funding valuation adjustments
Funding valuation adjustments (FVA) reflect the costs and
benefits of funding associated with uncollateralized and partially
collateralized derivative receivables and payables and are
calculated as the valuation effect from moving the discounting
of the uncollateralized 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.
Debit valuation adjustments
A debit valuation adjustment (DVA) is estimated to incorporate
own credit in the valuation of derivatives, effectively consistent
is determined for each
with the CVA framework. DVA
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.
e) Transfers between Level 1 and Level 2
counterparty, 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.
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 appropriate, 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
valuations 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 produced directly by models
incorporate
uncertainties in the relevant 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 considers a range of market
practices, including how it believes market participants would
assess these uncertainties. Model reserves are reassessed
periodically in light of data from market transactions, consensus
pricing services and other relevant sources.
to
As of
31.12.17
31.12.16
(113)
(49)
2
(715)
(465)
(250)
(216)
(106)
5
(713)
(439)
(274)
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 0.8 billion, which were
mainly comprised of financial assets designated at fair value,
largely corporate and municipal bonds, and financial assets held
for trading, predominantly investment fund units as well as
corporate and municipal bonds, were transferred from Level 2 to
Level 1 during 2017, generally due to increased levels of trading
activity observed within the market. Transfers of financial
liabilities from Level 2 to Level 1 during 2017 were not
significant.
Assets totaling approximately CHF 0.3 billion, which were
mainly comprised of financial assets available for sale, largely
government bonds, and financial assets held for trading,
predominantly investment fund units and equity instruments,
were transferred from Level 1 to Level 2 during 2017, generally
due to diminished levels of trading activity observed within the
market. Transfers of financial liabilities from Level 1 to Level 2
during 2017 were not significant.
395
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 22 Fair value measurement (continued)
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. Several inputs disclosed in prior periods are
not disclosed in the table below because they are not considered
significant
technique as of
respective valuation
the
31 December 2017.
to
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 instruments 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
Range of inputs
31.12.17
31.12.16
31.12.17 31.12.16
31.12.17 31.12.16
weighted
average2
CHF billion
Financial assets held for trading / Trading portfolio liabilities, Financial assets / liabilities designated at fair value and Financial assets available for sale
Corporate and municipal
bonds
Traded loans, loans
designated at fair value,
loan commitments and
guarantees
Relative value to
market comparable
Valuation
technique(s)
Bond price equivalent
Loan price equivalent
0.6
0.0
1.7
0.0
0.6
0.0
0.0
2.0
133
102
high
low
92
50
98
0
Significant
unobservable
input(s)1
low high
weighted
average2
unit1
0
128
88
points
Credit spread
23
124
71
554
39
103
94
points
basis
points
Relative value to
market comparable
Discounted expected
cash flows
Market comparable
and securitization
model
Relative value to
market comparable
Relative value to
market comparable
Discounted expected
cash flows
Investment fund units 3
0.7
0.2
0.0
0.0
Equity instruments 3
Structured (reverse)
repurchase agreements
Issued and over-the-
counter debt instruments 4
Replacement values
0.5
0.4
0.1
0.1
0.2
0.6
0.0
0.3
12.8
10.7
Interest rate contracts
0.1
0.3
0.2
0.5 Option model
Credit derivative contracts
0.5
1.3
0.6
1.5
Discounted expected
cash flows
Equity / index contracts
0.7
0.7
1.9
1.9 Option model
Discount margin
0
14
2
0
16
2
%
Net asset value
Price
Funding spread
15
195
15
195
Volatility of interest
rates
Credit spreads
Bond price equivalent
Equity dividend yields
Volatility of equity
stocks, equity and
other indices
Equity-to-FX
correlation
Equity-to-equity
correlation
26
229
26
176
6
2
0
550
102
13
0
3
0
791
100
15
0
172
0
150
(39)
70
(45)
82
(50)
97
12
98
basis
points
%
basis
points
points
%
%
%
%
1 The ranges of significant unobservable inputs are represented in points, percentages and basis points. Points are a percentage of par (e.g., 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 values given the diverse nature of the investments. 4 Valuation techniques, significant unobservable inputs and the
respective input ranges for issued debt instruments and over-the-counter debt instruments are the same as the equivalent derivative or structured financing instruments presented elsewhere in this table.
396
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
facilitate an understanding of factors that give rise to the input
shown. Relationships between observable and
ranges
unobservable inputs have not been included in the summary
below.
Factors
instruments.
Bond price equivalent
Where market prices are not available for a bond, fair value is
measured by comparison with observable pricing data from
similar
selecting
comparable instruments include credit quality, maturity and
industry of the issuer. Fair value may be measured either by a
direct price comparison 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).
considered when
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
measurement 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 similar 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 measuring 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 generally expressed in terms of basis points. An
increase / (decrease) in credit spread will increase / (decrease) the
value of credit protection 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 benchmark against which the spread is
calculated. A wider credit spread
represents decreasing
creditworthiness. The range represents a diverse set of
underlyings, with the lower end of the range representing
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 DM in isolation would result in a higher / (lower) fair
value.
The high end of the range relates to securities that are priced
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
funding curves that best represent the assets that are pledged as
collateral for the transactions. They are not representative of
where UBS can fund itself on an unsecured basis, but provide an
estimate 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.
397
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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
positions 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 represents the effect of pricing options of different option
strikes at different implied volatility levels.
The volatility of
interest rates reflects the range of
unobservable 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 volatilities. The volatility of equity stocks, equity and
other indices reflects the range of underlying stock volatilities.
Correlation
Correlation measures the
inter relationship between the
movements of two variables. It is expressed as a percentage
between –100% and +100%, where +100% represents
perfectly correlated 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.
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 projected 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 corporate structure.
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
contracts 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 generally 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 represents the most significant
parameter in determining fair value for instruments that are
sensitive to an equity forward price.
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
estimated effect thereof.
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
market participants, variation in modeling approaches and
reasonably possible changes to assumptions used within the fair
value measurement process. The sensitivity ranges are not
always symmetrical around the fair values as the inputs used in
valuations are not always precisely in the middle of the favorable
and unfavorable range.
398
Note 22 Fair value measurement (continued)
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
parameter 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 that, 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 estimated 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
there are
diversification benefits within the portfolios representing these
sensitivity numbers, they are not significant to this analysis.
that, while
Sensitivity of fair value measurements to changes in unobservable input assumptions1
CHF million
Traded loans, loans designated at fair value, loan commitments and guarantees
Asset-backed securities
Equity instruments
Interest rate derivative contracts, net
Credit derivative contracts, net
Foreign exchange derivative contracts, net
Equity / index derivative contracts, net
Structured (reverse) repurchase agreements
Other
Total
31.12.17
31.12.16
Favorable
changes2
Unfavorable
changes2
Favorable
changes2
Unfavorable
changes2
79
19
79
13
64
12
190
34
13
502
(11)
(15)
(53)
(26)
(99)
(6)
(193)
(34)
(13)
(450)
80
23
85
30
128
18
142
43
12
560
(8)
(29)
(66)
(30)
(174)
(9)
(143)
(46)
(12)
(517)
1 Effective 31 December 2017, the sensitivity of issued and over-the-counter debt instruments is reported with the equivalent derivative or structured financing instrument. Prior-period information has been restated
to reflect this change in presentation. 2 Of the total favorable changes, CHF 78 million as of 31 December 2017 (31 December 2016: CHF 75 million) related to financial assets available for sale. Of the total
unfavorable changes, CHF 51 million as of 31 December 2017 (31 December 2016: CHF 55 million) related to financial assets available for sale.
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
hierarchy and, as a result, realized and unrealized gains and
losses included in the table may not include the effect of related
hedging 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
presented 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 1.4
billion and CHF 1.1 billion, respectively. Transfers into Level 3
were primarily comprised of investment fund units and equity /
index contracts, due to decreased observability of the respective
net asset value and equity volatility inputs. Transfers out of
Level 3 were primarily comprised of credit derivative and equity /
the
reflecting
index contracts,
respective credit spread and equity volatility inputs.
increased observability of
Liabilities transferred into and out of Level 3 totaled CHF 1.8
billion and CHF 3.2 billion, respectively. Transfers into Level 3
issued debt
were primarily comprised of equity-linked
instruments and equity / index contracts, due to decreased
observability of the respective equity 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 credit derivative
contracts resulting from changes in the availability of the
observable equity volatility and credit spread inputs used to
determine the fair value of the options embedded in these
structures.
399
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 22 Fair value measurement (continued)
Movements of Level 3 instruments
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 Purchases
Sales
Issuances Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
translation
2.1
0.7
0.8
0.6
3.3
1.7
1.5
0.1
0.7
2.9
1.3
1.0
0.6
3.3
1.3
1.4
0.6
10.7
9.3
0.8
0.1
0.0
0.9
(6.8)
4.1
0.0
1.7
(0.3)
(0.1)
0.2
(0.1)
0.0
0.1
(0.1)
0.0
0.6
0.1
0.2
(0.8)
(5.2)
(0.8)
0.0
4.1
0.0
0.0
0.0
0.0
0.1
1.1
0.5
(0.1)
(0.2)
0.0
(0.1)
0.0
0.0
(0.4)
(0.1)
0.1
0.0
0.7
(1.9)
0.5
(0.1)
0.0
(0.4)
(0.1)
0.0
0.0
0.6
(1.0)
0.4
(0.1)
0.0
0.0
0.0
0.0
(0.4)
(0.2)
(0.1)
(0.1)
0.6
0.5
0.3
(0.2)
1.0
0.9
0.1
0.0
0.0
0.0
(0.5)
(0.1)
0.0
(0.3)
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.5
0.0
0.6
0.1
(0.2)
0.0
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
1.0
0.6
0.4
0.1
1.5
0.2
1.0
0.3
(0.9)
0.0
0.0
(1.9)
(0.7)
(0.6)
(0.6)
0.0
0.0
0.0
1.3
0.4
0.2
0.7
0.0
0.0
(0.1)
(0.4)
(0.1)
(0.2)
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(2.1)
1.2
(0.6)
0.0
(0.7)
(0.8)
(0.6)
0.3
0.2
0.7
(0.1)
(0.3)
(0.2)
0.0
0.0
0.0
0.6
0.0
0.0
5.0
(3.5)
0.9
(2.9)
(0.1)
0.6
0.0
0.0
0.0
0.0
0.0
4.1
0.8
(2.5)
(0.6)
0.8
0.1
(2.9)
0.0
(0.1)
0.0
CHF billion
Financial assets held for trading
of which:
Corporate and municipal bonds
Loans
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
Equity / index contracts
Other
Negative replacement values
of which:
Credit derivative contracts
Equity / index contracts
Other
Financial liabilities designated at fair
value
of which:
Issued debt instruments
Over-the-counter debt instruments
Structured repurchase agreements
0.0
1 Total Level 3 assets as of 31 December 2017 were CHF 5.5 billion (31 December 2016: CHF 6.9 billion). Total Level 3 liabilities as of 31 December 2017 were CHF 15.7 billion (31 December 2016: CHF 15.1
billion).
(0.4)
0.0
0.6
0.0
0.1
0.0
0.0
0.0
0.0
400
Total gains / (losses) included in
comprehensive income
Net interest
income,
net trading
income
and other
income
of which:
related to
Level 3
instruments
held at the end
of the reporting
period
(0.1)
0.0
0.1
0.0
(0.1)
0.2
0.2
0.0
(0.1)
0.0
(0.3)
(0.2)
(0.1)
0.0
0.2
0.0
0.3
0.0
1.4
1.4
0.0
0.0
0.1
(0.1)
0.0
0.2
0.2
0.0
(0.1)
0.0
(0.4)
(0.2)
(0.1)
(0.1)
0.1
(0.2)
0.2
0.0
0.9
0.9
0.0
0.0
Balance
as of
31 December
2016
1.7
0.6
0.7
0.4
2.1
1.2
0.6
0.2
0.5
2.5
1.3
0.7
0.5
4.0
1.5
1.9
0.6
11.0
9.7
1.1
0.3
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
translation
Balance
as of
31 December
20171
0.7
0.4
0.1
0.2
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
(3.8)
(0.7)
(2.8)
(0.3)
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
2.7
0.0
2.7
0.0
0.4
0.1
0.1
0.2
0.0
0.9
0.0
0.9
0.0
0.7
0.1
0.6
0.0
6.7
5.2
1.5
0.0
0.0
0.0
0.0
0.0
(1.2)
(0.6)
(0.6)
0.0
0.0
(1.2)
(0.3)
(0.7)
(0.2)
(1.4)
(0.4)
(0.6)
(0.4)
(5.7)
(4.9)
(0.7)
(0.1)
0.9
0.1
0.0
0.8
0.1
0.0
0.0
0.1
0.1
0.4
0.0
0.3
0.1
0.5
0.2
0.2
0.1
1.3
1.2
0.1
0.0
(0.2)
0.0
(0.1)
0.0
(0.1)
(0.1)
0.0
0.0
0.0
(0.8)
(0.4)
(0.4)
(0.1)
(1.3)
(0.8)
(0.5)
(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
0.1
0.0
0.0
0.0
2.0
0.6
0.5
0.9
1.4
0.8
0.2
0.5
0.5
1.5
0.5
0.7
0.3
2.8
0.6
1.9
0.3
(1.8)
(0.1)
12.8
(1.6)
0.0
(0.2)
(0.1)
0.0
0.0
10.9
1.9
0.0
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
401
Consolidated 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
Cash and balances with central banks
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
Carrying
value
31.12.17
Fair value
Carrying
value
31.12.16
Fair value
Total
Total
Level 1
Level 2
Level 3
Total
Total
Level 1
Level 2
Level 3
87.8
13.7
12.4
77.2
23.4
87.8
13.7
12.4
77.2
23.4
319.6
321.0
9.2
27.9
7.5
1.8
15.3
30.2
409.0
139.6
36.3
9.0
27.9
7.5
1.8
15.3
30.2
409.0
143.5
36.3
87.8
13.1
0.0
0.0
0.0
0.0
6.3
0.0
6.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.6
12.4
74.8
23.4
0.0
0.0
0.0
2.5
0.0
107.8
107.8
107.8
13.2
15.1
66.2
26.7
13.2
15.1
66.2
26.7
176.7
144.3
306.3
309.7
2.7
27.9
1.1
1.8
15.3
30.2
409.0
139.1
36.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.3
0.0
9.3
18.5
10.6
2.8
6.6
35.5
423.7
103.7
38.3
9.1
18.5
10.6
2.8
6.6
35.5
423.7
106.1
38.4
0.0
0.7
15.1
62.5
26.7
0.0
0.0
0.0
3.7
0.0
169.3
140.4
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
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
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 2017: 100% of cash and
balances with central banks, 95% of amounts due from
banks, 100% of cash collateral on securities borrowed, 81%
of reverse repurchase agreements, 100% of cash collateral
receivables on derivative instruments, 51% of loans, 0% of
financial assets held to maturity, 86% of amounts due to
banks, 100% of cash collateral on securities lent, 96% of
repurchase agreements, 100% of cash collateral payables on
derivative instruments, 99% of amounts due to customers
and 13% of debt issued.
– The
repurchase and
fair value estimates
reverse
for
repurchase agreements with variable and fixed interest rates,
for all maturities, 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.
The fair values included in the table above were calculated for
disclosure purposes only. The valuation
techniques and
assumptions described below relate only to the fair value of
UBS’s financial instruments not measured at fair value. Other
institutions may use different methods and assumptions for their
fair value estimation, and therefore such fair value disclosures
cannot necessarily be compared from one financial institution to
another. The
following principles were applied when
determining fair value estimates 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
estimates 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
402
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
issuance of covered bonds. The Group generally enters into
repurchase and securities lending arrangements under standard
market agreements. For securities lending, the cash received as
collateral may be more or less than the fair value of the
securities loaned, depending on the nature of the transaction.
For repurchase agreements, the fair value of the collateral sold
under an agreement to repurchase is generally in excess of the
cash borrowed. Pledged mortgage loans serve as collateral for
existing liabilities against Swiss central mortgage institutions and
for existing covered bond issuances of CHF 12,457 million as of
31 December 2017 (31 December 2016: CHF 14,137 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 bankruptcy 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.
limit
UBS Group AG and its subsidiaries are, in certain cases,
subject to regulatory requirements that affect the transfer of
dividends and capital within the Group. 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. Supervisory authorities
generally have discretion to impose higher requirements or to
the activities of subsidiaries. Supervisory
otherwise
authorities also may require entities to measure capital and
leverage ratios on a stressed basis, such as the Federal Reserve
Board’s Comprehensive Capital Analysis and Review (CCAR)
process that affects UBS Americas Holding LLC, and may limit
the ability of the entity to engage in new activities or take capital
actions based on the results of those tests. Non-regulated
subsidiaries are generally not subject to such requirements and
transfer restrictions. However, restrictions can also be the result
of different legal, regulatory, contractual, entity- or country-
specific arrangements and / or requirements.
→ Refer to “Financial and regulatory key figures for our significant
regulated subsidiaries and sub-groups” in the “Significant
regulated subsidiary and sub-group information” section of this
report for financial information on significant regulated
subsidiaries of the group
Restricted financial assets
CHF million
Financial assets pledged as collateral
Trading portfolio assets
of which: assets pledged as collateral that may be sold or repledged by counterparties
Loans1
Financial assets designated at fair value
of which: assets pledged as collateral that may be sold or repledged by counterparties
Total financial assets pledged as collateral2
31.12.17
31.12.16
46,219
35,363
17,631
170
170
64,020
36,549
30,260
19,887
776
636
57,213
Other restricted financial assets
Due from banks
2,625
658
Reverse repurchase agreements
12,129
Trading portfolio assets
Cash collateral receivables on derivative instruments
4,329
958
Loans
328
Financial assets designated at fair value
Financial assets available for sale
247
Other
5,195
Total other restricted financial assets
26,470
83,683
Total financial assets pledged and other restricted financial assets
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 2.1 billion for 31 December 2017 (31 December 2016: approximately CHF 1.9 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 2017: CHF 2.5 billion; 31 December 2016:
CHF 4.7 billion).
3,280
0
12,273
3,822
1,256
2,602
246
95
23,573
87,593
403
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated 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
31.12.17
31.12.16
Trading portfolio assets that 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 that may be sold or repledged by counterparties
Total financial assets transferred
Transactions in which financial assets are transferred, but
continue 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 subject 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 2017, approximately one-third of the
transferred financial assets were trading portfolio assets
transferred in exchange for cash, in which case the associated
recognized liability represents the amount to be repaid to
counterparties.
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.
securities
lending
and
For
Carrying value of
transferred assets
35,363
Carrying value of
associated liabilities
recognized
on-balance sheet
12,942
Carrying value of
transferred assets
30,260
Carrying value of
associated liabilities
recognized
on-balance sheet
11,260
13,145
21,137
1,081
170
35,533
12,942
0
0
169
13,111
11,410
17,341
1,509
636
30,896
11,260
0
0
630
11,890
In securities lending arrangements entered into in exchange
for the receipt of other securities as collateral, neither the
securities 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 transaction, this is not considered to be a transfer of
financial assets.
Other financial asset transfers primarily include securities
transferred to collateralize derivative transactions, for which the
carrying 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
to
derecognition in full, but remain on the balance sheet to the
extent of the Group’s continuing involvement, were not material
as of 31 December 2017 and as of 31 December 2016.
that are not subject
404
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
transfer agreement or from a separate agreement with the
counterparty 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 2017, the majority of the retained
continuing involvement related to securitization positions held in
the trading portfolio, primarily collateralized debt obligations, US
residential
commercial mortgage-backed
mortgage-backed securities. The fair value and carrying amount
of UBS’s continuing involvement related to these purchased and
retained interests was CHF 8 million as of 31 December 2017,
and UBS recognized gains of CHF 4 million in 2017 related to
these positions. As of 31 December 2017, life-to-date losses of
securities
and
CHF 1,170 million were recorded related to the positions held as
of 31 December 2017.
As of 31 December 2016, the fair value and carrying amount
of UBS’s continuing involvement related to purchased and
retained interests in securitization vehicles was CHF 5 million,
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 were recorded related to the positions held as
of 31 December 2016.
The maximum exposure to loss related to purchased and
retained interests in securitization structures was CHF 14 million
as of 31 December 2017 compared with CHF 28 million as of
31 December 2016.
Undiscounted cash outflows of CHF 7 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 that can be sold or repledged
31.12.17
31.12.16
469,132
429,327
received as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions 1
462,460
423,524
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 transactions 1
6,672
5,803
337,514
316,323
293,295
277,341
30,463
13,756
22,824
16,158
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 2017: CHF 28.1 billion; 31 December 2016: CHF 30.9 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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
405
Consolidated financial statements
Note 24 Offsetting financial assets and financial liabilities
UBS enters into netting agreements with counterparties to
manage the credit risks associated primarily with repurchase and
reverse repurchase transactions, securities borrowing and
lending, over-the-counter (OTC) derivatives and exchange-traded
derivatives
(ETD). These netting agreements and similar
arrangements generally 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 collateral 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
mitigation 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 sheet3
Gross assets
before netting
Netting with
gross liabilities2
Net assets
recognized
on the
balance
sheet
Assets after
consideration
of
netting
potential
Financial
liabilities
Collateral
received
Assets not
subject to netting
arrangements4
Assets
recognized
on the
balance
sheet
Total assets
Total assets
after
consideration
of netting
potential
Total assets
recognized
on the
balance
sheet
3.7
140.5
114.3
21.6
0.4
280.5
4.2
128.4
152.3
37.2
1.7
323.8
0.0
(76.8)
(2.1)
(1.0)
0.0
(79.9)
0.0
(71.5)
(2.5)
(15.1)
0.0
(89.1)
3.7
63.7
(0.6)
(6.9)
112.2
(83.5)
20.6
0.4
200.6
(11.7)
0.0
(102.7)
4.2
56.9
(0.9)
(2.1)
149.8
(113.1)
22.1
1.7
234.7
(14.2)
0.0
(130.3)
(3.1)
(56.8)
(20.7)
(0.7)
(0.2)
(81.6)
(3.3)
(54.8)
(26.7)
(1.0)
(0.6)
(86.3)
0.0
0.0
8.0
8.1
0.2
16.4
0.0
0.0
10.0
7.0
1.1
18.1
8.7
13.5
6.0
2.9
58.5
89.6
10.9
9.3
8.6
4.5
63.7
97.1
8.7
13.5
14.0
11.0
58.7
106.0
10.9
9.3
18.6
11.5
64.7
115.2
12.4
77.2
118.2
23.4
58.9
290.2
15.1
66.2
158.4
26.7
65.4
331.8
As of 31.12.17, 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 31.12.16, 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
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. Effective 3 January 2017, interest rate swaps and credit derivatives transacted with the Chicago Mercantile Exchange (CME) were legally
converted from the previous collateral model to a settlement model resulting in a derecognition of the associated assets and liabilities. Previously, UBS applied IAS 32 netting principles to offset the fair value of CME
interest rate swaps with the associated variation margin. Gross cash collateral receivables and payables on derivative instruments and corresponding IAS 32 netting, decreased by approximately CHF 11.4 billion as
of 31 December 2017, with no change to net cash collateral receivables and payables on derivative instruments recognized and presented on the balance sheet. 2 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. 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 assets presented
on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes assets not subject to enforceable netting arrangements and other out-of-scope items.
406
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 similar 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 netting 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 counterparties that have been offset on the balance sheet
and other financial 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
Gross
liabilities
before
netting
1.7
88.4
111.4
Netting with
gross assets2
0.0
(76.8)
(2.1)
Net
liabilities
recognized
on the
balance
sheet
1.7
11.6
Financial
assets
Collateral
pledged
(0.6)
(6.9)
(1.2)
(4.7)
109.4
(83.5)
(15.0)
29.5
(1.0)
28.4
(16.3)
(1.2)
1.9
233.0
2.6
76.7
146.3
0.0
(79.9)
1.9
153.0
0.0
(107.3)
(0.1)
(22.1)
0.0
(71.5)
(2.5)
2.6
5.2
(0.9)
(2.1)
(1.7)
(3.1)
143.9
(113.1)
(16.6)
48.5
(15.1)
33.4
(20.8)
(1.4)
2.8
276.9
0.0
(89.1)
2.8
187.9
0.0
(137.0)
(0.2)
(22.9)
Liabilities
after
consideration of
netting
potential
0.0
0.0
10.9
11.0
1.8
23.7
0.0
0.0
14.2
11.2
2.6
28.0
Liabilities not
subject
to netting
arrangements4
Liabilities
recognized
on the
balance
sheet
Total liabilities
Total
liabilities
after
consideration
of netting
potential
Total
liabilities
recognized
on the
balance
sheet
0.1
3.6
6.8
1.8
52.3
64.6
0.2
1.4
10.0
2.1
52.2
65.9
0.1
3.6
17.7
12.8
54.1
88.3
0.2
1.4
24.2
13.3
54.8
93.9
1.8
15.3
116.1
30.2
54.2
217.6
2.8
6.6
153.8
35.5
55.0
253.7
As of 31.12.17, 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 31.12.16, 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
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. Effective 3 January 2017, interest rate swaps and credit derivatives transacted with the Chicago Mercantile Exchange (CME) were legally
converted from the previous collateral model to a settlement model resulting in a derecognition of the associated assets and liabilities. Previously, UBS applied IAS 32 netting principles to offset the fair value of CME
interest rate swaps with the associated variation margin. Gross cash collateral receivables and payables on derivative instruments and corresponding IAS 32 netting, decreased by approximately CHF 11.4 billion as
of 31 December 2017, with no change to net cash collateral receivables and payables on derivative instruments recognized and presented on the balance sheet. 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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
407
Consolidated financial statements
Note 25 Measurement categories, credit risk and maturity analysis of financial instruments
a) Measurement categories of financial assets and liabilities
individual classes of
The table below provides information about the carrying amounts
the
financial
of
measurement 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
instruments within
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
31.12.17
31.12.16
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
126,144
7
10
118,227
244,388
58,933
122
59,055
87,775
13,739
12,393
77,240
23,434
319,568
9,166
27,913
571,226
8,665
883,335
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
153,810
176,634
30,463
116,133
146,597
Financial liabilities
Held for trading
Trading portfolio liabilities
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
10,645
Due to banks
Cash collateral on securities lent
2,818
Repurchase agreements
6,612
35,472
Cash collateral payables on derivative instruments
Due to customers
423,684
103,687
Debt issued
38,349
Other liabilities
621,267
Total
Total financial liabilities
862,335
1 As of 31 December 2017, CHF 134 billion of Loans, CHF 0 billion of Due from banks, CHF 2 billion of Reverse repurchase agreements, CHF 7 billion of Financial assets available for sale, CHF 24 billion of Financial
assets designated at fair value and CHF 7 billion of Financial assets held to maturity are expected to be recovered or settled after 12 months. 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. 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 1.1 billion as of 31 December 2017 (31 December 2016: CHF 1.0 billion). Refer to
Notes 10 and 31 for more information.
7,533
1,789
15,255
30,247
409,006
139,561
36,268
639,659
852,103
54,202
11,523
122
65,847
55,017
9,286
131
64,434
408
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. The section “Risk management and control”
describes management’s view of credit risk and the related
exposures, which can differ in certain respects from the
requirements of IFRS.
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
31.12.17
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
87.1
13.7
12.4
77.2
23.4
319.6
9.2
25.8
568.4
118.2
25.6
58.4
7.9
210.1
778.5
18.8
39.1
12.7
70.6
849.1
0.1
12.2
72.8
4.2
12.5
16.1
111.4
160.1
15.9
0.0
1.3
19.5
216.0
16.1
4.0
9.8
160.1
20.1
12.5
0.0
1.3
142.3
100.2
0.0
13.8
0.0
0.0
100.2
16.1
1.0
1.0
17.2
229.8
2.1
2.8
12.4
17.4
247.1
112.7
160.1
0.2
1.1
20.1
1.2
9.5
1.2
161.3
10.7
30.8
0.0
112.7
0.0
0.0
1.0
1.0
1.1
0.0
1.3
3.0
1.4
4.4
5.8
Exposure to
credit risk
after collateral
and credit
enhancements
87.1
13.6
0.2
0.2
11.0
14.8
9.2
6.3
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
14.0
25.6
48.5
7.9
96.1
238.4
11.3
23.3
0.3
34.8
273.2
409
Consolidated financial statements
Note 25 Measurement categories, credit risk and maturity analysis of financial instruments (continued)
Maximum exposure to credit risk (continued)
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
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
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
Exposure to
credit risk
after collateral
and credit
enhancements
107.1
13.2
0.3
0.5
11.5
14.6
9.3
8.7
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
5.3
2.6
7.9
194.9
2.0
3.9
10.2
16.1
210.9
0.0
17.4
1.4
0.1
1.5
18.9
158.2
17.7
15.1
0.1
1.8
165.2
134.5
0.0
0.0
134.5
149.6
158.2
0.2
1.0
17.7
1.2
9.5
1.1
159.4
10.6
28.4
0.0
149.6
18.6
21.8
61.6
14.9
116.9
282.1
8.8
33.1
0.0
41.9
324.0
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
1 Includes but is 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 Collateral arrangements generally incorporate a range of collateral, including cash, securities, property and other collateral. In 2017, we further aligned
our collateral allocation processes within Wealth Management Americas to prioritize collateral mainly according to its liquidity profile. This change resulted in increases in loans secured by cash and decreases in
loans secured by securities of CHF 4.5 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 2017, the
credit risk of such loans with a total notional amount of CHF 4
million (31 December 2016: CHF 609 million) was mitigated by
credit derivatives for which the notional amount and fair value
were not material (31 December 2016: notional amount was
CHF 578 million, fair value was negative CHF 7 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 2017 and 31 December 2016 and
from inception until 31 December 2017 and 31 December 2016.
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 2017 and
31 December 2016 and from inception until 31 December 2017
and 31 December 2016.
→ Refer to Note 22 for more information on financial assets
designated at fair value
410
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
86.6
0.6
24.3
17.0
6.5
10.3
3.2
33.8
6.8
8.5
0.1
2.0
1.9
2–3
0.5
10.6
36.4
75.3
9.7
7.3
161.8
14.2
1.0
0.7
0.4
9.1
15.4
12.7
31.12.17
4–5
6–8
9–13
Defaulted
1.4
16.8
19.4
5.6
3.0
65.4
1.5
0.9
10.4
6.2
1.6
2.0
70.0
0.8
0.1
0.3
1.8
0.3
0.1
3.0
17.6
8.0
8.3
15.9
0.8
4.1
9.4
2.7
5.8
0.8
6.5
1.5
0.3
0.2
Total
87.1
13.7
89.6
118.2
23.4
25.6
319.6
58.4
7.9
9.2
25.8
18.8
39.1
12.7
Total
201.7
354.9
134.8
116.5
39.1
2.0
849.1
31.12.16
4–5
6–8
9–13
Defaulted
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
2.0
20.1
34.2
6.4
2.9
0.5
6.9
7.4
1.6
1.7
63.1
63.6
1.0
0.2
1.6
0.1
0.3
0.7
0.4
0.2
1.3
19.1
1.3
6.2
7.7
2.2
3.6
8.7
0.7
6.5
3.7
17.1
0.3
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
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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
411
Consolidated 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 2017 are based on the
earliest 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 2016. Derivative positions
and trading 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 31.12.17
Total 31.12.16
Guarantees, commitments and forward starting transactions7
Loan commitments
Guarantees
Forward starting transactions
Reverse repurchase agreements
Securities borrowing agreements
Total 31.12.17
Total 31.12.16
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
6.1
1.7
11.9
30.5
116.1
30.2
393.0
18.4
4.1
46.7
658.7
704.3
38.2
18.8
12.7
0.0
69.7
81.0
0.4
0.2
2.8
10.2
10.3
15.0
39.0
39.2
0.2
0.0
0.2
0.2
1.0
0.6
5.2
11.6
45.2
63.5
40.4
0.1
0.0
0.7
8.8
50.8
60.4
46.6
0.0
0.0
0.0
7.1
38.1
45.2
46.0
0.2
0.1
0.2
0.2
0.1
0.0
0.0
0.0
Total
7.5
1.9
15.3
30.5
116.1
30.2
409.1
56.3
153.2
46.7
866.8
876.6
38.7
18.9
12.7
0.0
70.2
81.4
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 29.5 billion due within one month (2016: CHF 21.8 billion), CHF 0.8 billion due between one month and one year (2016: CHF 1.0
billion) and CHF 0.1 billion due between 1 and 5 years (2016: CHF 0.1 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.
reclassified financial assets, which were entirely comprised of
municipal auction rate securities, was CHF 0.1 billion (31 December
2016: CHF 0.2 billion), which was approximately equal to the fair
value of these assets.
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 2017, the carrying value of the remaining
The overall effect on operating profit before tax from reclassified
financial assets for the year ended 31 December 2017 was a profit
of CHF 1 million (2016: CHF 1 million). If the financial assets had not
been reclassified, the impact on operating profit before tax for the
year ended 31 December 2017 would have been a loss of CHF 4
million.
412
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 plans 1
of which: Swiss plan 2
of which: UK plan
of which: US and German plans
of which: related to post-employment medical insurance plans 3
of which: UK plan
of which: US plans
of which: related to remaining plans and other expenses 4
Expenses for defined contribution plans5
of which: UK plans
of which: US plan
of which: remaining plans
31.12.17
31.12.16
31.12.15
471
452
406
14
31
3
1
2
17
239
71
108
59
435
412
381
(2)
33
4
1
3
19
236
77
106
53
569
546
515
18
12
4
1
2
19
239
86
100
53
Total pension and other post-employment benefit plan expenses6
1 Refer to Note 26a for more information. 2 The increase in net periodic pension expenses for the Swiss pension plan between 2017 and 2016 related primarily to lower curtailments, partly offset by lower
expenses due to changes in demographic and financial assumptions. 3 Refer to Note 26b for more information. 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.
710
808
670
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 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
1 Refer to Note 26a for more information. 2 Refer to Note 26b for more information. 3 Refer to the “Statement of comprehensive income.”
31.12.17
31.12.16
31.12.15
245
(78)
295
28
1
1
0
31
277
11
288
288
0
(837)
(105)
(610)
(122)
(13)
(6)
(7)
(26)
(876)
52
(824)
(824)
0
339
58
317
(35)
(3)
6
(9)
(14)
322
(19)
304
298
5
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
413
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
UBS recognizes assets and liabilities with respect to defined
benefit plans within Other assets and Other liabilities.
As of 31 December 2017 and 31 December 2016, 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
estimated future economic benefit was zero as of 31 December
2017 and 31 December 2016, no net defined benefit pension
asset was recognized on the balance sheet.
The table below provides information on UBS’s liabilities with respect to defined benefit plans.
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 plans 2
Post-employment medical insurance plans3
of which: UK plan
of which: US plans
Remaining plans
31.12.17
805
0
268
536
86
26
59
35
31.12.16
1,140
0
529
611
91
26
65
35
Total net defined benefit pension and post-employment liability4
1 Refer to Note 26a for more information. 2 Of the total liability as of 31 December 2017, CHF 149 million related to US plans and CHF 388 million related to German plans (31 December 2016: CHF 265 million
related to US plans and CHF 346 million related to German plans). 3 Refer to Note 26b for more information. 4 Refer to Note 21.
1,266
925
414
Note 26 Pension and other post-employment benefit plans (continued)
a) Defined benefit pension plans
UBS has established defined benefit pension plans for its
employees in various jurisdictions, with the major plans located
in Switzerland, 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 that, 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
conditions 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.
investment
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 portfolio of financial assets, including
real estate, bonds,
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
responsible
plan are
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.
independently determined by
the
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
contributory 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
compensation. Depending on the age of the employee, UBS
pays a contribution 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 that 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, disability and survivor
benefits. 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 starting
from the age of 58. Employees have the possibility to make
additional purchases of benefits to fund early retirement benefits
(Plan 58+).
The pension amount payable is a result of the conversion rate
applied on the accumulated balance of the individual plan
participant’s pension account at the retirement date. The
accumulated 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
contribution promise under Swiss pension law, it is accounted
for as a defined benefit plan under IAS 19, primarily because of
the obligation to accrue interest on the pension accounts and
the payment of lifetime pension benefits.
415
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
The Swiss pension plan is governed by a Pension Foundation
Board. 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 regularly. According to Swiss
pension law, a temporary limited underfunding is permitted.
However, should an underfunded situation occur, the Pension
Foundation Board is required to take the necessary 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 pension law basis,
additional employer and employee contributions could be required.
In this situation, 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 2017, the Swiss pension plan had a technical funding
ratio under Swiss pension law of 131.9% (31 December 2016:
125.4%).
The investment strategy of the Swiss plan is implemented on the
basis of a multi-level investment and risk management process and
complies 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 2017, the Swiss pension plan was in a
surplus situation on an International Financial Reporting Standards
(IFRS) measurement basis, as the fair value of plan assets exceeded
the DBO by CHF 3,156 million (31 December 2016: surplus of
CHF 1,749 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 contributions. The
maximum future economic benefit is highly variable based on
changes in the discount rate. Both as of 31 December 2017 and 31
December 2016, the estimated future economic benefit was zero
and hence no net defined benefit asset was recognized on the
balance sheet. As of 31 December 2017, the difference between
the pension plan surplus and the estimated future economic
benefit, i.e., the asset ceiling effect, was CHF 3,156 million (31
December 2016: CHF 1,749 million). CHF 1,394 million out of the
total movement of CHF 1,407 million was recognized in Other
comprehensive income and CHF 13 million related to interest
expense on the asset ceiling effect was recognized in the income
statement. As of 31 December 2016, CHF 452 million out of the
total movement of CHF 466 million was recognized in Other
comprehensive income and CHF 14 million related to interest
expense on the asset ceiling effect was recognized in the income
statement.
The employer contributions expected to be made to the Swiss
pension plan in 2018 are estimated to be CHF 470 million.
→ Refer to Note 35 for information on changes to the Swiss
pension plan that will take effect from the start of 2019
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 retirement,
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. Normal
retirement age for participants in the UK plan is 60. The UK plan is
closed to new entrants and pension plan participants are no longer
accruing benefits for current or future service. 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 2017
and 2016, UBS did not make any deficit-funding contributions.
The plan assets are invested in a diversified portfolio of financial
assets. A liability-driven investment approach is applied, as a portion
of the plan assets is invested in inflation-indexed bonds that provide
a partial hedge against price inflation. If price inflation 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.
416
Note 26 Pension and other post-employment benefit plans (continued)
As of 31 December 2017, 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 268 million (31 December
2016: deficit of CHF 529 million).
assets. Both US plans apply a
investment
approach to support the volatility management in the net asset /
liability position. Derivative instruments may also be employed to
manage volatility.
liability-driven
No employer contributions are currently scheduled to be
made to the UK defined benefit pension plan in 2018, subject to
periodic review.
The employer contributions expected to be made to the US
defined benefit pension plans in 2018 are estimated to be CHF 8
million.
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
contribution-based plan in which each participant accrues a
percentage of salary in a pension account. The pension account
is credited annually 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. Former employees with vested benefits have
the option to take a lump sum payment or a lifetime annuity
commencing early or at retirement age.
As required under local state pension laws, both plans have
fiduciaries who, together with UBS, are responsible for the
governance of the plans. UBS regularly reviews the contribution
strategy for these plans. In determining the contribution
strategy, UBS considers local statutory funding rules and the cost
of any premiums that must be paid to the Pension Benefit
Guaranty Corporation for having an underfunded plan. In 2017,
the contributions made by UBS were CHF 89 million (2016:
CHF 172 million).
The plan assets for both plans are invested in a diversified
portfolio of financial assets. Each pension plan’s fiduciaries are
responsible for the investment decisions with respect to the plan
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 accumulated 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 German pension
law, under which the responsibility to pay pension benefits
when they are due rests entirely with UBS. For the German
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 2018 are estimated to be CHF 10 million.
Financial information by plan
The tables on the following pages provide 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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
417
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
of which: actuarial (gains) / losses due to changes in demographic assumptions
6
(659)
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 financial assumptions
of which: experience (gains) / losses 1
Curtailments
Benefit payments
Other movements
Foreign currency translation
Defined benefit obligation at the end of the year
of which: amounts owed to active members
of which: amounts owed to deferred members
of which: amounts owed 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
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 recognized in net profit
Gains / (losses) recognized in other comprehensive income
Employer contributions
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
Swiss plan
31.12.17 31.12.16
22,636
22,865
UK plan
31.12.17 31.12.16
3,350
3,704
US and German plans
31.12.17 31.12.16
1,619
1,755
Total
31.12.17 31.12.16
27,605
28,325
448
163
205
303
471
240
210
477
0
100
0
(82)
(80)
0
116
0
922
(63)
145
152
(49)
698
438
(96)
47 1,022
(49)
(37)
0
0
(1,098)
(1,074)
(251)
(135)
(8)
0
0
22,828
0
22,865
0
179
3,650
0
(549)
3,704
10,470 10,419
176
290
0
0
1,881 2,210
12,358 12,446
1,593 1,204
24,614
23,919
3,175
3,400
1,619
178
477
205
824
258
486
210
213
86
0
0
312
118
0
0
(1,098)
(1,074)
(251)
(135)
(10)
(10)
0
25,984
0
24,614
1,749
1,283
13
1,394
3,156
0
14
452
1,749
0
0
159
3,381
0
(520)
3,175
0
0
0
0
0
0
0
0
9
61
0
80
(5)
84
2
0
(107)
0
(29)
1,770
248
628
893
1,144
108
44
97
0
(107)
(4)
(48)
1,234
0
0
0
0
9
62
0
125
3
107
15
0
(98)
19
20
1,755
258
584
913
997
2
44
179
0
(98)
(6)
26
1,144
0
0
0
0
456
325
205
301
480
419
210
1,524
(79)
(719)
276 1,827
104
(49)
416
(96)
(1,457)
(1,307)
(8)
19
150
28,248
(529)
28,325
10,894 10,967
2,510 2,794
14,844 14,563
28,934
28,316
1,939
1,139
307
574
205
420
665
210
(1,457)
(1,307)
(14)
(16)
111
30,599
(494)
28,934
1,749
1,283
13
1,394
3,156
14
452
1,749
(268)
(529)
(536)
(611)
(805)
(1,140)
0
(406)
(78)
477
8
0
0
0
(381)
(105)
486
0
0
0
(529)
(14)
295
0
0
(20)
(268)
50
2
(610)
0
0
29
(529)
(611)
(31)
28
97
0
(20)
(536)
(622)
(33)
(122)
179
(19)
6
(611)
(1,140)
(452)
245
574
8
(39)
(805)
(572)
(412)
(837)
665
(19)
35
(1,140)
22,828
22,865
3,650
3,704
1,291
1,316
27,769
27,885
0
0
0
0
25,984
3,156
24,614
1,749
3,381
(268)
3,175
(529)
3,156
1,749
0
0
479
1,234
(536)
0
440
1,144
(611)
479
440
30,599
2,351
28,934
609
0
3,156
1,749
(1,140)
Net defined benefit asset / (liability)
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.
(268)
(536)
(805)
(529)
(611)
0
0
418
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
Curtailments
Net periodic expenses recognized in net profit
Swiss plan
31.12.17 31.12.16
471
448
UK plan
31.12.17 31.12.16
0
0
US and German plans
31.12.17 31.12.16
9
9
Total
31.12.17 31.12.16
480
456
163
(178)
13
10
(49)
406
240
(258)
14
10
(96)
381
100
(86)
116
(118)
0
0
0
14
0
0
0
(2)
61
(44)
0
4
0
31
62
(44)
0
6
0
33
325
(307)
13
14
(49)
452
419
(420)
14
16
(96)
412
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
Swiss plan
31.12.17 31.12.16
(477)
(303)
UK plan
31.12.17 31.12.16
(922)
82
US and German plans
31.12.17 31.12.16
(125)
(80)
Total
31.12.17 31.12.16
(1,524)
(301)
1,619
(1,394)
(78)
824
(452)
(105)
213
0
295
312
0
(610)
108
0
28
2
1,939
1,139
0
(122)
(1,394)
245
(452)
(837)
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
US and German plans1
31.12.17
31.12.16
31.12.17
31.12.16
31.12.17
31.12.16
15.1
15.1
20.0
22.6
10.6
10.6
1,120
2,236
3,368
5,423
4,980
1,140
2,204
3,394
5,439
5,041
81
177
328
699
786
72
164
315
710
856
16,757
17,162
4,216
6,064
105
212
321
558
501
865
103
213
328
562
514
958
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
419
Consolidated 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 volatility 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
currency 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
participants 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 population continues to accrue benefits for future
service and therefore the effect of a salary increase on the
DBO is minimal.
– Rate of pension increase: for the Swiss plan, there is no
automatic 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 automatically 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
participants 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 are offered.
→ 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
calculating its DBO to determine their continuing relevance.
in
Swiss pension plan
In 2017, a net loss of CHF 303 million was recognized in Other
comprehensive income (OCI) related to the remeasurement of
the DBO. This was primarily due to a market-driven decrease in
the discount rate, which resulted in an OCI loss of CHF 170
million, as well as experience losses of CHF 152 million,
reflecting differences between
actuarial
assumptions and what actually occurred. These effects were
partially offset by market-driven changes to the assumed rate of
interest credit on retirement savings, which resulted in a gain of
CHF 27 million. Changes in other assumptions were not
significant.
the previous
In 2016, UBS continued to enhance its methodology for
estimating 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 recognized in OCI.
UK pension plan
In 2017, a net gain of CHF 82 million was recognized in OCI
related to the remeasurement of the DBO for the UK plan. This
was primarily driven by changes
life expectancy
assumption, which resulted in a gain of CHF 80 million. In
addition, market-driven changes in the inflation rate assumption
resulted in a gain of CHF 60 million and experience gains were
CHF 49 million. These gains were partly offset by a market-
driven decrease in the discount rate, which resulted in a loss of
CHF 105 million.
in the
In 2016, a net loss of CHF 922 million was recognized in OCI
related to the remeasurement of the DBO for the UK plan,
resulting from a loss of CHF 866 million due to a market-driven
decrease in the discount rate and a loss of CHF 156 million from
market-driven changes in the inflation rate assumption, partly
offset by a gain of CHF 63 million from changes in the life
expectancy assumption and an experience gain of CHF 37
million.
US and German pension plans
In 2017, a net loss of CHF 80 million was recognized in OCI
related to the remeasurement of the DBO for the US and
German plans compared with a net loss of CHF 125 million in
2016. OCI losses in both years were primarily driven by market-
driven decreases in discount rates.
420
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
USA
Germany
Country
Switzerland
UK
USA
Germany
Mortality table
BVG 2015 G with CMI 2016 projections1
S2PA with CMI 2016 projections2
RP2014 WCHA with MP2017 projection scale3
Dr. K. Heubeck 2005 G
Mortality table
BVG 2015 G with CMI 2016 projections1
S2PA with CMI 2016 projections2
RP2014 WCHA with MP2017 projection scale3
Dr. K. Heubeck 2005 G
Swiss plan
UK plan
US and German plans1
31.12.17
31.12.16
31.12.17
31.12.16
31.12.17
31.12.16
0.67
1.30
0.00
0.67
0.73
1.30
0.00
0.73
2.55
0.00
3.11
0.00
2.69
0.00
3.18
0.00
3.14
2.83
1.50
2.56
3.58
2.86
1.50
1.74
Life expectancy at age 65 for a male member currently
aged 65
aged 45
31.12.17
31.12.16
31.12.17
31.12.16
21.6
23.4
22.8
20.3
21.5
23.7
22.9
20.1
23.0
24.6
24.4
22.9
22.9
25.0
24.4
22.8
Life expectancy at age 65 for a female member currently
aged 65
aged 45
31.12.17
31.12.16
31.12.17
31.12.16
23.4
25.2
24.4
24.3
23.4
25.6
24.5
24.2
24.9
26.5
26.0
26.8
24.9
27.4
26.1
26.7
1 In 2016, the mortality table BVG 2015 G with proposed CMI 2016 was used. 2 In 2016, the mortality table S2PA with CMI 2015 projections was used. 3 In 2016, the mortality table RP2014 WCHA with
MP2016 projection scale was used.
Sensitivity analysis of significant actuarial assumptions
The table below presents a sensitivity analysis for each significant
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. Unforeseen
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 sensitivities below
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
31.12.17
31.12.16
31.12.17
31.12.16
US and German plans
31.12.17
31.12.16
(1,432)
1,627
84
(80)
1,181
–3
260
(247)
807
(1,435)
1,630
86
(79)
1,178
–3
264
(250)
796
(341)
391
–2
–2
370
(327)
–4
–4
(388)
452
–2
–2
435
(377)
–4
–4
(88)
96
1
(1)
7
(6)
9
(9)
(86)
94
1
(1)
6
(6)
9
(8)
139
136
47
44
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 2017 and as of 31 December 2016, a downward change in assumption is not
applicable. 4 As the UK plan does not provide interest credits on retirement savings, a change in assumption is not applicable.
421
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
Fair value of plan assets
The tables below provide 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 fair value of plan assets
Total fair value of plan assets
of which: 2
Bank accounts at UBS
UBS debt instruments
UBS shares
Securities lent to UBS 3
Property occupied by UBS
Derivative financial instruments, counterparty UBS 3
31.12.17
31.12.16
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
Quoted
in an active
market
117
Other
0
Total
117
0
2,787
2,787
650
0
650
7,317
1,298
8,615
2,221
6,214
563
0
0
0
2,221
6,214
563
0
23
23
839
3,942
4,781
0
12
12
Quoted
in an active
market
869
Other
0
Total
869
0
2,689
2,689
938
0
6,558
1,170
2,222
5,877
1,176
0
0
0
938
7,728
2,222
5,877
1,176
0
42
42
283
2,776
3,059
0
15
15
0
11
3
33
9
24
2
0
18
0
4
11
4
31
9
24
5
0
12
0
17,922
8,061
25,984
100
17,923
6,691
24,614
100
31.12.17
25,984
117
3
33
1,979
83
23
31.12.16
24,614
432
5
47
1,855
83
(220)
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 2017 and 31 December 2016. Net of
collateral, derivative financial instruments amounted to CHF 11 million as of 31 December 2017 (31 December 2016: CHF 76 million).
422
Note 26 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
UK plan
31.12.17
31.12.16
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
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 investments2
Total fair value of plan assets
Quoted
in an active
market
159
Other
0
Total
159
1,666
1
31
1,020
625
21
143
56
100
(4)
(560)
0
0
0
0
81
0
0
0
27
5
11
1,666
1
31
1,020
706
21
143
56
128
1
(549)
3,257
124
3,381
Quoted
in an active
market
133
1,131
1
39
984
500
23
245
39
39
(35)
(144)
2,955
5
49
0
1
30
21
1
4
2
4
0
(16)
100
Other
0
Total
133
1,131
1
39
984
528
23
245
39
111
76
0
0
0
0
28
0
0
0
72
111
10
221
4
36
0
1
31
17
1
8
1
4
2
(134)
3,175
(4)
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. 2 Mainly relates to repurchase arrangements on UK treasury bonds.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
423
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
US plans
31.12.17
31.12.16
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
Fair value
Quoted
in an active
market
74
Other
0
Fair value
Quoted
in an active
market
75
Other
0
Weighted
average
plan asset
allocation %
6
16
1
4
0
24
22
17
2
4
0
1
2
1
1
0
Total
74
195
10
44
1
291
270
210
19
46
5
12
21
17
15
4
195
10
44
1
291
270
210
19
46
5
0
21
0
15
4
0
0
0
0
0
0
0
0
0
0
12
0
17
0
0
30
Weighted
average
plan asset
allocation %
7
14
1
4
0
23
22
19
2
4
0
1
2
2
1
0
Total
75
158
13
42
1
264
248
218
18
42
5
11
19
18
8
3
1,144
100
158
13
42
1
264
248
218
18
42
5
0
19
0
8
3
0
0
0
0
0
0
0
0
0
0
11
0
18
0
0
29
Total fair value of plan assets
1,204
1,234
100
1,115
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.
424
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
insurance benefits that contribute to the health care coverage of
certain employees and their beneficiaries after retirement. The
UK post-employment medical insurance plan is closed to new
entrants.
These plans are not prefunded. In the US, the retirees also
contribute to the cost of the post-employment medical benefits.
The benefits expected to be paid by UBS to the post-
employment medical insurance plans in 2018 are estimated to
be CHF 5 million.
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
recognized 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) / losses 1
Benefit payments2
Foreign currency translation
Post-employment benefit obligation at the end of the year
of which: amounts owed to active members
of which: amounts owed to deferred members
of which: amounts owed 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
UK plan
US plans
Total
31.12.17
31.12.16
31.12.17
31.12.16
31.12.17
31.12.16
26
0
1
0
(1)
0
(1)
0
(1)
1
26
6
0
20
0
(26)
0
1
1
1
1
25
0
1
0
6
1
5
0
(1)
(4)
26
6
0
21
0
(26)
0
1
1
(6)
(6)
65
0
2
3
0
0
2
(2)
(7)
(3)
59
0
0
59
0
(59)
0
2
2
0
0
59
0
3
2
7
(1)
1
6
(7)
1
65
0
0
65
0
(65)
0
3
3
(7)
(7)
91
0
3
3
(1)
(1)
2
(2)
(9)
(1)
86
6
0
79
0
(86)
0
3
3
1
1
84
0
3
2
13
0
6
6
(8)
(3)
91
6
0
86
0
(91)
0
3
4
(13)
(13)
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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
425
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans (continued)
Actuarial assumptions
The measurement of each medical insurance plan’s post-
employment benefit obligation considers different actuarial
assumptions. Changes in assumptions lead to volatility in the
post-employment benefit obligation. The following principal
actuarial assumptions are applied:
– Discount rate: discount rates used for post-employment
medical insurance plans are the same as those used for
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.
Principal actuarial assumptions used1
In %
Discount rate
Average health care cost trend rate – initial
Average health care cost trend rate – ultimate
– Average health care cost trend rate: an increase in health care
the post-employment benefit
increases
costs generally
obligation.
– Life expectancy: as some plan participants have lifetime
benefits under these plans, an increase in life expectancy
increases the post-employment benefit obligation.
UBS regularly reviews the actuarial assumptions used in
calculating its post-employment benefit obligations to determine
their continuing relevance. Principal actuarial assumptions used
to determine post-employment benefit obligations at the end of
the year were:
UK plan
US plans2
31.12.17
31.12.16
31.12.17
31.12.16
2.55
5.10
5.10
2.69
5.10
5.10
3.54
7.99
4.50
3.97
7.03
4.50
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 reasonably possible. Caution should be
used in extrapolating the sensitivities below on the post-
employment benefit 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
31.12.17
31.12.16
31.12.17
31.12.16
(2)
2
4
(3)
2
(2)
2
4
(3)
2
(3)
3
1
(1)
4
(3)
3
2
(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 contribution plans are the US and the UK. Certain plans
allow employees to make contributions and earn matching or
other contributions from UBS. Employer contributions to defined
contribution plans are recognized as an expense, which, for the
years ended 31 December 2017, 2016 and 2015, amounted to
CHF 239 million, CHF 236 million and CHF 239 million,
respectively.
426
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 capacity, 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
relationship with UBS.
Also, UBS leases certain properties that are owned by the
Swiss pension fund. As of 31 December 2017, the minimum
commitment toward the Swiss pension fund under the related
leases was approximately CHF 5 million (31 December 2016:
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
Dividends, capital repayments and interest
For the year ended
31.12.17
31.12.16
31.12.15
36
4
9
36
4
15
33
5
13
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
31.12.17
31.12.16
905
2
2,897
4
2,427
0
1,618
0
31.12.17
16,370
293
31.12.16
18,363
293
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
427
Consolidated financial statements
Note 27 Employee benefits: variable compensation
a) Plans offered
The Group has several share-based and other compensation
plans that align the interests of Group Executive Board (GEB)
members, Key Risk Takers (KRTs) and other employees with the
interests of
investors. These
compensation plans are also designed to meet regulatory
requirements. Section a) of this Note provides a description of
the most significant compensation plans.
shareholders and other
→ Refer to Note 1a item 6 for a description of the accounting policy
related to share-based and other compensation plans
Mandatory deferred compensation plans
Equity Ownership Plan (EOP)
The EOP is a mandatory deferred compensation 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.
EOP awards granted to GEB members and certain other
employees only vest if both Group and business division
performance conditions are met. Group performance
is
measured based on the average adjusted return on tangible
equity (RoTE) excluding deferred tax assets over the performance
period. Business division performance is measured on the basis
of the business division’s average adjusted return on attributed
equity (RoAE). For Corporate Center employees, it is measured
on the basis of the average operating businesses RoAE.
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 that may be paid in notional shares or cash and
that vests on the same terms and conditions as the awards.
However, awards that have been granted in February 2018 for the
performance year 2017 to individuals who are deemed to be
Material Risk Takers (MRTs) based on regulatory guidance in the EU
do not carry such a dividend equivalent. 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.
Deferred Contingent Capital Plan (DCCP)
The DCCP is a mandatory deferred 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 can be settled in the form of either
a cash payment or a perpetual, marketable AT1 capital instrument,
at the discretion of UBS. Awards vest in full after five years and up
to seven years for certain employees subject to specific regulation in
the UK unless there is a trigger event.
Awards 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 support 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.
For awards granted up to January 2015, interest on the
awards is paid annually, provided that UBS achieved an adjusted
profit before tax in the preceding year. For awards granted since
February 2015, interest payments are discretionary. Awards
granted to MRTs since February 2018 are not eligible for interest
payments. The awards are generally forfeitable upon, among
other circumstances, voluntary termination of employment with
UBS.
In 2017, UBS modified the terms of the majority of DCCP awards
that were granted for the performance years 2012 and 2013 by
removing the service period requirement. This resulted in a CHF 36
million expense in 2017, of which CHF 25 million related to the
Investment Bank.
Asset Management EOP
In order to align deferred compensation of certain Asset
Management employees with the performance of the investment
funds they manage, awards are granted to such employees in the
form of cash-settled notional investment 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 circumstances, voluntary termination of employment
with UBS.
428
Note 27 Employee benefits: variable compensation (continued)
Wealth Management Americas financial advisor
compensation
In line with market practice for US wealth management businesses,
the compensation for financial advisors in Wealth Management
Americas
is comprised of production payout and deferred
compensation awards. Production payout, paid monthly in the form
of non-deferred cash payments, is primarily based on compensable
revenue.
Financial advisors may also qualify for deferred compensation
awards, which vest over various time periods of up to 10 years.
Production payout rates and deferred compensation 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.
Strategic objective awards
Strategic objective awards are deferred compensation awards based
on strategic performance measures, including production, length of
service with the firm and net new business. These awards are
granted in the form of both deferred share-based and deferred
cash-based awards with a vesting period of up to six years.
Through performance year 2016, strategic objective awards
were partly granted under the PartnerPlus deferred cash plan. In
addition to such granted awards (UBS company contributions),
participants were also allowed to voluntarily contribute additional
amounts otherwise payable as production payout up to a certain
percentage, which vest upon contribution. Company contributions
and voluntary contributions are credited with interest 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
interest on both company and voluntary
contributions and
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.
GrowthPlus
GrowthPlus is a compensation plan for selected financial advisors
whose revenue production and length of service exceed defined
thresholds from 2010 through 2017. Awards were granted in 2010,
2011, 2015 and early 2018. The awards are distributed over seven
years, with the exception of 2018 awards, which will be distributed
over five years.
Other compensation plans
Equity Plus Plan (Equity Plus)
Equity Plus is a voluntary share-based compensation 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 until three years from the start of the associated
plan year and, in general, if the employee remains in employment,
the notional shares vest. For notional shares granted since April
2014, employees are entitled to receive a dividend equivalent,
which may be paid in notional shares and / or cash.
Role-based allowances (RBAs)
Certain employees of legal entities regulated in the EU 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 awarded
in cash and, above a certain 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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
429
Consolidated financial statements
Note 27 Employee benefits: variable compensation (continued)
Discontinued deferred compensation plans
Senior Executive Equity Ownership Plan (SEEOP)
Up to February 2012, GEB members and selected senior executives
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 scheduled
vesting. Awards granted under SEEOP were settled by delivering
UBS shares at vesting. No SEEOP awards have been granted since
2012.
Senior Executive Stock Option Plan (SESOP)
Up to February 2008, GEB members and selected senior
executives were granted UBS options with a strike price set at
110% of the fair market value of a UBS share on the grant date.
These awards vested in full following a three-year vesting period
and generally expire ten years from the grant date. No SESOP
awards have been granted since 2008.
Long-Term Deferred Retention Senior Incentive Scheme (LTDRSIS)
Awards under the LTDRSIS were granted to employees in Australia
up to and including 2014 and represented a profit share amount
based on the profitability of the Australian business. Awards vested
after three years and included an arrangement that allowed for
unpaid installments to be reduced if the business recorded a loss for
the calendar year preceding vesting. The awards were generally
forfeitable upon voluntary termination of employment with UBS.
Key Employee Stock Appreciation Rights Plan (KESAP) and Key
Employee Stock Option Plan (KESOP)
Until 2009, certain key and high-potential employees were
granted discretionary 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 market price increase of a UBS share
between the grant date and the exercise date. One option
entitles the holder to acquire one registered 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. No options or SARs awards have been granted
since 2009.
Share delivery obligations
Share delivery obligations related to employee share-based
compensation awards were 166 million shares as of 31
December 2017, unchanged from 31 December 2016. Share
delivery obligations are calculated on the basis of unvested
notional share awards, options and stock appreciation rights,
taking applicable performance conditions into account.
As of 31 December 2017, UBS held 132 million treasury
shares (31 December 2016: 138 million) that were available to
satisfy share delivery obligations. Treasury shares held are
delivered to employees at exercise or vesting. However, share
delivery obligations related to certain options and stock
appreciation rights can also be satisfied by shares issued out of
conditional capital. As of 31 December 2017, the number of
UBS Group AG shares that could have been issued out of
conditional capital for this purpose was 128 million (31
December 2016: 130 million).
430
Note 27 Employee benefits: variable compensation (continued)
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 total variable compensation, including financial advisor
compensation
in Wealth Management Americas, that were
recognized in the financial year ended 31 December 2017, as well
as expenses that were deferred and will be recognized in the
income statement for 2018 and later. The majority of expenses
deferred to 2018 and later that are related to the performance year
2017 relates to awards granted in February 2018. The total
compensation expense for unvested share-based awards granted up
to 31 December 2017 will be recognized in future periods over a
weighted average period of 2.1 years.
Variable compensation including Wealth Management Americas financial advisor compensation
Expenses recognized in 2017
Expenses deferred to 2018 and later
CHF million
Non-deferred cash
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Asset Management EOP
of which: Other performance awards
Total variable compensation – performance awards
Replacement payments
Forfeiture credits
Severance payments
Retention plan and other payments
Deferred Contingent Capital Plan: interest expense
Total variable compensation – other
Financial advisor compensation
of which: non-deferred cash
of which: deferred share-based awards
of which: deferred cash-based awards
Compensation commitments with recruited financial advisors1
Total Wealth Management Americas: Financial advisor compensation
Total variable compensation including WMA FA compensation
Related to the
performance
year 2017
2,047
Related to prior
performance
years
(25)
392
235
132
25
0
2,439
13
0
111
25
0
148
2,995
2,836
56
102
30
3,025
5,613
676
337
304
31
4
651
58
(105)
0
37
109
99
252
0
44
209
710
962
1,712
Related to the
performance
year 2017
0
Related to prior
performance
years
0
590
323
241
27
0
590
84
0
0
30
78
191
153
0
69
84
679
284
367
26
3
679
42
0
0
32
216
291
779
0
117
662
360
513
1,294
2,009
2,788
3,758
Total
2,022
1,068
572
437
55
4
3,090
71
(105)
111
62
109
248
3,247
2,836
100
311
740
3,986
7,3242
Total
0
1,270
607
607
52
3
1,270
126
0
0
61
294
482
932
0
186
746
2,369
3,300
5,052
1 Reflects expenses 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. 2 Includes CHF 698 million in expenses related to share-based compensation (performance awards: CHF 572 million; other variable compensation:
CHF 26 million; Wealth Management Americas financial advisor compensation: CHF 100 million). A further CHF 99 million in expenses related to share-based compensation was recognized within other Note 6
expense categories (Salaries: CHF 25 million, related to role-based allowances; Social security: CHF 50 million; Other personnel expenses: CHF 25 million, related to the Equity Plus Plan). Total personnel expenses
related to share-based equity-settled compensation excluding social security were CHF 721 million.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
431
Consolidated financial statements
Note 27 Employee benefits: variable compensation (continued)
Variable compensation including Wealth Management Americas financial advisor compensation
Expenses recognized in 2016
Expenses deferred to 2017 and later
CHF million
Non-deferred cash
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Asset Management EOP
of which: Other performance awards
Total variable compensation – performance awards
Replacement payments
Forfeiture credits
Severance payments
Retention plan and other payments
Deferred Contingent Capital Plan: interest expense
Total variable compensation – other
Financial advisor compensation
of which: non-deferred cash
of which: deferred share-based awards
of which: deferred cash-based awards
Compensation commitments with recruited financial advisors1
Total Wealth Management Americas: Financial advisor compensation
Total variable compensation including WMA FA compensation
Related to the
performance
year 2016
1,817
Related to prior
performance
years
(42)
373
214
133
26
0
2,191
24
0
217
25
0
266
2,651
2,506
33
112
43
2,695
5,152
825
485
295
39
6
781
62
(73)
0
49
113
151
247
0
48
199
756
1,002
1,935
Related to the
performance
year 2016
0
Related to prior
performance
years
0
671
372
266
34
0
671
40
0
0
24
98
162
196
0
57
139
607
804
1,637
856
356
468
27
5
856
31
0
0
27
243
301
893
0
120
773
2,120
3,013
4,169
Total
1,775
1,198
699
428
65
6
2,972
86
(73)
217
74
113
418
2,898
2,506
81
311
799
3,697
7,0872
Total
0
1,527
727
735
60
5
1,527
71
0
0
50
341
463
1,089
0
177
912
2,727
3,816
5,806
1 Reflects expenses 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. 2 Includes CHF 820 million in expenses related to share-based compensation (performance awards: CHF 699 million; other variable compensation:
CHF 40 million; Wealth Management Americas financial advisor compensation: CHF 81 million). A further CHF 90 million in expenses related to share-based compensation was recognized within other Note 6
expense categories (Salaries: CHF 39 million, related to role-based allowances; Social security: CHF 27 million; Other personnel expenses: CHF 24 million, related to the Equity Plus Plan). Total personnel expenses
related to share-based equity-settled compensation excluding social security were CHF 861 million.
432
Note 27 Employee benefits: variable compensation (continued)
Variable compensation including Wealth Management Americas financial advisor compensation
Expenses recognized in 2015
Expenses deferred to 2016 and later
CHF million
Non-deferred cash
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Asset Management EOP
of which: Other performance awards
Total variable compensation – performance awards
Replacement payments
Forfeiture credits
Severance payments
Retention plan and other payments
Deferred Contingent Capital Plan: interest expense
Total variable compensation – other
Financial advisor compensation
of which: non-deferred cash
of which: deferred share-based awards
of which: deferred cash-based awards
Compensation commitments with recruited financial advisors1
Total Wealth Management Americas: Financial advisor compensation
Total variable compensation including WMA FA compensation
Related to the
performance
year 2015
2,073
Related to prior
performance
years
(94)
461
261
172
28
0
2,535
11
0
157
15
0
184
2,629
2,460
37
132
43
2,673
5,391
769
461
258
38
12
675
65
(86)
0
102
81
162
187
0
45
142
692
879
1,716
Related to the
performance
year 2015
0
Related to prior
performance
years
0
900
524
343
34
0
900
72
0
0
15
160
248
776
0
66
710
940
1,716
2,864
822
338
446
35
3
822
41
0
0
52
200
293
571
0
115
456
1,899
2,470
3,585
Total
1,980
1,230
722
429
67
12
3,210
76
(86)
157
117
81
346
2,816
2,460
82
275
735
3,552
7,1082
Total
0
1,722
861
789
69
3
1,722
114
0
0
67
360
541
1,347
0
182
1,166
2,839
4,186
6,449
1 Reflects expenses 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. 2 Includes CHF 858 million in expenses related to share-based compensation (performance awards: CHF 722 million; other variable compensation:
CHF 54 million; Wealth Management Americas financial advisor compensation: CHF 82 million). A further CHF 108 million in expenses related to share-based compensation was recognized within other Note 6
expense categories (Salaries: CHF 26 million, related to role-based allowances; Social security: CHF 61 million; Other personnel expenses: CHF 21 million, related to the Equity Plus Plan). Total personnel expenses
related to share-based equity-settled compensation excluding social security were CHF 858 million.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
433
Consolidated financial statements
Note 27 Employee benefits: variable compensation (continued)
c) Outstanding share-based compensation awards
Share and performance share awards
Movements in outstanding share-based awards under the EOP plan during 2017 and 2016 are provided in the table below.
Movements in outstanding share and performance share awards granted under the EOP
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
2017
165,626,088
63,872,651
(58,756,089)
(7,906,936)
162,835,713
74,883,139
Weighted average
grant date fair value
(CHF)
15
Number of shares
2016
144,185,104
Weighted average
grant date fair value
(CHF)
17
14
16
15
15
82,473,059
(56,018,881)
(5,013,194)
165,626,088
73,913,272
14
16
15
15
The total carrying amount of the liability related to cash-settled share-based awards as of 31 December 2017 and 31 December
2016 was CHF 55 million and CHF 50 million, respectively.
Option awards
No option awards have been granted since 2009. Movements in outstanding option awards during 2017 and 2016 are provided in
the table below.
Movements in outstanding option awards
Outstanding, at the beginning of the year
Exercised during the year1
Forfeited during the year
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Number of options
2017
55,913,291
Weighted average
exercise price (CHF)
39
Number of options
2016
80,848,217
Weighted average
exercise price (CHF)
45
(1,632,319)
(38,995)
(21,658,809)
32,583,168
32,583,168
12
27
61
25
25
(624,554)
(51,065)
(24,259,307)
55,913,291
55,913,291
12
43
61
39
39
1 The weighted average share price upon option exercise was CHF 16.73 in 2017 (2016: CHF 15.69), resulting in an intrinsic value of CHF 8 million of options exercised during 2017 (2016: CHF 3 million).
The table below provides additional information about options outstanding as of 31 December 2017.
Options outstanding
Number of options
outstanding
Weighted average
exercise price (CHF)
Aggregate intrinsic
value (CHF million)
Weighted average
remaining
contractual term
(years)
6,139,267
6,729,572
18,565,697
1,146,032
2,600
32,583,168
11.37
19.12
31.43
35.67
46.02
40.3
5.3
0.0
0.0
0.0
45.7
1.1
1.2
0.2
0.2
0.0
Range of exercise prices
CHF
10.21–15.00
15.01–25.00
25.01–35.00
35.01–45.00
45.01–55.00
10.21–55.00
434
Note 27 Employee benefits: variable compensation (continued)
SAR awards
No SAR awards have been granted since 2009. Movements in outstanding SAR awards during 2017 and 2016 are provided in the
table below.
Movements in outstanding SAR awards
Outstanding, at the beginning of the year
Exercised during the year1
Forfeited during the year
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Number of SARs
2017
10,807,315
(2,212,700)
(23,000)
(58,200)
8,513,415
8,513,415
Weighted average
exercise price (CHF)
12
Number of SARs
2016
12,519,765
Weighted average
exercise price (CHF)
12
11
11
13
12
12
(1,579,449)
(6,000)
(127,001)
10,807,315
10,807,315
11
11
12
12
12
1 The weighted average share price upon exercise of SARs was CHF 16.70 in 2017 (2016: CHF 15.36), resulting in an intrinsic value of CHF 12 million of SARs exercised during 2017 (2016: CHF 6 million).
The table below provides additional information about SARs outstanding as of 31 December 2017.
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
market 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 discount for share and performance share awards
granted during 2017 was approximately 20.2% (2016: 18.1%)
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.
SARs outstanding
Number of SARs
outstanding
Weighted average
exercise price (CHF)
Aggregate intrinsic
value (CHF million)
Weighted average
remaining
contractual term
(years)
8,174,915
2,500
42,000
294,000
8,513,415
11.34
14.85
16.80
19.25
54.0
0.0
0.0
0.0
54.0
1.1
1.4
1.4
1.7
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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
435
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 accordance 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
subsidiaries as of 31 December 2017. Unless otherwise stated,
the subsidiaries listed below have share capital consisting solely
of ordinary shares that are held fully by the Group, and the
proportion 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 Germany, Italy, Luxembourg, Spain and Austria.
UBS Group Funding (Jersey) Ltd. was dissolved in 2017.
Subsidiaries of UBS Group AG as of 31 December 2017
Company
UBS AG
Registered office
Zurich and Basel, Switzerland
UBS Business Solutions AG1
Zurich, Switzerland
UBS Group Funding (Switzerland) AG
Zurich, Switzerland
Share capital in million
Equity interest accumulated in %
CHF
CHF
CHF
385.8
1.0
0.1
100.0
100.0
100.0
1 UBS Business Solutions (India) Private Limited and UBS Business Solutions Poland Sp. z o.o. are directly held subsidiaries of UBS Business Solutions AG.
Individually significant subsidiaries of UBS AG as of 31 December 2017
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
Investment Bank
Investment Bank
Zurich, Switzerland
Personal & Corporate Banking
Share capital in million
2,250.01
USD
CHF
USD
EUR
USD
GBP
USD
CHF
43.2
0.0
446.0
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.
436
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 2017
Company
UBS Americas Inc.
Registered office
Wilmington, Delaware, USA
Primary business division
Corporate Center
Share capital in million
0.0
USD
Equity interest
accumulated in %
100.0
UBS Asset Management (Americas) Inc.
Wilmington, Delaware, USA
Asset Management
UBS Asset Management (Australia) Ltd
Sydney, Australia
UBS Asset Management (Deutschland) GmbH
Frankfurt, Germany
UBS Asset Management (Hong Kong) Limited
Hong Kong, Hong Kong
UBS Asset Management (Japan) Ltd
Tokyo, Japan
UBS Asset Management (Singapore) Ltd
Singapore, Singapore
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
UBS Asset Management (UK) Ltd
UBS Business Solutions US LLC
UBS Card Center AG
UBS Credit Corp.
UBS (France) S.A.
London, United Kingdom
Wilmington, Delaware, USA
Corporate Center
Glattbrugg, Switzerland
Personal & Corporate Banking
Wilmington, Delaware, USA
Wealth Management Americas
Paris, France
Wealth Management
UBS Fund Advisor, L.L.C.
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
UBS Hedge Fund Solutions LLC
Wilmington, Delaware, USA
Asset Management
UBS (Monaco) S.A.
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 South Africa (Proprietary) Limited
Monte Carlo, Monaco
Dover, Delaware, USA
Wealth Management
Asset Management
Wilmington, Delaware, USA
Investment Bank
Boston, Massachusetts, USA
Asset Management
Bangkok, Thailand
Sydney, Australia
Mumbai, India
Tokyo, Japan
Singapore, Singapore
Sandton, South Africa
Investment Bank
Investment Bank
Investment Bank
Investment Bank
Investment Bank
Investment Bank
UBS UK Properties Limited
London, United Kingdom
Corporate Center
1 Includes a nominal amount relating to redeemable preference shares.
USD
AUD
EUR
HKD
JPY
SGD
GBP
USD
CHF
USD
EUR
USD
EUR
CHF
USD
EUR
USD
USD
USD
THB
AUD
INR
JPY
SGD
ZAR
GBP
0.0
20.11
7.7
206.0
2,200.0
4.0
125.0
0.0
0.1
0.0
133.0
0.0
13.0
1.0
0.1
49.2
1.0
0.0
9.0
500.0
0.31
140.0
32,100.0
420.4
0.0
132.0
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
437
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 28 Interests in subsidiaries and other entities (continued)
Changes in consolidation scope
In 2017, no significant subsidiaries were added to or removed
from the scope of consolidation as a result of acquisitions or
disposals.
Non-controlling interests
Non-controlling interests decreased by CHF 625 million in 2017
to CHF 57 million as a EUR 600 million non-Basel III-compliant
hybrid tier 1 capital instrument was redeemed on its first call
date. As of 31 December 2017 non-controlling interests were
not material to the Group.
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
subsidiaries 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 manager, 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 2017 and 2016, the Group has not entered into any
contractual obligation that could require the Group to provide
financial 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.
438
Note 28 Interests in subsidiaries and other entities (continued)
b) Interests in associates and joint ventures
As of 31 December 2017 and 2016, 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 profit 1
of which: share of other comprehensive income 2
Dividends received
Impairment
Foreign currency translation
Carrying amount at the end of the year
of which: associates
of which: UBS Securities Co. Limited, Beijing 3
of which: SIX Group AG, Zurich 4
of which: other associates
of which: joint ventures
31.12.17
31.12.16
963
3
0
98
75
23
(51)
(7)
12
1,018
989
401
464
124
29
954
3
(2)
82
106
(24)
(50)
0
(23)
963
934
392
426
116
29
1 For 2017, consists of CHF 60 million from associates and CHF 15 million from joint ventures. For 2016, consists of CHF 94 million from associates and CHF 12 million from joint ventures. 2 For 2017, consists of
CHF 24 million from associates and negative CHF 1 million from joint ventures. For 2016, consists of negative CHF 25 million from associates and CHF 0 million from joint ventures. 3 UBS AG’s equity interest
amounts to 24.99%. 4 UBS AG’s equity interest amounts to 17.31%. UBS AG is represented on the Board of Directors.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
439
Consolidated financial statements
Note 28 Interests in subsidiaries and other entities (continued)
c) Interests in unconsolidated structured entities
During 2017, 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, that UBS did not consolidate as of 31
December 2017 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 carrying 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
Assets held by the unconsolidated structured entities in which UBS had an interest
(CHF billion)
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
Securitization
vehicles
363
21
0
84
0
291
7603
204
20
575
Securitization
vehicles
634
40
0
103
0
289
1,0663
334
Client
vehicles
308
68
0
662
3,865
292
4,337
53
53
786
Client
vehicles
394
76
0
832
3,381
372
3,971
346
31.12.17
Investment
funds
6,143
22
97
105
45
0
6,412
203
203
4127
31.12.16
Investment
funds
6,215
101
79
98
58
0
6,552
67
Total
6,815
111
97
255
3,910
320
11,508
276
276
Total
7,243
217
79
284
3,439
327
11,589
446
Maximum
exposure to loss1
6,815
111
97
1,780
3,910
1,407
14
Maximum
exposure to loss1
7,243
217
79
1,863
3,439
1,490
90
Total liabilities
Assets held by the unconsolidated structured entities in which UBS had an interest
(CHF billion)
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 2017, CHF 0.7 billion of the CHF 0.8 billion
(31 December 2016: CHF 1.0 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.
1026
3347
725
346
446
33
67
440
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
instruments with a positive replacement value only, such as total
return swaps, is presented as the maximum exposure to loss.
Risk exposure for these swap instruments could change over
time with market movements.
The maximum exposure to loss disclosed in the table on the
previous 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 2017 and 2016, the Group did not provide support,
financial 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 2017 and 2016, income and expenses from interests in
unconsolidated SEs primarily resulted from mark-to-market
movements 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, both
retained and acquired,
Interests in securitization vehicles
As of 31 December 2017 and 31 December 2016, the Group
held
in various
securitization vehicles, a majority of which are held within
Corporate Center – Non-core and Legacy Portfolio. The
Investment Bank also retained interests in securitization vehicles
related to financing, underwriting, secondary market and
derivative trading activities. In some cases the Group may be
required to absorb losses from an unconsolidated 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
securitization vehicles and the relative ranking and external
credit rating of those interests is presented in the table on the
following pages. The numbers outlined in this table differ from
the securitization positions presented in the 31 December
2017 Pillar 3 report – Group and significant regulated
subsidiaries and sub-groups under “Pillar 3 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
IFRS carrying value within the table above
cases
compared with net exposure amount at default for Basel III
Pillar 3 disclosures) and (iii) different classification of vehicles
viewed as sponsored by the Group versus sponsored by third
parties.
(e.g.,
→ 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 31 December 2017 Pillar 3 report – Group and
significant regulated subsidiaries and sub-groups under “Pillar 3
disclosures” at www.ubs.com/investors for more information
Interests in client vehicles
As of 31 December 2017 and 31 December 2016, 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
investments are securities guaranteed by US government
agencies.
Interests in investment funds
The Group holds interests in a number of investment funds,
primarily 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 investors. 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 2017 or
as of 31 December 2016.
441
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 28 Interests in subsidiaries and other entities (continued)
Interests in unconsolidated securitization vehicles1
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 junior tranches
of which: rated 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 sub-investment grade
Tranche information not available
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
31.12.17
Other
asset-backed
securities2
Re-securiti-
zation3
84
0
84
0
84
0
84
1
75
75
9
9
1
1
0
0
0
85
85
18
24
24
9
9
32
32
0
10
6
6
1
1
0
0
7
7
5
0
0
0
0
0
0
165
165
0
0
0
165
165
20
10
10
0
10
10
0
1
64
64
0
0
0
64
64
0
Total
118
24
84
10
9
9
126
43
84
12
311
311
9
1
9
1
1
0
0
0
321
321
43
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.
442
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: 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)
Residential
mortgage-
backed
securities
Commercial
mortgage-
backed
securities
31.12.16
Other
asset-backed
securities2
Re-securiti-
zation3
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
14
0
0
0
0
0
241
241
0
14
0
14
14
0
1
125
125
0
0
0
241
241
5
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.
Total
151
34
103
14
1
1
152
49
103
16
535
535
32
29
3
18
17
1
585
585
56
443
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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
entities. 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
incurred from risk
management activities, including income and expenses from
financial instruments used to economically hedge instruments
transacted with the unconsolidated SEs.
income earned and expenses
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 management services, UBS was not exposed to risk from
the performance 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
liabilities designated at fair value, which do not qualify as
interests because the Group does not absorb variability from the
performance of the entity. Total income reported does not
reflect economic hedges or other mitigating effects from the
Group’s risk management activities.
During 2017, UBS and third parties transferred assets totaling
CHF 17 billion
sponsored
(2016: CHF 13 billion)
securitization and client vehicles created in 2017. 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 15
billion (31 December 2016: CHF 14 billion).
into
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
31.12.17
Securitization
vehicles
2
Client vehicles
(9)
Investment
funds
0
0
(8)
(6)
102
0
(49)
(58)
73
40
2
43
154
As of or for the year ended
31.12.16
Securitization
vehicles
3
Client vehicles
(6)
Investment
funds
0
0
2
4
72
0
(158)
(165)
63
53
29
82
144
Total
(7)
40
(55)
(21)
Total
(3)
53
(128)
(78)
1 These tables exclude profit attributable to non-controlling interests of CHF 72 million for the year ended 31 December 2017 and CHF 78 million for the year ended 31 December 2016. 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 2016: CHF 2 billion) and CHF 8 billion was transferred by third
parties (31 December 2016: CHF 5 billion). 3 Represents total assets transferred to the respective client vehicles. Of the total amount transferred, CHF 6 billion was transferred by UBS (31 December 2016: CHF 5
billion) and CHF 1 billion was transferred by third parties (31 December 2016: CHF 1 billion). 4 Represents the total net asset value of the respective investment funds.
Note 29 Business combinations
In 2017 and 2016, UBS did not complete any significant business combinations.
444
Note 30 Changes in organization and disposals
Measures to improve the resolvability of the UBS Group
Sale of subsidiaries and businesses
In December 2014, UBS Group AG became the holding
company of the UBS Group. In 2015, UBS transferred its
Personal & Corporate Banking and Wealth Management
businesses booked in Switzerland from UBS AG to UBS
Switzerland AG and implemented a more self-sufficient business
and operating model for UBS Limited.
UBS Business Solutions AG was established in 2015 as a
direct subsidiary of UBS Group AG to act as the Group service
company. 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. In 2017, shared
services functions in Switzerland and the UK were transferred
from UBS AG to UBS Business Solutions AG, which is the Group
service company and a wholly owned subsidiary of UBS Group
AG. UBS also completed the transfer of the shared services
employees in the US to its US service company, UBS Business
Solutions US LLC, a wholly owned subsidiary of UBS Americas
Holding LLC.
In addition, UBS transferred the majority of the operating
subsidiaries 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 establish UBS’s new European legal entity, which
is headquartered in Frankfurt, Germany.
total
UBS established UBS Group Funding (Switzerland) AG in
2016 as a wholly owned direct subsidiary of UBS Group AG, to
issue loss-absorbing additional tier 1 (AT1) capital instruments
and
senior
unsecured debt, which are guaranteed by UBS Group AG. In the
first half of 2017, UBS transferred the then outstanding TLAC-
eligible senior unsecured debt
to UBS Group Funding
(Switzerland) AG as the issuer.
(TLAC)-eligible
loss-absorbing
capacity
In the fourth quarter of 2017, UBS completed the sale of Asset
Management’s
in
administration
Luxembourg and Switzerland to Northern Trust, resulting in a
pre-tax gain on sale of CHF 153 million.
servicing units
fund
In the second quarter of 2017, UBS completed the sale of a
life insurance subsidiary within Wealth Management. A loss on
sale of CHF 23 million was recognized in 2016 relating to this
transaction. Prior to completion of the sale, the assets and
liabilities of this business were presented as a disposal group
liabilities
held
(31 December 2016: CHF 5.1 billion and CHF 5.2 billion,
respectively).
for sale within Other assets and Other
In 2015, UBS sold its Alternative Fund Services (AFS) business
to Mitsubishi UFJ Financial Group Investor Services. Upon
completion 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
the manner
in which such business
Restructuring expenses arise from programs that materially
change either the scope of business that the Group engages in
or
is conducted.
Restructuring expenses are necessary to effect such programs
and include items such as severance and other personnel-related
expenses, duplicate headcount
impairment and
accelerated depreciation of assets, contract termination costs,
consulting fees, and related infrastructure and system costs.
These costs are presented in the income statement according to
the underlying nature of the expense.
costs,
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
445
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: Group ALM
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
Marketing and public relations
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.
446
For the year ended
31.12.17
31.12.16
31.12.15
463
113
103
100
359
30
19
4
6
1,168
534
627
7
0
447
139
117
100
577
78
57
0
21
323
137
101
82
396
196
140
0
56
1,458
1,235
751
695
11
0
460
761
12
2
For the year ended
31.12.17
31.12.16
31.12.15
346
34
98
62
8
(29)
15
534
435
102
209
56
8
(75)
17
751
312
38
108
46
5
(65)
15
460
For the year ended
31.12.17
31.12.16
31.12.15
75
93
1
25
1
14
186
240
(8)
627
123
94
1
16
0
16
162
289
(5)
695
109
31
0
6
0
17
187
316
95
761
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 2017, 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
indices. However, the
adjustments based on price
lease
agreements do not contain contingent rent payment clauses and
purchase 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:
2018
2019
2020
2021
2022
2023 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
31.12.17
666
602
516
429
382
2,013
4,608
262
4,346
31.12.17
31.12.16
31.12.15
725
67
658
749
78
671
743
70
673
b) Finance lease receivables
UBS leases a variety of assets to third parties under finance
leases, such as commercial vehicles, production lines, medical
equipment, 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 2017, unguaranteed residual values of
CHF 158 million had been accrued, and the accumulated
allowance for uncollectible minimum lease payments receivable
amounted to CHF 10 million. No contingent rents were received
in 2017.
Lease receivables
CHF million
2018
2019–2022
Thereafter
Total
Total minimum lease
payments
333
684
112
1,129
31.12.17
Unearned finance
income
22
36
3
61
Present value
311
648
110
1,069
447
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 32 Related parties
UBS defines related parties as associates (entities that are
significantly 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 family members of key management personnel and entities
that 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 Chairman of the BoD has a specific management employment contract and receives pension benefits upon retirement. Total
remuneration of the Chairman of the Board of Directors and all GEB members is included 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
31.12.17
31.12.16
31.12.15
25
15
22
3
2
40
106
25
11
22
3
2
41
104
23
10
21
2
2
42
99
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 2017, 2016 and 2015, 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 7.1 million in 2017, CHF 7.2 million in 2016 and CHF 6.7 million in 2015.
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.
31.12.17
398,867
31.12.16
620,950
3,709,539
3,267,911
Of the share totals above, 95,597 shares were held by close
family members of key management personnel on 31 December
2017 and 31 December 2016. No shares were held by entities
that are directly or indirectly controlled or jointly controlled by
key management personnel or their close family members on 31
December 2017 and 31 December 2016. Refer to Note 27 for
more information. As of 31 December 2017, no member of the
BoD or GEB was the beneficial owner of more than 1% of UBS
Group AG’s shares.
448
Note 32 Related parties (continued)
c) Loans, advances and mortgages to key management personnel
The non-independent members of the BoD and GEB members
are granted loans, fixed advances and mortgages in the ordinary
course of business on substantially the same terms and
conditions that are available to other employees, including
interest rates and collateral, and neither involve more than the
normal risk of collectibility nor contain any other unfavorable
features for the firm. Independent BoD members are granted
loans and mortgages in the ordinary course of business at
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
2017
41
1
2016
33
21
Reductions
Balance at the end of the year2
1 All loans are secured loans. 2 Excludes unused uncommitted credit facilities for two GEB members and one BoD member of CHF 5,196,294 as of 31 December 2017 and for one GEB and one BoD member of
CHF 2,684,498 as of 31 December 2016.
(13)
(1)
41
41
d) Other related party transactions with entities controlled by key management personnel
In 2017 and 2016, UBS did not enter into transactions with
entities that are directly or indirectly controlled or jointly
controlled by UBS’s key management personnel or their close
family members and as of 31 December 2017, 31 December
2016 and 31 December 2015, there were no outstanding
balances related to such transactions. Furthermore, in 2017 and
2016, 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 2017 and 2016, and therefore also received
no fees.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
449
Consolidated financial statements
Note 32 Related parties (continued)
e) Transactions with associates and joint ventures
Loans to and outstanding receivables from associates and joint ventures
CHF million
Carrying value at the beginning of the year
Additions
Reductions
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
2017
472
82
(3)
551
540
2016
476
4
(8)
472
461
As of or for the year ended
31.12.17
31.12.16
177
2
4
153
3
4
450
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
managed fund assets, managed institutional assets, discretionary
and advisory wealth management portfolios, fiduciary deposits,
time deposits, savings accounts and wealth management
securities or brokerage accounts. All assets held for purely
transactional purposes and custody-only assets,
including
corporate client assets held for cash management and
transactional purposes, 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
double 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
determined at the client level based on transactions. Interest and
dividend 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
Investment 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 2017 and 2016.
Invested assets and net new money
CHF billion
Fund assets managed by UBS
Discretionary assets
Other invested assets1
Total invested assets1,2
of which: double counts
Net new money2
1 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 were corrected by CHF 12 billion. 2 Includes double counts.
Development of invested assets
CHF billion
Total invested assets at the beginning of the year1,2
Net new money
Market movements3
Foreign currency translation
Other effects
of which: acquisitions / (divestments)
For the year ended
31.12.17
31.12.16
330
1,025
1,824
3,179
204
104
275
886
1,649
2,810
176
27
For the year ended
31.12.17
2,810
31.12.16
2,678
104
313
(45)
(3)
4
27
98
21
(14)
(14)
Total invested assets at the end of the year1,2
1 Includes double counts. 2 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12 billion and CHF 11 billion,
respectively. 3 Includes interest and dividend income.
3,179
2,810
451
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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
31.12.17
31.12.16
31.12.17
31.12.16
31.12.15
0.97
1.17
1.32
0.86
1.02
1.07
1.26
0.87
0.98
1.12
1.28
0.88
0.99
1.09
1.32
0.91
0.97
1.06
1.47
0.80
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
Events subsequent to the publication of the unaudited fourth
quarter 2017 report
The 2017 results and the balance sheet as of 31 December 2017
differ from those presented in the unaudited fourth quarter
2017 report published on 22 January 2018 as a result of events
adjusted for after the balance sheet date. Provisions for
litigation, regulatory and similar matters increased, which
reduced 2017 operating profit before tax by CHF 141 million,
2017 net profit attributable to shareholders by CHF 112 million,
and both basic and diluted earnings per share by CHF 0.03.
Integration of Wealth Management and Wealth Management
Americas into a single business division
Effective 1 February 2018, UBS is integrating its Wealth
Management and Wealth Management Americas business
divisions into a single Global Wealth Management business
division. The firm will report the results for Global Wealth
Management beginning with the first quarter of 2018.
→ Refer to Note 1c for more information on the change in
segment reporting
interest
Changes to the Pension Fund of UBS in Switzerland
As a result of the effects of continuing low and in some cases
return
rates, diminished
negative
expectations and increasing life expectancy, the Pension Fund of
UBS in Switzerland and UBS have agreed measures that will take
effect from the start of 2019 to support the long-term financial
stability of the Swiss pension fund. As a result, the conversion
investment
rate will be lowered, the regular retirement age and employee
contributions will be increased, and savings contributions will
start earlier. These measures will have no effect on current
pensioners of UBS.
To mitigate the effects of the reduction of the conversion rate
on future pensions, UBS will make a payment to employees’
retirement assets in the Swiss pension fund of up to CHF 720
million in three installments in 2020, 2021 and 2022.
In accordance with
International Financial Reporting
Standards (IFRS), these measures, including the portion of the
payment to be made by UBS that is attributable to past service,
will lead to a reduction in the pension obligation recognized by
UBS, resulting in a pre-tax gain of CHF 225 million in the first
quarter of 2018 with no overall effect on total equity and a
reduced pension service cost starting from January 2018. The
gain will be recognized as a reduction in personnel expense
within the income statement across the business divisions and
Corporate Center, with a corresponding effect
in Other
comprehensive income, as the Swiss pension plan is currently in
a surplus situation that cannot be recognized due to the IFRS
asset ceiling requirement. If the Swiss pension plan remains in an
asset ceiling position, the annual payments adjusted for
expected forfeitures are expected to reduce total equity by
approximately CHF 200 million per year over the installment
period, with no effect on the income statement.
→ Refer to Note 26 for more information on the Swiss pension
plan and the asset ceiling effect
452
Note 36 Main differences between IFRS and Swiss GAAP
IFRS
The consolidated financial statements of UBS Group AG are
prepared in accordance with International Financial Reporting
Standards
(IFRS). The Swiss Financial Market Supervisory
Authority (FINMA) requires financial groups that present their
financial statements under
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
immaterial to the Group or that are held temporarily only are
instead are recorded as
exempt from consolidation, but
participations accounted for under the equity method of
accounting or as financial investments measured at the lower of
cost or market value.
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 instruments with a
permanent holding intent are classified as participations in Non-
consolidated 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 non-consolidated subsidiaries and other participations.
Reversals 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. Hedge accounting
Under IFRS, when cash flow 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
fair value hedge accounting is applied, the fair value gains or
losses of the derivative and the hedged item are recognized in
the income statement.
Under Swiss GAAP, the effective portion of the fair value
change of the derivative instrument designated as a cash flow or
as fair value hedge is deferred on the balance sheet as Other
assets or Other liabilities. The carrying value of the hedged item
designated in fair value hedges is not adjusted for fair value
changes attributable to the hedged risk.
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 instruments, certain non-structured debt instruments, high-
quality liquid debt securities, structured reverse repurchase and
repurchase agreements and securities borrowing agreements,
certain structured 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.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
453
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
indefinite 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
financial
the UBS Switzerland AG standalone
statements. The requirements of Swiss GAAP are better aligned
with the specific 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 Pension 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 remeasurements are recognized in the income statement of
UBS AG standalone under Swiss GAAP.
Swiss GAAP requires that employer contributions to the
pension 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
requirements 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
counterparties, 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
collateral are generally reported on a net basis, provided the
master netting and the related collateral agreements are legally
enforceable 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
interest income, respectively.
Under Swiss GAAP, negative interest on financial assets is
presented 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
participations, 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. (cid:3)
454
Standalone
financial
statements
UBS Group AG standalone financial statements
Table of contents
457 UBS Group AG standalone financial statements
457
458
459
Income statement
Balance sheet
Statement of appropriation of retained earnings and
proposed dividend distribution out of capital contribution
reserve
464
465
465
466
466
466
466
467
12
13
14
15
16
17
18
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
460
461
1
2
Corporate information
Accounting policies
Income statement notes
3
Dividend income from investments in subsidiaries
Other operating income
Financial income
Personnel expenses
Other operating expenses
Financial expenses
4
5
6
7
8
468 Additional information
20 Guarantees
468
21
468
468
469
470
22
23
24
471
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
Liquid assets
Balance sheet notes
9
10 Marketable securities
11 Other short-term receivables
472
474
Report of the statutory auditor on the financial statements
Independent auditor’s report related to the issue of new
shares from conditional capital
463
463
463
463
463
463
463
464
464
464
464
456
UBS Group AG standalone financial
statements
Audited |
Income statement
CHF million
Dividend income from investments in subsidiaries
Other operating income
Financial income
OOperating income
Personnel expenses
Other operating expenses
Amortization of intangible assets
Financial expenses
OOperating expenses
Profit / (loss) before income taxes
Tax expense / (benefit)
NNet profit / (loss)
For the year ended
Note
331.12.17
3
4
5
6
7
8
10
129
580
719
20
97
4
547
668
51
4
47
31.12.16
5,684
44
475
6,202
23
34
0
512
569
5,633
27
5,606
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
457
UBS Group AG standalone financial statements
Balance sheet
CHF million
Assets
Liquid assets
Marketable securities
Other short-term receivables
Accrued income and prepaid expenses
TTotal current assets
Investments in subsidiaries
of which: investment in UBS AG
Financial assets
Prepaid assets
Other intangible assets
TTotal non-current assets
TTotal assets
of which: amounts due from subsidiaries
Liabilities
Current interest-bearing liabilities
Accrued expenses and deferred income
TTotal short-term liabilities
Long-term interest-bearing liabilities
Compensation-related long-term liabilities
TTotal long-term liabilities
TTotal liabilities
of which: amounts due to subsidiaries
Equity
Share capital
General reserves
of which: statutory capital reserve
of which: capital contribution reserve
Voluntary earnings reserve
Treasury shares
Reserve for own shares held by subsidiaries
Net profit / (loss)
EEquity attributable to shareholders
TTotal liabilities and equity
458
Note
331.12.17
31.12.16
9
10
11
12
13
14
15
16
17
18
19
2,543
100
710
437
3,790
40,441
40,126
8,742
9
16
49,208
52,998
12,064
1,640
1,871
3,511
7,882
3,311
11,193
14,704
1,853
385
32,683
32,683
32,683
7,323
(2,145)
1
47
38,294
52,998
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
1,716
(2,271)
2
5,606
40,324
53,751
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 3 May 2018 approve 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
Appropriation of retained earnings
Appropriation to voluntary earnings reserve
Retained earnings carried forward
For the year ended
31.12.17
47
0
47
(47)
0
Proposed dividend distribution out of capital contribution reserve
The Board of Directors proposes that the AGM on 3 May 2018
approve an ordinary dividend distribution of CHF 0.65 in cash
per share of CHF 0.10 par value payable out of the capital
contribution reserve. Provided that the proposed dividend
distribution out of the capital contribution reserve is approved,
the payment of CHF 0.65 per share will be made on 9 May 2018
to holders of shares on the record date 8 May 2018. The shares
will be traded ex-dividend as of 7 May 2018 and, accordingly,
the last day on which the shares may be traded with entitlement
to receive the dividend will be 4 May 2018.
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 0.65 per dividend-bearing share2
Total statutory capital reserve: capital contribution reserve after proposed distribution
31.12.17
32,683
(2,505)
30,179
1 The Swiss Federal Tax Administration’s current position is that, of the CHF 32.7 billion capital contribution reserve available as of 31 December 2017, an amount limited to CHF 18.0 billion is available from which
dividends may be paid without a Swiss withholding tax deduction. 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 2,505
million presented is based on the total number of shares issued as of 31 December 2017.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
459
UBS Group AG standalone 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,
Switzerland. UBS Group AG operates under article 620ff. of the
Swiss Code of Obligations as an Aktiengesellschaft, a
corporation limited by shares.
UBS Group AG is the ultimate holding company of the UBS
Group, the grantor of the majority of UBS’s deferred
compensation plans and issuer of long-term capital instruments.
Issuance of additional tier 1 capital instruments
During 2016 and 2015, UBS Group AG issued 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.
→ 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
2017, 2016 and 2015. These DCCP awards also qualify as Basel
III AT1 capital on a consolidated UBS Group basis.
As of 31 December 2017, UBS Group AG’s distributable items
for the purpose of AT1 capital instruments were CHF 37.8 billion
(31 December 2016: CHF 39.9 billion). For this purpose,
distributable items are defined in the terms and conditions of
the relevant instruments as the aggregate of (i) net profits
carried forward and (ii) freely distributable reserves, in each case,
less any amounts that must be contributed to legal reserves
under applicable law.
460
Note 2 Accounting policies
The UBS Group AG standalone financial statements are prepared
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
transaction. 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
income statement.
in the
in subsidiaries measured at historic cost are
Investments
translated at the spot exchange rate on the date of the
transaction. All currency translation effects are recognized in the
income statement.
The main currency translation rates used by UBS Group AG
are provided in Note 34 to the consolidated financial statements.
Marketable securities
include
securities
investments
in alternative
Marketable
investment vehicles (AIVs) with a short-term holding period. The
holding 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
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
impairment losses.
Financial assets further include loans granted to UBS AG that
substantially mirror the terms of AT1 perpetual capital notes
issued and fixed-term deposits with UBS AG with maturities
more than 12 months after the balance sheet date. The loans
and deposits are measured at nominal value.
→ Refer to Note 14 for more information
Derivative instruments
UBS Group AG uses derivative instruments to manage exposures
to foreign currency risks from investments in foreign subsidiaries.
The derivative instruments are entered into with UBS AG,
mirroring the conditions of the closing transactions UBS AG
enters into with external third parties.
Derivative instruments are measured at fair value based on
quoted market prices or other observable market prices as of the
balance sheet date. Unrealized gains and losses are recognized
as Accrued income and prepaid expenses and Accrued expenses
and deferred income, respectively. Corresponding gains and
losses resulting from fair value changes are recognized in
Financial income and Financial expenses, respectively.
Investments in subsidiaries
Investments in subsidiaries are equity interests that are held to
carry on the business of UBS Group or for other strategic
purposes. 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 UBS
Group
Treasury shares
Treasury shares acquired by UBS Group AG are recognized at
acquisition 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 settlement of related share awards, the realized
gains and losses on treasury 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
generally 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
461
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
UBS Group AG standalone 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
settled 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 compensated for with a loan from UBS AG to
UBS Group AG.
Equity participation plans
The grant date fair value of equity-settled share-based
compensation 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 Compensation-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
sale and hedge
restrictions, non-vesting conditions and market conditions,
where applicable.
into consideration post-vesting
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 market price of the treasury shares at settlement
and the grant date fair value of the share awards.
462
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
from
AIVs,
remeasurement of the
in Other
operating income and Other operating expenses, respectively.
liabilities are recognized
respectively. Gains
resulting
losses
and
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
its
to a
obligation toward employees.
representing
liability
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
disclosures
financial statements. The
dispensations include the management report and the statement
of cash flows, as well as certain note disclosures.
the standalone
in
Income statement notes
Note 3 Dividend income from investments in subsidiaries
Dividend income from investments in subsidiaries in 2017
consists of CHF 5 million received from UBS Business Solutions
AG related to the financial year ended 31 December 2016,
which was approved by the Annual General Meeting of
Shareholders of UBS Business Solutions AG on 27 April 2017,
and CHF 5 million received from UBS Group Funding (Jersey) Ltd.
in the course of the liquidation of the entity, which was
dissolved on 24 November 2017. In 2016, dividend from
investments in subsidiaries consisted of CHF 3,434 million and
CHF 2,250 million received from UBS AG related to the financial
years ended 31 December 2015 and 31 December 2016,
respectively.
Note 4 Other operating income
CHF million
Fair value gains on AIV awards
Gains related to equity-settled awards1
Amortization of net liability related to deferred compensation plan transfer
Commission income from guarantees issued
Total other operating income
1 Gains related to equity-settled awards in 2017 include the release of hidden reserves of CHF 88 million (2016: CHF 0).
Note 5 Financial income
CHF million
Fair value gains on marketable securities and financial assets
Interest income on long-term receivables from UBS AG
Interest income on liquid assets
Foreign currency translation gains
Total financial income
Note 6 Personnel expenses
For the year ended
31.12.17
0
104
1
24
129
For the year ended
31.12.17
49
525
5
0
580
31.12.16
6
24
2
12
44
31.12.16
0
470
0
4
475
Personnel expenses include recharges from UBS AG and UBS
Business Solutions AG for personnel-related costs for activities
performed by the personnel of those companies for the benefit
of UBS Group AG.
UBS Group AG had no employees throughout 2017 and
2016. 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
2017, the UBS Group employed 61,253 personnel (31 December
2016: 59,387) on a full-time equivalent basis.
Note 7 Other operating expenses
CHF million
Fair value losses on AIV awards
Losses related to equity-settled awards
Capital 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
31.12.17
48
18
14
16
97
For the year ended
31.12.17
0
2
12
532
1
547
31.12.16
0
3
13
18
35
31.12.16
3
3
35
469
2
512
463
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
UBS Group AG standalone financial statements
Balance sheet notes
Note 9 Liquid assets
As of 31 December 2017, liquid assets comprised CHF 1,663 million held on current accounts at UBS Switzerland AG and UBS AG
and CHF 880 million of time deposits placed with UBS 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
CHF million
Receivables from UBS AG1
Loans to UBS Business Solutions AG
Receivables from employing entities related to compensation awards
Other
Total other short-term receivables
1 Receivables from UBS AG as of 31 December 2016 related to the dividend for the financial year ended 31 December 2016. Refer to Note 3 for more information.
Note 12 Accrued income and prepaid expenses
CHF million
Accrued interest income
Other accrued income and prepaid expenses
Total accrued income and prepaid expenses
31.12.17
0
80
621
9
710
31.12.16
2,250
0
557
23
2,830
31.12.17
31.12.16
368
69
437
375
93
469
464
Note 13 Investments in subsidiaries
Unless otherwise stated, the subsidiaries listed 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
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 Germany,
Italy, Luxembourg, Spain and Austria.
In 2017, UBS transferred shared services functions
in
Switzerland from UBS AG to UBS Business Solutions AG. This
transfer resulted in a decrease of the investment value of UBS
AG by CHF 250 million and a corresponding increase in the
investment value of UBS Business Solutions AG.
UBS Group Funding (Jersey) Ltd. was dissolved in 2017.
Subsidiaries of UBS Group AG as of 31 December 2017
Company
UBS AG
Registered office
Zurich and Basel, Switzerland
UBS Business Solutions AG1
UBS Group Funding (Switzerland) AG
Zurich, Switzerland
Zurich, Switzerland
1 UBS Business Solutions (India) Private Limited and UBS Business Solutions Poland Sp. z o.o. are directly held subsidiaries of UBS Business Solutions AG.
Individually significant subsidiaries of UBS AG as of 31 December 2017
Company
UBS Americas Holding LLC
UBS Asset Management AG
UBS Bank USA
UBS Europe SE
Registered office
Wilmington, Delaware, USA
Primary business division
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
385.8
CHF
CHF
CHF
1.0
0.1
Equity interest
accumulated in %
100.0
100.0
100.0
Share capital in million
2,250.01
USD
CHF
USD
EUR
USD
GBP
USD
CHF
43.2
0.0
446.0
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.
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 regulations.
→ 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
Long-term receivables from UBS Business Solutions AG
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.
31.12.17
8,247
205
286
4
8,742
31.12.16
7,865
0
291
6
8,162
465
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
UBS Group AG standalone 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
Note 16 Long-term interest-bearing liabilities
31.12.17
6
1,461
486
975
356
47
1,871
31.12.16
1
1,048
93
955
374
65
1,487
Long-term interest-bearing liabilities totaled CHF 7,882 million as of 31 December 2017 comprising CHF 7,677 million of notes
issued and CHF 205 million of fixed-term loans from UBS AG.
Notes issued, overview by amount, maturity and coupon
31.12.17
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 notes issued
Carrying value
in transaction
currency
Carrying value
in CHF
Maturity1
Coupon1
1,000
1,250
1,250
1,575
1,500
1,100
1,170
19.02.22
5.750%
1,218
19.02.25
7.000%
1,218
19.02.20
7.125%
1,535
07.08.25
6.875%
1,462
22.03.21
6.875%
1,072
7,677
10.08.21
7.125%
31.12.16
Carrying value
in transaction
currency
Carrying value
in CHF
1,000
1,250
1,250
1,575
1,500
1,100
1,071
1,272
1,272
1,603
1,527
1,120
7,865
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
Note 18 Share capital
31.12.17
31.12.16
3
3,308
1,504
1,804
3,311
10
3,469
1,532
1,937
3,479
As of 31 December 2017, the issued share capital consisted of 3,853,096,603 (31 December 2016: 3,850,766,389) registered
shares at a par value of CHF 0.10 each.
→ Refer to “UBS shares” in the “Capital management” section of this report for more information on UBS Group AG shares
466
Note 19 Treasury shares
Balance as of 31 December 2015
of which: treasury shares held by UBS Group AG
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 AG 1
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 2017
of which: treasury shares held by UBS Group AG 1
of which: treasury shares held by UBS AG and other subsidiaries
Number of registered shares
Average price in CHF
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
54,828,640
(1,689,932)
(59,278,930)
132,301,550
132,211,630
89,920
1 Treasury shares held by UBS Group AG had a carrying value of CHF 2,145 million as of 31 December 2017 (31 December 2016: CHF 2,271 million).
17.51
17.50
19.51
15.49
17.82
16.86
16.41
16.41
16.06
15.87
16.23
16.32
16.23
16.23
17.54
467
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
UBS Group AG standalone financial statements
Additional information
Note 20 Guarantees
As of 31 December 2017, UBS Group Funding (Switzerland) AG,
a subsidiary of UBS Group AG, had issued CHF 27,706 million
equivalent of senior debt (31 December 2016: CHF 17,281
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 (Switzerland) AG.
Note 21 Assets pledged to secure own liabilities
As of 31 December 2017, total pledged assets of UBS Group AG
amounted to CHF 4,337 million. These assets consisted of
certain liquid assets, marketable securities and financial assets
and were pledged to UBS AG. As of 31 December 2016, total
pledged assets of UBS Group AG amounted to CHF 4,134
million. The associated liabilities secured by these pledged assets
were CHF 1,800 million and CHF 524 million as of 31 December
2017 and 31 December 2016, 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.
468
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
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.
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
Financial Market Infrastructure (FMIO-FINMA). In particular, the
FMIO-FINMA sets forth that nominee companies that cannot
autonomously 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, the following
entities held more than 3% of the total share capital of UBS
Group AG as of 31 December 2017: BlackRock Inc., New York,
disclosed a holding of 5.01% of the total share capital of UBS
Group AG on 29 December 2017; MFS
Investment
Management, Boston, disclosed a holding of 3.05% on 10
February 2016; and Norges Bank, Oslo, the Central Bank of
Norway, disclosed a holding of 3.30% on 10 December 2014.
31.12.17
31.12.16
11.16
6.64
4.11
9.43
6.62
3.88
With the exception of BlackRock Inc., New York, with a
disclosed holding of 5.02% of the total share capital of UBS
Group AG on 5 March 2018, the above disclosures have not
been subsequently superseded and no new disclosures of
significant shareholdings have been notified since 31 December
2017.
In accordance with the FMIA, the aforementioned holdings
are calculated in relation to the total share capital of UBS Group
AG reflected in its Articles of Association at the time of the
respective disclosure notification.
Shareholders who notified a significant shareholding in
accordance with the abovementioned requirements may or
may not be recorded in the UBS share register, and therefore
table above.
they may not necessarily appear
Information on disclosures under the FMIA is available at
www.six-exchange-regulation.com/en/home/publications/
significant-shareholders.html.
the
in
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 2017 or as of 31 December 2016.
Cross-shareholdings
UBS Group AG has no cross-shareholdings in excess of a
reciprocal ownership of 5% of capital or voting rights with any
other company.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
469
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
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 31.12.17
For the year ended 31.12.16
Number of shares
416,980
2,720,614
61,152,037
64,289,631
Value of shares
in CHF million
7
43
874
923
Number of shares
411,962
2,572,329
79,900,730
82,885,021
Value of shares
in CHF million
6
39
1,107
1,152
→ 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
William G. Parrett, member
Julie G. Richardson, member2
Isabelle Romy, member
Robert W. Scully, member
Beatrice Weder di Mauro, member
Dieter Wemmer, member
Joseph Yam, former member2
Total
oon 31 December
2017
Number of shares held
642,100
Voting rights in %
0.037
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
635,751
290,694
254,287
154,672
205,540
76,772
51,567
232,263
201,457
106,916
104,385
0
–
94,376
91,038
29,917
0
126,809
99,737
14,002
0
–
109,938
1,768,521
0.038
0.017
0.015
0.009
0.012
0.004
0.003
0.013
0.012
0.006
0.006
–
–
0.005
0.005
0.002
0.000
0.007
0.006
0.001
0.000
–
0.007
0.102
0.104
1 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2017 and 2016. 2 Julie G. Richardson was newly elected and Joseph Yam
stepped down from the BoD at the AGM on 4 May 2017.
1,753,700
2016
470
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, Co-President Global Wealth Management
Christian Bluhm, Group Chief Risk Officer
Markus U. Diethelm, Group General Counsel
Kirt Gardner, Group Chief Financial Officer
Sabine Keller-Busse, Group Chief Operating Officer
Ulrich Körner, President Asset Management and
President UBS EMEA
Axel P. Lehmann, President Personal & Corporate Banking
and President UBS Switzerland
Tom Naratil, Co-President Global Wealth Management and
President UBS Americas
Andrea Orcel, President Investment Bank
Kathryn Shih, President UBS Asia Pacific
Jürg Zeltner, former President Wealth Management
Total
on
31 December
2017
Number of
unvested
shares / at risk2
1,632,464
Number of
vested shares
460,377
Total number of
shares
2,092,841
Potentially
conferred
voting
rights in %
0.121
Potentially
conferred
voting
rights in %4
0.000
Number of
options3
0
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
1,365,537
65,761
265,515
0
1,631,052
65,761
0
131,520
0
589,659
538,520
264,718
142,646
244,676
200,272
881,979
797,165
156,180
0
1,047,311
838,193
1,328,113
1,203,535
581,546
567,777
976,001
881,976
0
0
0
194,000
154,820
61,652
38,581
176,602
120,897
95,597
95,597
277,978
277,978
422,298
352,634
251,439
184,220
0
0
1,075
1,075
0
131,520
0
783,659
693,340
326,370
181,227
421,278
321,169
977,576
892,762
434,158
277,978
1,469,609
1,190,827
1,579,552
1,387,755
581,546
567,777
977,076
883,051
7,899,928
1,941,018
9,840,946
0.097
0.004
0.000
0.008
0.000
0.045
0.041
0.019
0.011
0.024
0.019
0.057
0.053
0.025
0.017
0.085
0.071
0.091
0.083
0.034
0.034
0.057
0.053
0.569
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
281,640
412,917
0
0
74,599
143,869
42,628
64,164
398,867
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.016
0.025
0.000
0.000
0.004
0.009
0.002
0.004
0.023
0.037
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 2017” section of this report for more information on the plans.
3 Refer to “Note 27 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
8,049,832
1,514,211
6,535,621
620,950
0.479
2016
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
31.12.17
31.12.16
166
77
89
119
51
68
(cid:3)
471
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Ernst & Young Ltd
Aeschengraben 9
P.O. Box
CH-4002 Basel
Phone
Fax
www.ey.com/ch
+41 58 286 86 86
+41 58 286 86 00
To the General Meeting of
UBS Group AG, Zurich
Basel, 8 March 2018
Report of the statutory auditor on the financial statements
As statutory auditor, we have audited the financial statements of UBS Group AG, which comprise the balance
sheet, income statement and notes, for the year ended 31 December 2017.
Board of Directors’ responsibility
The Board of Directors is responsible for the preparation of the financial statements in accordance with the
requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing,
implementing and maintaining an internal control system relevant to the preparation of financial statements
that are free from material misstatement, whether due to fraud or error. The Board of Directors is further
responsible for selecting and applying appropriate accounting policies and making accounting estimates that
are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted
our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An
audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of
accounting estimates made, as well as evaluating the overall presentation of the financial statements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements for the year ended 31 December 2017 comply with Swiss law and the
company’s articles of incorporation.
Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current period. We have determined that there are no key audit matters to
communicate in our report.
Report on other legal requirements
We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA)
and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible
with our independence.
472
Page 2
In accordance with article 728a para. 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an
internal control system exists, which has been designed for the preparation of financial statements according
to the instructions of the Board of Directors.
We further confirm that the proposed appropriation of available earnings complies with Swiss law and the
company’s articles of incorporation. We recommend that the financial statements submitted to you be
approved.
Ernst & Young Ltd
Marie-Laure Delarue
Licensed audit expert
(Auditor in charge)
Bruno Patusi
Licensed audit expert
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
473
474
Significant
regulated
subsidiary and
sub-group
information
Significant regulated subsidiary and sub-group information
Financial and regulatory key figures
for our significant regulated subsidiaries
and sub-groups
As of or for the year ended
Financial information2,3,4
Income statement
Total operating income
Total operating expenses
Operating profit / (loss) before tax
Net profit / (loss)
Balance sheet
Total assets
Total liabilities
Total equity
Capital5,6
Common equity tier 1 capital
Additional tier 1 capital
Tier 1 capital
Total going concern capital
Tier 2 capital
Total gone concern loss-absorbing capacity
Total capital
Total loss-absorbing capacity
UBS AG
(standalone)
CHF million,
except where indicated
31.12.16
331.12.17
UBS Switzerland AG
(standalone)
CHF million,
except where indicated
31.12.16
331.12.17
UBS Limited
(standalone)
GBP million,
except where indicated
31.12.161
331.12.17
UBS Americas Holding LLC
(consolidated)
USD million,
except where indicated
331.12.17
31.12.161
110,297
99,837
4460
9909
15,111
13,352
1,759
3,244
88,350
66,419
11,931
11,513
8,341
6,644
1,697
1,313
4476,977
4427,030
449,947
439,476
387,937
51,539
2290,310
2275,525
114,785
294,497
281,034
13,463
448,374
33,666
552,040
559,914
33,983
0
33,983
0
33,983
110,160
33,000
113,160
113,160
10,416
1,2357
11,651
11,651
88,400
3,2657
221,560
14,916
7796
5599
1197
1114
335,569
332,761
22,808
22,344
2235
22,579
762
565
197
26
40,663
37,789
2,874
2,521
235
2,756
112,019
110,717
11,302
((1,689)
1140,698
1117,869
222,829
110,839
11,178
112,017
10,610
10,471
139
1,413
137,699
113,151
24,548
11,598
0
11,598
6685
687
7722
722
33,263
3,442
112,739
12,320
Risk-weighted assets and leverage ratio denominator5,6
Risk-weighted assets
Leverage ratio denominator
2277,529
5599,727
232,422
561,979
992,894
3302,987
93,281
306,586
110,473
336,409
11,081
35,793
449,558
1135,705
51,488
140,112
Capital and leverage ratios (%)5,6
Common equity tier 1 capital ratio
Tier 1 capital ratio
Going concern capital ratio
Total capital ratio
Total loss-absorbing capacity ratio
Leverage ratio8
Total loss-absorbing capacity leverage ratio
Liquidity6,9,10
High-quality liquid assets (billion)
Net cash outflows (billion)
Liquidity coverage ratio (%)
117.4
221.6
110.0
887
666
1132
14.6
14.6
14.6
6.0
98
76
129
110.9
114.2
223.2
77.1
669
448
1144
11.2
12.5
16.0
4.9
75
63
120
222.4
224.6
331.2
77.1
66
11
4454
22.8
24.9
31.1
7.7
221.9
224.2
225.7
88.9
22.5
22.5
23.9
8.3
00
1
669
Other
Joint and several liability between UBS AG and UBS Switzerland AG
(billion)11
11 Figures as of or for the year ended 31 December 2016 have been adjusted for consistency with the full year financial statements and local regulatory reporting of the respective entity, which were finalized after
the publication date of UBS Annual Report 2016. 2 UBS AG and UBS Switzerland AG financial information is prepared in accordance with Swiss GAAP (FINMA Circular 2015/1 and Banking Ordinance), but does
not represent financial statements under Swiss GAAP. 3 UBS Limited financial information is prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the EU, but does not
represent financial statements under IFRS. 4 UBS Americas Holding LLC financial information is prepared in accordance with accounting principles generally accepted in the US (US GAAP), but does not represent
financial statements under US GAAP. 5 For UBS AG and UBS Switzerland AG, based on the applicable phase-in rules for Swiss systemically relevant banks (SRBs). Since 1 July 2017, UBS AG is subject to going
concern capital requirements, following the implementation of the FINMA decree issued on 20 October 2017. 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. 6 Refer to the 31
December 2017 Pillar 3 report – Group and significant regulated subsidiaries and sub-groups under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 7 Under the Swiss SRB rules, going
concern capital includes CET1 and high-trigger loss-absorbing additional tier 1 capital. Outstanding low-trigger loss-absorbing tier 2 capital instruments would qualify as going concern capital 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 was used to meet the gone concern requirements. 8 For UBS AG, on the basis of going concern capital as of 31 December 2017 and on the basis of total capital as of 31 December
2016. On the basis of tier 1 capital for UBS Limited and UBS Americas Holding LLC. 9 There was no local disclosure requirement for liquidity coverage ratio for UBS Limited as of 31 December 2016 or for UBS
Americas Holding LLC as of 31 December 2017 and 31 December 2016. 10 For UBS Limited, the values represent a twelve-month average of the respective month-end balances in 2017 in line with the European
Banking Authority guidelines on the liquidity coverage ratio disclosure (EBA/GL/2017/01). Including PRA Pillar 2 requirements, the equivalent average ratio for 2017 was 187%. 11 Refer to the “Capital
management” section of this report for more information on the joint and several liability. Under certain circumstances, the Swiss Banking Act and FINMA’s Banking 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.
91
476
The table in this section summarizes the regulatory capital
components and capital ratios of our significant regulated
subsidiaries and sub-groups determined under the regulatory
framework of each subsidiary’s or sub-group’s home jurisdiction.
→ Refer to “Capital and capital ratios of our significant regulated
subsidiaries” in the “Capital management” section of this report
for more information
→ Refer to “Note 23 Restricted and transferred financial assets” in
the “Consolidated financial statements” section of this report
for more information.
Standalone regulatory information for UBS AG, UBS Switzerland
AG and UBS Limited as well as consolidated regulatory information
for UBS Americas Holding LLC is provided in the 31 December
2017 Pillar 3 report – Group and significant regulated subsidiaries
and sub-groups, which is available under “Pillar 3 disclosures” at
www.ubs.com/investors. Standalone financial statements for UBS
Group AG as well as standalone financial statements and
regulatory information for UBS AG, UBS Switzerland AG and
UBS Limited are available under “Holding company and significant
regulatory
at
www.ubs.com/investors.
sub-groups”
subsidiaries
and
477
d
n
a
i
y
r
a
d
i
s
b
u
s
l
d
e
t
a
u
g
e
r
t
n
a
c
fi
n
g
S
i
i
n
o
i
t
a
m
r
o
f
n
i
p
u
o
r
g
-
b
u
s
Appendix
Abbreviations frequently used in our financial reports
commercial mortgage-
backed security
EU Capital Requirements
Directive of 2013
credit risk mitigation (credit
risk) or comprehensive risk
measure (market risk)
combined stress test
credit valuation adjustment
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
exposure at default
European Banking
Authority
European Commission
European Central Bank
expected credit loss
effective interest rate
Europe, Middle East and
Africa
Equity Ownership Plan
earnings per share
Employee Retirement
Income Security Act of
1974
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
Infrastructures and Market
Conduct in Securities and
Derivatives Trading
FINMA Ordinance on
Financial Market
Infrastructure
forward rate agreement
UK Financial Services
Authority
Financial Stability Board
first to default
funding valuation
adjustment
foreign exchange
G
GAAP
GBP
GEB
GHG
GIA
GIIPS
generally accepted
accounting principles
British pound
Group Executive Board
greenhouse gas
Group Internal Audit
Greece, Italy, Ireland,
Portugal and Spain
Group Managing Director
GMD
GRI
Global Reporting Initiative
Group ALM Group Asset and Liability
Management
global systemically
important bank
G-SIB
H
HQLA
high-quality liquid assets
CMBS
CRD IV
CRM
CST
CVA
D
DBO
DCCP
DOJ
DTA
DVA
E
EAD
EBA
EC
ECB
ECL
EIR
EMEA
EOP
EPS
ERISA
ETD
ETF
EU
EUR
EURIBOR
asset-backed security
annual general meeting of
shareholders
advanced internal ratings-
based
alternative investment
vehicle
Asset and Liability
Management Committee
advanced measurement
approach
Articles of Association of
UBS Group AG
additional tier 1
base erosion and anti-
abuse tax
Basel Committee on
Banking Supervision
Bank for International
Settlements
Board of Directors
Corporate Center
Comprehensive Capital
Analysis and Review
credit conversion factor
central counterparty
counterparty credit risk
Corporate Culture and
Responsibility Committee
collateralized debt
obligation
constant default rate
credit default swap
Commodity Exchange Act
Chief Executive Officer
common equity tier 1
Chief Financial Officer
Commodity Futures
Trading Commission
Swiss franc
credit-linked note
collateralized loan
obligation
A
ABS
AGM
A-IRB
AIV
ALCO
AMA
AoA
AT1
B
BEAT
BCBS
BIS
BoD
C
CC
CCAR
CCF
CCP
CCR
CCRC
CDO
CDR
CDS
CEA
CEO
CET1
CFO
CFTC
CHF
CLN
CLO
478
Abbreviations frequently used in our financial reports (continued)
O
OCI
OTC
P
PD
PFE
PRA
PRV
Q
QRRE
R
RBA
RBC
RLN
RMBS
RniV
RoAE
RoE
RoTE
RV
RW
RWA
other comprehensive
income
over-the-counter
probability of default
potential future exposure
UK Prudential Regulation
Authority
positive replacement value
qualifying revolving retail
exposures
ratings-based approach
risk-based capital
reference-linked note
residential mortgage-
backed security
risks-not-in-VaR
return on attributed equity
return on equity
return on tangible equity
replacement value
risk weight
risk-weighted assets
I
IAS
IASB
IFRS
IMM
IRB
IRC
ISDA
K
KPI
KRT
L
LAS
LCR
LGD
LIBOR
LRD
LTV
M
MiFID II
MiFIR
MRT
MTN
N
NAV
NII
NPA
NRV
NSFR
International Accounting
Standards
International Accounting
Standards Board
International Financial
Reporting Standards
internal model method
internal ratings-based
incremental risk charge
International Swaps and
Derivatives Association
key performance indicator
Key Risk Taker
liquidity-adjusted stress
liquidity coverage ratio
loss given default
London Interbank Offered
Rate
leverage ratio denominator
loan-to-value
Markets in Financial
Instruments Directive II
Markets in Financial
Instruments associated
Regulation
Material Risk Taker
medium-term note
net asset value
net interest income
non-prosecution
agreement
negative replacement
value
net stable funding ratio
S
SA
SA-CCR
SAR
SE
SEC
SEEOP
SFA
SESTA
SESTO
SFT
SI
SICR
SME
SMF
SNB
SRB
SRM
SVaR
T
TBTF
TCJA
TLAC
TRS
U
USD
V
VaR
standardized approach
standardized approach for
counterparty credit risk
stock appreciation right
structured entity
US Securities and
Exchange Commission
Senior Executive Equity
Ownership Plan
supervisory formula
approach
Swiss Federal Act on Stock
Exchanges and Securities
Trading
FINMA Ordinance on Stock
Exchanges and Securities
Trading
securities financing
transaction
sustainable investing
significant increase in
credit risk
small and medium-sized
enterprises
Senior Management
Function
Swiss National Bank
systemically relevant bank
specific risk measure
stressed value-at-risk
too big to fail
Tax Cuts and Jobs Act
total loss-absorbing
capacity
total return swap
US dollar
value-at-risk
479
Information sources
Reporting publications
Other information
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
corporate 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: Email alerts to news about UBS can be
subscribed to under ”UBS News Alert” at www.ubs.com/investors.
Messages are sent in English, German, French or Italian, with an
option to select theme preferences for such alerts.
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 presented 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 on the SEC’s website www.sec.gov, or at the SEC’s
public reference room at 100 F Street, N.E., Room 1580,
Washington, DC, 20549. Call the SEC on +1-800-SEC-0330 for
more information on the operation of its public reference room.
Refer to www.ubs.com/investors for more information.
including
framework,
Annual publications: Annual Report
(SAP no. 80531):
Published in English, 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,
responsibility and our
corporate governance, corporate
compensation
on
information
compensation for the Board of Directors and the Group
Executive Board members; and financial information, including
the financial statements. Auszug aus dem Geschäftsbericht (SAP
no. 80531): This publication provides the translation into
German of selected sections of the Annual Report. Annual
Review (SAP no. 80530): The booklet contains key information
on our strategy and performance, with a focus on corporate
responsibility at UBS. It is published in English, German, French
and Italian. Compensation Report (SAP no. 82307): The report
discusses our
and provides
information on compensation for the Board of Directors and the
Group Executive Board members. It is available in English and
German.
compensation
framework
Quarterly publications: The quarterly financial report provides
an update on our strategy and performance for the respective
quarter. It is available in English.
free of charge. For annual publications
How to order publications: The annual and quarterly
publications are available in PDF at www.ubs.com/investors in
the “UBS Group AG and UBS AG consolidated financial
information” section, and printed copies can be requested from
UBS
to
www.ubs.com/investors 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.
refer
480
Cautionary Statement Regarding Forward-Looking Statements | This report contains statements that constitute “forward-looking statements,” including
but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic
initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the
matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s
expectations. These factors include, but are not limited to: (i) the degree to which UBS is successful in the ongoing execution of its strategic plans, including its
cost reduction and efficiency initiatives and its ability to manage its levels of risk-weighted assets (RWA), including to counteract regulatory-driven increases,
leverage ratio denominator, liquidity coverage ratio and other financial resources, and the degree to which UBS is successful in implementing changes to its
businesses to meet changing market, regulatory and other conditions; (ii) continuing low or negative interest rate environment, developments in the
macroeconomic climate and in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads,
and currency exchange rates, and the effects of economic conditions, market developments, and geopolitical tensions on the financial position or
creditworthiness of UBS’s clients and counterparties as well as on client sentiment and levels of activity; (iii) changes in the availability of capital and funding,
including any changes in UBS’s credit spreads and ratings, as well as availability and cost of funding to meet requirements for debt eligible for total loss-
absorbing capacity (TLAC); (iv) changes in or the implementation of financial legislation and regulation in Switzerland, the US, the UK and other financial
centers that have imposed, or resulted in, or may do so in the future, more stringent or entity-specific capital, TLAC, leverage ratio, liquidity and funding
requirements, incremental tax requirements, additional levies, limitations on permitted activities, constraints on remuneration, constraints on transfers of capital
and liquidity and sharing of operational costs across the Group or other measures, and the effect these will or would have on UBS’s business activities; (v) the
degree to which UBS is successful in implementing further changes to its legal structure to improve its resolvability and meet related regulatory requirements,
including changes in legal structure and reporting required to implement US enhanced prudential standards, and the potential need to make further changes
to the legal structure or booking model of UBS Group in response to legal and regulatory requirements, to proposals in Switzerland and other jurisdictions for
mandatory structural reform of banks or systemically important institutions or to other external developments, and the extent to which such changes will have
the intended effects; (vi) uncertainty as to the extent to which the Swiss Financial Market Supervisory Authority (FINMA) will confirm limited reductions of gone
concern requirements due to measures to reduce resolvability risk; (vii) the uncertainty arising from the timing and nature of the UK exit from the EU and the
potential need to make changes in UBS’s legal structure and operations as a result of it; (viii) changes in UBS’s competitive position, including whether
differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s ability to compete in certain lines of
business; (ix) changes in the standards of conduct applicable to our businesses that may result from new regulation or new enforcement of existing standards,
including recently enacted and proposed measures to impose new and enhanced duties when interacting with customers and in the execution and handling of
customer transactions; (x) the liability to which UBS may be exposed, or possible constraints or sanctions that regulatory authorities might impose on UBS, due
to litigation, contractual claims and regulatory investigations, including the potential for disqualification from certain businesses or loss of licenses or privileges
as a result of regulatory or other governmental sanctions, as well as the effect that litigation, regulatory and similar matters have on the operational risk
component of our RWA; (xi) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies
and practices relating to this business; (xii) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control
its businesses, which may be affected by competitive factors including differences in compensation practices; (xiii) changes in accounting or tax standards or
policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and
other matters, including from changes to US taxation under the Tax Cuts and Jobs Act; (xiv) UBS’s ability to implement new technologies and business
methods, including digital services and technologies and ability to successfully compete with both existing and new financial service providers, some of which
may not be regulated to the same extent; (xv) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and
modeling, and of financial models generally; (xvi) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime,
cyberattacks, and systems failures; (xvii) restrictions on the ability of UBS Group AG to make payments or distributions, including due to restrictions on the
ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficulties, due to the exercise by FINMA or the
regulators of UBS’s operations in other countries of their broad statutory powers in relation to protective measures, restructuring and liquidation proceedings;
(xviii) the degree to which changes in regulation, capital or legal structure, financial results or other factors may affect UBS’s ability to maintain its stated capital
return objective; and (xix) the effect that these or other factors or unanticipated events may have on our reputation and the additional consequences that this
may have on our business and performance. The sequence in which the factors above are presented is not indicative of their likelihood of occurrence or the
potential magnitude of their consequences. Our business and financial performance could be affected by other factors identified in our past and future filings
and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by
UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2017. 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.
481
UBS Group AG
P.O. Box
CH-8098 Zurich
ubs.com