UBS Group AG
Annual Report 2018
Our external reporting approach
www.ubs.com/annualreporting
Annual Report 2018 –
UBS Group AG and UBS AG
SEC Form 20-F, including XBRL filing
UBS Group AG SEC
UBS AG
USD
SEC
Annual Report 2018 –
UBS Group AG
This document is at the center of our
external reporting approach.
UBS Group AG
MG
MT
USD USD
UBS AG i
UBS Switzerland AG i
UBS Americas Holding LLC i
UBS Limited i
Standalone legal entity reports
UBS Switzerland AG
UBS AG
UBS Group
Funding
(Switzerland) AG
CHF
USD
USD
Standalone legal entity reports for UBS AG, UBS
Switzerland AG and UBS Group Funding (Switzerland) AG
are available from 15 March 2019. UBS Limited was
merged into UBS Europe SE effective 1 March 2019.
UBS Europe SE will be considered a signifi cant regulated
subsidiary and beginning with our fi rst quarter 2019
reporting, we will provide respective information in our
quarterly and annual reporting. 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.
Other legal entity-specifi c disclosures in accordance with
article 89 of the EU Capital Requirements Directive IV
(CRD IV) are provided under “EU CRD IV disclosures”
at www.ubs.com/investors.
Consolidated
Standalone
Information for UBS AG con solidated does not differ
materially from UBS Group AG on a consoli dated basis.
Information provided in management’s discussion
and analysis applies to 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(cid:124)AG consoli dated is
separately provided.
Auszug aus dem
Geschäftsbericht 2018 –
UBS Group AG
UBS Group AG
MG
MT
USD USD
The German translation includes the following
sections of our Annual Report 2018: “Group
performance,” IFRS-required disclosures
in “Risk, treasury and capital management,”
“Corporate governance,” “Compensation” and
consoli dated and standalone fi nancial
statements for UBS Group AG.
31 December 2018 Pillar 3 report
UBS Group and significant regulated
subsidiaries and sub-groups
(UBS Group AG, UBS AG,
UBS Switzerland AG, UBS Limited,
UBS Americas Holding LLC)
Select Swiss
franc disclosures
UBS Group AG
i
UBS AG
i
i
Global Reporting
Initiative (GRI)
Document 2018
UBS Group AG GRI
The GRI Document provides
comprehensive disclosures on
environmental, social and governance
factors and includes the disclosures
on non-fi nancial information required
by German law implementing the
EU Directive 2014/95 (CSR-Richtlinie-
Umsetzungsgesetz, CSR-RUG).
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 specifi c additional requirements
of the Swiss Financial Market Supervisory
Authority (FINMA) and voluntary disclosures on
our part. We are also required to disclose
certain regulatory information for our signifi cant
regulated subsidiaries and sub-groups.
MG
MT
Management’s discussion and analysis
SEC
Supplemental SEC disclosures
USD
CHF
Financial statements
i
Selected financial and regulatory information
GRI
Global Reporting Initiative
Our external reporting requirements and the scope of our external
reports are defined by accounting standards, relevant stock and
debt listing rules, SEC (US Securities and Exchange Commission) and
other regulatory requirements, as well as by our financial reporting
policies.
We 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 the SIX
Swiss Exchange and the New York Stock Exchange, where our
shares are listed. We also publish our results on a quarterly basis in
order to provide shareholders with more frequent disclosures than
required by law. 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 complements our
IFRS financial statements.
The Annual Report 2018 – UBS Group AG and UBS AG is the
basis for our SEC Form 20-F filing, which includes Extensible
Business Reporting Language (XBRL) interactive financial data, as
required for non-US private issuers that prepare financial statements
in accordance with IFRS.
Our approach to long-term value creation
› What we put into the equation
(cid:57)(cid:71)(cid:2)(cid:70)(cid:71)(cid:82)(cid:78)(cid:81)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:101)
(cid:101)(cid:2)(cid:86)(cid:81)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:2)(cid:67)(cid:70)(cid:70)(cid:71)(cid:70)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)
(cid:2) (cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:88)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)
(cid:40)inan(cid:69)ia(cid:78)
•(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:81)(cid:80)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:86)(cid:75)(cid:71)(cid:84)(cid:2)(cid:19)(cid:2)(cid:10)(cid:37)(cid:39)(cid:54)(cid:19)(cid:11)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)USD 34.1 billion
•(cid:2)(cid:54)(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:28)(cid:2)USD 84 billion
•(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:15)(cid:89)(cid:71)(cid:75)(cid:73)(cid:74)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:28)(cid:2)USD 264 billion
•(cid:2)(cid:46)(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:70)(cid:71)(cid:80)(cid:81)(cid:79)(cid:75)(cid:80)(cid:67)(cid:86)(cid:81)(cid:84)(cid:28)(cid:2)USD 905 billion
•(cid:2)(cid:53)(cid:86)(cid:84)(cid:81)(cid:80)(cid:73)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:85)(cid:74)(cid:71)(cid:71)(cid:86)(cid:2)(cid:84)(cid:71)(cid:387)(cid:71)(cid:69)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:74)(cid:75)(cid:73)(cid:74)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:81)(cid:89)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:82)(cid:84)(cid:81)(cid:386)(cid:78)(cid:71)(cid:14)(cid:2)
(cid:2) (cid:71)(cid:16)(cid:73)(cid:16)(cid:14)(cid:2)(cid:74)(cid:75)(cid:73)(cid:74)(cid:15)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:78)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:28)(cid:2)USD 173 billion
•(cid:2)(cid:57)(cid:71)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:71)(cid:69)(cid:74)(cid:80)(cid:81)(cid:78)(cid:81)(cid:73)(cid:91)(cid:2)(cid:86)(cid:81)(cid:2)(cid:71)(cid:80)(cid:74)(cid:67)(cid:80)(cid:69)(cid:71)(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:14)(cid:2)
having spent USD 3.5 billion(cid:2)(cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:69)(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:84)(cid:81)(cid:87)(cid:80)(cid:70)
(cid:2) (cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:2)(cid:81)(cid:72)(cid:2)(cid:85)(cid:82)(cid:71)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:20)(cid:18)(cid:20)(cid:19)(cid:14)(cid:2)(cid:79)(cid:67)(cid:75)(cid:80)(cid:78)(cid:91)(cid:2)(cid:81)(cid:80)(cid:2)(cid:80)(cid:71)(cid:89)(cid:2)(cid:86)(cid:71)(cid:69)(cid:74)(cid:80)(cid:81)(cid:78)(cid:81)(cid:73)(cid:75)(cid:71)(cid:85)
(cid:52)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:78)(cid:78)(cid:71)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)
• Over 150 (cid:91)(cid:71)(cid:67)(cid:84)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:84)(cid:75)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:75)(cid:80)(cid:73)
• Strong brand
• 10,677 (cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:85)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(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:75)(cid:80)(cid:2)(cid:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:57)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(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:55)(cid:36)(cid:53)(cid:2)(cid:68)(cid:87)(cid:75)(cid:78)(cid:70)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:80)(cid:73)(cid:86)(cid:74)(cid:71)(cid:80)(cid:85)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)
(cid:2) (cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:88)(cid:67)(cid:84)(cid:75)(cid:81)(cid:87)(cid:85)(cid:2)(cid:82)(cid:78)(cid:67)(cid:86)(cid:72)(cid:81)(cid:84)(cid:79)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:72)(cid:72)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)(cid:85)(cid:87)(cid:69)(cid:74)(cid:2)(cid:67)(cid:85)(cid:2)
UBS Evidence Lab Innovations, UBS Partner, UBS Atrium
and we.trade
(cid:42)uman
•(cid:2)(cid:47)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80) 68,000 (cid:82)(cid:71)(cid:81)(cid:82)(cid:78)(cid:71)(cid:2)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:89)(cid:75)(cid:70)(cid:71)(cid:14)(cid:2)
(cid:2) (cid:81)(cid:72)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:96)(cid:19)(cid:17)(cid:21)(cid:2)(cid:75)(cid:80)(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:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:78)(cid:91)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:74)(cid:75)(cid:84)(cid:71)(cid:70)(cid:2)(cid:67)(cid:78)(cid:79)(cid:81)(cid:85)(cid:86)(cid:2)1,700(cid:2)(cid:76)(cid:87)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:86)(cid:67)(cid:78)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:75)(cid:80)(cid:86)(cid:81)(cid:2)
(cid:2) (cid:71)(cid:80)(cid:86)(cid:84)(cid:91)(cid:15)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:2)(cid:86)(cid:84)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:84)(cid:81)(cid:73)(cid:84)(cid:67)(cid:79)(cid:85)
• 104 (cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:85)(cid:2)(cid:10)(cid:86)(cid:81)(cid:2)(cid:70)(cid:67)(cid:86)(cid:71)(cid:11)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:87)(cid:80)(cid:69)(cid:74)(cid:71)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:75)(cid:84)(cid:2)(cid:69)(cid:67)(cid:84)(cid:71)(cid:71)(cid:84)(cid:85)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)
(cid:2) (cid:81)(cid:87)(cid:84)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:15)(cid:89)(cid:75)(cid:80)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)UBS Career Comeback Program
•(cid:2)(cid:40)(cid:81)(cid:69)(cid:87)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:74)(cid:75)(cid:84)(cid:75)(cid:80)(cid:73)(cid:14)(cid:2)(cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:84)(cid:81)(cid:79)(cid:81)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:89)(cid:81)(cid:79)(cid:71)(cid:80)(cid:2)
(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:386)(cid:84)(cid:79)
(cid:53)(cid:81)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:80)(cid:67)(cid:86)(cid:87)(cid:84)(cid:67)(cid:78)
•(cid:2)(cid:57)(cid:71)(cid:2)(cid:89)(cid:67)(cid:80)(cid:86)(cid:2)(cid:86)(cid:81)(cid:2)(cid:68)(cid:71)(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:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:69)(cid:74)(cid:81)(cid:75)(cid:69)(cid:71)(cid:2)(cid:72)(cid:81)(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:85)(cid:74)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:2) (cid:86)(cid:81)(cid:2)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:86)(cid:81)(cid:89)(cid:67)(cid:84)(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:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(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:2) (cid:38)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:41)(cid:81)(cid:67)(cid:78)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:2)(cid:78)(cid:81)(cid:89)(cid:15)(cid:69)(cid:67)(cid:84)(cid:68)(cid:81)(cid:80)(cid:2)(cid:71)(cid:69)(cid:81)(cid:80)(cid:81)(cid:79)(cid:91)
• (cid:37)(cid:81)(cid:79)(cid:82)(cid:84)(cid:71)(cid:74)(cid:71)(cid:80)(cid:85)(cid:75)(cid:88)(cid:71)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid: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:10)(cid:39)(cid:53)(cid:52)(cid:11)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)
(cid:2) (cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:84)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:67)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:70)(cid:2)(cid:386)(cid:84)(cid:79)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)
(cid:2) (cid:86)(cid:81)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:88)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)
• USD ~41 million (cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:86)(cid:81)(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:2)
• 197,807 (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:74)(cid:81)(cid:87)(cid:84)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91)(cid:2)(cid:82)(cid:84)(cid:81)(cid:76)(cid:71)(cid:69)(cid:86)(cid:85)
•(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:28)(cid:2)USD ~67 million raised in donations
•(cid:2)(cid:54)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:78)(cid:91)(cid:2)(cid:69)(cid:74)(cid:67)(cid:75)(cid:80)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:70)(cid:2)(cid:55)(cid:53)(cid:38)(cid:2)(cid:19)(cid:19)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:86)(cid:85)(cid:2)
(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:14)(cid:2)(cid:81)(cid:72)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:89)(cid:71)(cid:2)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:55)(cid:53)(cid:38)(cid:2)(cid:20)(cid:16)(cid:23)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:73)(cid:81)(cid:81)(cid:70)(cid:85)(cid:2)
(cid:2) (cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:90)(cid:75)(cid:79)(cid:67)(cid:86)(cid:71)(cid:78)(cid:91)(cid:2)(cid:19)(cid:19)(cid:14)(cid:18)(cid:18)(cid:18)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:84)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)
As of or for the year ended 31 December 2018
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a (cid:78) (cid:8) C orporate B
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Corporate Ce n t e r
› to create long-term value for our stakeholders
(cid:101)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:87)(cid:80)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:84)(cid:75)(cid:85)(cid:77)(cid:85)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)
and our business
(cid:2)(cid:101)(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:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:85)(cid:86)(cid:67)(cid:77)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:85)
• Dividend of CHF 0.70(cid:2)(cid:82)(cid:71)(cid:84)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:82)(cid:81)(cid:85)(cid:71)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(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:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)
•(cid:2)(cid:37)(cid:81)(cid:79)(cid:68)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:82)(cid:81)(cid:85)(cid:71)(cid:70)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:84)(cid:71)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:25)(cid:23)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:78)(cid:67)(cid:85)(cid:86)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:14)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:2)(cid:2)
(cid:2) (cid:82)(cid:67)(cid:91)(cid:81)(cid:87)(cid:86)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:2)(cid:89)(cid:75)(cid:78)(cid:78)(cid:2)(cid:68)(cid:71)(cid:2)(cid:25)(cid:24)(cid:7)(cid:2)(cid:10)(cid:69)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:67)(cid:69)(cid:69)(cid:84)(cid:87)(cid:67)(cid:78)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:82)(cid:84)(cid:81)(cid:82)(cid:81)(cid:85)(cid:71)(cid:70)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85)(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:85)(cid:2)
(cid:2) (cid:82)(cid:78)(cid:87)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:84)(cid:71)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:70)(cid:2)(cid:68)(cid:91)(cid:2)(cid:80)(cid:71)(cid:86)(cid:2)(cid:82)(cid:84)(cid:81)(cid:386)(cid:86)(cid:2)(cid:67)(cid:86)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:67)(cid:68)(cid:78)(cid:71)(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:85)(cid:11)
•(cid:2)(cid:48)(cid:71)(cid:86)(cid:2)(cid:82)(cid:84)(cid:81)(cid:386)(cid:86)(cid:2)(cid:67)(cid:86)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:67)(cid:68)(cid:78)(cid:71)(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:85)(cid:28)(cid:2)USD 4,516 million (cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)
•(cid:2)(cid:52)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:28)(cid:2)10.0%(cid:16)(cid:2)(cid:35)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:16)(cid:2)(cid:70)(cid:71)(cid:72)(cid:71)(cid:84)(cid:84)(cid:71)(cid:70)(cid:2)(cid:86)(cid:67)(cid:90)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:80)(cid:85)(cid:71)(cid:2)(cid:17)(cid:2)(cid:68)(cid:71)(cid:80)(cid:71)(cid:386)(cid:86)
(cid:2) (cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:71)(cid:72)(cid:71)(cid:84)(cid:84)(cid:71)(cid:70)(cid:2)(cid:86)(cid:67)(cid:90)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:28)(cid:2)12.9%
•(cid:2)(cid:55)(cid:82)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(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:86)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:85)(cid:14)(cid:2)(cid:67)(cid:79)(cid:68)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:2)(cid:73)(cid:87)(cid:75)(cid:70)(cid:71)(cid:78)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)(cid:71)(cid:72)(cid:72)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)
•(cid:2)(cid:57)(cid:71)(cid:2)(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)(cid:70)(cid:2)(cid:67)(cid:2)13.1%(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(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:2)(cid:10)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:86)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:96)(cid:19)(cid:23)(cid:7)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:72)(cid:87)(cid:78)(cid:78)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:11)
•(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:85)(cid:28)(cid:2)(cid:47)(cid:81)(cid:81)(cid:70)(cid:91)(cid:111)(cid:85)(cid:28)(cid:2)(cid:35)(cid:67)(cid:21)(cid:2)(cid:10)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:81)(cid:87)(cid:86)(cid:78)(cid:81)(cid:81)(cid:77)(cid:11)(cid:29)(cid:2)(cid:53)(cid:8)(cid:50)(cid:28)(cid:2)(cid:35)(cid:13)(cid:2)(cid:10)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:81)(cid:87)(cid:86)(cid:78)(cid:81)(cid:81)(cid:77)(cid:11)(cid:29)(cid:2)(cid:40)(cid:75)(cid:86)(cid:69)(cid:74)(cid:28)(cid:2)(cid:35)(cid:35)(cid:15)(cid:2)(cid:10)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:81)(cid:87)(cid:86)(cid:78)(cid:81)(cid:81)(cid:77)(cid:11)
•(cid:2)(cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:28)(cid:2)USD 3,101 billion
•(cid:2)(cid:43)(cid:80)(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:14)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:71)(cid:2)(cid:74)(cid:81)(cid:87)(cid:85)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:85)(cid:14)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:23)(cid:18)(cid:7)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:2) (cid:86)(cid:74)(cid:71)(cid:2)(cid:79)(cid:75)(cid:70)(cid:15)(cid:2)(cid:86)(cid:81)(cid:2)(cid:78)(cid:67)(cid:84)(cid:73)(cid:71)(cid:2)(cid:386)(cid:84)(cid:79)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(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:7)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:78)(cid:67)(cid:84)(cid:73)(cid:71)(cid:2)(cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:85)
•(cid:2)(cid:35)(cid:69)(cid:69)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:84)(cid:71)(cid:74)(cid:71)(cid:80)(cid:85)(cid:75)(cid:88)(cid:71)(cid:2)(cid:81)(cid:72)(cid:72)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:88)(cid:71)(cid:80)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:70)(cid:75)(cid:73)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:75)(cid:80)(cid:73)
•(cid:2)(cid:43)(cid:80)(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:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:71)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:90)(cid:75)(cid:79)(cid:67)(cid:86)(cid:71)(cid:78)(cid:91)(cid:2)3,000(cid:2)(cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:67)(cid:84)(cid:81)(cid:87)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)
•(cid:2)(cid:49)(cid:87)(cid:84)(cid:2)(cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:14)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:21)(cid:21)(cid:2)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:84)(cid:75)(cid:71)(cid:85)(cid:14)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:85)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:2)(cid:88)(cid:67)(cid:84)(cid:75)(cid:71)(cid:86)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)(cid:14)(cid:2)
(cid:2) (cid:85)(cid:87)(cid:69)(cid:74)(cid:2)(cid:67)(cid:85)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:81)(cid:84)(cid:85)(cid:14)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:84)(cid:85)(cid:14)(cid:2)(cid:74)(cid:71)(cid:70)(cid:73)(cid:71)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:85)(cid:14)(cid:2)(cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:85)(cid:14)(cid:2)(cid:82)(cid:71)(cid:80)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:85)(cid:14)(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:14)(cid:2)(cid:2)
(cid:2) (cid:85)(cid:81)(cid:88)(cid:71)(cid:84)(cid:71)(cid:75)(cid:73)(cid:80)(cid:85)(cid:14)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:72)(cid:67)(cid:79)(cid:75)(cid:78)(cid:91)(cid:2)(cid:81)(cid:72)(cid:386)(cid:69)(cid:71)(cid:85)(cid:14)(cid:2)(cid:67)(cid:85)(cid:2)(cid:89)(cid:71)(cid:78)(cid:78)(cid:2)(cid:67)(cid:85)(cid:2)(cid:86)(cid:81)(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:70)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)
•(cid:2)(cid:46)(cid:67)(cid:87)(cid:80)(cid:69)(cid:74)(cid:2)(cid:81)(cid:72)(cid:2)UBS Manage(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:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:10)(cid:53)(cid:43)(cid:11)(cid:2)(cid:10)(cid:70)(cid:75)(cid:85)(cid:69)(cid:84)(cid:71)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:84)(cid:91)(cid:2)(cid:79)(cid:67)(cid:80)(cid:70)(cid:67)(cid:86)(cid:71)(cid:11)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:80)(cid:71)(cid:89)(cid:2)(cid:37)(cid:43)(cid:49)(cid:2)(cid:53)(cid:43)(cid:2)
(cid:2) (cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:75)(cid:69)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:67)(cid:78)(cid:78)(cid:81)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:10)(cid:19)(cid:18)(cid:18)(cid:7)(cid:2)(cid:53)(cid:43)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:78)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:78)(cid:78)(cid:81)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:11)
•(cid:2)(cid:54)(cid:84)(cid:87)(cid:78)(cid:91)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:28)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:89)(cid:81)(cid:84)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:2)50(cid:2)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:84)(cid:75)(cid:71)(cid:85)(cid:14)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:69)(cid:75)(cid:86)(cid:75)(cid:92)(cid:71)(cid:80)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)133(cid:2)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:82)(cid:71)(cid:67)(cid:77)(cid:2)
more than 150(cid:2)(cid:78)(cid:67)(cid:80)(cid:73)(cid:87)(cid:67)(cid:73)(cid:71)(cid:85)
•(cid:2)(cid:35)(cid:79)(cid:81)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:111)(cid:85)(cid:2)(cid:79)(cid:81)(cid:85)(cid:86)(cid:2)(cid:67)(cid:86)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:84)(cid:85)(cid:2)
(cid:2) (cid:10)(cid:55)(cid:80)(cid:75)(cid:88)(cid:71)(cid:84)(cid:85)(cid:87)(cid:79)(cid:2)(cid:54)(cid:81)(cid:82)(cid:2)(cid:23)(cid:18)(cid:14)(cid:2)(cid:39)(cid:83)(cid:87)(cid:75)(cid:78)(cid:71)(cid:67)(cid:82)(cid:2)(cid:41)(cid:71)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:39)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:52)(cid:67)(cid:80)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:48)(cid:81)(cid:16)(cid:2)(cid:19)(cid:26)(cid:11)
•(cid:2)(cid:49)(cid:87)(cid:84)(cid:2)(cid:75)(cid:80)(cid:15)(cid:74)(cid:81)(cid:87)(cid:85)(cid:71)(cid:2)UBS University(cid:2)(cid:74)(cid:71)(cid:78)(cid:82)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:71)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:85)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:77)(cid:75)(cid:78)(cid:78)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:91)(cid:2)(cid:80)(cid:71)(cid:71)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71)
•(cid:2)(cid:35)(cid:85)(cid:2)(cid:67)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:80)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:79)(cid:82)(cid:84)(cid:81)(cid:88)(cid:71)(cid:70)(cid:2)(cid:71)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:69)(cid:91)(cid:14)(cid:2)(cid:89)(cid:71)(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:84)(cid:71)(cid:70)(cid:87)(cid:69)(cid:71)(cid:70)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:71)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:85)(cid:86)(cid:67)(cid:72)(cid:72)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:2) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:37)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:67)(cid:89)(cid:2)(cid:67)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:75)(cid:80)(cid:2)(cid:81)(cid:87)(cid:84)(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:37)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:85)
•(cid:2)(cid:46)(cid:71)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(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:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:86)(cid:85)(cid:2)(cid:75)(cid:80)(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:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:96)(cid:20)(cid:21)(cid:7)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)
(cid:2) (cid:67)(cid:79)(cid:81)(cid:80)(cid:73)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:89)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:84)(cid:85)
•(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:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:84)(cid:71)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)USD 1,110 billion,(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:96)(cid:21)(cid:24)(cid:7)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)
• (cid:49)(cid:87)(cid:84)(cid:2)(cid:39)(cid:53)(cid:52)(cid:2)(cid:85)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:85)(cid:2)(cid:67)(cid:82)(cid:82)(cid:78)(cid:91)(cid:2)(cid:86)(cid:81)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:84)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:71)(cid:83)(cid:87)(cid:67)(cid:78)(cid:78)(cid:91)(cid:16)(cid:2)(cid:49)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:20)(cid:14)(cid:19)(cid:19)(cid:22)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)
(cid:2) (cid:68)(cid:91)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:39)(cid:53)(cid:52)(cid:2)(cid:72)(cid:87)(cid:80)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:96)(cid:19)(cid:18)(cid:18)(cid:2)(cid:89)(cid:71)(cid:84)(cid:71)(cid:2)(cid:84)(cid:71)(cid:76)(cid:71)(cid:69)(cid:86)(cid:71)(cid:70)(cid:2)(cid:81)(cid:84)(cid:2)(cid:80)(cid:81)(cid:86)(cid:2)(cid:72)(cid:87)(cid:84)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:82)(cid:87)(cid:84)(cid:85)(cid:87)(cid:71)(cid:70)(cid:14)(cid:2)(cid:96)(cid:21)(cid:23)(cid:18)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:89)(cid:71)(cid:84)(cid:71)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:88)(cid:71)(cid:70)(cid:2)
(cid:2) (cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:83)(cid:87)(cid:67)(cid:78)(cid:75)(cid:386)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)
•(cid:2)(cid:49)(cid:80)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:82)(cid:2)(cid:86)(cid:67)(cid:90)(cid:82)(cid:67)(cid:91)(cid:71)(cid:84)(cid:85)(cid:2)(cid:75)(cid:80)(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:47)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)343,000 (cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:68)(cid:71)(cid:80)(cid:71)(cid:386)(cid:69)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:85)(cid:2)(cid:67)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:2)(cid:81)(cid:72)(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:91)(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: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:111)(cid:85)(cid:2)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:74)(cid:71)(cid:78)(cid:82)(cid:71)(cid:70)(cid:2)(cid:75)(cid:79)(cid:82)(cid:84)(cid:81)(cid:88)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:89)(cid:71)(cid:78)(cid:78)(cid:15)(cid:68)(cid:71)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:72)(cid:2)2.8 million (cid:69)(cid:74)(cid:75)(cid:78)(cid:70)(cid:84)(cid:71)(cid:80)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:78)(cid:91)
•(cid:2)(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:70)(cid:87)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:73)(cid:84)(cid:71)(cid:71)(cid:80)(cid:74)(cid:81)(cid:87)(cid:85)(cid:71)(cid:2)(cid:73)(cid:67)(cid:85)(cid:2)(cid:72)(cid:81)(cid:81)(cid:86)(cid:82)(cid:84)(cid:75)(cid:80)(cid:86)(cid:2)(cid:68)(cid:91)(cid:2)(cid:24)(cid:21)(cid:7)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:78)(cid:75)(cid:80)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:20)(cid:18)(cid:18)(cid:22)
As of or for the year ended 31 December 2018
Investors
(cid:37)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)
(cid:39)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:85)
(cid:53)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:91)
Contents
Letter to shareholders
2
6 Our key figures
8 Our Board of Directors
10 Our Group Executive Board
12 Our evolution
1. Our strategy, business model and environment
3.
Risk, treasury and
capital management
16 Our strategy
17 Performance targets and measurement
19 Our businesses
29 Our environment
32 How we create value for our stakeholders
43 Regulation and supervision
45 Regulatory and legal developments
50 Risk factors
2.
Financial
and operating performance
64 Critical accounting estimates and judgments
65 Significant accounting and financial reporting changes
68 Group performance
82 Global Wealth Management
86 Personal & Corporate Banking
92 Asset Management
Investment Bank
97
103 Corporate Center
119 Risk management and control
173 Treasury management
194 Capital management
4.
Corporate governance and compensation
216 Corporate governance
250 Compensation
5.
Financial
statements
301 Consolidated financial statements
505 Standalone financial statements
6.
Significant regulated subsidiary and sub-group
information
530
Financial and regulatory key figures for our significant
regulated subsidiaries and sub-groups
Appendix
532 Abbreviations frequently used in our financial reports
535
536 Cautionary statement
Information sources
Our Pillars are the
foundation for
everything we do.
Our Principles are
what we stand for
as a fi rm.
Our Behaviors are
what we stand for
individually.
Capital strength
Effi ciency and effectiveness
Risk management
Client focus
Excellence
Sustainable performance
Integrity
Collaboration
Challenge
Annual Report 2018
Letter to shareholders
Dear shareholders,
Axel A. Weber Chairman of the Board of Directors
Sergio P. Ermotti Group Chief Executive Officer
Building on your positive feedback from last year, our shareholder
letter this year again answers a series of questions that we are
regularly asked by different stakeholders of the bank.
buyback of CHF 750 million last year, our total payout ratio3 for
2018 will be 76%. To sum up, we continue to deliver attractive
shareholder returns, while maintaining a strong capital position
and investing for further growth.
What was the market context in 2018?
The year started off positively, but nervousness set in by the end
of the first half. Markets started fearing a downturn well ahead
of any real economy indicators. Our private clients became less
active, and from the fourth quarter onward, markets sold off as
well. The most striking example to illustrate what developed
over the course of 2018 is the fact that about 90% of asset
classes were down on a year-over-year basis. That’s quite
extraordinary. And when you look at what happened in
December 2018, it was one of the worst months since the Great
Depression in terms of market performance. The coexistence of
macroeconomic and geopolitical issues caused even more
concerns with investors. For example, according to our fourth
quarter client survey, cash balances with our US wealth
management clients reached a record-high level of 24%.
How do you assess the financial performance of
the Group in 2018?
We had a very successful 2018, despite the market conditions
just described. Against this backdrop, we increased net profit1 by
USD 0.6 billion or 16% to USD 4.5 billion, and achieved a strong
adjusted return on tangible equity excluding deferred tax
expense / benefit and DTAs2 of 12.9%. Reported return on CET1
capital was 13.1%, markedly above most of our European peers
and in line with American banks. We also generated USD 4.0
billion of additional capital in 2018 and our total loss-absorbing
capacity increased to USD 84 billion.
How did 2018 reflect your capital returns policy?
Consistent with our capital returns policy, we accrued for a
higher dividend and exceeded our share buyback goal of CHF
550 million by CHF 200 million. The Board of Directors intends
to propose an 8% increase in our dividend to CHF 0.70 per
share for the financial year 2018. Combined with the share
2
relative performance.
Why has the UBS share price lost so much ground despite
these achievements?
In our view, the current share price doesn’t reflect the long-run
value of our franchise. The entire banking sector saw significant
share price corrections in 2018. One needs to look at both
absolute and
Investors’ profitability
expectations for the industry reflect the fear of a global
economic slowdown, more challenging market conditions or a
combination of both. Nevertheless, we are among the highest-
valued banks in Europe and compare well to a number of US
peers.
return, we also
outperformed our main European peers. Our focus is on
sustainable performance, which is at the core of our strategy
and should drive valuation growth over the cycle.
total shareholder
terms of
In
Why do you believe UBS still has the right strategy – how
does it set you apart from others?
Secular trends such as global wealth creation, including the
increased need for pension products, and the opening up of
China’s financial markets will continue to drive the unique value of
our franchise. We are the preeminent global wealth manager to
high net worth and ultra high net worth clients as well as the
number one Swiss bank, enhanced by an investment bank that is
strong in the areas where we choose to compete, and a successful
asset manager. The strength of our business model and our
strategic focus have generated more than USD 19 billion in net
profits over the last five years. More than half of our profits come
from asset-gathering businesses, and our Swiss business further
contributes to the stability of our earnings. We are diversified
geographically, and well positioned in the world’s largest and
fastest growing markets. Of course we review and recalibrate
our strategy each year, as we constantly evolve in response to
new challenges, but we have strategic clarity and consistency.
Are you satisfied with your combined wealth
management division’s performance – where can you
improve?
We’ve made good progress in exploiting the combined scale and
capabilities of the businesses. Global Wealth Management
achieved a decade-high pre-tax profit of USD 3.6 billion in 2018.
Working as an integrated business creates new opportunities for
revenue growth and improves our ability to execute existing
opportunities, which we expect to enable us to achieve our
10−15% profit growth target. We also expect to generate cost
synergies of USD 600 million over the next three years that will
help fund our investments for growth and efficiency. We intend
to make strategic investments totaling more than USD 1 billion
through 2021 to further improve client and advisor experience.
We remain confident in our growth plans even though net new
money was not what we wanted it to be in 2018. Therefore, we
will be intensifying our efforts to attract and retain a higher
proportion of our current and prospective clients’ assets.
Your adjusted cost / income ratio is currently 79.5%. How
do you intend to reach your 2021 ambition of around
72%?
First, when measuring efficiency, it’s important to include risk-
adjusted capital returns and not look at the cost / income ratio in
isolation. Our goal is to balance revenue growth with both cost
and capital efficiency. We delivered 3% positive operating
leverage in 2018, as we increased revenues while reducing
expenses. Our aim is to keep costs, excluding performance-
based compensation, broadly flat over the next three years. And
we have a range of tactical measures to address market
headwinds. For example, while we cannot and do not want to
halt our investments, we can adjust the pace and relative
priority. And we will be focusing our hiring plans on the most
important strategic growth areas.
Where and how do you expect to grow going forward?
We believe we can grow our revenues at more than the rate of
global economic expansion over the cycle. From a geographic
standpoint, the greatest growth is expected to come from
gaining market share in the US and Asia Pacific. In the US, we
have a sizeable opportunity with ultra high net worth clients.
And we want to build our share of wallet with US persons
outside the US. Also, further globalizing our Global Family Office
capabilities is another part of our growth initiatives. In China, we
became the first foreign bank to increase its stake to a majority
of 51% in a securities joint venture, giving us a great foothold
for future expansion. And in Switzerland, net new business
volume growth in Personal & Corporate Banking was double
GDP growth last year. Our aim is to further solidify this
leadership position by, for example, expanding our digital lead.
These are just some of the opportunities we are focused on,
there are plenty of others, many of which are discussed in the
pages of our annual report.
You want to be the bank for US, Asian and European
entrepreneurs and corporates for their local and global
needs – why should they choose UBS?
Because we are a truly global bank. Our clients globally require
advice and solutions for both their own wealth and their
businesses. They expect us to deliver the whole of UBS to them,
with global wealth management and
investment bank
capabilities under one roof, from M&A all the way to succession
planning, as well as the best teams when it comes to research
and execution. We have the breadth and the expertise to bridge
between both their corporate and their personal financial needs.
This makes UBS an obvious choice, given our leading position in
those fields that matter most to our clients.
Sustainability is a key part of your strategy, how is that
reflected in your client offering?
We provide a broad range of products and solutions to both
private and institutional clients, including sustainable and impact
investing opportunities. For example, Asset Management
followed its successful UK Climate Aware rules-based fund with
a similar fund available for international investors. The portfolio
is oriented toward companies that are better prepared for a low-
carbon future while reducing exposure to, rather than excluding,
companies with higher carbon risk, in order to pursue strategic
engagement with these companies. Also in 2018, Global Wealth
Management
launched the world’s first fully sustainable
investing (SI) cross-asset mandate portfolio for private clients. As
of 31 December 2018, clients had invested USD 2.8 billion assets
under management in this innovative solution.
What are you doing to prepare UBS for the digital future
of banking?
We’re not just preparing for the future, we’re actively shaping it.
Technology is changing the way banks, including UBS, operate.
That’s why we are investing more than 10% of revenues, more
than USD 3 billion each year, into technology. For example,
we’ve accelerated our journey into the cloud space, thereby
reducing the number of costly traditional data centers. We also
increased the number of robots performing routine tasks from
roughly 700 to 1,000 last year. We will more broadly leverage
machine learning and artificial intelligence-powered engines to
automate more complex tasks and allow for better and faster
decision-making, for example in risk management or anti-money
laundering. But the big focus is on front-to-back digitalization
ultimately driving a better client experience, so technology is
about much more than just cost savings.
3
Annual Report 2018
Letter to shareholders
You put several legacy issues behind you in 2018, but just
received an adverse verdict in France. Can you comment
on this matter?
We continued to make significant progress last year on legacy
litigation, including resolution of two RMBS-related cases. In the
two most prominent open matters, the FIRREA litigation and the
French cross-border case, UBS has chosen to defend the bank in
court with the best interests of shareholders in mind. We are
confident in our legal position, and contesting these cases has
also allowed us to present our arguments to stakeholders
publicly. We strongly disagree with the verdict in France. UBS
respected and followed its obligations under Swiss and French
law as well as the European Savings Tax Directive. The judgment
is not supported by the facts. For example, no evidence was
provided that any French client was solicited on French soil by a
UBS AG client advisor to open an account in Switzerland. This is
acknowledged by the decision itself. Even assuming liability -
which we contest - the calculation of the fine and the damages
are, in our view, inconsistent and not in line with applicable law.
We have appealed the French court’s decision to the Court of
Appeal, which will retry the case in its entirety. The Court of
Appeal operates under the supervision of the French Supreme
Court and is required to address our arguments in its decision.
Based on the law and the facts, we believe the verdict should be
reversed.
What provisions have you taken for the France case?
Notwithstanding the strength of our legal arguments and the
lack of evidence to support the charges, we have increased the
provision for this matter to a total of EUR 450 million (USD 516
million). Under the accounting standard, we are required to
judge if an outflow is probable and to estimate the extent of
such an outflow considering a wide range of outcomes. In light
of the first judgment and considering the full range of potential
final decisions, the provision on our balance sheet reflects our
best estimate of possible financial implications. That said, we still
believe the verdict should be reversed, at which time we would
release the provision.
Looking back at the Investor Update in October last year,
how was the start into 2019?
Given the market developments since last October, our starting
point for the year is different than we had planned, making this
year’s journey toward our targets steeper. Also, despite some
rebound in equity markets, clients so far have remained cautious
in the first quarter of 2019. Nevertheless, we will have to see
how the rest of the year develops. One of our goals at the 2018
Investor Update was to be transparent about the factors that we
can and cannot control. We do not control the external
environment, nor equity markets and interest rates. But of
course this doesn’t mean we are passively waiting for markets to
improve. It’s up to us to continue executing our plans with
energy and commitment, with a focus on sustainable, long-term
value creation.
What are the biggest opportunities medium to long term?
Over the last ten years, we have reconfigured UBS, while
delivering strong results, and we are excited about the potential
for the next decade. We had to deal with many challenges and
that also taught us a lot, which will allow us to execute even
better going forward. To achieve that, we need to take
partnership within UBS to the next level. Because we know it
leads to better results for clients, which in turn leads to more
capital generation and even better returns for shareholders. We
expect to generate almost as much capital in the next three
years as we did in the previous six. And to tie in with our global
growth ambitions mentioned earlier, our global infrastructure
has the capacity to accommodate far more assets at marginal
cost – so more scale is a significant opportunity. From a client
perspective, we’ve seen that those who have navigated this
environment most successfully are those who develop a clear
long-term plan to allow for a sustainable legacy. With that in
place, clients will be well positioned to seek opportunities amid
the short-term noise. That’s exactly what we at UBS are doing
ourselves.
Thank you for your ongoing support. We look forward to your
feedback and also to welcoming you at our AGM on
2 May 2019 in Basel.
Yours sincerely,
Axel A. Weber
Chairman of the
Board of Directors
Sergio P. Ermotti
Group Chief Executive Officer
11 Net profit attributable to shareholders, excluding the USD 2,939 million 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.
2 Adjusted return on tangible equity excluding deferred tax expense / benefit and DTAs; calculated as adjusted net profit / loss attributable to shareholders excluding amortization and impairment of goodwill and
intangible assets and deferred tax expense / benefit, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as CET1 capital. 3 Calculated as accruals for proposed
dividends to shareholders plus the share buyback in 2018 divided by net profit attributable to shareholders.
4
Returning home
In 2018, we returned to our
newly-renovated historic headquarters.
This story and more in
our Annual Review 2018.
Available from 1 April 2019
ubs.com/annualreview
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 +44-207-567 8000
New York +1-212-821 3000
Hong Kong +852-2971 8888
Singapore +65-6495 8000
Investor Relations
UBS’s Investor Relations team supports
institutional, professional and retail
investors from our offices in Zurich,
New York and Krakow.
UBS Group AG, Investor Relations
P.O. Box, CH-8098 Zurich, Switzerland
www.ubs.com/investors
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
Shareholder Services
UBS’s Shareholder Services team, a unit
of the Group Company Secretary office, is
responsible for the registration of
UBS Group AG registered shares.
UBS Group AG, Shareholder Services
P.O. Box, CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Hotline +41-44-235 6652
US Transfer Agent
For global registered share-related
inquiries in the US.
Computershare Trust Company NA
P.O. Box 505000
Louisville, KY 40233-5000, USA
Shareholder online inquiries:
https://www-us.computershare.com/
investor/Contact
Shareholder website:
www.computershare.com/investor
Calls from the US +1-866-305-9566
Calls from outside the US
+1-781-575-2623
TDD for hearing impaired
+1-800-231-5469
TDD foreign shareholders
+1-201-680-6610
Corporate calendar UBS Group AG
Imprint
Publication of the first quarter 2019 report:
Thursday, 25 April 2019
Annual General Meeting 2019:
Thursday, 2 May 2019
Publication of the second quarter 2019 report: Tuesday, 23 July 2019
Publication of the third quarter 2019 report:
Tuesday, 22 October 2019
Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com
Language: English / German | SAP-No. 80531E
© UBS 2019. 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
5
1
2
3
Annual Report 2018
Our key figures
As of or for the year ended
31.12.16
31.12.17
331.12.18
330,213
224,222
55,991
44,516
11.18
29,622
24,272
5,351
969
0.25
28,729
24,519
4,209
3,348
0.88
88.6
110.0
112.9
113.1
111.8
33.3
779.9
779.5
3366.0
1.8
2.2
13.7
3.0
12.6
3.3
81.6
78.2
(71.1)
6.1
7.1
11.3
10.9
13.1
3.2
85.2
80.8
(48.3)
USD million, except where indicated
GGroup results
Operating income
Operating expenses
Operating profit / (loss) before tax
Net profit / (loss) attributable to shareholders
Diluted earnings per share (USD)1
PProfitability and growth2
Return on equity (%)3
Return on tangible equity (%)4
Adjusted return on tangible equity excluding deferred tax expense / benefit and deferred tax assets (%)5
Return on common equity tier 1 capital (%)6
Return on risk-weighted assets, gross (%)7
Return on leverage ratio denominator, gross (%)7
Cost / income ratio (%)8
Adjusted cost / income ratio (%)9
Net profit growth (%)10
RResources
Total assets
Equity attributable to shareholders
Common equity tier 1 capital11
Risk-weighted assets11
Common equity tier 1 capital ratio (%)11
Going concern capital ratio (%)11
Total loss-absorbing capacity ratio (%)11
Leverage ratio denominator11
Common equity tier 1 leverage ratio (%)11
Going concern leverage ratio (%)11
Total loss-absorbing capacity leverage ratio (%)11
Liquidity coverage ratio (%)12
OOther
Invested assets (USD billion)13
Personnel (full-time equivalents)
Market capitalization14,15
Total book value per share (USD)14
Total book value per share (CHF)14,16
Tangible book value per share (USD)14
Tangible book value per share (CHF)14,16
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 “Performance targets and
measurement” section of this report for more information on our performance targets. 3 Calculated as net profit attributable to shareholders / average equity attributable to shareholders. 4 Calculated as net
profit attributable to shareholders before amortization and impairment of goodwill and intangible assets / average equity attributable to shareholders less average goodwill and intangible assets. 5 Calculated as
adjusted net profit attributable to shareholders before amortization and impairment of goodwill and intangible assets and before deferred tax expense or benefit / average equity attributable to shareholders less
average goodwill and intangible assets and less average deferred tax assets that do not qualify as common equity tier 1 capital. 6 Calculated as net profit attributable to shareholders / average common
equity tier 1 capital. 7 Calculated as operating income before credit loss expense or recovery / average risk-weighted assets and average leverage ratio denominator, respectively. 8 Calculated as operating
expenses / operating income before credit loss expense or recovery. 9 Calculated as adjusted operating expenses / adjusted operating income before credit loss expense or recovery. 10 Calculated as 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. 11 Based on
the Swiss systemically relevant bank framework as of 1 January 2020. Refer to the “Capital management” section of this report for more information. 12 Effective 1 January 2017 the reported quarterly
average is the average of daily values during the quarter. The 2016 figure is based on the average of the three month-end values. Refer to the “Balance sheet, liquidity and funding management” section of this
report for more information. 13 Includes invested assets for Global Wealth Management, Asset Management and Personal & Corporate Banking. 14 Refer to “UBS shares” in the “Capital management”
section of this report for more information. 15 The calculation of market capitalization has been amended to reflect total shares outstanding multiplied by the share price at the end of the period. The
calculation was previously based on total shares issued multiplied by the share price at the end of the period. Market capitalization has been reduced by USD 2.1 billion as of 31 December 2018, by USD 2.4
billion as of 31 December 2017 and by USD 2.2 billion as of 31 December 2016 as a result. 16 Total book value per share and tangible book value per share in Swiss francs are calculated based on
a translation of equity under our US dollar presentation currency. As a consequence of the restatement to a US dollar presentation currency, amounts may differ from those originally published in our quarterly and
annual reports.
918,906
52,916
30,156
218,785
13.8
17.9
31.1
855,255
3.53
4.6
7.9
132
939,279
52,495
33,516
243,636
13.8
17.6
33.0
909,032
3.69
4.7
8.8
143
9958,489
552,928
334,119
2263,747
112.9
117.5
331.7
9904,598
33.77
55.1
99.3
1136
2,761
59,387
58,177
14.25
14.51
12.52
12.74
3,262
61,253
68,477
14.11
13.75
12.34
12.03
33,101
666,888
445,907
114.35
114.11
112.55
112.33
Events subsequent to the publication of the unaudited fourth quarter 2018 report
The 2018 results and the balance sheet as of 31 December 2018 differ from those presented in the unaudited fourth quarter
2018 report published on 22 January 2019 as a result of events adjusted for after the balance sheet date. Provisions for litigation,
regulatory and similar matters increased, which reduced 2018 operating profit before tax and 2018 net profit attributable to
shareholders by USD 382 million. As a result, basic earnings per share decreased by USD 0.10 and diluted earnings per share
decreased by USD 0.09.
6
Changes to our functional and presentation currencies
Effective from 1 October 2018, the functional currency of UBS Group AG and UBS AG’s Head Office in Switzerland changed from
Swiss francs to US dollars and that of UBS AG’s London Branch from British pounds to US dollars, in compliance with the
requirements of International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates. The presentation
currency of UBS Group AG’s consolidated financial statements has changed from Swiss francs to US dollars to align with the
functional currency changes of significant Group entities. Prior periods have been restated for this change in presentation
currency. Assets, liabilities and total equity were translated to US dollars at closing exchange rates prevailing on the respective
balance sheet dates, and income and expenses were translated at the respective average rates prevailing for the relevant periods.
Performance measures reason for use
Return on equity
Return on tangible equity
This measure provides information on the profitability of the business in relation to equity.
This measure provides information on the profitability of the business in relation to tangible equity.
Adjusted return on tangible equity excluding
This measure provides information on the profitability of the business in relation to tangible equity, excluding deferred tax
deferred tax expense / benefit and
expense / benefit and deferred tax assets. We believe that excluding these items better reflects the underlying returns
deferred tax assets
of the businesses, as deferred tax items are generally not included in capital and have volatility that is unrelated to the
performance of the business divisions and the Group in that period.
Return on common equity tier 1 capital
This measure provides information on the profitability of the business in relation to common equity tier 1 capital.
Return on risk-weighted assets, gross
This measure provides information on the revenues of the business in relation to risk-weighted assets.
Return on leverage ratio denominator, gross
This measure provides information on the revenues of the business in relation to leverage ratio denominator.
Cost / income ratio
Adjusted cost / income ratio
This measure provides information on the efficiency of the business by comparing operating expenses with gross income.
This measure provides information on the efficiency of the business by comparing operating expenses with gross income, while
excluding items that management believes are not representative of the underlying performance of the businesses.
Net profit growth
This measure provides information on profit growth in comparison with the prior period.
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
7
Our Board of Directors
1. Axel A. Weber
Chairman of the Board of Directors / Chairperson
of(cid:124)the Corporate Culture and Responsibility
Committee / Chairperson of the Governance and
Nominating Committee
2. Julie G. Richardson
Member of the Compensation Committee / member
of the Risk Committee
3. Ann F. Godbehere
Chairperson of the Compensation
Committee / member of the Audit Committee
4. Jeremy Anderson
Chairperson of the Audit Committee / member of
the Corporate Culture and Responsibility Committee
5. Dieter Wemmer
Member of the Compensation Committee / member
of the Risk Committee
6. David Sidwell
Senior Independent Director / Chairperson of the
Risk Committee / member of the Governance and
Nominating Committee
7. Beatrice Weder di Mauro
Member of the Audit Committee / member of the
Corporate Culture and Responsibility Committee
8. Fred Hu
Member of the Board of Directors
9.
Isabelle Romy
Member of the Audit Committee / member of the
Governance and Nominating Committee
10. Reto Francioni
Member of the Corporate Culture and Responsibility
Committee / member of the Risk Committee
11. Michel Demaré
Independent Vice Chairman / member of the
Audit Committee / member of the Compensation
Committee / member of the Governance and
Nominating Committee
12. Robert W. Scully*
Member of the Risk Committee
*Robert W. Scully is not present on the picture
8
4
1
3
2
6
5
10
11
8
7
9
The Board of Directors (BoD) of UBS Group AG, under the
leadership of the Chairman, consists of six to 12 members as per
our Articles of Association. The BoD decides on the strategy of the
Group upon recommendation of the Group Chief Executive
Officer (Group CEO) and is responsible for the overall direction,
supervision and control of the Group and its management as well
as for supervising compliance with applicable laws, rules and
regulations. The BoD exercises oversight over UBS Group AG and
its subsidiaries and is responsible for establishing a clear Group
framework
governance
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
Our Group Executive Board
UBS Group AG operates under a strict dual board structure, as mandated by Swiss
banking law, and therefore the BoD delegates the management of the business to the
GEB. Under the leadership of the Group CEO, the GEB 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
10
1. Sergio P. Ermotti
Group Chief Executive Offi cer
2. Edmund Koh
President UBS Asia Pacifi c
3. Kirt Gardner
Group Chief Financial Offi cer
4. Sabine Keller-Busse
Group Chief Operating Offi cer
5. Markus Ronner
Group Chief Compliance and Governance Offi cer
6. Robert Karofsky
Co-President Investment Bank
7. Piero Novelli
Co-President Investment Bank
8. Ulrich Körner
President Asset Management and President UBS
Europe, Middle East and Africa
9. Axel P. Lehmann
President Personal & Corporate Banking and
President UBS Switzerland
10. Martin Blessing
Co-President Global Wealth Management
11. Christian Bluhm
Group Chief Risk Offi cer
12. Tom Naratil
Co-President Global Wealth Management and
President UBS Americas
13. Markus U. Diethelm
Group General Counsel
10
2
3
4
5
7
1
8
9
6
12
11
13
11
Our evolution
Since our origins in the mid-19th century, many financial
institutions have become part of the history of our firm and have
helped to shape its development. 1998 was a major turning
point for the firm, when two of the then three largest banks of
Switzerland, Union Bank of Switzerland and Swiss Bank
Corporation (SBC), merged to form today’s UBS. At the time of
the merger, both banks were already well established and
successful in their own right. Union Bank of Switzerland had
grown organically to become the largest Swiss bank. In contrast,
SBC had grown mainly through a combination of strategic
partnerships and acquisitions, including S.G. Warburg in 1995.
In 2000, we acquired PaineWebber, a US brokerage and asset
management firm whose roots went back to 1879, establishing
us as a significant player in the US. Over the past half century
and more, we have largely organically built a strong presence in
the Asia Pacific region, where we are the largest wealth
manager (measured by invested assets), a top-tier investment
bank and an established player in asset management.
During the financial crisis of 2008, we incurred significant
losses. In 2011, we initiated a strategic transformation of our
firm toward a business model that focused on our core
businesses of wealth management and personal and corporate
banking in Switzerland. We sought to revert to our roots,
emphasizing a client-centric model that requires less risk-taking
and capital, and have successfully completed this transformation.
Three keys
Our Pillars, Principles and Behaviors, launched in 2013, are the
foundation for our corporate strategy, identity and culture.
Today, we are a global financial services firm, consisting of
the preeminent global wealth manager to high net worth and
ultra high net worth clients, the leading personal and corporate
banking business in Switzerland, a global asset manager and a
focused investment bank.
The chart on the next page provides an overview of our
principal legal entities and reflects our legal entity structure.
→ Refer to www.ubs.com/history for more information
Most recent changes to
our legal entity structure
In 2014, we began adapting our legal entity structure to
improve the resolvability of the Group in response to too big
to fail requirements in Switzerland and recovery and resolution
regulation in other countries in which the Group operates.
We continue to consider further changes to the Group’s
legal structure in response to regulatory requirements and
other external developments. 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
➔ Refer to the “Regulatory and legal developments”
section of this report for more information
12
2014
2015
Holding company
UBS structure
• UBS Group AG became the holding
• Transferred our personal and corporate
company of the Group
banking and wealth management
businesses booked in Switzerland from
UBS AG to the newly established UBS
Switzerland AG
• Implemented a more self-suffi cient
business and operating model for UBS
Limited
• UBS Business Solutions AG, a direct
subsidiary of UBS Group AG, was
established as the Group service
company
The legal structure of the UBS Group as of 1 March 2019
(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)
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(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: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:21)(cid:14)(cid:24)(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: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)
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(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:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)
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(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:23)(cid:14)(cid:24)
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(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:24)(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:21)(cid:19)(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)
2016
2017
2018
2019
UBS structure
UBS Business Solutions
UBS Group Funding
(Switzerland) AG
• UBS Americas Holding LLC
• Shared services functions transferred
in(cid:124)Switzerland and the UK from UBS AG
to(cid:124)UBS Business Solutions AG
• 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
• Transferred our then outstanding
TLAC-eligible senior unsecured debt to
UBS Group Funding (Switzerland) AG
as(cid:124)the issuer
designated as our intermediate
holding company for our US
subsidiaries
• Wealth management subsidiaries
in various European countries
merged into UBS Europe SE
• Majority of Asset Management’s
operating subsidiaries transferred
to UBS Asset Management AG
• UBS Group Funding (Switzerland)
AG established as a wholly
owned direct subsidiary to issue
loss-absorbing AT1 capital
instruments and TLAC-eligible
senior unsecured debt,
guaranteed by UBS Group AG
UBS Group Funding
(Switzerland) AG
UBS Europe SE
• Substituted UBS Group AG where it
was the issuer of outstanding AT1
capital instruments with UBS Group
Funding (Switzerland) AG
• Merger of UBS Limited, our UK-
headquartered subsidiary, into
UBS Europe SE, our German-
headquartered European subsidiary,
prior to the UK’s scheduled departure
from the EU at the end of March 2019
13
Our strategy,
business model
and environment
Management report
Our strategy, business model and environment
Our strategy
Our strategy
Attractive business model
is centered on our
Our strategy
leading global wealth
management business and our premier personal and corporate
banking business in Switzerland, complemented by our focused
investment bank and global asset manager. We concentrate on
capital-efficient businesses in our targeted markets, where we
have a strong competitive position and an attractive long-term
growth or profitability outlook.
We are the preeminent global wealth manager to high net
worth and ultra high net worth clients, based on invested assets.
We have a strong presence in the largest market, the United
States, and the leading position in the fastest-growing region,
Asia Pacific, based on invested assets. Our global wealth
management business benefits from its scale, which is difficult
to replicate organically, and leading positions across the high net
worth and ultra high net worth client segments in an industry
with attractive growth prospects. The partnership between our
business divisions is critical to the success of our strategy and a
source of competitive advantage.
Capital strength is the foundation of our strategy and our
business model is capital-accretive and capital-efficient.
Long-term value creation through cost- and capital-
efficient growth
We are managing UBS for the long term, focusing on
sustainable profit growth and responsible resource deployment.
We aim to balance growth opportunities with cost and capital
efficiency in order to drive attractive risk-adjusted returns and
sustainable performance.
Revenue growth
We believe we can grow our revenues at least at the rate of
global economic expansion over the cycle, by executing our
plans with discipline and by taking advantage of favorable
market and
Improved collaboration and
partnership across our business divisions provide further revenue
growth potential and enable us to better meet the needs of our
ultra high net worth and Global Family Office clients.
industry trends.
Geographically, we expect the US and Asia Pacific to be the
strongest contributors to future profit growth. We are already a
strong player in the US and Latin America, with ambitions to
grow further by capturing market share and benefiting from
secular growth trends. We believe Asia Pacific, particularly
China, presents a significant long-term opportunity, given its
economic expansion and wealth creation. Our competitive
position in the region is strong and we are well positioned to
capture the growth opportunities across our businesses. In
Switzerland, our home market, we intend to reinforce our
leadership position. In Europe, the Middle East and Africa, we
want to leverage our existing capabilities to grow our market
16
share during the further consolidation that is expected in the
financial services industry.
→ Refer to “Industry trends” in the “Our environment” section of
this report for more information on the expected industry
consolidation
Cost efficiency
We are a cost-conscious organization with objectives to improve
our overall cost efficiency. Our aim is to keep costs, excluding
performance-based compensation which is linked to revenues,
broadly flat over the next three years, while growing our revenues.
We plan to continue to invest in technology to improve
efficiency and effectiveness, drive growth and better serve our
clients.
In order to further strengthen the business divisions’ ownership
of Corporate Center costs and align Group and divisional
performance, we have adjusted our Corporate Center cost
allocation methodology. A higher proportion of these costs will be
allocated to the business divisions from the first quarter of 2019.
→ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on the
changes in cost allocations to business divisions
Capital efficiency
We remain disciplined when deploying capital across our businesses,
aiming to cover the cost of capital where capital is allocated.
We are improving transparency and accountability regarding
the use of resources, allowing the business divisions to further
optimize their capital usage and pursue growth opportunities in
a capital-efficient manner. Consequently, we have adapted our
equity attribution framework and, from the first quarter of
2019, will further allocate to the business divisions resources
that were previously centrally held.
→ Refer to “Equity attribution and return on attributed equity” in
the “Capital management” section of this report for more
information on how equity is attributed to our business divisions
→ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on the
changes in resource allocations to business divisions
Attractive capital returns
Our capital strength and capital-accretive business model allow us
to grow our business while delivering attractive capital returns to
our shareholders.
We aim to increase our ordinary dividend per share at a mid-
to-high single-digit percentage each year. We also aim to return
excess capital, after accruals for ordinary dividends, most likely in
the form of share repurchases. We consider our business
outlook and capital plan, as well as other developments, in
determining excess capital available for share repurchases.
Performance targets and measurement
l
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o
m
s
s
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i
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b
,
y
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t
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r
t
s
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o
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d
n
a
Targets, ambitions and capital and resource guidelines
In October 2018, we refined our performance target framework,
introducing more specific targets and ambitions for the Group
targets and ambitions are
and business divisions. Our
underpinned by our latest three-year strategic plan. Our strategic
plan reflects our strategic initiatives, management actions as well
as certain economic and market assumptions. The changes take
into account the effects of the changes in Corporate Center
allocations and our equity attribution methodology, which came
into effect on 1 January 2019.
tax growth
Targets are measured on an annual basis, except our adjusted
profit before
for Global Wealth
Management, Personal & Corporate Banking and Asset
Management, and the adjusted return on attributed equity
target for the Investment Bank, all of which represent the
average annual performance we aim to deliver over the cycle.
targets
The table on the next page shows the performance
targets, ambitions, and capital and resource guidelines for
the Group and business divisions for the 2019–2021 period.
Our targets represent what we expect to achieve in the short
term. Our ambitions reflect what we aim to achieve within
the next three years.
Both Group and business division performance against targets
are taken into account when determining variable compensation.
→ Refer to “Performance and compensation at a glance” in the
“Compensation” section of this report for more information on
variable compensation
Group targets and ambitions
Our Group targets reflect our overarching goal of growing our
business while delivering attractive capital
returns and
maintaining disciplined resource management.
Regulatory capital plays an important role in how we manage
our business. It drives our regulatory capital ratios, which are a
key input for defining our risk appetite and a primary constraint
on our ability to invest or return capital to shareholders. We
have therefore adopted return on common equity tier 1 (CET1)
capital as a Group target, aiming at around 15% on a reported
basis in 2019, with an ambition to improve to around 17% by
2021.
For our cost efficiency target, we believe adjusted financials
better reflect our fundamental business performance than
reported financials. Our reported and adjusted results have been
converging as we have reduced restructuring expenses, and we
expect this convergence to continue. We are targeting an
adjusted cost / income ratio of around 77% in 2019, with the
ambition to improve to around 72% by 2021.
Divisional targets and ambitions
Our divisional targets include measures of profitability, efficiency
and growth, tailored to the strategic objectives and market
conditions of each business division, and underpin our Group
targets.
17
Our strategy, business model and environment
Performance targets and measurement
Targets, ambitions and capital and resource guidelines 2019–2021
Group
Global Wealth
Management
Personal & Corporate
Banking
Asset Management
Investment Bank
1
2
3
4
5
2
6
5
2
7
5
2
6
8
2
9
Reported return on CET1 capital
Adjusted cost / income ratio1
CET1 capital ratio
CET1 leverage ratio
Adjusted pre-tax profit growth1
Adjusted cost / income ratio1
Net new money growth
Adjusted pre-tax profit growth1
Adjusted cost / income ratio1
Net interest margin
Adjusted pre-tax profit growth1
Adjusted cost / income ratio1
Net new money growth (excl. money markets)
Adjusted return on attributed equity1
Adjusted cost / income ratio1
RWA and LRD in relation to Group
Targets
Ambitions
FY19–21
~17%
~72%
~70%
~56%
~68%
~75%
10–15%2
2–4%
3–5%2
145–155 bps
~10%2
3–5%
~15%2,3
FY19
~15%
~77%
~75%
~59%
~72%
~78%
Capital /
resource
guidelines
FY19–21
~13%
~3.7%
~1/3
1 Refer to the “Group performance” section of this report for information on adjusting items. 2 Over the cycle. 3 Repositioned from a minimum return to a performance target.
Definitions
1
2
Reported return on CET1 capital
Adjusted cost / income ratio
Net profit attributable to shareholders divided by average CET1 capital.
Adjusted operating expenses divided by adjusted operating income before credit loss (expense) / recovery.
CET1 capital ratio
CET1 leverage ratio
CET1 capital divided by risk-weighted assets as of period end.
CET1 capital divided by leverage ratio denominator as of period end.
Adjusted pre-tax profit growth
Change in business division adjusted profit before tax between current and comparison periods divided by business
Net new money growth
Net interest margin
division adjusted profit before tax in the comparison period. For Asset Management, this metric excludes the effect
of business exits. For Personal & Corporate Banking, it is measured in Swiss francs.
Net new money for the period (annualized as applicable) divided by invested assets at the beginning of the period.
Net interest income (annualized as applicable) divided by average loans.
Adjusted return on attributed equity (RoAE)
Business division adjusted operating profit before tax (annualized as applicable) divided by average attributed equity.
RWA and LRD in relation to Group
Risk-weighted assets (RWA) or leverage ratio denominator (LRD) attributed to the Investment Bank divided by total
Group RWA or LRD, as applicable.
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Our businesses
Working in partnership
We operate through four business divisions – Global Wealth
Management,
Banking, Asset
Management and the Investment Bank – as well as our
Corporate Center.
Personal & Corporate
We see partnership as key to our growth, both within and
between business divisions. We are at our best when we
combine our strengths to provide our clients with more
comprehensive and better solutions.
How we deliver the whole firm to our clients – examples
Our global reach and the breadth of our expertise are major
assets that set us apart from our competitors. Combining our
strengths makes us a better firm. Initiatives such as the Group
Franchise Awards encourage employees to look for ways to build
bridges between areas and offer the whole firm to our clients.
Wealth Management Platform
Our Wealth Management Platform was built
on our Swiss IT platform – as Global Wealth
Management migrates to one operating
platform outside of the US. The same
interface is shared by Personal & Corporate
Banking clients in Switzerland and Global
Wealth Management clients outside
the US. In the US the Wealth Management
Americas Platform is expected to
improve advisor productivity by leveraging
a newly-created advisory utility.
alth M an a g e
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In
Global Family Offi ce
Our Global Family Offi ce unit brings
together the capabilities of Global Wealth
Management, Asset Management and
the Investment Bank. It provides
customized, institutional-style service
to wealthy families and individuals
seeking access to, or advice on,
capital market activities.
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set Management
Client evolution, shifts and referrals
Personal & Corporate Banking generates
client shifts and referrals to other business
divisions. For example, personal banking
clients are shifted to Global Wealth
Management, and corporate and
institutional segment clients are referred to
Asset Management for pension fund
solutions or the Investment Bank for capital
market and corporate transactions.
Cross-divisional product development
Asset Management and Global Wealth
Management collaborate to design
products such as the Systematic Allocation
Portfolio, which in the three years since
it was launched has attracted more
than USD 28 billion in invested assets. In
partnership with the World Bank and
other institutions, we have also developed
a fully sustainable investing cross-asset
mandate portfolio for private clients.
Investment solutions aligned with this asset
allocation have attracted USD 2.8 billion
of investments in support of objectives like
the Sustainable Development Goals (SDG)
as of 31 December 2018.
19
Definitions
Reported return on CET1 capital
Adjusted cost / income ratio
CET1 capital ratio
CET1 leverage ratio
Adjusted pre-tax profit growth
Net new money growth
Net interest margin
Adjusted return on attributed equity (RoAE)
RWA and LRD in relation to Group
Our strategy, business model and environment
Our businesses
Global Wealth Management
We are the preeminent global wealth manager to high net
worth and ultra high net worth clients, with USD 2.3 trillion in
invested assets. Our goal is to provide tailored investment advice
and solutions to private clients, in particular in the ultra high net
worth and high net worth segments.
At the start of 2018, Wealth Management and Wealth
Management Americas were combined into a single unit designed
to better deliver our services to clients, realize meaningful
improvements in efficiency and accelerate growth for our
shareholders. We combined the central functions of Chief
Investment Office (CIO), Investment Platforms and Solutions (IPS),
Client Strategy Office (CSO) and Chief Operating Office (COO),
which enables us to operate these central functions efficiently and
effectively support the regional business units, which remain close
to our clients with decentralized service delivery. The unification of
the ultra high net worth business unit enables us to leverage best
practices in serving the wealthiest individuals globally and
supporting our growth ambitions by working closer together. We
have established a referral and collaboration framework that
fosters cross-regional teamwork.
Our focus
We serve high net worth and ultra high net worth individuals,
families and family offices around the world and affluent
clients in selected markets. Our business is focused on the
high net worth and ultra high net worth segments, including
family offices. Our unified Global Wealth Management
division helps us to better serve clients with global needs. We
are already a market leader in the ultra high net worth
segment outside the US.1 We believe that Global Wealth
Management can become the firm of choice for the
wealthiest clients both in and outside the US. We expect that
increasing our market share with ultra high net worth clients
in the US could generate approximately USD 70 billion of
cumulative net new money from 2019 to 2021.
We expect that our business growth will occur primarily in the
US, in part from the initiatives described above, and in Asia
Pacific, where we are already the largest wealth manager based
on invested assets.
We are focusing on
increasing mandate and
lending
penetration with innovative solutions for our clients as well as
enhancing the advisors’ productivity in these regions by making
operational processes more efficient. Additionally, we aim to
maintain low attrition and to increase our share of clients’
business.
As of 31 December 2018, approximately 80% of invested
assets booked outside the Americas were on the Wealth
Management Platform. We plan to eventually converge to a
single operating platform outside the Americas. In parallel, we
are working on creating the Wealth Management Americas
Platform in collaboration with third-party software provider
Broadridge. This platform is anticipated to improve advisor
productivity and support advisors in growing their businesses.
We expect the platform, scheduled to go live in 2021, to
increase efficiency and scalability.
→ Refer to “Our focus on technology” in the “How we create
value for our stakeholders” section of this report for more
information on the Wealth Management Platform and Group-
wide technology spend
How we operate
We have a global footprint, with a strong presence in the
world’s largest and fastest-growing markets. The US is our
largest market, representing more than 50% of our invested
assets. We are the largest wealth manager in Asia Pacific and
the second largest in Latin America, based on invested assets.1
In Switzerland, we maintain the leading market position and
collaborate closely with Personal & Corporate Banking, Asset
Management and the Investment Bank.
Our broad domestic footprint in Europe enables us to provide
locally adapted offerings, while local offices across Central
Europe, the Middle East and Africa keep us close to our clients.
Collaboration with
Investment Bank and Asset
Management allows us to offer ultra high net worth clients
tailored institutional coverage and global execution.
the
→ Refer to “Working in partnership” in this section for more
information on the Global Family Office
We continue to control costs and are focused on identifying
new synergies across Global Wealth Management. We expect to
realize USD 600 million of cost savings over the next three years
by delayering and removing duplicate functions, reducing
replacement hiring and optimizing third-party spending. At the
same time, we expect to make strategic investments totaling
more than USD 1 billion through 2021, including USD 600
million in technology, to further improve client and advisor
experience.
Our main competitors are either large US players, but with
less reach outside the US – including Bank of America,
Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo –
or geographically diverse firms without our scale or US exposure,
such as BNP Paribas, Credit Suisse, Deutsche Bank, HSBC and
Julius Baer. Our size and diversified client portfolio are
exceptional and would be difficult and expensive for other
wealth managers to replicate organically.
11 Statements of market position for Global Wealth Management are UBS's estimates based on published invested assets and internal estimates.
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What we offer
By operating as a single business, we aim to offer our clients the
best wealth management solutions, services and expertise
globally.
We deliver our
investment solutions through our
IPS
offerings, including flagship investment mandates, consisting of
our innovative long-term themes and sustainable investment
offerings. Our core
investment solutions consist of: UBS
Transact, a self-directed account granting clients access to UBS
execution capabilities and the UBS House View; UBS Advice,
which adds portfolio monitoring against an agreed investment
strategy to self-directed accounts; and UBS Manage, a
discretionary mandate solution where we use our expertise to
invest clients’ assets according to a predefined investment
strategy. We provide our clients with investment analysis and
thought
investment
strategies through the CIO and the CSO. The CIO provides a
concise, comprehensive UBS House View, which identifies and
communicates investment opportunities and market risks to help
protect and grow our clients’ wealth over generations. The CSO
aims at deepening the firm’s understanding of clients’ needs,
behaviors and preferences to tailor our offerings and better
serve our clients.
formulate our client
leadership and
including wealth planning,
Clients benefit from our comprehensive set of capabilities and
expertise,
lending,
philanthropy, corporate and banking services as well as family
office services in collaboration with the Investment Bank and
Asset Management.
investing,
→ Refer to “Working in partnership” in this section for more
information on collaboration between the business divisions
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We are continuously working to improve our offering. Key
innovations launched in 2018 include enhancements to UBS
Manage, which now incorporates mandate solutions with 100%
sustainable investments, and two additional impact investment
solutions. In addition, we launched the Systematic Allocation
Portfolio in the US, a UBS Manage offering based on the UBS
CIO World Equity Market Model, which analyzes economic and
financial data to detect signs of improving or deteriorating
equity markets to adjust portfolio exposure dynamically.
How we serve our clients
We serve our clients through local offices and dedicated
advisors. Our ultra high net worth business is managed globally
across the regions.
We use a mix of digital and non-digital channels (including
marketing campaigns, events, advertising, publications and
digital-only solutions) to help drive greater awareness of UBS
relationships
reinforce
among prospects and
between advisors and clients.
trust-based
How we are organized
Our business division is organized into the regional business
units the Americas, which includes the US, Canada and Latin
America; Europe, Middle East and Africa (EMEA); Asia Pacific;
and Switzerland, as well as the business unit for our ultra high
net worth clients. Central functions for global capabilities
supporting these business units are the CIO, IPS, the CSO and
the COO. We are governed by executive, risk, operating as well
as asset and liability committees.
4
regional
business units
The Americas, including the US,
Canada and Latin America,
EMEA, Asia Pacific, and
Switzerland
ultra high net
worth business unit
Serves clients globally across the
regions
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Our strategy, business model and environment
Our businesses
Personal & Corporate Banking
As the leading personal and corporate bank in Switzerland, we
provide comprehensive financial products and services to private,
corporate and institutional clients. We are among the country’s
foremost players in the private and corporate loan market, with
a well-collateralized and conservatively managed
lending
portfolio. Personal & Corporate Banking is at the core of our
universal bank delivery model in Switzerland.
Our focus
We are the premier personal and corporate bank in Switzerland,
providing superior client experience and combining technology
with a personal touch.
We have a strong pipeline of growth initiatives in both of our
business areas. In Personal Banking, for example, we are further
improving technology-enabled mortgage advisory and aim to
improve efficiency by streamlining processes and introducing
new digital self-service tools. In Corporate & Institutional Clients
(CIC), we are investing for growth with a focus on our SMEs,
corporates and multinationals businesses and leveraging our
transaction banking capabilities. We have recently launched a
number of innovations and digital solutions such as the UBS
Atrium investor portal, which allows institutional investors to
invest in mortgages directly, our vendor leasing solution and the
trade
finance platform we.trade, based on blockchain
technology, which we developed as part of a consortium with
other banks.
Technology plays a key role in our client-centered operating
model and we aim to expand our digital leadership. Our multi-
year digitalization program enables us to further enhance the
client experience. On the basis of advanced analytics and
blockchain technologies, we are able to offer clients new
products and to identify new cross-selling opportunities.
→ Refer to “Our focus on technology” in the “How we create
value for our stakeholders” section of this report for more
information on our investment in technology
Operationally, we strive for superb execution, focusing on
efficiency while improving our service quality and overall agility.
How we operate
While we operate primarily in our home market of Switzerland,
we also provide capabilities to support the growth of the
international business activities of our corporate and institutional
clients through our local hubs in Frankfurt, New York, Hong
Kong and Singapore.
22
In the CIC business, our main competitors are Credit Suisse,
the cantonal banks and globally active foreign banks. We
in areas covering basic banking services, cash
compete
management,
finance, asset servicing,
corporate finance and lending, as well as cash and securities
transactions for banks.
trade and export
In the Swiss personal banking business, our competitors are
Credit Suisse, PostFinance, Raiffeisen, the cantonal banks and
other regional and local Swiss banks. We compete in areas
including basic banking, mortgages and foreign exchange, as
well as investment mandates and funds.
What we offer
Our personal banking clients have access to a comprehensive life
cycle-based offering and convenient digital banking. We deliver
a broad range of basic banking products, from payments to
deposits, cards, online and mobile banking, as well as lending
(predominantly mortgages), investments and retirement services.
The overall service range is complemented by our KeyClub
reward program. In close collaboration with Global Wealth
Management, we offer leading private banking and wealth
management services.
→ Refer to “Working in partnership” in this section for more
information on collaboration between the business divisions
Our corporate and institutional clients benefit from our
financing and investment solutions, notably from 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, receivables
finance, as well as global custody solutions to institutional
clients. In real estate, we offer our mortgage platform UBS
Atrium, connecting institutional investors with Swiss mortgage
to create a competitive offering and attractive
holders
investment opportunities for institutional investors.
We collaborate closely with the Investment Bank to offer
capital market and
foreign exchange products, hedging
strategies and trading capabilities, as well as corporate finance
advice. In cooperation with Asset Management, we also provide
fund and portfolio management solutions.
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How we serve our clients
We are the recognized digital leader with the highest online and
mobile penetration in Switzerland and continue to invest in a
multi-channel distribution strategy to further enhance our
leading position.
We are adapting existing branch formats to suit evolving
client needs, converting some locations to smaller, more agile
branches that serve as marketing and digital support hubs and
ensure a strong local presence. We aim to further reshape our
physical footprint in an innovative and client-centric way, namely
by defining future branch formats with different purposes.
In addition, we continue to shift basic banking services and
transactions from branches to contact centers and digital
channels, which already serve most of our 2.5 million personal
banking clients. Dedicated client advisors serve personal banking
clients who have more individualized needs.
Similarly, we bundle our digital offering for small businesses
in our Digital Corporate Bank, which offers the convenience and
leading digital solutions that small companies look for.
For marketing campaigns, we use online media (including
social media and search engine advertising), out-of-home media
(posters and digital billboards) and, very selectively, print, TV,
radio and cinema advertising. In line with our position as a
digital leader in Swiss banking, and because of the channel’s
cost effectiveness, we follow a digital-first media strategy. More
than 50% of our media investment goes into online channels.
How we are organized
Our business division is organized into Personal Banking and
CIC, and further into client and (for corporate banking) product
segments. Geographically, our business and our 279 branches
are organized into 10 regions, covering distinct Swiss economic
areas. We are governed by executive, risk and operating
committees, and operate mainly through UBS Switzerland AG.
279
branches in
Switzerland
Personal Banking with
279 branches in Switzerland,
of which 91 branches are
shared with GWM
and 60 branches are
shared with CIC
23
Our strategy, business model and environment
Our businesses
Asset Management
Asset Management is a large-scale and diversified global asset
manager, with USD 781 billion in invested assets. We offer
investment capabilities and styles across all major traditional and
alternative asset classes, as well as platform solutions and
advisory support to institutions, wholesale intermediaries and
Global Wealth Management clients around the world.
These programs are expected to be completed by 2020. We
leverage new
to optimize processes and
also continue
technologies across our Client Coverage, Investments and
Products, Platforms & Specialists areas.
→ Refer to “Our focus on technology” in the “How we create
value for our stakeholders” section of this report for more
information on our UBS Partner offering
Our focus
How we operate
We cover the main asset management markets globally, with a
presence in 23 countries grouped in four regions: the Americas;
Europe, Middle East and Africa; Switzerland; and Asia Pacific.
Our main competitors are global firms with wide-ranging
capabilities and distribution channels, such as Amundi,
BlackRock, DWS, Goldman Sachs Asset Management, Invesco,
JPMorgan Asset Management, Morgan Stanley Investment
Management and Schroders, as well as firms with a specific
market or asset class focus.
What we offer
We offer clients a wide range of investment products and
services in different asset classes in the form of segregated,
pooled or advisory mandates as well as registered investment
funds in various jurisdictions.
Our traditional and alternative capabilities include equities,
fixed income, hedge funds, real estate and private markets,
indexed and alternative beta strategies (including ETFs) as well as
sustainable and impact investing products and solutions.
Our Investment Solutions business draws on the breadth of
our capabilities to offer asset allocation and currency investment
strategies across the risk / return spectrum; customized multi-
asset solutions, advisory and fiduciary services; and multi-
manager hedge fund solutions and advisory services.
Our Platform Services capabilities include UBS Fondcenter, a
leading fund platform in Europe and Asia; Fund Management
Services, providing fund corporate governance and white-
labeling services; and UBS Partner, our innovative new offering
that provides banks with powerful tools and analytics to support
their advisory offering.
Building on our global reach and strengths across all major
traditional and alternative asset classes, as well as our
differentiated client proposition, our strategy focuses on
capturing opportunities in areas with above-average industry
growth and is based on six priorities.
In wholesale, which is a rapidly evolving and attractive
segment, we aim to significantly expand our market share
through a combination of product innovation, the development
of strategic partnerships and
leverage of our
increased
comprehensive Platform Services capabilities.
We continue to develop our award-winning1 Indexed and
Alternative Beta business (including exchange-traded funds
(ETFs) in Asia Pacific, Europe and Switzerland). Since the end of
2016, this business has grown by approximately 50% in terms
of invested assets driven by continued product innovation and
our highly scalable platform.
Our Investment Solutions business provides access to the
breadth and depth of our capabilities across public and private
markets, and combines them to meet the needs of clients across
the globe, as few other firms can. To drive further growth, we
are focused on delivering superior multi-asset strategies for
wholesale clients and providing components of the investment
process to strategic partners.
Sustainable & Impact Investing is a further key area, as clients
are increasingly seeking solutions that combine their investment
goals with sustainability objectives. We aim to establish ourselves
as a leading provider through: product and service innovation;
dedicated research; integration of environmental, social and
governance factors into our investment processes; leveraging
our proprietary analytics; and active corporate engagement.
Geographically, we are further expanding our onshore
business in China, one of the fastest-growing asset management
markets in the world, building on our extensive and long-
standing presence in Asia Pacific.
To support our growth, we have a continuous emphasis on
increasing efficiency and effectiveness, driven through our
operational excellence initiatives. This includes our flagship
programs to replace our core IT platform, develop our data
analytic capabilities and further evolve our operations platform.
11 Second largest Europe-based indexed player based on peers’ public reporting as of November 2018 (UBS calculation) and ranked fifth largest ETF provider in Europe as of December 2018 (source: ETFGI).
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How we serve our clients
How we are organized
We deliver our investment products and services directly to
institutional clients. High net worth and retail clients are served
through Global Wealth Management, third-party banks and
distributors.
Our clients require world-class holistic advice and global
coverage. In order to enable our client relationship managers to
provide the specialized advice our clients need, and to deliver to
them the full strengths of our firm, our Client Coverage teams
are aligned along global segments (institutional, wholesale and
Global Wealth Management). In addition, we believe it is equally
important that our relationship managers are located near our
clients to help ensure that our teams are best placed to build
long-term relationships and develop a deep understanding of
the challenges they face.
→ Refer to “Working in partnership” in this section for examples
of areas of collaboration
Our business division is organized by the products and services
we offer: Client Coverage, Investments, Real Estate & Private
Markets, Products, Platforms & Specialists, and the Chief
Operating Officer area. While we are based in 23 countries
worldwide across four regions, 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, supplemented by business unit-specific committees.
London
Chicago
Zurich
New York
23
countries
Covering the main asset
management markets globally
8
main hubs
Connecting the full breadth of
our investment insights across
the world to serve our clients
Tokyo
Hong Kong
Singapore
Sydney
1
25
Our strategy, business model and environment
Our businesses
Investment Bank
The Investment Bank provides a range of services to institutional,
corporate and wealth management clients to help them raise
capital, grow their businesses, invest and manage risks. We are
focused on our traditional strengths in advisory, capital markets,
equities and foreign exchange, complemented by a targeted
rates and credit platform. We use our powerful research and
technology capabilities to support our clients as they adapt to
the evolving market structures and changes in the regulatory,
technological, economic and competitive landscape.
We aspire to deliver market-leading solutions to clients, using
our intellectual capital and electronic platforms. We also provide
services to Global Wealth Management, Personal & Corporate
Banking and Asset Management, while managing our
balance sheet, costs, risk-weighted assets and leverage ratio
denominator with discipline.
Our focus
Our key priority is disciplined growth in the capital-light advisory
and execution businesses, while accelerating our digital
transformation.
Corporate Client Solutions is focused on deepening selected
industry verticals, providing macro views complemented by
expertise within specific sub-sectors, and increasing senior-level
client interactions. In Equities, we aim to offer our clients a
range of products, innovative solutions, expert advice, access to
liquidity and seamless execution, as well as a continued flow of
differentiated content. In Foreign Exchange, Rates and Credit,
our focus is on delivering returns from recent investments made
in talent and technology. We also plan to expand our Foreign
Exchange business and our Solutions business within Rates and
Credit. We continue to build out UBS Evidence Lab Innovations
to concentrate on data-driven research.
→ Refer to “Our focus on technology” in the “How we create
value for our stakeholders” section of this report for more
information on Evidence Lab Innovations
Our digital strategy is led by our businesses, which harness
technology to deliver superior and differentiated client service
and content. We established UBS Investment Bank Innovation
Lab to speed up innovation by enabling proofs of concept.
We are also making efforts to digitalize our entire front-to-
back processes.
Our balanced global reach gives us attractive options for
growth across various regions. In the Americas, the largest
investment banking fee pool globally, we are focusing on
increasing our market share in our Advisory, Equity Capital
Markets, Equities and Foreign Exchange, Rates and Credit
businesses.
In Asia Pacific, we see opportunities primarily from expected
market internationalization and growth in China. We are
planning to grow there by further strengthening Corporate
Client Solutions, both onshore and offshore.
26
Partnership across the Investment Bank’s businesses and the
Group should also lead to growth by delivering global products
to each region, leveraging our global connectivity across borders
and sharing and strengthening our best client relationships.
→ Refer to “Working in partnership” in this section for examples
of areas of collaboration
How we operate
We have a global reach, with a presence in 33 countries and
principal offices in the major financial hubs. Our business is
geographically balanced, with 45% of adjusted profit before
tax in 2018 coming from the Americas, 25% from Europe,
Middle East and Africa (including Switzerland), and 30% from
Asia Pacific.
Competing firms are active in many of our markets, but our
strategy differentiates us with its focus on leadership in the
selected areas where we have chosen to compete, and a
business model that leverages talent and technology rather than
balance sheet.
Our main competitors are the major global investment banks,
including Morgan Stanley, Credit Suisse and Goldman Sachs, as
well as corporate investment banks, including Bank of America,
Barclays, Citigroup, Deutsche Bank and JPMorgan Chase. We
also compete with boutique investment banks and fintechs in
certain regions and products.
What we offer
Through our Corporate Client Solutions business, we advise our
clients on strategic business opportunities and help them raise
capital to fund their activities.
Our Investor Client Services business enables our clients to
buy, sell and finance securities on capital markets across the
globe and to manage their risks and liquidity.
In Equities, we distribute, structure, execute, finance and clear
equity cash and derivative products.
Foreign Exchange, Rates and Credit provides execution
services and solutions, with an emphasis on electronic
trading, and maintains high levels of balance sheet velocity.
In Foreign Exchange, we help our clients manage their
currency exposures and to buy and sell precious metals, and
are recognized as one of the leading foreign exchange
market-makers. Rates and Credit encompasses sales, trading
and market-making in a selected range of products, including
tailored financing solutions.
Furthermore, in Research, we offer clients key insights on
major financial markets and securities around the globe.
Separately, our team of experts in UBS Evidence Lab Innovations
specializes in creating insight-ready datasets for companies of all
sizes, spanning over 50 sectors and 30 countries.
We seek to develop new products and solutions that are
consistent with our capital-efficient business model. These are
typically related to new technologies or changing market
standards. Some examples are UBS Data Solutions, a centralized
data processing and distribution platform, which was launched
to meet client demand for both financial and alternative data,
and UBS Evidence Lab Innovations, as mentioned above.
Since 2005, we have addressed increasing client demand for
sustainable investing by providing thematic and sector research.
socially
We also provide
responsible and impact exchange-traded funds and index-linked
notes. In addition, we offer capital-raising and strategic advisory
services globally to companies that make a positive contribution
to climate change mitigation and adaptation.
investment
solutions
through
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In Equities, we use our execution capabilities, differentiated
research content, bespoke solutions and our global platform to
expand our coverage across a broad set of institutional and
corporate clients.
In Foreign Exchange, Rates and Credit, we deliver seamless
client service through One Client. This is the evolution of our
client franchise coverage model, which aims to drive the best
client
collaboration,
relationships,
technology and data-driven client intelligence.
outcomes
through
In Research, we deliver high-quality differentiated research
to our institutional clients using a wide range of methods,
including UBS Neo, our multi-channel platform.
How we are organized
How we serve our clients
We use a variety of marketing channels, including online and
face-to-face, to interact with our clients.
In Corporate Client Solutions, we leverage our intellectual
capital and relationships to deliver high-quality solutions for
our clients.
Our business division is organized into the following units:
Corporate Client Solutions,
Investor Client Services, and
Research and UBS Evidence Lab Innovations. We are governed
liability
by executive, operating,
committees. Each business unit is organized globally by
product and, within that, by region.
risk, and asset and
London
Frankfurt
Chicago
Zurich
New York
9
financial hubs
In all major financial centers
Tokyo
Shanghai
Hong Kong
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countries
Ensuring a global reach
Singapore
27
Our strategy, business model and environment
Our businesses
Corporate Center
Our Corporate Center provides services to the Group through
the Corporate Center – Services and Group Asset and Liability
Management (Group ALM) units with a focus on quality, risk
mitigation and efficiency. Corporate Center also includes the
Non-core and Legacy Portfolio unit.
How we are organized
Until the end of 2018, we reported Corporate Center as three
separate units: Corporate Center – Services, Group ALM and
Non-core and Legacy Portfolio.
Beginning with our first quarter 2019 report, we will provide
results for total Corporate Center only and will not separately
disclose Corporate Center – Services, Group ALM and Non-core
and Legacy Portfolio. Furthermore, we will operationally
combine Group Treasury with Group ALM and their net retained
operating income will be reported as a separate line item within
Corporate Center.
→ Refer to the “Significant accounting and financial reporting
changes” section in this report for more information on the
changes in the structure of Corporate Center
Corporate Center – Services
Corporate Center – Services consists of the Group Chief
Operating Officer area (Group Technology, Group Corporate
Services, Group Human Resources, Group Operations and Group
Sourcing), Group Finance (excluding Group ALM), Group Legal,
Group Risk Control, Group Communications & Branding, Group
Compliance, Regulatory & Governance, and UBS in society.
Specifically, in the areas of finance, legal, compliance and risk
management and control, we aim to provide high-quality advice
while optimizing resources and mitigating risk. In other areas,
such as human resources, information technology, operations,
and marketing and communications, we align services based on
demand and delivery of defined strategies.
These functions partner with business divisions and Group
ALM through a service-based operating model. Corporate
Center – Services allocates the majority of its operating expenses
to the business divisions and other Corporate Center units, and
determines cost allocations with them as part of the annual
business planning cycle.
In 2018, we aligned our Corporate Center more closely with
the business divisions, while keeping the benefits of a strong
Corporate Center. Increasing proximity between the business
and Corporate Center means UBS can be more agile and
responsive to the needs of our clients, positioning us better to
capture
such as
digitalization. By bringing the activities of the businesses and
Corporate Center closer together, we also increase efficiency
and create a working environment built on a culture of
accountability and collaboration.
front-to-back opportunities
in areas
28
Corporate Center – Group ALM
Group ALM manages the structural risk of our balance sheet,
including interest rate risk, structural foreign exchange risk and
collateral risk, as well as the risks associated with our liquidity
and funding portfolios. Group ALM also seeks to optimize
financial performance by matching assets and liabilities. Group
ALM serves all business divisions and the 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 include
managing the interest rate risk in the banking book on behalf of
Global Wealth Management and Personal & Corporate Banking,
and managing high-quality liquid asset (HQLA) portfolios, 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 other Corporate Center units.
Capital investment and issuance activities consist of managing
our 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.
Group structural risk is managed to meet overall objectives.
These activities include managing the Group’s HQLA and long-
term debt portfolios. The net positive or negative income
generated is allocated to the business divisions and other
Corporate Center units based on their consumption of the
underlying risks and resources.
Corporate Center – Non-core and Legacy Portfolio
Non-core and Legacy Portfolio manages legacy positions from
businesses exited by the Investment Bank, following a largely
passive wind-down strategy. It is overseen by a committee
chaired by the Group Chief Risk Officer. The portfolio also
includes positions relating to
legal matters arising from
businesses that were transferred to it at the time of its
formation.
→ Refer to “Note 21 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information on litigation, regulatory and similar matters
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Our environment
Current market climate
Global economic developments in 2018
The global economy maintained its pace of growth in 2018.
World GDP expanded by 3.8%, almost identical to the 3.9%
growth of 2017.
Economic expansion was as broadly based as in 2017, with
no G20 nations in recession. The US provided much of the
growth impetus, driven, in part, by its Tax Cuts and Jobs Act
introduced in December 2017, which put the US on course for
2.8% growth (up from 2.2% in 2017). The stronger economy
and lower tax rates contributed to more than 20% higher
corporate earnings, despite concerns over a potential trade
conflict with China.
Growth was slower in the eurozone. However, the region
managed to get through the year without major political or
economic shocks. A dispute between the Italian government and
the European Commission was resolved, and the Greek debt
crisis, which in recent years seemed to threaten the integrity of
the eurozone, was largely absent from the headlines. Overall,
eurozone GDP increased by close to 2% for the year. Outside of
the eurozone, the Swiss economy did especially well, expanding
2.6% after 1.7% in the prior year.
Emerging markets faced mounting pressures. Efforts by China
to restrain domestic corporate borrowing cooled its economy,
with growth slowing to 6.5%, from 6.9% in 2017. Other
emerging nations were also affected as the trade conflict
between the US and China dampened business confidence.
Despite such obstacles, most emerging market economies
achieved solid GDP expansion – with the Indian economy even
seeing growth improve to 7.3%, from 6.7%.
This relatively benign backdrop and muted inflation pressures
allowed developed market central banks to continue gradually
tightening monetary policy. The European Central Bank
announced it would end its quantitative easing program, while
the Federal Reserve contracted its balance sheet by USD 50
billion a month and increased its target overnight rate by 1
percentage point in four steps during 2018.
For much of the year, US equities performed strongly in this
environment of sound growth, rising earnings and only gradual
central bank tightening of monetary policy. The strength of the
US market helped lift global stock indexes, more than offsetting
a muted performance from emerging market and eurozone
indexes. However, markets turned volatile in October 2018.
The Morgan Stanley Capital International (MSCI) All Country
World Index – which by late September 2018 had climbed 6%
year to date – saw a correction in the last quarter and ended the
year with a loss of 7.7%. This was the first year of negative
returns since 2011.
Safer assets, such as 10-year US Treasury bonds (USTs),
proved more stable to investors. Yields on 10-year USTs fell
around 40 basis points in the last three months of the year.
Uncertainty over the terms of the UK withdrawal from the EU
captured headlines but had limited effect on global markets.
Economic and market outlook for 2019
The economic cycle is maturing. Potential setbacks such as trade
turmoil and monetary tightening could create obstacles for
investors. However, we do not think they will tip the global
economy into recession. The US-China trade dispute looks set to
remain a concern, but a major escalation that could end the
global economic expansion appears unlikely.
We do not expect the ongoing negotiations on the UK’s
withdrawal from the EU to exert a major influence over global
markets.
Equally, we expect the world’s main central banks to avoid
excessive tightening of monetary policy. For the first time since
the 2008 financial crisis, central bank balance sheets are likely to
be smaller at the end than at the start of the year. The
withdrawal of stimulus will remove a powerful force inhibiting
market volatility. However, with inflation still under control,
policy makers can afford to be gradual in tightening, reducing
the risk that they will undermine growth or unsettle markets
with accelerated rises. In the US, expectations about multiple
interest rate hikes during 2019 have diminished.
We do not see signs of overvaluation in global equity
markets. As of the end of 2018, global stocks traded at a
discount to their 30-year average on a trailing price-to-earnings
basis, reflecting the aggressive sell-off in the fourth quarter and
the higher earnings achieved throughout the year.
Equity markets recovered at the start of 2019, supporting our
view that the sell-off in late 2018 was excessive.
29
Our strategy, business model and environment
Our environment
Industry trends
While our industry was heavily affected by regulatory developments
over the past decade, technology is slowly emerging as the main
driver of change going forward and is expected to affect the
competitive landscape as well as our products and operations.
Digitalization
Technology is changing the way banks operate and we expect this
to continue in step with exponential advances in computing
capability, evolving customer needs and digital trends. Technology
spend is no longer solely considered a means to make banks more
efficient. Today, technology investment is the key to keeping
banks flexible and competitive in a digitalized world and creates
the opportunity to develop new business models.
We strive to deliver state-of-the-art digital tools and services
to provide a better experience for clients and employees. In
doing so, we are continuously improving the ability to transact,
perform day-to-day tasks and add value for the firm. UBS’s
is powered by a growing number of
digital ecosystem
automated systems and processes that generate data, which in
turn drive our efforts
is this
in artificial
convergence of automation, artificial intelligence and strong
human capital that will drive innovation and superior client
experience, as well as enable business growth.
intelligence.
It
Consolidation
We expect further consolidation in the financial services industry,
driven by ongoing margin pressure as well as the increasing scale
advantages resulting from the fixed costs of technology and
regulation. Many
regions and businesses are still highly
fragmented and the search for scale and cost efficiencies is
expected to be a key driver for consolidation. Many banks are also
seeking exposure to regions with attractive growth profiles, such
as Asia and emerging markets, through local acquisitions or
partnerships. Lastly, the increased focus on core capabilities or
geographical footprints and the ongoing simplification of
operating models to reduce operational and compliance risks will
also result in further disposals of non-core businesses and assets.
30
New competitors
Our competitive environment is also evolving. In addition to our
traditional competitors in the asset-gathering businesses, new
entrants are targeting selected components of the value chain.
However, we have not yet seen a fundamental unbundling of
the value chain and client relationships, ultimately resulting in
the disintermediation of banks by new competitors. Over the
longer term, we believe the entry into the financial services
industry of large platform companies could pose a significant
competitive threat, given their strong client franchises and
access to client data.
Regulation
The measures set out by the post-2008 regulatory reform
agenda are now largely in place. While some areas, such as
funding in resolution, must still be fully addressed, and
implementation of certain standards, such as the Basel III capital
rules, is continuing on a national level, the focus is shifting from
regulation to supervision. In parallel, some regulators are
considering reassessing the efficiency of the new frameworks.
In general, regulatory-driven change continues to consume
substantial resources. In 2019, we expect further adjustments
to the Swiss too big to fail framework, including concrete
proposals to implement the finalized Basel III standard at
national level. We anticipate continued work on resolution-
related and derivatives reforms, and a sustained high focus on
conduct and anti-money laundering.
The overall context of these developments is a backdrop of
increased protectionism and new regulatory hurdles, posing
challenges to the provision of cross-border financial services.
Market access restrictions into the EU in particular would have a
significant effect on Switzerland as a financial center including
UBS. Variations in how different countries implement rules, and
an increasing national focus, bring a risk of additional regulatory
fragmentation across the globe, which in turn may lead to higher
costs for us and new financial stability risks. However, we believe
the adaptations made to our business model and proactive
management of regulatory change put us in a strong position to
absorb upcoming changes to the regulatory environment.
→ Refer to the “Regulatory and legal developments” and “Capital
management” sections of this report for more information
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Wealth transfer
Retirement funding
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 bound
to adapt its services and offerings to meet the specific needs and
expectations of growing client groups. We are working to
defend our status as the preferred wealth manager for these
clients through our active segment management strategy. Our
wealth planning expertise is also supported by dedicated
intergenerational wealth transfer services for all segments, such
as Great Wealth for ultra high net worth clients. Wealth Way is
another example that covers wealth transfer. This offering takes
a holistic view of our clients’ financial matters and covers needs
beyond their lifetime to support them in creating a legacy.
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.
31
Our strategy, business model and environment
How we create value for our stakeholders
How we create value for our stakeholders
insights and a holistic approach to tailoring solutions. By building
long-term, personalized relationships with our clients and
partners, we aim to achieve a deep understanding of their needs
and to earn their trust. We draw on the breadth and depth of
our global offering across asset classes and our Platform Services
capabilities to deliver the solutions they need. With over 900
investment professionals, our teams bring distinct investment
styles and philosophies with one shared goal – to provide clients
with best-in-class ideas and superior investment performance.
The Investment Bank provides corporate, institutional and
wealth management clients with expert advice, financial solutions,
best-in-class execution, and comprehensive access to the world’s
capital markets. Our model is specifically built around our clients
and their needs. Corporate clients can access advisory services,
debt and equity capital market solutions and bespoke financing
through our Corporate Client Solutions business. Our Investor
Client Services business is focused on helping institutional clients
engage with local markets globally, offering equities and equity-
linked products, foreign exchange, rates and credit, and is
underpinned by our research offering, which gives clients an edge
when it comes to understanding markets. UBS Evidence Lab
Innovations provides clients with access to insight-ready datasets
for thousands of companies – the same evidence we provide to
our UBS Research analysts.
Enhancing the client experience through digitalization
We strive to personalize interactions with our clients, while
streamlining and simplifying
front-to-back
digitalization.
through
them
In Global Wealth Management we provide our clients with a
hybrid approach that preserves and enhances the value of
human relationships. Clients expect digital tools but say personal
time spent with advisors is more important than ever. This
means providing technology that empowers client advisors so
they spend more time with clients. And our clients want digital
tools that improve their experience – high end e-banking, access
to bespoke research that is tailored to their needs, and multiple
ways to communicate with their client advisors.
Clients
With clients at the heart of our business, we are committed to
building and sustaining long-term relationships based on mutual
respect, trust and integrity. Understanding our clients’ needs and
expectations allows us to serve their best interests and to create
value for them.
Our clients and what matters most
There is no archetypal UBS client. Our clients have varying needs,
but each of them expects outstanding advice and service, a wide
range of choices, and an excellent client experience.
Global Wealth Management serves high net worth and ultra
high net worth individuals, families, and family offices around
the world and affluent clients in selected markets. We provide
these clients with access to outstanding advice, service, and
opportunities from around the globe delivered by experts they
can trust. Global Wealth Management clients demand a bank
that understands their unique needs and circumstances. A bank
that values
trust and
dependability, and a bank that helps them maintain their
lifestyles today, improve their lifestyles in the future, and
improve the lives of others.
relationships built on
long-term
In Switzerland, Personal & Corporate Banking serves
approximately 2.5 million individuals and 121,000 corporate and
institutional clients, ranging from small and medium-sized
companies to larger corporates and multinational companies.
Personal & Corporate Banking clients look for financial advice
based on their needs at each stage of their life cycle, as well as a
comprehensive digital offering enabling them to bank at their
convenience, wherever they are, whenever they want to. We
provide tailored advice, drawing on our broad product offering
in all relevant areas: basic banking services, investing, financing
(including mortgages), retirement planning, cash management,
trade and export finance, global custody, and company
succession among others.
In Asset Management, we deliver investment products and
services directly to approximately 3,000 clients around the world
– including sovereign institutions, central banks, supranational
corporations, pension funds, insurers and charities, as well as
its clients, wholesale
Global Wealth Management and
intermediaries and financial institutions. Our clients seek global
32
In Personal & Corporate Banking, more than 60% of our
personal banking client relationships are now completely
paperless and we pioneered video onboarding in Switzerland. In
addition, front-to-back digitalization enables corporate clients to
create customized product bundles based on their specific
needs. We also pioneered the new blockchain-based trade
finance platform we.trade, together with other
industry
participants, which allows corporate and institutional clients to
easily and safely create trade orders online and manage the
entire trade process from order to payment.
In Asset Management we are investing in new tools and
technologies, as well as our alternative data capabilities, to
support our teams’ investment decision-making processes and
enhance client service. In addition, our flagship operational
excellence programs are focused on building a scalable and
globally integrated operating platform to better enable our
teams to deliver the full breadth of our capabilities to clients
around
to develop our
comprehensive Platform Services capabilities including UBS
Partner, our new and
innovative private-label technology
solution, which will enable a step change in the advisory process
and services offered by our wholesale clients.
the world. We also continue
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The Investment Bank strives to be the digital investment bank
innovation-led businesses that drive
of the future, with
efficiencies and solutions. Our investments in new technologies
and data science teams help us to better understand our clients’
investment processes and trading needs. This allows us to deliver
tailored sales and trading commentary, research, access to
liquidity and prime brokerage products. We recently established
the UBS Investment Bank Innovation Lab to help connect
business teams to leverage best practice, build and test proof of
concepts safely and quickly and inspire a culture of innovation.
We see
in financial and
alternative datasets that they can incorporate into their models.
In response, we set up UBS Data Solutions to meet those needs
through a centralized robust data processing and distribution
platform.
interest from clients
increasing
→ Refer to “Our focus on technology” in this section for more
examples on how technology is used for the benefit of our
clients
33
Our strategy, business model and environment
How we create value for our stakeholders
Our focus on technology
As digitalization continues to transform the banking industry,
investment in technology plays a critical role in maintaining our
position as the largest global wealth manager. In 2018, we
spent USD 3.5 billion on technology and we expect to maintain
around this level of spend through 2021. We gear our
investments toward technologies to enable business growth
through innovation and superior client experience, and to
continue to increase efficiency across the organization.
in 2018
Significant achievements
the
foundations for enterprise-wide Cloud adoption. We expect that
leveraging the Cloud will enable us to respond more rapidly to
market changes and client needs without compromising on
security or efficiency. We aim to take advantage of the Cloud by
include
laying
improving the scalability of our systems and reducing the time to
market for innovative IT products.
Additionally, we continued deploying robots (i.e., automated
processes) to reduce manual work and ensure the stability of our
systems. We are growing capabilities for smarter cognitive
technologies including artificial intelligence (AI) to support more
insightful and faster decision making.
Advanced technologies are used in our business divisions and
Corporate Center to enhance the client experience by increasing
front-to-back digitalization, improving product excellence and
distribution, driving efficiency gains and maintaining platform
security. Selected highlights are described below.
Global Wealth Management
Wealth
Management
Online
Wealth Management Online is a digital offering for
clients with a UBS investment solution, fully
integrated in UBS Digital Banking and available
for desktop and mobile devices. The content is
tailored to clients’ underlying investment solutions.
Clients benefi t from up-to-date portfolio quality
information and notifi cation thereof, and direct
execution of investment proposals to optimize the
portfolio quality. The hybrid servicing model offers
the possibility to involve the client advisor for
further advice at any stage.
UBS Wealth
Management
USA App
Our wealth management clients in the
Americas can now benefi t from an innovative
banking app that allows them to set
personalized and tailored investment and
savings goals. The app also features the
option to receive portfolio diagnostics and
tailored investment proposals as well as
personal fi nancial advisor support. This all
serves to facilitate the achievement of the set
objectives. In addition, fi nancial advisors can
leverage social media to engage with clients
and prospects in a more meaningful and
differentiating way.
Structured
Product Investor
Structured Product Investor is a single
platform with multi-location, multi-issuer
and multi-asset class capabilities for
customized structured products.
34
Wealth
Management
Platform
The strategic, client-centric Wealth Manage-
ment Platform, which also hosts the Personal &
Corporate Banking business, enables scalability
and effi ciency through standardization as well
as fl exibility for innovative offerings.
Personal & Corporate Banking
we.trade
we.trade is an open and inter operable
trade fi nance platform based on
blockchain technology that grants
clients across the globe digital,
transparent, effi cient and cost-effective
access to international trade.
UBS Access App
The new UBS Access App offers a fast,
convenient and secure way to access UBS
e-banking without a special log-in device and to
confi rm online credit card transactions via a
new 3-D Secure process.
Investment Bank
UBS Evidence Lab
Innovations
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Digital
Business
Digital Business is an integrated
corporate portal, offering Swiss small
and medium-sized entities tailored
banking packages consisting of up to
20 modular digital solutions covering
online and mobile banking, payment
transactions and liquidity and credit
planning.
Asset Management
UBS Partner
UBS Partner is a unique offering within our compre-
hensive Platform Services capabilities, creating a step
change in analysis capability for wholesale clients. It
can scan and analyze millions of portfolios every night
against clients’ risk profi les, instrument quality criteria
and investment goals, fl agging issues and providing
actionable investment options to address them.
Centered on each client’s investment goals, UBS
Partner can support wholesale clients in increasing
client satisfaction levels and willingness to refer.
UBS Evidence Lab Innovations provides
clients with access to insight-ready
datasets for a large set of companies
and sectors. Experts work across
45 specialized areas to harvest,
cleanse, and connect billions of data
items each month to surface evidence
that relates to investment decisions.
UBS Investment Bank
Innovation Lab
The UBS Investment Bank Innovation Lab works
with businesses and operations across the bank
with the ambition to create innovative and
user-centric solutions for our clients. Driving a
culture of innovation, the lab makes it easier for
people to collaborate by connecting them to
expert internal and external resources, ideas, and
new technologies to test and deploy new proof
of concepts faster.
Corporate Center
A3
The strategic fi rm-wide end user
platform, A3, seeks to enable
access to any UBS application,
from any device, anywhere,
within cross border restrictions.
This private cloud-based
technology increases fl exibility
and staff productivity.
eDiscovery
eDiscovery service capabilities include the
collection, processing, review and production
of electronically stored UBS data to provide
better results for internal investigation and
litigation activities by using machine learning.
This allows UBS to substantially reduce legal
spend and to meet regulators’ expectations in
a timely manner with reasonable effort.
35
Our strategy, business model and environment
How we create value for our stakeholders
Investors
We build long-term value for our investors by executing our
strategy with discipline, striving for cost- and capital-efficient
growth, long-term sustainable value creation and attractive
shareholder returns.
Cost- and capital-efficient revenue growth
Our ambition is to grow our Group revenues faster than global
real GDP. Our Global Wealth Management business is well
positioned to take advantage of two secular trends: wealth
creation and continued economic growth, notably in Asia,
where China is opening its financial markets. Each of our
businesses has initiatives to achieve revenue growth and improve
operating efficiency in its area.
→ Refer to “Industry trends” in the “Our environment” section of
this report for more information on wealth creation
While we aim to increase revenues, cost efficiency is a
strategic priority for us. Similarly, capital efficiency is of utmost
importance for UBS overall and for each business division. To
provide further transparency and increase accountability on costs
and capital consumption, we have revised our cost allocation
methodology and equity attribution framework effective on
1 January 2019.
→ Refer to the “Significant accounting and financial reporting
Alignment of interests
We aim to align the interests of our employees with those of our
equity and debt investors. This is reflected in our compensation
philosophy and practices.
→ Refer to “Our compensation philosophy” in the “Compensation”
section of this report for more information
Communications
Our Investor Relations function serves as the primary point of
contact between UBS and the institutional investor community.
Our senior management and the Investor Relations team
regularly interact with investors, financial analysts and other
market participants, such as credit rating agencies. Clear,
transparent and relevant disclosures, together with regular and
direct interactions with existing and prospective shareholders,
form the basis for our communications. The Investor Relations
team also relays the views of and feedback from the institutional
investor community on UBS to our senior management.
The Investor Relations and Corporate Responsibility teams
work together and interact with those investors focusing on
sustainability topics relevant to UBS and society at large.
→ Refer to “Corporate governance” and “Information policy” in
the “Corporate governance and compensation” section of this
changes” section of this report for more information
report for more information
Shareholder returns
→ Refer to ”Society” in this section of the report for more
information on our sustainability efforts
We aim to increase our ordinary dividend per share at a mid-to-
high single-digit percentage each year. We also aim to return
excess capital, after accruals for ordinary dividends, most likely in
the form of share repurchases. We consider our business
outlook and capital plan, as well as other developments, in
determining excess capital available for share repurchases.
36
Employees
Our employees are crucial to our business strategy. Accordingly,
our human resource (HR) strategy seeks to attract, develop and
retain talented people at all levels with the diverse skills,
experience and commitment to effectively advise our clients,
deliver innovative solutions, manage risk, navigate evolving
regulatory requirements, and drive change.
and IT roles, and 151 trainees into our bank entry programs for
high school graduates. Our UK apprenticeship program hired
57 school leavers across various roles.
→ Refer to www.ubs.com/employerawards for more information
Our diverse and inclusive workplace
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Our corporate culture
invest
levels. We
A strong culture drives sustainable success and adds value at the
individual, team and corporate
in our
employees and promote measures that build engagement and a
cohesive, collaborative work environment. Our strategy and
culture are underpinned by our three keys to success: our Pillars,
Principles and Behaviors. These keys are the foundation for how
we manage our workforce, how we work with our stakeholders
and each other, and how we make business decisions and
deliver on our strategy.
→ Refer to the contents page of this report for more information
on the Pillars, Principles and Behaviors
Since 2013, we have embedded the three keys into our
culture, including all HR processes, through transformative
initiatives like our firm-wide Senior Leadership Experience and,
more recently, our Group Franchise Awards (GFA) program. The
GFA program fosters cross-divisional collaboration and ideas for
simplifying our processes, with more than 14,300 business
referrals and nearly 900 simplification ideas submitted in 2018.
We measure our culture-building progress through regular
employee surveys. In 2018, responses indicated that employee
engagement, appreciation for our talent management practices
and pride in working at UBS were at, or above, the norm for
high-performing organizations.
Employer of choice
We are widely recognized as an employer of choice, as
evidenced by the numerous external awards that we have
received. Key to this is ensuring our employees can build
rewarding careers here. Internal mobility therefore remained a
priority in 2018, as it builds cross-firm connections, increases
engagement and enables employees to leverage and develop
their skills. We further enhanced our suite of
in-house
recruitment tools during the year to better match internal talent
with open roles, and developed specialized training to increase
line manager effectiveness.
We received nearly 847,000 applications and hired a total of
13,249 external candidates in 2018. For our graduate talent
programs, we hired 467 new university graduates and 585
interns. In Switzerland, we hired 268 apprentices for business
Our diverse workforce and inclusive culture are critical to our
long-term success. We are committed to further increasing our
diversity and to ensuring equal opportunities for all employees.
We are especially focused on hiring, retaining and promoting
more women across the firm, with a stated aspiration to
increase the representation of women in management roles to
one-third.
Our award-winning UBS Career Comeback Program, already
established in the UK, US and Switzerland, was extended to
India
in 2018. The program offers permanent roles to
professionals wishing to return to corporate jobs after a career
break and supports them with on-the-job experience, classroom
learning and mentoring. To date, Career Comeback has helped
102 women and 2 men at senior levels to relaunch their careers.
In addition to our strategic initiatives, every year we sponsor
numerous activities to promote inclusiveness. For example, this
year we became a supporter of the UN Standards of Conduct for
Business, a set of anti-discrimination guidelines. Additionally, our
employee networks regularly host events regarding gender,
culture, ethnicity, LGBTI / Pride, disability, veterans, parenting,
elder care and other topics. In 2018, we sponsored 43 employee
networks globally.
→ Refer to www.ubs.com/diversity for more information
Our integrated workforce strategy
Throughout the year, the firm focused on enabling higher
productivity, enhancing the client experience, building critical in-
house expertise and managing costs. Our integrated workforce
strategy contributed
through a
combination of insourcing (especially in Group Technology) and
regular hiring of staff. As a result, our Business Solutions Centers
(BSCs) in China, India, Poland, Switzerland and the US grew
substantially.
these achievements
to
Our BSC employee population increased by 3,115 in 2018
through hiring or insourcing, including 1,893 in India and 822 in
Poland. We also expanded our BSC presence in Switzerland with
the opening of a new BSC in Manno, focused on data analytics
and artificial intelligence. At year-end, offshore and nearshore
employees accounted for around 29% of our global Corporate
Center employee population. As a result of insourcing initiatives
and improved efficiency, we reduced our external staff in
Corporate Center by 5,515.
37
Our strategy, business model and environment
How we create value for our stakeholders
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
331.12.18
21,309
As of
31.12.17
20,770
20,495
12,119
12,620
5,782
6,670
168
20,840
66,888
19,944
8,959
11,097
5,274
5,662
161
20,427
61,253
31.12.16
20,522
19,695
7,539
10,746
5,206
5,373
167
20,581
59,387
% change from
31.12.17
3
3
35
14
10
18
5
2
9
TTotal1
11 The increase in workforce in 2018 was mainly due to insourcing initiatives and was more than offset by a decrease in external staff.
Gender distribution by employee category1
By headcount, as of 31.12.18
Male
Female
Total
Officers (Director and
above)
Officers (other officers)
Employees
Total
Number
18,514
6,078
24,592
%
75
25
100
Number
15,465
10,059
25,524
%
61
39
100
Number
7,794
10,428
18,222
%
43
57
100
Number
41,773
26,565
68,338
%
61
39
100
1 Calculated on the basis that a person (working full time or part time) is considered one headcount (in this table only). This accounts for the total UBS employee number of 68,338 as of 31 December 2018, which
excludes staff from UBS Card Center, Wolfsberg and Hotel Seepark Thun.
Developing and retaining talent
Our business strategy and culture are advanced through
education and leadership development, with our in-house UBS
University as the one-stop shop for all learning activities at
UBS. Through our suite of development programs, business
skills and risk management classes, as well as lifelong learning
opportunities, we seek to ensure that all employees have the
skills and expertise to meet client needs and grow their
careers. Our Master in Wealth Management program remains
the pinnacle of development for client-facing staff in Global
Wealth Management. By the end of 2018, 208 senior client
advisors, desk heads and client-aligned managers had
successfully completed (or were on track to complete) the two-
year degree program.
In 2018, UBS University transformed its offering to connect
employees with global trends, transform their businesses, lead
in a digital world and re-skill to prepare for the future. Monthly
recommended learning playlists enable employees to explore a
wide variety of topics. Our permanent employees completed
approximately 812,000 learning activities in 2018, including
mandatory training on compliance, business and other topics.
This averaged to 11.9 sessions, or 1.76 training days, per
employee.
Clear expectations, challenging goals, continuous feedback
and a performance-centric compensation framework promote
long-term success for employees, as well as for the firm. Since
we believe that how we achieve results is as important as the
results themselves, our annual year-end reviews assess both
performance goals and the behaviors of integrity, collaboration
and challenge. Both ratings are then considered in development,
reward and promotion decisions. Our
talent
including
management and succession-planning processes,
accelerated development and internal mobility opportunities for
key talent, support employee satisfaction and retention and help
ensure our long-term success.
firm-wide
38
Our workforce at a glance1
20% under 30 years old,
59% between 30 and 50,
21% over 50
66,888
total employees (FTE)
5,635 more than a year ago (FTE)
68,338 employees (by headcount)
39%
are women
(26,565)
31%
in Americas
8,221
13,342
19%
in EMEA
5,124
7,836
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32%
in Switzerland
7,954
13,728
18%
in APAC
5,266
6,867
More than 150
languages spoken
61%
are men
(41,773)
Citizens of 133
countries
50
countries
49% of employees in Switzerland have worked here 10+ years
8 is the average years of service
1 Calculated as of 31.12.18 on a headcount basis of 68,338 internal employees only (2017: 62,558) unless specifi ed to be on a full-time equivalent (FTE) basis, where we include proportionate numbers
of part-time employees.
39
Our strategy, business model and environment
How we create value for our stakeholders
Society
We want to promote global economic development that is
sustainable for the planet and humanity. We have embodied the
overarching objective of the 17 Sustainable Development Goals
(SDGs), which provide a roadmap to solve the common
sustainability-related challenges of our society.
→ Refer to the UBS World Economic Forum white paper 2019
under www.ubs.com/wef for more information
As the preeminent global wealth manager to high net worth
and ultra high net work clients, we aspire to take a leading role
in shaping the future. Our firm is in a powerful position to
contribute
integrating
sustainability in our mainstream offerings, through new and
innovative financial products with a positive effect on the
environment and society, and by advising our clients on their
philanthropic works.
toward achieving
the SDGs by
footprint
and our
environmental
We contribute to the setting of standards and collaborate in
and beyond our industry. We do so through the management
of environmental and social risks, the management of
our
comprehensive
sustainability disclosures. Information on all of these efforts
and commitments is provided in the Global Reporting Initiative
(GRI) Document on our website. For all references to the GRI
Document
at
to
www.ubs.com/investors. The content of the GRI Document has
the GRI Standards
been prepared
in accordance with
(“comprehensive” option) and with
rules
the German
implementing the EU directive on disclosure of non-financial
and diversity information (2014/95/EU). Our reporting on
sustainability has been reviewed by Ernst & Young Ltd against
the GRI Standards providing limited assurance.
reporting”
“Annual
2018,
refer
Code of Conduct and Ethics
In our Code of Conduct and Ethics (Code), the Board of
Directors and the Group Executive Board set out the principles
and practices that define our ethical standards and the way we
do business. These principles apply to all aspects of our business.
All employees must confirm annually that they have read and
will adhere to the Code and other key policies, supporting a
culture where ethical and responsible behavior is part of our
everyday operations.
→ Refer to the Code of Conduct and Ethics of UBS at
www.ubs.com/code for more information
40
Strategy
UBS in society
UBS in society is a dedicated organization within the firm,
focused on maximizing our positive effect and minimizing
any negative effects UBS has on society and the environment.
It covers topics such as sustainable and impact investing,
client philanthropy, environmental and human rights policies
governing client and
relationships, and our
supplier
community investment. Through UBS in society, UBS is
driving change that matters by using our firm’s expertise to
bring about sustainable performance.
The activities driven by UBS in society are overseen, at the
highest level of our firm, by our Board of Directors’ Corporate
Culture and Responsibility Committee (CCRC). The Group CEO
proposes the UBS in society strategy and annual objectives to
the CCRC, supervises their execution and informs the Group
Executive Board and CCRC, as appropriate. Reporting to the
Group CEO, the Head UBS in society is UBS’s senior-level
representative for sustainability issues.
→ Refer to “Board of Directors” in the “Corporate governance”
section of this report for more information on the CCRC
→ Refer to the GRI Document 2018 for more information on UBS’s
sustainability governance and UBS in society
Supporting clients in their sustainability efforts
At the heart of our approach to sustainability are both our
clients and society at large. We support clients in their
sustainability efforts through thought leadership, innovation and
partnerships, and strive to incorporate environmental, social and
governance (ESG) impacts into the products and services we
provide, serving society through them.
We know that ESG topics are increasingly important to
society and our clients alike. Our research found that 58% of
high net worth investors expected sustainable investing to
become the standard within 10 years, while 82% believed SI
returns would match or surpass those of traditional investments.
Moreover, we are among the 2,200 signatories of the
Principles for Responsible Investment (PRI), the world’s leading
proponent of responsible investment. The PRI works to support
its signatories in incorporating ESG factors into their investment
and ownership decisions.
(SI)
investing
Sustainable investing
is an approach that seeks to
Sustainable
incorporate ESG considerations into investment decisions. SI
strategies seek to achieve one or more of the following
objectives: achieve a positive environmental or social impact,
align investments with an investor’s personal environmental or
social values or improve portfolio risk and return characteristics.
We aim to be a leader in SI for private and institutional clients,
measurable by the size of SI assets under management (AuM).
As of 31 December 2018, total SI assets represented
USD 1,110 billion (2017: USD 1,133 billion), or 35.8% (2017:
34.7%), of our total invested assets. Our core SI assets increased
to USD 313 billion (2017: USD 182 billion), representing 10.1%
(2017: 5.6%) of our total invested assets. Core SI products
involve a strict and diligent asset selection process through either
exclusions (of companies / sectors from the portfolio where the
companies are not aligned to an investor’s values) or positive
selections (such as best-in-class, thematic or ESG integration and
impact investing).
→ Refer to the ”Our businesses” section of this report for more
information on how individual business divisions incorporate
sustainability into their approach
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Climate action
We believe the transition to a low-carbon economy is vital and
we are focused on supporting our clients in preparing for
success
increasingly carbon-constrained world. We
implement our climate strategy in four different ways:
– by seeking to protect our assets from climate change risks;
– by supporting our clients’ efforts to assess, manage and
in an
protect themselves from climate-related risks;
– by mobilizing private and
institutional capital
toward
investments that facilitate climate change mitigation and
adaptation, and by supporting the transition to a low-carbon
economy as a corporate advisor and / or with our lending
capacity; and
– by continuing to reduce our greenhouse gas emissions and
increase the firm’s share in renewable energy.
We regularly report on the implementation of our climate
strategy and follow the recommendations on climate-related
disclosures provided by the Financial Stability Board’s Task Force
on Climate-related Financial Disclosures (TCFD).
→ Refer to “Our climate strategy – taking action to support a low-
carbon economy” in the “Our Governance and principles”
→ Refer to the “Sustainable investments” table in the “Our
section of the GRI Document 2018 for our full climate-related
clients” section of the GRI Document 2018 for more information
disclosures
on SI
Philanthropy – partnering with clients for good
We believe our clients can make a meaningful, and measurable,
difference for their chosen causes with advice from our
philanthropy experts and programs carefully selected through
our UBS Optimus Foundation. We increase social impact by
combining our expertise with capital and networks. Together
with the UBS Optimus Foundation, our experts offer clients
unique access
innovation and
philanthropic advice, as well as tailored program design, co-
funding and co-development opportunities.
social and
financial
to
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 make a measureable
difference to the world’s most vulnerable children. In 2018, the
Foundation’s work helped improve the well-being of 2.8 million
children globally.
→ Refer to www.ubs.com/optimus for more information
Environmental and social risk
We consider environmental and social risk (ESR) management
critical to our sustainability strategy. Our comprehensive ESR
framework governs client and supplier relationships and applies
firm-wide to all activities, meets the highest industry standards
(as recognized by ESG ratings) and is integrated in management
practices and control principles.
We have set ESR standards pertaining to environmental and
human rights topics in product development, investments,
financing and supply chain management. We have identified
certain controversial activities that we will not engage in at all,
or only under stringent criteria. As part of this process, we
engage with clients and suppliers to better understand their
processes and policies, and to explore how any environmental
and social risks may be mitigated.
→ Refer to the GRI Document 2018 for a full description of our ESR
management and framework
Community investment
We recognize that our long-term success depends on the health
and prosperity of the communities of which we are a part. We
seek to redress disadvantages through long-term investments in
education and entrepreneurship. We provide strategic financial
commitments and targeted employee volunteering to drive
change.
→ Refer to the “Our communities” section of the GRI Document
2018 for more information
41
Our strategy, business model and environment
How we create value for our stakeholders
Aims and progress
We work with a long-term focus on providing appropriate returns to all of our stakeholders in a responsible manner. To underline
our commitment, we provide transparent targets and report on progress made against them wherever possible. In 2018, we made
good progress in delivering against the Group aims.
WWe aim to be
OOur progress
AA leader in sustainable investing (SI) for private and institutional clients
as demonstrated by the size of UBS’s SI AuM, for which UBS has:
– set the ambition to double the penetration of core SI assets by the end
of 2020, from 5.6% (USD 182 billion) of our total invested assets at the
end of 20171; and
– set a target of directing USD 5 billion of client assets into new impact
investments for the SDGs by the end of 2021.
AA recognized innovator and thought leader in philanthropy as shown by the
engagement with our key stakeholders and our 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; and
– pioneer new ways to bring substantial funding to the SDGs and
substantially increase donations to the UBS Optimus Foundation to
improve the well-being of vulnerable children.
AAn 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.
– The penetration of core SI assets increased to 10.1% (USD 313 billion)
of our total invested assets in 2018, a 72% increase over 2017
(USD 182 billion).1, 2
– USD 1.9 billion of client assets were directed into SDG-related impact
investments3.
– 36% of our global workforce volunteered and 45% of the volunteer
hours were skills based.4
– UBS Optimus Foundation: USD 66.6 million in donations raised;
USD 81.8 million grants approved; well-being of 2.8 million children
globally improved; three Development Impact Bonds in education and
health care launched.
– UBS maintained its industry leadership in the Dow Jones Sustainability
Indices (DJSI).
– MSCI ESG Research upgraded UBS to an AA rating.
– Sustainalytics ranked UBS an industry leader.
– CDP awarded UBS a position on the Climate A List.
1 Core SI are SI products that involve a strict and diligent asset selection process through either exclusions (of companies/sectors from the portfolio where the companies are not aligned to an investor’s values) or
positive selections (such as best-in-class, thematic or ESG integration and impact investing). Refer to the “Sustainable investments” table in the ”Our clients” section of the GRI Document 2018. 2 The increase in
core SI assets was mainly driven by the ESG integration strategy of Asset Management. Refer to the “Sustainable investments” table in the “Our clients” section of the GRI Document 2018. 3 Strategies, where the
investment has the intention to generate measurable environmental and social impact alongside a financial return. 4 Refer to the “Our communities” section in the GRI Document 2018.
42
1
4
2
3
Regulation and supervision
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As a financial services provider based in Switzerland, UBS is subject
to the consolidated supervision of the Swiss Financial Market
Supervisory Authority (FINMA). Our entities are also regulated and
supervised by the authorities in each of the countries where they
conduct business. Through UBS AG and UBS Switzerland AG,
which are licensed as banks in Switzerland, the Group may
engage in a full range of financial services activities in Switzerland
and abroad, including personal banking, commercial banking,
investment banking and asset management.
As a global systemically important bank (G-SIB), as designated
by the Financial Stability Board, and a systemically relevant bank
(SRB) in Switzerland, we are subject to stricter regulatory
requirements and supervision than most other Swiss banks. The
significant changes to financial regulation after the financial
crisis in 2008 have had a material effect on how we conduct our
business and have required significant investment.
→ Refer to the “Our evolution” section of this report for more
information
→ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
Regulation and supervision in Switzerland
Supervision
UBS Group AG and its subsidiaries are subject to consolidated
supervision by FINMA under the Swiss Federal Law on Banks and
Savings Banks (Swiss Banking Act) and related ordinances, which
impose, among other requirements, minimum standards for
capital, liquidity, risk concentration and internal organization.
FINMA fulfills its statutory supervisory responsibilities through
is
licensing,
responsible for prudential supervision and mandates audit firms to
perform regulatory audits and other supervisory tasks on its
behalf.
regulation, monitoring and enforcement.
It
Capital adequacy and liquidity regulation
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. Furthermore, we are
subject to shorter-term liquidity coverage ratio rules, and following
the introduction of the net stable funding ratio in Switzerland, we
will be subject to longer-term minimum funding requirements.
→ 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 “Assets and liquidity management” in 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 intervention powers to resolve a failing financial institution,
including UBS Group AG, UBS AG and UBS Switzerland AG.
These measures may be triggered when thresholds are breached
and allow FINMA considerable discretion
in determining
whether, when or in what manner to exercise such powers. In
case of impending insolvency, FINMA may impose more onerous
requirements on UBS, including limiting 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
limits on our intra-Group funding and intra-Group guarantees)
or to reduce business risk in some manner. The Swiss Banking
Act allows FINMA to extinguish or convert to common equity
the liabilities of the Group in connection with its resolution.
Swiss too big to fail provisions require Swiss SRBs to establish
an emergency plan that shows how Swiss systemically important
functions can be maintained in a crisis. In response to these
requirements in Switzerland, and to similar requirements in
other jurisdictions, UBS – in close cooperation with its main
resolution authorities under the lead of FINMA – has developed
recovery plans and resolution strategies to manage a crisis. UBS
has also developed plans for restructuring or winding down
businesses if the firm could not be stabilized by other means. In
recent years, we have invested significantly in making UBS
simpler from a structural, financial and operational perspective.
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,
under which the Federal Reserve Board has supervisory authority
over the US operations of both UBS Group AG and UBS AG.
UBS’s US operations are also subject to oversight by the Federal
Reserve Board’s Large
Institution Supervision Coordinating
Committee.
In addition to being a financial holding company under the
Bank Holding Company Act, UBS AG maintains several branches
and representative offices in the US, which are authorized and
supervised by the Office of the Comptroller of the Currency.
UBS AG is registered as a swap dealer with the Commodity
Futures Trading Commission (CFTC) and we expect to register as
a security-based swap dealer with the Securities and Exchange
Commission (SEC) when such registration becomes required.
43
Anti-money laundering and anti-corruption
Combating money laundering and terrorist financing has been a
major focus of government policies relating to financial
institutions in recent years. The US Bank Secrecy Act and other
laws and regulations 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.
In addition, we are subject to laws and regulations, in
jurisdictions in which we operate, prohibiting corrupt or illegal
payments to government officials and others, including the US
Foreign Corrupt Practices Act and the UK Bribery Act. We
maintain policies, procedures and internal controls intended to
comply with these regulations.
Data protection
We are subject to regulations concerning the use and protection
of customer, employee, and other personal and confidential
information. This includes provisions under Swiss law, the EU
General Data Protection Regulation (GDPR) – which provides
significant new data protection – and laws of other jurisdictions.
If implemented as proposed, we will become subject to the
revised Swiss data protection law (Swiss Federal Act on Data
Protection), which seeks to
improve data protection for
individuals by enhancing the transparency and accountability
rules for companies processing data, among other measures.
This would align Swiss data regulation with revised European
legislation, including the 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
Our strategy, business model and environment
Regulation and supervision
UBS Americas Holding LLC – the intermediate holding
company for our non-branch operations in the US, as required
under the Dodd-Frank Act –
is subject to requirements
established by the Federal Reserve Board related to risk-based
capital, liquidity, the Comprehensive Capital Analysis and Review
stress testing and capital planning process, resolution planning
and governance.
UBS Bank USA, a Federal Deposit Insurance Corporation-
licensed and
institution subsidiary,
is
insured depository
regulated by state regulators in Utah.
UBS Financial Services Inc., UBS Securities LLC and several other
US subsidiaries are subject to regulation by a number of different
government agencies and self-regulatory organizations, including
the SEC, the Financial Industry Regulatory Authority, the CFTC, the
Municipal Securities Rulemaking Board and national securities
exchanges, depending on the nature of their business.
Regulation and supervision in the UK
Our regulated operations in the UK are mainly subject to the
authority of the Prudential Regulation Authority (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 is a member.
UBS AG and UBS Europe SE have UK-registered branches in
London. UBS AG London Branch serves as a global booking
center for our Investment Bank. In addition, our regulated
subsidiaries in the UK that provide asset management services
are authorized and regulated mainly by the FCA, with one entity
being also subject to the authority of the PRA.
transferred
Regulation and supervision in Germany
With the transfer and merger of certain UBS Limited businesses
into UBS’s German-incorporated subsidiary UBS Europe SE,
headquartered in Frankfurt, Germany, supervision of UBS Europe
the German Federal Financial
SE was
Supervisory Authority (BaFin) to the European Central Bank. The
entity is subject to EU and German laws and regulation. UBS
Europe SE has branches in Austria, Denmark, France, Italy,
Luxembourg,
the Netherlands, Poland, Spain, Sweden,
Switzerland, and the UK, and is subject to conduct supervision
by authorities in all these countries.
from
44
Regulatory and legal developments
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Switzerland
systemically
TBTF framework in Switzerland
In November 2018, the Swiss Federal Council adopted a revision
of the Capital Adequacy Ordinance (CAO), which features the
following elements: (i) gone concern capital requirements for the
three Swiss domestic systemically important banks were set at
40% of the going concern capital requirements already in force;
(ii) a risk-weighting approach was introduced for the treatment
their
important banks’ participations
of
subsidiaries; and
(iii) group entities that provide services
necessary for the continuation of a bank’s business processes,
including UBS Business Solutions AG, will now be subject to
the Swiss Financial Market
consolidated supervision by
Supervisory Authority (FINMA).
The Federal Council
initiate a separate
consultation in the first half of 2019 regarding potential revisions
to the gone concern capital requirements at legal entity level for
the two Swiss global systemically important banks, including UBS.
is expected to
in
issued by
Separately, in December 2018, the Swiss Parliament approved
changes to the tax treatment of too big to fail (TBTF)
instruments
the holding companies of Swiss
systemically important banks. The new law aims to eliminate the
additional tax burden imposed on systemically important banks
as a result of required issuances of TBTF instruments at the
holding company level. In March 2019, the Federal Council
determined that the rule would enter into force retroactively as
of 1 January 2019. Going forward, we will issue new loss-
absorbing additional tier 1 capital instruments and total loss-
absorbing capacity (TLAC)-eligible senior unsecured debt directly
out of UBS Group AG. We also expect UBS Group AG to assume
outstanding capital and debt instruments that were previously
issued by UBS Group Funding (Switzerland) AG as a means of
managing the aforementioned tax burden.
Consultation on ordinance specifying FinSA
In October 2018, the Swiss government initiated a consultation
on, among other
items, the proposed Financial Services
Ordinance (FinSO), which would specify the details of the
Financial Services Act (FinSA). The act will come into force on
1 January 2020, as would the ordinances.
FinSO, together with FinSA and the Financial Institutions Act
(FinIA), would introduce new investor protection rules, including
and documentation
significantly
requirements. We have begun preparing for implementation of
the new rules.
information
enhanced
EU equivalence for Swiss trading venues
In December 2018, the European Commission (EC) extended its
equivalence decision for Swiss trading venues by six months,
until the end of June 2019. The EC has stated that any further
extension of its equivalence decision will be contingent upon the
Federal Council’s endorsement of a framework agreement.
If the EC does not extend recognition of Switzerland’s trading
venues beyond June 2019, the Swiss contingency measure,
which was adopted by the Swiss Federal Council in November
2018, would come into effect. The measure would introduce a
new Swiss standard recognizing non-EU foreign trading venues
that admit Swiss shares to trading, but disallowing trading in
Swiss shares on EU trading venues. We would then be required
to significantly alter our trading arrangements, for which UBS
has taken the appropriate preparations. We expect that EU
trading venues would comply with the Swiss measure, resulting
in a shift of liquidity in shares issued in Switzerland from EU
trading venues to Swiss trading venues.
Automatic exchange of information
In September 2018, as a consequence of the automatic
exchange of information (AEI) introduced in Switzerland as of
1 January 2017, financial data was exchanged for the first time
with the first 36 partner states to have signed an agreement for
information exchange. On 1 January 2018, an additional
41 countries were added to Switzerland’s network of AEI
partner states. Financial data is expected to be exchanged with
them for the first time in 2019. Before the first transmission,
these jurisdictions will be subject to a mandatory review by the
Federal Council to ensure compliance with data exchange
requirements. On 1 January 2019, the Swiss Parliament
approved the introduction of the AEI with another 89 partner
states, out of a total of 107 states that have committed to
implementing the AEI. In December 2018, the Swiss government
launched a consultation on AEI implementation with the
remaining 18 partner states.
We have experienced outflows of cross-border client assets in
connection with the AEI, as well as with other changes in tax
regimes or their enforcement.
45
Developments related to cyber resilience in the financial system
In April 2018, the Swiss Federal Council adopted the national
strategy for Switzerland’s protection against cyber risks for
2018-2022. The
is deemed a critical
infrastructure and will be required to implement measures to
strengthen its resilience in terms of cybersecurity and further
enhance its cooperation with relevant public-sector bodies as a
result of the national strategy.
financial
sector
Also in April 2018, the European Central Bank (ECB)
consulted on its cyber resilience oversight expectations for
financial market infrastructures (FMIs) and banks, based on
global guidance by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions, aiming to address fragmentation of approaches,
but stop short of imposing a single set of standards. In
December 2018, the ECB finalized the FMI cyber resilience
oversight expectations, thus providing FMIs with detailed steps
on how to operationalize the guidance and reflecting the
feedback from the consultation, in particular on the need for
harmonization across different
jurisdictions and among
regulators to reduce the current fragmentation.
In November 2018, the Financial Stability Board (FSB) finalized
its Cyber Lexicon, which comprises a set of approximately
50 core terms related to cybersecurity and cyber resilience in the
financial sector. The lexicon is intended to support the work of
the FSB, standard-setting bodies, authorities and private-sector
participants.
In addition, in July 2018, the UK Prudential Regulation
Authority (PRA) and Financial Conduct Authority (FCA) published
a joint discussion paper on an approach to improve the
operational resilience of FMIs. Among other things, the paper
envisages that boards and senior management can achieve
better standards of operational resilience through increased
focus on setting, monitoring and testing specific
impact
tolerances for key business services. Separately, the Basel
Committee on Banking Supervision (BCBS) confirmed in its June
2018 update on the 2018–2019 work program that cyber risk
and operational resilience remain priorities.
Our strategy, business model and environment
Regulatory and legal developments
tax
treatment
Adoption of Swiss corporate tax reform
In September 2018, the Swiss Parliament adopted corporate tax
reform measures, previously known as Tax Proposal 17, that
abolish preferential corporate
for holding
companies and introduce a series of tax measures aligned to the
Organisation for Economic Co-operation and Development
(OECD) standards to maintain Switzerland’s competitiveness as a
business location. The measures include an optional relief on
capital tax that compensates for the proposed elimination of the
current preferential holding company capital tax rate. In addition,
the cantonal share of direct federal tax revenue would increase,
giving the cantons leeway to reduce their cantonal corporate
income tax rate. The popular vote will take place on 19 May 2019
and, if the vote is successful, the reform will enter into force on
1 January 2020. The changes would increase our tax liability in
Switzerland by a modest amount, which we expect to be largely
offset by the changes in cantonal tax rates, if enacted.
Revision of AML regulation in Switzerland
In June 2018, the Swiss Federal Council initiated a consultation
on amendments to the Anti-Money Laundering Act, aiming to
implement the recommendations from the Financial Action Task
Force’s Mutual Evaluation Report of Switzerland. The
consultation proposes changes to enhance due diligence
obligations for certain services, beneficial owner verification, and
monitoring and reporting of suspicious activities.
Implementation of these amendments may require changes
to our client onboarding and ongoing compliance processes and
may lead to increased costs. The precise effect on UBS depends
on the final law, which is subject to parliamentary debate.
46
International
NSFR implementation
In November 2018, the Swiss Federal Council announced that it
would consider finalization of the net stable funding ratio (NSFR)
requirement at the end of 2019. The NSFR requirement, as
originally proposed in 2017, could result in a significant increase
in long-term funding requirements on a legal entity level.
In the EU, the political agreement on the Risk Reduction
Measures package implies implementation of the NSFR in the
first half of 2021. This
is expected to apply at both
consolidated and legal entity level, with the possibility for
cross-border waivers at the legal entity level. There will be a
four-year transitional period during which certain derivatives,
repurchase and reverse repurchase agreements will receive
lower required stable funding factors. UBS’s EU entities are
expected to be within the scope of the NSFR requirements,
although at Group consolidated level UBS will be subject to the
Swiss NSFR requirements, once implemented.
In the United States, the US Department of Treasury in its
June 2017 Core Principles report recommended delaying the
implementation of the NSFR until it can be appropriately
the proposal has been
calibrated and assessed. While
outstanding for over two years, representatives of the US
banking agencies have not indicated how this will be achieved,
though comments provided earlier in 2018 indicated that the
proposal was near finalization. While recent tailoring of
prudential standards has indicated which US bank holding
companies would be subject to the final rule, including a
modified approach, it has not been clarified for US-based
intermediate holding companies of
foreign banks. Any
difference between the US implementation and that applied by
other jurisdictions could present competitive challenges for non-
US banking organizations.
→ Refer to “Liabilities and funding management” in the “Treasury
management” section of this report for more information on
the NSFR
Adjustments to the market risk framework
In January 2019, the Basel Committee published final revisions
of the market risk framework, which followed its fundamental
review of the trading book and will serve as the Pillar 1
minimum capital requirement as of 1 January 2022. The
revisions include adjustments to the risk sensitivity of the
standardized approach and clarifications on the scope of
application, amendments
the
standardized approach and to the internal models approach, in
particular to the profit and loss attribution test and the non-
modelable risk factors. We are currently assessing any potential
effect on UBS.
risk sensitivity of
the
to
Pillar 3 disclosure requirements revised
In December 2018, the BCBS published its updated Pillar 3
disclosure requirements, completing revisions to the disclosure
framework started earlier. In particular, the revision reflects the
final Basel III standards issued in December 2017. In addition,
the updated framework sets out new disclosure requirements on
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asset encumbrance and, if required by national supervisors at
the jurisdictional level, on capital distribution constraints.
The implementation deadline for the disclosure requirements
related to Basel III is 1 January 2022. The effective date for the
disclosure
for asset encumbrance, capital
distribution constraints and the prudential treatment of problem
assets is the end of 2020.
requirements
Basel Committee developments on the leverage ratio
The BCBS consulted on a targeted and limited revision of the
leverage ratio’s treatment of client-cleared derivatives, outlining
three options, two of which would recognize initial margin offset
and could lead to a reduction of the Group leverage ratio
denominator compared with Basel III requirements. The BCBS is
ratio disclosure
also
requirements to address leverage ratio window-dressing concerns,
with proposed implementation no later than 1 January 2022.
consulting on additional
leverage
EU Risk Reduction Measures package
The EU institutions reached political agreement on the Risk
Reduction Measure legislative package, which will incorporate a
number of Basel III reforms as well as the FSB TLAC standard
into EU law. The agreement remains subject to final technical
adjustments.
The package includes an internal TLAC requirement calibrated
at 90% of the full Pillar 1 level for material subsidiaries of non-
EU global systemically important banks. UBS Europe SE is likely
to fall within this definition and is therefore expected to attract
an internal TLAC requirement.
The measures also include a requirement for third-country
banking groups with more than EUR 40 billion of assets to
establish an intermediate EU parent undertaking (IPU). This will
be subject to a three-year implementation period. We therefore
expect implementation to be required by the first half of 2024.
UBS expects to be within the scope of this requirement and to
implement the necessary measures to comply with it.
The European Commission (EC) is expected to introduce new
legislation by mid-2020 to turn these reporting requirements
into binding capital requirements following finalization of the
market risk standard. We therefore expect the EU to introduce
binding capital requirements later than the effective date of the
revised Basel III standards.
Finally, the measures introduce a new two-business-day pre-
resolution moratorium tool, in addition to the existing tool
established in the EU Bank Recovery and Resolution Directive.
However, the rules as proposed will not permit the two tools to
be used in combination, meaning the maximum length of a stay
will remain two business days. While a pre-resolution tool
diverges from international standards, the retention of the two-
business-day maximum limits the effect of this change.
The legislative package is expected to receive final approval in
the second quarter of 2019, with the majority of the measures
being phased in from the first half of 2021.
47
Our strategy, business model and environment
Regulatory and legal developments
Developments related to EU cross-border business
We expect finalization of the EU Investment Firm Review (IFR)
during the first half of 2019. In addition to amending EU
prudential rules for investment firms, the IFR is expected to
update the Markets in Financial Instruments Directive II (MiFID II)
equivalence framework. The final rules, once agreed, are likely
to introduce further reporting obligations for third-country
headquartered firms such as UBS on services provided within the
EU alongside a more granular focus on the equivalence of third-
country rules by EU regulators. Depending on final legislative
discussions, it is possible that further restrictions on cross-border
market access may be introduced. We are monitoring these
developments closely to determine potential effects on our
business activities.
We also expect finalization of revisions to the European
Market Infrastructure Regulation in the first half of 2019, which
would allow the EU to derecognize systemic third-country
central clearing counterparties (CCPs) under certain conditions.
Our EU-based entities, principally UBS Europe SE, can only hold
exposures against those third-country CCPs that are recognized
by the EU. While the EU is putting in place arrangements to
ensure that, in the event of a no-deal Brexit, EU firms can
continue to access UK CCPs for one year, we have developed
contingency plans to ensure continuity of service for our EU
clients should these arrangements lapse after 12 months.
UK withdrawal from the EU
We continue to prepare for the UK withdrawal from the EU in
the expectation that the UK will leave the EU on 29 March 2019.
Our plans are intended to ensure that we can continue to serve
our clients in any scenario (including a scenario in which the UK
leaves the EU without a binding withdrawal agreement).
As the effective date of the UK’s withdrawal approaches, and
given the political challenges of the UK ratification process, it
appears increasingly likely that any transition arrangements may
be significantly limited in scope, since the withdrawal agreement
may only be agreed close to the exit date, if at all. Equally, it
remains possible that the exit date may change.
On 1 March 2019, the previously announced combined UK
business transfer and cross-border merger of UBS Limited into
took place. Former clients and other
UBS Europe SE
counterparties of UBS Limited who can be serviced by UBS AG’s
London Branch were migrated to UBS AG’s London Branch prior
to the merger. As a result of this action, we expect no material
effect on our ability to serve our clients as a result of the UK’s
withdrawal from the EU.
The EC has adopted an equivalence decision that permits the
European Securities and Markets Authority (ESMA) to recognize
UK-authorized CCPs such that they may continue to provide
clearing services in the EU for one year in a no-deal scenario,
effective from 30 March 2019. ESMA has announced that it
aims to adopt the recognition decisions ahead of 29 March
2019. Once in place, these decisions would allow us to maintain
derivatives exposures to UK CCPs in UBS Europe SE after the
UK’s withdrawal from the EU.
48
Developments related to the transition away from IBOR
The Swiss National Working Group on Swiss Franc Reference
Rates (NWG) suggested a fallback clause (defining how the
client interest rate is calculated under Swiss law in case the
London
is discontinued
permanently), to be used in retail and corporate loans. As of 1
November 2018, all of our new three-year LIBOR mortgages
include a fallback clause. Regarding term rate, the Swiss NWG
recommends using a compounded Swiss average rate overnight
(SARON), wherever possible.
Interbank Offered Rate
(LIBOR)
In December 2018, FINMA issued guidance on risks related to
a potential replacement of the interbank offered rates (IBORs),
outlining legal and valuation risks as well as risks related to
operational readiness for supervised institutions.
In response to a request from UK regulators PRA and FCA in
September 2018, we submitted a board-approved summary of
our assessment of key risks relating to IBOR discontinuation and
details of actions to mitigate those risks.
We have a substantial number of contracts linked to IBORs.
The new risk-free alternative reference rates do not currently
provide a term structure and will therefore require a change in
the contractual terms of products currently indexed on terms
other than overnight. We have established a cross-divisional,
cross-regional governance structure and change program to
address the scale and complexity of the transition.
EU Sustainable Finance Action Plan
In March 2018, the EC launched a Sustainable Finance Action
Plan as the basis for a “greener” financial system in the form of
10 action points.
In May 2018, the EC adopted the first set of measures
implementing several key points announced in its action plan.
This included a proposal for a taxonomy on sustainable finance,
which introduces disclosure obligations on how institutional
investors and asset managers integrate environmental, social
and governance (ESG) factors in their risk processes, and a
proposal to create a new category of benchmarks comprising
low carbon and positive carbon impact benchmarks, which
would provide investors with better information on the carbon
footprint of their investments. Other initiatives include seeking
feedback on inclusions of ESG considerations into the advice
that investment firms and insurance distributors offer to
individual clients.
We are committed to creating long-term positive effects for
our clients, employees, investors and society. In 2015, we
established a cross-divisional organization, UBS in society, to
help drive capital toward
investments that support the
achievement of the Sustainable Development Goals and the
transition to a low-carbon economy.
→ Refer to “Society” in the “How we create value for our
stakeholders” section of this report for more information on
UBS in society
USA
Proposed BEAT regulations issued
In December 2018, the US Department of Treasury issued
proposed regulations in connection with the base erosion and
anti-abuse tax (BEAT), which was introduced into law as part of
the Tax Cuts and Jobs Act in December 2017. BEAT is calculated
on the basis of modified taxable income that includes an add
back of otherwise tax-deductible payments made by a US
taxpayer to non-US-related parties. BEAT applies in a given year
to the extent that it is higher than the regular federal corporate
tax for that same year. The proposed regulations clarify that
payments made by a US entity to a non-US-related party are not
subject to BEAT, provided the income from such payments is
either taxable in the hands of the non-US-related party as US
effectively connected income or the payment relates to the US
minimum mandatory amount of TLAC instruments. Consistent
with our previous guidance, and taking the proposed regulations
into account, we do not expect to incur material BEAT expenses
for the foreseeable future.
US Fed on tailoring of enhanced prudential standards
With the passage of the Economic Growth, Regulatory Relief
and Consumer Protection Act (EGRRCPA) in May 2018, the US
banking agencies were required to implement a series of
reforms relative to Section 165 of the Dodd-Frank Act that most
notably dealt with resolution planning and enhanced prudential
standards. While EGRRCPA was targeted at US bank holding
companies and their subsidiary banks, the US regulators have
begun efforts that may extend similar reforms to foreign banks’
intermediate holding companies operating in the US. Of these
reforms, the tailoring of enhanced prudential standards is the
more important aspect. Such tailoring is expected to better align
regulatory requirements such as capital and liquidity risk
management and stress testing processes with the risk profile of
our US-based activities, and would permit a more efficient
allocation of capital and funding resources to our US operations.
Proposal to introduce stress capital buffer
In April 2018, the Federal Reserve Board issued a proposal to
introduce a bank-specific stress capital buffer (SCB), which
would replace the existing capital conservation buffer of 2.5%
applicable to firms subject to the Comprehensive Capital
Analysis and Review (CCAR) and would be applied to a firm’s
common equity tier 1 (CET1) and tier 1 leverage ratios based on
the higher of 2.5% or the difference between the starting and
minimum projected capital ratio levels over the nine-quarter
projection period using the Federal Reserve Board’s severely
adverse scenario. Additionally, the Federal Reserve Board would
no longer separately make quantitative objections to a covered
firm’s capital plans. While Federal Reserve Board principals have
publicly expressed views that certain elements of the proposal
would be delayed, the Federal Reserve Board has not re-issued a
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formal communication expressing such. Absent any further
clarification on the proposal and planned tailoring of prudential
standards for foreign banks, we expect UBS Americas Holding
LLC, our US intermediate holding company, to be subject to the
SCB and to remain a covered firm under the Federal Reserve
Board’s CCAR program.
Duties to customers in the US
In April 2018, the US Securities and Exchange Commission (SEC)
proposed a new regulation and interpretation intended to
enhance and clarify the duties of brokers and investment
advisors to retail customers. The proposals would require broker-
dealers and investment advisors to provide a new relationship
summary to customers describing the relationship with the
customers, the services offered, standards of conduct, fees and
costs, conflicts of interest and disciplinary information. The new
regulation would apply to broker-dealers and would require they
act in a customer’s best interest when making an investment or
investment strategy recommendation to a retail investor. The
proposed
certain obligations of
clarifies
investment advisors relating to acting in the best interest of
clients, obtaining best execution of transactions, providing
ongoing advice and monitoring, and disclosing and mitigating
conflicts of interest. The proposed requirements, if adopted,
would apply to a large portion of Global Wealth Management’s
businesses in the US.
interpretation
The proposals overlap with the US Department of Labor’s
(DOL) fiduciary rule, which would have applied to retirement
accounts, and would have been phased in through 2019. The
DOL fiduciary rule was invalidated by a US court of appeals in
March 2018.
rule
limit
(SCCL)
to mitigate
Single-counterparty credit limits
In June 2018, the Federal Reserve Board finalized the single-
counterparty credit
the
concentrations of risk between large banking organizations and
their counterparties from undermining financial stability. The
rule will become effective in 2020. Under the rule, foreign banks
with US banking operations and USD 250 billion or more in total
global assets would be subject to the SCCL framework relative
to their combined US operations and their intermediate holding
companies (IHC) greater than USD 50 billion. With respect to
UBS’s combined US operations, the rule allows for compliance
with the SCCL rule with respect to its combined US operations
by certifying to the Federal Reserve Board that it complies with a
comparable home country regime, which for UBS would be the
FINMA Circular “Risk diversification – banks,” which entered
into force on 1 January 2019. For its IHC, UBS would be subject
to a limit of aggregate net credit exposure to a counterparty of
25% of the IHC’s total regulatory capital plus the balance of its
loan loss reserves not included in tier 2 capital. The IHC currently
does not have any counterparty exposures that would exceed
the required threshold.
49
Our strategy, business model and environment
Risk factors
Risk factors
Certain risks, including those described below, may affect our
ability to execute our strategy or our business activities, financial
condition, results of operations and prospects. We are inherently
exposed to multiple risks, many of which may become apparent
only with the benefit of hindsight. As a result, risks that we do
not consider to be material or of which we are not currently
aware could also adversely affect us. 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 and macroeconomic risks
Performance in the financial services industry is affected by
market conditions and the macroeconomic climate
Our businesses are materially affected by market and
macroeconomic conditions. Adverse changes in interest rates,
credit spreads, securities prices, market volatility and liquidity,
foreign exchange rates, commodity prices, and other market
fluctuations, as well as changes in investor sentiment, can affect
our earnings and ultimately our financial and capital positions.
A market downturn and weak macroeconomic conditions
can be precipitated by a number of factors,
including
geopolitical events, 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
financial markets are global and highly
and, because
interconnected, even local and regional events can have
widespread effects 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, or be unable to effectively manage our risks.
We could be materially affected if a crisis develops, regionally
or globally, as a result of disruptions in markets as a result of
macroeconomic or political developments, or as a result of the
failure of a major market participant. Over time, our strategic
plans have become more heavily dependent on our ability to
generate growth and revenue in emerging markets, including
China, causing us to be more exposed to the risks associated
with such markets.
50
We have material exposures to a number of markets, and
our businesses have regional exposures and concentrations
that differ
from certain of our peers. Global Wealth
Management derives revenues from all the principal regions,
but has a greater concentration in Asia than many peers and a
substantial presence in the US, unlike many European peers.
The Investment Bank’s Equities business is more heavily
weighted to Europe and Asia than our peers, and within this
business its derivatives business is more heavily weighted to
in
structured products for wealth management clients,
particular with European and Asian underlyings. Our
performance may therefore be more affected by political,
economic and market developments in these regions and
businesses than some other financial service providers.
A decrease in business and client activity and market volumes,
for example, as a result of significant market volatility, adversely
affects transaction fees, commissions and margins, particularly in
Global Wealth Management and the Investment Bank, as we
experienced in the fourth quarter of 2018 and in 2016. A
market downturn is likely to reduce the volume and valuations
of assets that we manage on behalf of clients, which would
reduce recurring fee income that is charged based on invested
asset and performance-based fees in Asset Management. Such a
downturn may 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 may limit
trading opportunities and may therefore reduce transaction-
based fees and may also impede our ability to manage risks.
In addition, the implementation of the expected credit loss
(ECL) regime, as required by IFRS 9, is intended to result in fewer
pro-cyclical charges for credit impairment by ensuring that
impairment charges would be recognized earlier through
anticipating a downturn using appropriate forward-looking
measures and, conversely, an expected positive development once
the trough of a downturn has been reached. There is a material
risk that these expectations will not materialize, and that ECL
under IFRS 9 will prove to be pro-cyclical. Provision requirements
under IFRS 9 may in practice increase rapidly at the onset of an
economic downturn as a result of higher levels of credit
impairment (stage 3) as well as higher ECL from stages 1 and 2,
only gradually diminishing once the economic outlook improves.
Substantial increases in ECL could exceed expected loss for
regulatory capital purposes and adversely affect our common
equity tier 1 (CET1) capital and regulatory capital ratios. The effect
of pro-cyclical ECL requirements will be assessed in our stress
testing outputs.
We are exposed to the credit risk of our clients, trading
counterparties and other financial institutions
Credit risk is an integral part of many of our activities, including
lending, underwriting and derivatives activities. Failure to
properly assess and manage credit risk or adverse economic or
market conditions may lead to impairments and defaults on
credit exposures. Losses may be exacerbated by declines in the
value of collateral securing loans and other exposures. In our
prime brokerage, securities finance and Lombard
lending
businesses we extend substantial amounts of credit against
securities collateral, the value or liquidity of which may decline
rapidly. Our Swiss mortgage and corporate lending portfolios are
a large part of our overall lending. We are therefore exposed to
the risk of adverse economic developments in Switzerland,
including the strength of the Swiss franc and its effect on Swiss
exports, prevailing negative interest rates by the Swiss National
Bank, economic conditions within the eurozone or the EU, and
the evolution of agreements between Switzerland and the EU
and European Economic Area, which represent Switzerland’s
largest export market.
The aforementioned developments have in the past affected,
and going forward could materially affect, our overall financial
performance and the financial performance of our individual
businesses.
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 the Personal & Corporate Banking
and Global Wealth Management businesses. Our performance is
also affected by the cost of maintaining the high-quality liquid
assets required to cover regulatory outflow assumptions
embedded in the liquidity coverage ratio.
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
funding for us), net new money outflows and a declining market
share in our Swiss lending business.
Our shareholders’ equity and capital are also affected by
changes in interest rates. In particular, the calculation of our
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Swiss pension plan’s net defined benefit assets and liabilities is
sensitive to the discount rate applied and to fluctuations in the
value of pension plan assets. Any further reduction in interest
rates may lower the discount rates and result in pension plan
deficits as a result of the long duration of corresponding
liabilities. This could lead to a corresponding reduction in our
equity and common equity tier 1 capital.
Currency fluctuation
We are subject to currency fluctuation risks. Effective 1 October
2018, the functional currency of UBS Group AG and UBS AG’s
Head Office in Switzerland has changed from Swiss francs to US
dollars and the functional currency of UBS AG’s London Branch
operations has changed from British pounds to US dollars. In line
with these changes, we have changed the presentation currency
of UBS Group AG’s and UBS AG’s consolidated financial
statements from Swiss francs to US dollars effective from our
fourth quarter 2018 reporting. Although this change reduces
our exposure to currency fluctuation risks against Swiss francs, a
substantial portion of our assets and liabilities are denominated
in currencies other than the US dollar. Accordingly, changes in
foreign exchange rates may continue to adversely affect our
profits, balance sheet and capital leverage and liquidity coverage
ratios.
In order to hedge our CET1 capital ratio, our CET1 capital
must have foreign currency exposure, which leads to currency
sensitivity. As a consequence, it is not possible to simultaneously
fully hedge both the amount of capital and the capital ratio. Our
change to the US dollar as our presentation currency has
reduced, but not eliminated the exposure of our CET1 capital
and capital ratios to currency fluctuations.
Regulatory and legal risks
the 2007–2009
Substantial changes in the regulation may adversely affect our
businesses and our ability to execute our strategic plans
Fundamental changes in the laws and regulations affecting
financial institutions can have a material and adverse effect on
our business. Following
financial crisis,
regulators and legislators have adopted a wide range of changes
to the laws, regulations and supervisory frameworks applicable
to banks. The changes are intended to address the perceived
causes of the crisis and to limit the systemic risks posed by major
financial institutions. They have caused us to make significant
changes in our businesses, strategy and legal structure. We have
moved significant operations
improve
resolvability and meet other regulatory requirements, and this
has resulted in substantial implementation costs, increased our
capital and funding costs and reduced operational flexibility.
Although many of the regulatory changes have been completed,
some continue to be phased in over time or require further
rulemaking or guidance for implementation, and other changes
are still under consideration.
into subsidiaries to
51
Our strategy, business model and environment
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. Swiss regulatory changes with regard to such
matters as capital and liquidity have often proceeded more
quickly than those in other major jurisdictions, and Switzerland’s
requirements for major international banks are among the
strictest of the major financial centers. This could put Swiss
banks such as UBS at a disadvantage when competing with peer
financial institutions subject to more lenient regulation or with
unregulated non-bank competitors.
transferred substantially all
Banking structure and activity limitations: We have made
significant changes to 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 have
the
operations of Personal & Corporate Banking and Global Wealth
Management booked in Switzerland to UBS Switzerland AG, to
improve resolvability. These changes, particularly the transfer of
operations to subsidiaries, require significant time and resources
to implement, and create operational, capital, liquidity, funding
and tax inefficiencies. In addition, they may increase our
aggregate credit exposure to counterparties as they transact
with multiple entities within the Group. Further, 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 affects our ability to benefit from
synergies between business units and to distribute earnings to
the Group.
We have incurred substantial costs in implementing a
compliance and monitoring framework in connection with the
Volcker Rule under the Dodd-Frank Act and have modified our
business activities both inside and outside the US to conform to
the Volcker Rule’s activity limitations. We may incur additional
costs in the short term if aspects of the Volcker Rule are
modified in ways that would require changes to the operation of
our Volcker compliance program, even if those changes may
reduce the long-term burden on our operations. We may also
become subject to other similar regulations substantively limiting
the types of activities in which we may engage or the way we
conduct our operations.
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.
We expect our risk-weighted assets (RWA) to increase in
2019 as a result of changes in methodology and add-ons in the
calculation of RWA, as well as
implementation of new
accounting standards. 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.
52
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 this framework and similar regulations in the
US, the UK, the EU and other jurisdictions in which we operate,
we are required to prepare credible recovery and resolution
plans detailing the measures that would be taken to recover in
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. If a recovery or resolution plan we
produce
is determined by the relevant authority to be
inadequate or not credible, relevant regulation may permit the
authority to place limitations on the scope or size of our business
in that jurisdiction, or oblige us to hold higher amounts of
capital or liquidity or to change our legal structure or business in
order to remove the relevant impediments to resolution.
The Swiss Banking Act and implementing ordinances provide
the Swiss Financial Market Supervisory Authority (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 directly or indirectly require us, 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.
and
new
pre-trade
post-trade
Substantial changes in market regulation have affected and will
continue to affect how we conduct our business: The revised
Markets in Financial Instruments Directive (MiFID II) became
effective in 2018. MiFID II, among other things, introduces
substantial new regulation of exchanges and trading venues,
including
transparency
requirements, a ban on the practice of using commissions on
transactions to compensate for research services and substantial
new conduct requirements for financial services firms when
dealing with clients. Implementation by the G20 countries of the
commitment to require all standardized over-the-counter (OTC)
derivative contracts to be traded on exchanges or trading facilities
and cleared through central counterparties has had and will
continue to have a significant effect on our OTC derivatives
business, which is conducted primarily in the Investment Bank.
These market changes are likely to reduce the revenue potential of
certain lines of business for market participants generally,
including UBS. For example, the changes introduced by MiFID II
appear to have reduced commission rates and trading margins;
these reductions may not be fully offset by charges for research
services. Also, these changes may have a material effect on the
market infrastructure that we use and the way we interact with
clients, and may result in additional material implementation costs.
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Some of the regulations applicable to UBS AG as a registered
swap dealer with the Commodity Futures Trading Commission
(CFTC) in the US, and certain regulations that will be applicable
when UBS AG registers as a security-based swap dealer with the
US Securities and Exchange Commission (SEC), apply to UBS AG
globally, including those relating to swap data reporting, record-
keeping, compliance and supervision. As a result, in some cases
US rules duplicate or may conflict with legal requirements
applicable to us elsewhere, including in Switzerland, and may
place us at a competitive disadvantage to firms that are not
required to register in the US with the SEC or CFTC.
In many instances, we provide services on a cross-border
basis, and we are therefore sensitive to barriers restricting
market access for third-country firms. In particular, efforts in
the EU to harmonize the regime for third-country firms to
access the European market may have the effect of creating
new barriers that adversely affect our ability to conduct
business in these jurisdictions from Switzerland. In addition, a
number of jurisdictions are increasingly regulating cross-border
activities based on determinations of equivalence of home
country regulation, substituted compliance or similar principles
of comity. A negative determination could limit our access to
the market in those jurisdictions and may negatively influence
our ability to act as a global firm. For example, the EU has
provided only a temporary equivalence determination for Swiss
exchanges, which has caused Switzerland to adopt regulations
that may result in limitations on trading Swiss listed securities
on EU markets. 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.
Material legal and regulatory risks arise in the conduct of our
business
As a global financial services firm operating in more than 50
countries, we are subject to many different legal, tax and
regulatory regimes, including extensive regulatory oversight, and
exposed to significant liability risk. We are subject to a large
number of claims, disputes, legal proceedings and government
investigations, and we expect that our ongoing business
activities will continue to give rise to such matters in the future.
The extent of our financial exposure to these and other matters
is material and could substantially exceed the level of provisions
that we have established. We are not able to predict the
financial and non-financial consequences these matters may
have when resolved.
We may be subject to adverse preliminary determinations or
court decisions that may negatively affect public perception and
our reputation, result in prudential actions from regulators, and
cause us to record additional provisions for the matter even
when we believe we have substantial defenses and expect to
ultimately achieve a more favorable outcome. This risk is
illustrated by the award of aggregate penalties and damages of
EUR 4.5 billion by the court in France.
Resolution of regulatory proceedings may require us to obtain
waivers of regulatory disqualifications to maintain certain
operations; may entitle regulatory authorities to limit, suspend or
terminate licenses and regulatory authorizations; and may permit
financial market utilities to limit, suspend or terminate our
participation in them. Failure to obtain such waivers, or any
limitation, suspension or termination of licenses, authorizations or
participations, could have material adverse consequences for us.
interest rates starkly
Our settlements with governmental authorities in connection
with foreign exchange, London Interbank Offered Rates (LIBOR)
and other benchmark
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 we have
remediated the deficiencies that led to those losses as well as to
the unauthorized trading incident announced in September
2011, the effects on our reputation, as well as on relationships
with regulatory authorities of the LIBOR-related settlements of
2012 and settlements with some regulators of matters related to
our foreign exchange and precious metals business, 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. Our implementation of additional regulatory requirements
and changes in supervisory standards, as well as our compliance
with existing laws and regulations, continue to receive heightened
scrutiny from supervisors.
If we do not meet supervisory
expectations in relation to these or other matters, or if additional
supervisory or regulatory issues arise, we would likely be subject to
further regulatory scrutiny as well as measures that might further
constrain our strategic flexibility. We are in active dialog with
regulators concerning the actions 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.
53
Our strategy, business model and environment
Risk factors
The effect of taxes on our financial results is significantly
influenced by tax law changes and reassessments of our
deferred tax assets
Our effective tax rate is highly sensitive to our performance, our
expectation of future profitability and statutory tax rates. Based
on prior years’ tax losses, we have recognized deferred tax assets
(DTAs) reflecting the probable recoverable level based on future
taxable profit as informed by our business plans. If our
performance is expected to produce diminished taxable profit in
future years, particularly in the US, we may be required to write
down all or a portion of the currently recognized DTAs through
the income statement in excess of anticipated amortization. This
would have the effect of increasing our effective tax rate in the
year in which any write-downs are taken. Conversely, if we
in which we have
expect the performance of entities
unrecognized tax losses to improve, particularly in the US or the
UK, we could potentially recognize additional DTAs. The effect
of doing so would be to reduce our effective tax rate in years in
which additional DTAs are recognized and to increase our
effective tax rate in future years. Our effective tax rate is also
sensitive to any future reductions in statutory tax rates,
particularly in the US 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 USD 2.9 billion net write-down in the
Group’s DTAs in the fourth quarter of 2017.
We generally revalue our DTAs in the fourth quarter of the
financial year based on a reassessment of future profitability
taking into account our updated business plans. We consider
the performance of our businesses and the accuracy of
historical forecasts, tax rates and other factors in evaluating
the recoverability of our DTAs, including the remaining tax loss
carry-forward period and our assessment of expected future
taxable profits over the life of DTAs. Estimating future
profitability is inherently subjective and is particularly sensitive
to future economic, market and other conditions, which are
difficult to predict.
Our results in recent periods have demonstrated that changes
in the recognition of DTAs can have a very significant effect on
our reported results. Any future change in the manner in which
UBS remeasures DTAs could affect UBS’s effective tax rate,
particularly in the year in which the change is made.
Our full-year effective tax rate could change if aggregate tax
expenses in respect of profits from branches and subsidiaries
without loss coverage differ from what is expected. In particular,
losses at entities that cannot be offset for tax purposes by net
operating losses may increase our effective tax rate. 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
54
on the utilization of tax losses that relate to businesses formerly
conducted by the transferor. Were this to occur in situations
where there were also limited planning opportunities to utilize
the tax losses in the originating entity, the DTAs associated with
such tax losses may be required to be written down through the
income statement.
Changes in tax law may materially affect our effective tax rate
and in some cases may substantially affect the profitability of
certain activities. In addition, statutory and regulatory changes,
as well as changes to the way in which courts and tax authorities
interpret tax laws including assertions that we are required to
pay taxes in a jurisdiction as a result of activities connected to
that jurisdiction constituting a permanent establishment or
similar theory, and changes in our assessment of uncertain tax
positions, could cause the amount of taxes we ultimately pay to
materially differ from the amount accrued.
Discontinuance of, or changes to, benchmark rates may require
adjustments to our agreements with clients and other market
participants, as well as to our systems and processes
Since April 2013, the UK Financial Conduct Authority (FCA) has
regulated LIBOR and regulators in other jurisdictions have
increased oversight of other interbank offered rates (IBORs) and
similar benchmark rates. Efforts to transition from IBORs to
alternative benchmark
several
jurisdictions. The FCA announced in July 2017 that it will not
continue beyond 2021 to regulate LIBOR or take other actions to
sustain LIBOR, and urged users to plan the transition to
alternative reference rates. As a result, there can be no
guarantee that LIBOR will be determined after 2021 on the same
basis as at present, if at all.
rates are underway
in
In the third quarter of 2018, the private-sector working group
on euro risk-free rates recommended ESTER (euro short-term
rate) as the replacement for EONIA (Euro OverNight Index
Average), which will be prohibited by the EU Benchmark
Regulation after 1 January 2020. Futures contracts referenced to
the Secured Overnight Financing Rate (SOFR), the recommended
successor to US dollar LIBOR, have begun trading on the
Chicago Mercantile Exchange. The Bank of England consulted
on the development of Term SONIA (Sterling Overnight Index
Average) Reference Rates, which are expected to become
available in the second half of 2019. The International Swaps
and Derivatives Association, as part of a Financial Conduct
Authority (FCA) mandate, consulted on preferred options for
LIBOR transition fallbacks for derivatives. The FCA and the
Prudential Regulation Authority have written to the CEOs of
banks and insurance companies in the UK, including us, seeking
assurance that senior managers and boards understand the risks
associated with the transition away from IBORs and are taking
appropriate preparatory action to transition to alternative rates
before the end of 2021. In July 2018, the International Swaps
and Derivatives Association launched a market-wide consultation
on technical issues related to new benchmark fallbacks for
derivatives contracts that reference certain IBORs.
We have a substantial number of contracts linked to IBORs.
The new risk-free alternative reference rates do not provide a
term structure and will therefore require a change in the
contractual terms of products currently indexed on terms other
than overnight. In some cases contracts may contain provisions
intended to provide a fall-back interest rate in the event of a
brief unavailability of the relevant IBOR. These provisions may
not be effective or may produce arbitrary results in the event of
a permanent cessation of the relevant IBOR. In addition,
numerous of our internal systems, limits and processes make use
of IBORs as reference rates. Transition to replacement reference
rates will require significant effort.
UK withdrawal from the EU
We have planned our response to the UK withdrawal from the EU
assuming that the UK will leave the EU in March 2019 and that
any transition arrangements will only become legally binding close
to the exit date. Given the continuing uncertainty on transition
arrangements and the potential future restrictions on providing
financial services into the EU from the UK, we have completed the
merger of UBS Limited, our UK-based subsidiary, into UBS Europe
SE, a German-headquartered European subsidiary. As a result, we
expect that UBS Europe SE will become subject to direct
supervision by the European Central Bank.
Clients and counterparties of UBS Limited who can be serviced
by UBS AG, London Branch following the exit of the UK from the
EU have generally been migrated to that branch. The remaining
clients and other counterparties of UBS Limited were transferred
to UBS Europe SE upon completion of a UK business transfer
proceeding on 1 March 2019 and the merger of the two entities.
In connection with the merger, a small number of roles are
being relocated from the UK to other European locations. We
also expect to increase the loss-absorbing capacity of UBS
Europe SE to reflect the additional activities it would acquire.
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 Group AG, UBS AG
and UBS Switzerland AG, if there is justified concern that the
entity is over-indebted, has serious liquidity problems or, after
the expiration of any relevant deadline, no longer fulfils capital
adequacy requirements. Such powers include ordering protective
measures, instituting restructuring proceedings (and exercising
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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 and
shareholders would have no right under Swiss law or in Swiss
courts to reject them, seek their suspension, or challenge their
imposition, including measures that require or result in the
deferment of payments.
If restructuring proceedings are opened with respect to UBS
Group AG, UBS AG or UBS Switzerland AG, the resolution
powers that FINMA may exercise include the power to (i)
transfer all or some of the assets, debt and other liabilities, and
contracts of the entity subject to proceedings to another entity,
(ii) stay for a maximum of two business days a. the termination
of, or the exercise of rights to terminate, netting rights, b. rights
to enforce or dispose of certain types of collateral or c. rights to
transfer claims, liabilities or certain collateral, under contracts to
which the entity subject to proceedings is a party, and / or (iii)
partially or fully write down the equity capital and, if such equity
capital is fully written down, convert into equity or write down
the capital and other debt instruments of the entity subject to
proceedings. Shareholders and creditors would have no right to
reject, or to seek the suspension of, any restructuring plan
pursuant to which such resolution powers are exercised. They
would have only limited rights to challenge any decision to
exercise resolution powers or to have that decision reviewed by
a judicial or administrative process or otherwise.
to
the
restructuring proceedings,
Upon full or partial write-down of the equity and debt of the
entity subject
relevant
shareholders and creditors would receive no payment in respect
of the equity and debt that is written down, the write-down
would be permanent, and the investors would not, at such time
or at any time thereafter, receive any shares or other
participation rights, or be entitled to any write-up or any other
compensation in the event of a potential recovery of the debtor.
If FINMA orders the conversion of debt of the entity subject to
restructuring proceedings into equity, the securities received by
the investors may be worth significantly less than the original
debt and may have a significantly different risk profile, and such
conversion would also dilute the ownership of existing
shareholders. In addition, creditors receiving equity would be
effectively subordinated to all creditors of the restructured entity
in the event of a subsequent winding up, liquidation or
dissolution of the restructured entity, which would increase the
risk that investors would lose all or some of their investment.
55
Our strategy, business model and environment
Risk factors
FINMA has significant discretion in the exercise of its powers
in connection with restructuring proceedings. Furthermore,
certain categories of debt obligations, such as certain types of
deposits, are subject to preferential treatment. As a result,
holders of obligations of an entity subject to a Swiss
restructuring proceeding may have their obligations written
down or converted into equity even though obligations ranking
on par with or junior to such obligations are not written down
or converted.
faces substantial
FINMA has expressed its preference for a single-point-of-entry
resolution strategy for global systemically important financial
groups, led by the bank’s home supervisory and resolution
authorities and focused on the top-level group company. This
would mean that, if UBS AG or one of UBS Group AG’s other
losses, FINMA could open
subsidiaries
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 affect 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.
Liquidity risks
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. Our funding sources have generally been
stable, but could change in the future because of, among
other things, general market disruptions or widening credit
spreads, which could also influence the cost of funding. A
substantial part of our liquidity and funding requirements are
met using short-term unsecured funding sources, including
retail and wholesale deposits and the regular issuance of
money market securities. A change in the availability of short-
term funding could occur quickly.
Moreover, more stringent capital and liquidity and funding
requirements will likely lead to increased competition for both
secured funding and deposits as a stable source of funding, and
to higher funding costs. The addition of loss-absorbing debt as a
component of capital requirements, the regulatory requirements
to maintain minimum TLAC at our holding company and at
subsidiaries, as well as the power of resolution authorities to bail
in TLAC and other debt obligations, and uncertainty as to how
such powers will be exercised, will increase our cost of funding
and could potentially increase the total amount of funding
required, in the absence of other changes in our business.
Reductions in our credit ratings may adversely affect the
market value of the securities and other obligations and
increase our funding costs, in particular with regard to funding
from wholesale unsecured sources, and could affect the
availability of certain kinds of funding. In addition, as we
experienced in connection with Moody’s downgrade of our
long-term debt rating in June 2012, rating downgrades can
require us to post additional collateral or make additional cash
payments under trading agreements. Our credit ratings,
together with our capital strength and reputation, also
contribute to maintaining client and counterparty confidence,
and it is possible that rating changes could influence the
performance of some of our businesses.
Liquidity and funding: The requirement to maintain a liquidity
coverage ratio of high-quality liquid assets to estimated stressed
short-term net cash outflows, the proposed requirement to
maintain a net stable funding ratio, and other similar liquidity
and funding requirements, oblige us to maintain high levels of
overall liquidity, limit our ability to optimize interest income and
expense, make certain lines of business less attractive and
reduce our overall ability to generate profits. The liquidity
coverage ratio and net stable funding ratio requirements are
intended to ensure that we are not overly reliant on short-term
funding and that we have sufficient long-term funding for
illiquid assets. The relevant calculations make assumptions about
the relative likelihood and amount of outflows of funding and
available sources of additional funding in market-wide and firm-
specific stress situations. There can be no assurance that in an
actual stress situation our funding outflows would not exceed
the assumed amounts. Moreover, many of our subsidiaries must
comply with minimum capital, liquidity and similar requirements
and as a result UBS Group AG and UBS AG have contributed a
significant portion of their capital and provide substantial
liquidity to these subsidiaries. These funds are available to meet
funding and collateral needs in the relevant entities, but are
generally not readily available for use by the Group as a whole.
Strategy, management and operations risks
We may not be successful in the ongoing execution of our
strategic plans
Over the last seven years, we have transformed our business to
focus on our Global Wealth Management business and our
in Switzerland, complemented by Asset
universal bank
Management and a significantly smaller and more capital
efficient Investment Bank; we have substantially reduced the
risk-weighted assets and leverage ratio denominator usage in
Corporate Center – Non-core and Legacy Portfolio; and made
significant cost reductions. We have recently provided an update
on the execution of our strategy, updated our performance
targets and provided guidance on capital and resources. Risk
remains that we may not succeed in executing our strategy or
achieving 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 and ambitions in the past and
we may need to do so again in the future.
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To achieve our strategic plans, we expect to continue to make
significant expenditures on technology and infrastructure to
improve client experience, improve and further enable digital
offerings and increase efficiency. Our investments in new
technology may not fully achieve our objectives or improve our
ability to attract and retain customers. In addition, we will likely
face competition in providing digitally enabled offerings from
both existing competitors and new financial service providers in
various portions of the value chain. Our ability to develop and
implement competitive digitally enabled offerings and processes
will be an important factor in our ability to compete.
As part of our strategy, we seek to improve our operating
efficiency, in part by controlling our costs. We may not be able
to
identify feasible cost reduction opportunities that are
consistent with our business goals and cost reductions may be
realized later or may be smaller than we anticipate. Higher
temporary and permanent regulatory costs and higher business
demand than anticipated have partly offset cost reductions and
delayed the achievement of our past cost reduction targets, and
we could continue to be challenged in the execution of our
ongoing efforts to improve operating efficiency.
Changes in our workforce as a result of outsourcing,
nearshoring, offshoring, insourcing or staff reductions may
introduce new operational risks that, if not effectively addressed,
could affect our ability to achieve cost and other benefits from
such changes, or could result in operational losses. 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 effectiveness and efficiency programs, we
may also experience unintended consequences, such as the
unintended loss or degradation of capabilities that we need in
order to maintain our competitive position, achieve our targeted
returns or meet existing or new regulatory requirements and
expectations.
Operational risks affect our business
Our businesses depend on our ability to process a large number
of transactions, many of which are complex, across multiple and
in different currencies, to comply with
diverse markets
requirements of many different legal and regulatory regimes to
which we are subject and to prevent, or promptly detect and
stop, unauthorized, fictitious or fraudulent transactions. We also
rely on access to, and on the functioning of, systems maintained
by
including clearing systems, exchanges,
information processors and central counterparties. Any failure of
our or third-party systems could have an adverse effect on us.
Our operational risk management and control systems and
third parties,
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 substantial loss we incurred 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. These attacks may be attempted through
the introduction of viruses or malware, phishing and other forms
of social engineering, distributed denial of service attacks and
other means. These attempts may occur directly, or using
equipment or security passwords of our employees, third party
service providers or other users. In addition to external attacks,
we have experienced loss of client data from failure by
employees and others to follow internal policies and procedures
and from misappropriation of our data by employees and others.
We may not be able to anticipate, detect or recognize threats to
our systems or data and our preventative measures may not be
effective to prevent an attack or a security breach. In the event
of a security breach notwithstanding our preventative measures,
we may not immediately detect a particular breach or attack.
Once a particular attack is detected, time may be required to
investigate and assess the nature and extent of the attack. A
successful breach or circumvention of security of our systems or
data could have significant negative consequences for us,
including disruption of our operations, misappropriation of
confidential
information concerning us or our customers,
damage to our systems, financial losses for us or our customers,
violations of data privacy and similar laws, litigation exposure
and damage to our reputation.
information
transfer personal
We are subject to complex and frequently changing laws
and regulations governing the protection of client and personal
data, such as the EU General Data Privacy Regulation. Ensuring
that we comply with applicable laws and regulations when we
collect, use and
requires
substantial resources and may affect the ways in which we
conduct our business. In the event that we fail to comply with
applicable laws, we may be exposed to regulatory fines and
penalties and other sanctions. We may also incur such
penalties if our vendors or other service providers or clients or
counterparties fail to comply with these laws or to maintain
appropriate controls over protected data. In addition, any loss
or exposure of client or other data, may adversely damage our
reputation and adversely affect our business.
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Our strategy, business model and environment
Risk factors
implemented policies, procedures and
A major focus of US and other countries’ governmental
policies relating to financial institutions in recent years has
been on fighting money laundering and terrorist financing. We
are required to maintain effective policies, procedures and
controls to detect, prevent and report money laundering and
terrorist financing, and to verify the identity of our clients
under the laws of many of the countries in which we operate.
We are also subject to laws and regulations related to corrupt
and illegal payments to government officials by others, such as
the US Foreign Corrupt Practices Act and the UK Bribery Act.
We have
internal
controls that are designed to comply with such laws and
regulations. Notwithstanding this, US regulators have found
deficiencies
in the design and operation of anti-money
in our US operations. We have
laundering programs
undertaken a significant program to address these regulatory
findings with the objective of fully meeting regulatory
expectations for our programs. Failure to maintain and
implement adequate programs to combat money laundering,
terrorist financing or corruption, or any failure of our programs
in these areas, could have serious consequences both from
legal enforcement action and from damage to our reputation.
increasingly
Frequent changes
imposed and
complex sanctions
imposed on countries, entities and
individuals increase our cost of monitoring and complying with
sanctions requirements and increase the risk that we will not
timely identify previously permissible client activity that is
subject to a sanction.
in sanctions
As a result of new and changed regulatory requirements and
the changes we have made in our legal structure, the volume,
frequency and complexity of our regulatory and other reporting
has significantly increased. Regulators have also significantly
increased expectations for our internal reporting and data
aggregation, as well as management reporting. We have
incurred and continue to incur significant costs to implement
infrastructure to meet these requirements. Failure to timely and
accurately meet external reporting requirements or to meet
regulatory expectations for internal reporting, data aggregation
and management reporting could result in enforcement action
or other adverse consequences for us.
Certain types of operational control weaknesses and failures
could also adversely affect our ability to prepare and publish
accurate and timely financial reports.
In addition, despite the contingency plans we have in place,
our ability to conduct business may be adversely affected by a
disruption in the infrastructure that supports our businesses and
the communities in which we operate. This may include a
disruption due to natural disasters, pandemics, civil unrest, war
communications,
or
transportation or other services we use or used by third parties
with whom we conduct business.
electrical,
terrorism
involve
and
58
implementation across
investment managers and other
We may not be successful in implementing changes in our
wealth management businesses to meet changing market,
regulatory and other conditions
Our wealth and asset management businesses operate in an
environment of increasing regulatory scrutiny and changing
standards with respect to fiduciary and other standards of care
and the focus on mitigating or eliminating conflicts of interest
between a manager or advisor and the client, which require
the global systems and
effective
industry
processes of
participants. For example, the SEC proposed a new regulation
and interpretation intended to enhance and clarify the duties of
brokers and investment advisers to retail customers. The
proposed requirements, if adopted, would apply to a large
portion of Global Wealth Management’s business in the US, and
we will likely be required to materially change business
processes, policies and the terms on which we interact with
these clients in order to comply with these rules, if and 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.
UBS experienced cross-border outflows over a number of years
as a result of heightened focus by fiscal authorities on cross-
border investment and fiscal amnesty programs, in anticipation of
the implementation in Switzerland of the global automatic
exchange of tax information, and as a result of the measures UBS
has implemented in response to these changes. Further changes in
laws or regulations and their enforcement, the
local tax
implementation of cross-border
information exchange
tax
regimes, national tax amnesty or enforcement programs or similar
actions may affect our clients’ ability or willingness to do business
with us and result in additional cross-border outflows.
In recent years, Global Wealth Management’s 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 Global Wealth
Management’s margins.
As the discussion above indicates, we are exposed to possible
outflows of client assets in our asset-gathering businesses and to
changes affecting the profitability of Global Wealth Management,
in particular. Initiatives that we may implement to overcome the
effects of changes
in the business environment on our
profitability, balance sheet and capital positions may not succeed
in counteracting those effects and may cause net new money
outflows and reductions in client deposits, as happened with our
balance sheet and capital optimization program in 2015. There is
no assurance that we will be successful in our efforts to offset the
adverse effect of these or similar trends and developments.
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Our stated capital returns objective is based, in part, on capital
ratios that are subject to regulatory change and may fluctuate
significantly
We plan to operate with a CET1 capital ratio of around 13%
and a CET1 leverage ratio of around 3.7%. Our ability to
maintain these ratios is subject to numerous risks, including the
financial results of our businesses, the effect of changes to
capital standards, methodologies and interpretation that may
adversely affect the calculation of our CET1 ratios, the
imposition of risk add-ons or capital buffers, and the application
of additional capital, liquidity and similar requirements to
subsidiaries. The results of our businesses may be adversely
affected by events arising from other factors described herein. In
some cases, such as litigation and regulatory risk and operational
risk events, losses may be sudden and large. These risks could
reduce the amount of capital available for return to shareholders
and hinder our ability to achieve our capital returns target of a
progressive cash dividend coupled with a share repurchase
program.
Failure to maintain our capital strength may adversely affect our
ability to execute our strategy, our client franchise and our
competitive position
Our capital strength is a key component of our strategy. Capital
strength enables us to grow our businesses, and absorb
increases in regulatory and capital requirements. It reassures our
clients and stakeholders, forms the basis for our capital return
policy and contributes to our credit ratings. Our capital ratios are
driven primarily by RWA, leverage ratio denominator and eligible
capital, all of which may fluctuate based on a number of factors,
some of which are outside our control.
Our eligible capital may be reduced by losses recognized
within net profit or other comprehensive income. Eligible capital
may also be reduced for other reasons, including 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, adverse currency movements, increased counterparty
risk, deterioration in the economic environment or increased
operational risk could result in an increase in RWA. We have
significantly reduced our market risk and credit risk RWA in
recent years. However, increases in operational risk RWA,
particularly those arising from litigation, regulatory and similar
matters, and regulatory changes in the calculation of RWA and
regulatory add-ons to RWA have offset a substantial portion of
this reduction. Changes in the calculation of RWA 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.
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 even if we satisfy
other risk-based capital requirements. Our
leverage ratio
denominator is driven by, among other things, the level of client
activity, including deposits and loans, foreign exchange rates,
interest rates and other market factors. Many of these factors
are wholly or partially outside of our control.
We may be unable to identify or capture revenue or competitive
opportunities, or retain and attract qualified employees
The financial services industry is characterized by intense
competition, continuous innovation, restrictive, detailed, and
sometimes fragmented regulation and ongoing consolidation.
We face competition at the level of local markets and individual
business lines, and from global financial institutions that are
comparable to us in their size and breadth. Barriers to entry in
individual markets and pricing levels are being eroded by new
technology. We expect
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 such trends and
developments by devising and implementing adequate business
strategies, do not adequately develop or update our technology
including our digital channels and tools, or are unable to attract
or retain the qualified people needed.
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 other
stakeholders, we have increased average deferral periods for stock
awards, expanded forfeiture provisions and, to a more limited
extent, introduced clawback provisions for certain awards linked
to business performance. We have also introduced individual caps
on the proportion of fixed to variable pay for the Group Executive
Board (GEB) members, as well as certain other employees.
Constraints on the amount or structure of employee
compensation, higher levels of deferral, performance conditions
and other circumstances triggering the forfeiture of unvested
awards may adversely affect our ability to retain and attract key
employees. The loss of key staff and the inability to attract
qualified replacements could seriously compromise our ability to
execute our strategy and to successfully improve our operating
and control environment, and could affect our business
performance. Swiss law requires that shareholders approve the
compensation of the Board of Directors (BoD) and the GEB each
year. If our shareholders fail to approve the compensation for the
GEB or the BoD, this could have an adverse effect on our ability to
retain experienced directors and our senior management.
59
Our strategy, business model and environment
Risk factors
We depend on our risk management and control processes to
avoid or limit potential losses in our businesses
Controlled risk-taking is a major part of the business of a
financial services firm. Some losses from risk-taking activities are
inevitable, but to be successful over time, we must balance the
risks we take against the returns generated. Therefore we must
diligently identify, assess, manage and control our risks, not only
in normal market conditions but also as they might develop
under more extreme, stressed conditions, when concentrations
of exposures can lead to severe losses.
As seen during the financial crisis of 2007–2009, we have not
always been able to prevent serious losses arising from extreme
or sudden market events that are not anticipated by our risk
measures and systems. Our risk measures, concentration
controls and the dimensions in which we aggregated risk to
identify correlated exposures proved inadequate in a historically
severe deterioration in financial markets. As a result, we
recorded substantial losses on fixed income trading positions,
particularly in 2008 and 2009. We have substantially revised and
strengthened our risk management and control framework and
increased the capital we hold relative to the risks we take.
Nonetheless, we could suffer further losses in the future if, for
example:
– we do not fully identify the risks in our portfolio, in particular
risk concentrations and correlated risks;
– our assessment of the risks identified, or our response to
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;
– third parties to whom we have credit exposure or whose
securities we hold are severely affected by events and we
suffer defaults and impairments beyond the level implied by
our risk assessment; or
– collateral or other security provided by our counterparties
proves inadequate to cover their obligations at the time of
default.
this portfolio
We have exposures related to real estate in various countries,
including a substantial Swiss mortgage portfolio. Although we
believe
is prudently managed, we could
nevertheless be exposed to losses if a substantial deterioration in
the Swiss real estate market were to occur. We also hold legacy
risk positions, primarily in Corporate Center, that, in many cases,
are illiquid and may again deteriorate in value.
We also manage risk on behalf of our clients. The
performance of assets we hold for our clients may be adversely
affected by the same factors mentioned above. If clients suffer
60
losses or the performance of their assets held with us is not in
line with relevant benchmarks against which clients assess
investment performance, we may suffer reduced fee income and
a decline in assets under management, or withdrawal of
mandates.
Investment positions, such as equity investments made as part
of strategic initiatives and seed investments made at the
inception of funds that we manage, may also be affected by
market risk factors. These investments are often not liquid and
generally are intended or required to be held beyond a normal
trading horizon. Deteriorations in the fair value of these
positions would have a negative effect on our earnings.
As UBS Group AG is a holding company, its operating results,
financial condition and ability to pay dividends and other
distributions and / or to pay its obligations in the future depend
on funding, dividends and other distributions received directly or
indirectly from its subsidiaries, which may be subject to
restrictions
UBS Group AG’s ability to pay dividends and other distributions
and to pay its obligations in the future will depend on the level
of funding, dividends and other distributions, if any, received
from UBS AG and other subsidiaries. The ability of such
subsidiaries to make loans or distributions, directly or indirectly,
to UBS Group AG may be restricted as a result of several
factors, including restrictions in financing agreements and the
requirements of applicable law and regulatory, fiscal or other
restrictions. In particular, UBS Group AG’s direct and indirect
subsidiaries, including UBS AG, UBS Switzerland AG, UBS
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 affect their ability to
repay any loans made to, or other investments in, such
subsidiary by UBS Group AG or another member of the Group.
For example, the US Comprehensive Capital Analysis and
Review process requires that our US intermediate holding
company demonstrate that it can continue to meet minimum
capital standards over a hypothetical nine-quarter severely
adverse economic scenario. If it fails to meet the quantitative
capital requirements, or the Federal Reserve Board’s qualitative
assessment of the capital planning process is adverse, our US
intermediate holding company would be prohibited from
paying dividends or making distributions. Restrictions and
regulatory actions of this kind could impede access to funds
that UBS Group AG may need to meet its obligations or to pay
dividends to shareholders. In addition, UBS Group AG’s right to
participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to all prior claims of the
subsidiary’s creditors.
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.
Reputational risk
Our reputation is critical to our success
Our reputation is critical to the success of our strategic plans,
business and prospects. Reputational damage is difficult to
reverse, and improvements tend to be slow and difficult to
measure. Our reputation has been adversely affected by our
losses during the financial crisis, investigations into our cross-
border private banking services, criminal resolutions of LIBOR-
related and foreign exchange matters, as well as other matters.
We believe that reputational damage as a result of these events
was an important factor in our loss of clients and client assets
across our asset-gathering businesses. New events that cause
reputational damage could have a material adverse effect on our
results of operation and financial condition, as well as our ability
to achieve our strategic goals and financial targets.
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Estimation and valuation risk
Our financial results may be negatively affected by changes to
assumptions and valuations, as well as changes to accounting
standards
We prepare our consolidated financial statements in accordance
with International Financial Reporting Standards (IFRS). The
application of these accounting standards requires the use of
judgment based on estimates and assumptions that may involve
significant uncertainty at the time they are made. This is the
case, for example, with respect to the measurement of fair value
of financial instruments, the recognition of deferred tax assets,
the assessment of the impairment of goodwill and estimation of
provisions for contingencies, including litigation, regulatory and
similar matters. Such judgments, including the underlying
estimates and assumptions, which encompass historical
experience, expectations of the future and other factors, are
regularly evaluated to determine their continuing relevance
based on current conditions. Using different assumptions could
cause the reported results to differ. Changes in assumptions, or
failure to make the changes necessary to reflect evolving market
conditions, may have a significant effect on the financial
statements in the periods when changes occur. Estimates of
provisions for contingencies may be subject to a wide range of
potential outcomes and significant uncertainty. For example, the
broad range of potential outcomes in our proceeding in France
increases
the
appropriate provision. If the estimates and assumptions in future
periods deviate from the current outlook, our financial results
may also be negatively affected.
the uncertainty associated with assessing
from
results
to differ
Changes to IFRS or interpretations thereof may cause future
reported results and financial position to differ from current
expectations, or historical
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 financial instruments
measured at amortized cost and certain other positions, to
record loans from 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 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.
61
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 2018 and the
results of our operations and cash flows for 2018 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 International Accounting Standards Board (IASB), we apply
judgment and make estimates and assumptions that may involve
significant uncertainty at the time they are made. We regularly
reassess those estimates and assumptions, which encompass
historical experience, expectations of the future and other
pertinent factors, to determine their continuing relevance based
on current conditions, and we update them as necessary.
Changes in estimates and assumptions may have a significant
effect on the financial statements. Furthermore, actual results
may differ significantly from our estimates, which could result in
significant losses to the Group, beyond what we anticipated or
provided for.
Key areas involving a high degree of judgment and areas
where estimates and assumptions are significant to the
consolidated financial statements include:
– fair value of financial instruments
– allowances and provisions for expected credit losses
– assessment of the business model and certain contractual
features when classifying financial instruments
– pension and other post-employment benefit plans
– income taxes
– goodwill
– provisions and contingent liabilities
– consolidation of structured entities
– determination of the functional currency and assessing the
earliest date from which it is practical to perform a
restatement following a change in presentation currency
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Significant accounting and financial reporting
changes
Significant accounting and financial reporting changes in
2018
Changes to our functional and presentation currencies
As a consequence of many legal entity structural changes over
recent years – notably the transfer of our Personal & Corporate
Banking and Global Wealth Management businesses booked in
Switzerland from UBS AG to UBS Switzerland AG, and the
creation of UBS Business Solutions AG, which houses a
significant portion of the employees and associated costs that
were previously held in UBS AG’s Head Office in Switzerland
and UBS AG’s London branch – there is now a concentration
of US dollar-influenced and -managed business activities in
UBS AG’s Head Office in Switzerland and UBS AG’s London
Branch. In addition, from the fourth quarter of 2018, for risk
management purposes we adopted the US dollar as our risk-
neutral currency and have adjusted our structural risk positions
accordingly. As a result of these changes, effective from
1 October 2018, the functional currency of UBS Group AG and
UBS AG’s Head Office in Switzerland changed from Swiss
francs to US dollars and that of UBS AG’s London Branch from
British pounds to US dollars,
in compliance with the
requirements of International Accounting Standard (IAS) 21,
The Effects of Changes in Foreign Exchange Rates.
The presentation currency of UBS Group AG’s consolidated
financial statements has changed from Swiss francs to US dollars
to align with the functional currency changes of significant
Group entities. Prior periods have been restated for this
presentation currency change. Assets, liabilities and total equity
were translated to US dollars at closing exchange rates prevailing
on the respective balance sheet dates, and income and expenses
were translated at the respective average rates prevailing for the
relevant periods. Additionally, Other income was restated to
reflect releases of foreign currency translation (FCT) gains or
losses from Other comprehensive income (OCI) to the income
statement when calculated under US dollars as the presentation
currency. The retrospective application of the presentation
currency change did not affect total equity, but resulted in
changes to the accumulated FCT OCI and other components of
equity, in particular share premium and retained earnings. We
have not restated our Basel III capital information due to
immateriality.
We will continue to publish selected financial and regulatory
information in Swiss francs as part of our quarterly and annual
reporting at www.ubs.com/investors. Business division results of
Personal & Corporate Banking are presented in both Swiss francs
and US dollars, and its management’s discussion and analysis is
provided in Swiss francs, as its business activities are mainly
managed in Swiss francs.
We expect that these functional and presentation currency
changes, together with the related changes to our risk
management framework and certain hedging programs, should
increase our reported Group operating income by approximately
USD 0.3 billion in 2019 based on market-implied forwards.
IFRS 9, Financial Instruments
Effective 1 January 2018, we adopted IFRS 9, Financial
Instruments, which replaces IAS 39, Financial Instruments:
Recognition and Measurement, and substantially changed the
classification, measurement and impairment of financial assets,
income statement and balance sheet presentation and
disclosure of financial instruments and other arrangements in
scope. As permitted by IFRS 9, we elected not to restate prior-
period information.
The adoption of IFRS 9 has resulted in a USD 0.6 billion
reduction in our IFRS consolidated equity, net of tax, as well as a
USD 0.3 billion reduction in our common equity tier 1 capital as
of 1 January 2018, with no material effect on our capital ratios.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information
IFRS 15, Revenue from Contracts with Customers
Effective 1 January 2018, we adopted IFRS 15, Revenue from
Contracts with Customers, which replaces IAS 18, Revenue, and
establishes principles for revenue recognition that apply to all
contracts with customers other than those relating solely to
financial instruments, leases and insurance contracts. IFRS 15
requires an entity to recognize revenue as performance
obligations are satisfied. As permitted by IFRS 15, we elected not
to restate prior-period information. The adoption of IFRS 15 has
resulted in a reduction in our IFRS consolidated equity of USD 25
million, net of tax, as of 1 January 2018, with no material effect
on our capital ratios.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the effects of restating to a US dollar
for more information
presentation currency
65
Financial and operating performance
Significant accounting and financial reporting changes
Changes to segment reporting effective first quarter 2018
integrated our Wealth
Effective 1 February 2018, we
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 performance measures, performance targets, operating
plan and management structure. Consistent with this, the
operating results of Global Wealth Management are presented
and assessed on an integrated basis in internal management
reports to the Group Executive Board, which is considered the
“chief operating decision maker” in accordance with IFRS 8,
Operating Segments. Consequently, from the first quarter of
2018, Global Wealth Management qualifies as an operating and
reportable segment for the purpose of segment reporting and is
presented in these financial statements alongside Personal &
Corporate Banking, Asset Management, the Investment Bank
and Corporate Center. Following the change in the composition
of our operating segments and corresponding reportable
segments, previously reported segment information has been
restated. The change has no effect on the recognized goodwill
of either of the former segments.
Changes to Pillar 3 disclosure requirements
During 2018, we implemented several changes related to the
“Pillar 3 disclosure requirement – consolidated and enhanced
framework” as issued by the Basel Committee on Banking
Supervision (BCBS) in March 2018, which represents the second
phase of the BCBS review of the Pillar 3 disclosure framework
and builds on the revisions to the Pillar 3 disclosure requirements
published in January 2015. In addition, we implemented
changes related to the revised Basel III securitization framework
for securitization exposures in the banking book.
On 16 July 2018, FINMA issued a revised Circular 2016 / 1
“Disclosure – banks,” including the aforementioned second-
phase revisions, which requires banks to gradually implement
the requirements from 31 December 2018 onward.
In addition, further disclosure requirements will be adopted in
the first half of 2019, according to the applicable effective dates.
→ Refer to the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors, for more information
on the changes to Pillar 3 disclosure requirements
Significant accounting and financial reporting changes in
2019
IFRS 16, Leases
We have adopted IFRS 16, Leases, as of 1 January 2019,
fundamentally changing how we account for operating leases
when acting as a lessee. Upon adoption, assets and liabilities
increased by
a
corresponding increase in risk-weighted assets (RWA) and
leverage ratio denominator (LRD). As permitted by IFRS 16, we
elected not to restate prior-period information.
approximately USD 3.5 billion, with
→ Refer to “Note 1d International Financial Reporting Standards
and Interpretations to be adopted in 2019 and later and other
changes” in the “Consolidated financial statements” section of
this report for more information
Changes in Corporate Center cost and resource allocation to
business divisions
In order to further align Group and divisional performance, we
are adjusting our methodology for the allocation of Corporate
Center – Services funding costs and expenses to the business
divisions. At the same time, we are updating our funds transfer
pricing framework to better reflect the sources and usage of
funding. All of these changes are effective as of 1 January 2019
and we will provide restated prior-period information in advance
of our first quarter 2019 results.
Together, these changes will decrease the business divisions’
operating results and thereby increase their adjusted cost /
income ratios by approximately 1–2 percentage points, with an
offsetting effect of approximately USD 0.7 billion in Corporate
Center’s operating profit / (loss) before tax.
We will retain in Corporate Center funding costs for deferred
tax assets, costs relating to our legal entity transformation
program and other costs not attributable to or representative of
the performance of the business divisions.
66
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Alongside the updates to cost allocations and to our funds
transfer pricing framework, we are increasing the allocation of
balance sheet resources from Corporate Center to the business
divisions. For 2018, the restatement will result in approximately
USD 26 billion of additional RWA and approximately USD 93
billion of additional LRD allocated from Corporate Center to the
business divisions, consisting of:
– approximately USD 9 billion of additional RWA and LRD
associated with property, equipment and software previously
retained in Corporate Center – Services;
– approximately USD 14 billion of operational risk RWA
previously allocated to Corporate Center – Services and
Corporate Center – Group Asset and Liability Management
(Group ALM);
– approximately USD 3 billion of additional RWA and
approximately USD 90 billion of additional LRD previously
retained in Corporate Center – Group ALM. This reflects a
higher allocation of high-quality liquid assets (HQLA) to the
business divisions, in line with the HQLA levels we expect to
maintain, as well as the allocation of certain other assets
centrally managed on behalf of the business divisions; and
– a reduction of approximately USD 7 billion in the LRD
allocation related to an offset for common equity tier 1
(CET1) deduction items previously held in Corporate Center –
Services, which is now allocated to the business divisions.
We have adopted IFRS 16, Leases, as of 1 January 2019, and
allocated approximately USD 3.5 billion each of additional RWA
and LRD to the business divisions.
Changes in equity attribution
in resource allocation from
The aforementioned changes
Corporate Center to the business divisions will be reflected in
the equity attribution to the business divisions. Furthermore, we
are updating our equity attribution framework, revising the
capital ratio for RWA from 11% to 12.5% and incrementally
allocating to business divisions approximately USD 2 billion of
attributed equity that is related to certain common equity tier 1
(CET1) deduction items previously held centrally. In aggregate,
we expect to allocate approximately USD 7 billion of additional
the business divisions, of which
attributed equity
approximately USD 3 billion will be allocated to the Investment
Bank. The remaining attributed equity retained in Corporate
Center will primarily relate to deferred tax assets, dividend
accruals and Corporate Center – Non-core and Legacy Portfolio.
to
All of these changes are effective as of 1 January 2019 and
we will provide restated prior-period information in advance of
our first quarter results.
→ Refer to “Equity attribution and return on attributed equity” in
the “Capital management” section of this report for more
information on the equity attributed to the business divisions
Changes in Corporate Center segment reporting
As announced in our third quarter 2018 report, as of 1 January
2019, we no longer separately assess the performance of
Corporate Center – Non-core and Legacy Portfolio, given its
In
substantially reduced size and resource consumption.
addition,
to our
methodology for allocating funding costs and expenses from
Corporate Center – Services and Corporate Center – Group ALM
to the business divisions, the operating
in
Corporate Center – Services and Corporate Center – Group ALM
will be significantly reduced.
the aforementioned changes
loss retained
following
Legacy Portfolio.
As a consequence and in compliance with IFRS 8, Operating
Segments, beginning with our first quarter 2019 report, we will
provide results for total Corporate Center only and will not
separately report Corporate Center – Services, Group ALM and
Furthermore, we will
Non-core and
operationally combine Group Treasury with Group ALM and call
this combined function Group Treasury. Commentary on the
performance of this function will be included in the Corporate
Center management discussion and analysis in our quarterly and
annual reporting. Former Group ALM total risk management net
income after allocations will continue to be disclosed as a
separate line item. Prior-period information will be restated.
IFRS 9 and our significant regulated subsidiaries and sub-groups
FINMA’s plan to implement expected credit losses under Swiss
GAAP has been deferred. We will continue to apply the incurred
loss model in the UBS AG standalone and UBS Switzerland AG
in
standalone
accordance with Swiss GAAP (FINMA Circular 2015 / 1 and
Banking Ordinance).
financial statements, which are prepared
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, in order for its
consolidated financial statements to align with the mandatory
effective date for some of its subsidiaries.
67
Financial and operating performance
Group performance
Group performance
Income statement
USD million
Net interest income
Other net income from fair value changes on financial instruments
Credit loss (expense) / recovery
Fee and commission income
Fee and commission expense
Net fee and commission income
Other income
Total operating income
of which: net interest income and other net income from fair value changes on financial instruments
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
% change from
331.12.18
31.12.17
31.12.16
31.12.17
6,025
5,984
(118)
19,598
(1,703)
17,895
427
30,213
12,008
16,132
6,797
1,228
65
24,222
5,991
1,468
4,522
7
4,516
4,231
5
4,225
6,656
5,065
(131)
19,362
(1,840)
17,522
511
29,622
11,721
16,199
6,949
1,053
71
24,272
5,351
4,305
1,046
77
969
2,113
326
1,787
6,487
5,023
(38)
18,374
(1,781)
16,593
663
28,729
11,510
15,913
7,517
997
93
24,519
4,209
777
3,432
84
3,348
1,251
62
1,189
(9)
18
(10)
1
(7)
2
(16)
2
2
0
(2)
17
(8)
0
12
(66)
332
(91)
366
100
(98)
136
68
Performance by business division and Corporate Center unit – reported and adjusted1,2
USD million
Operating income as reported
FFor the year ended 31.12.18
GGlobal Wealth
Management
16,941
PPersonal &
Corporate
Banking
4,222
AAsset
Manage-
ment
1,857
IInvestment
Bank
8,150
CCC –
Services3
(513)
CCC – Non-
core and
Legacy
Portfolio
165
CCC –
Group
ALM
(609)
of which: gains related to investments in associates 4
101
359
of which: gains on sale of real estate
of which: gains on sale of subsidiaries and businesses
of which: remeasurement loss related to UBS Securities China 5
Operating income (adjusted)
16,840
3,863
1,857
8,150
Operating expenses as reported
13,313
2,310
1,406
6,501
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: gain related to changes to the Swiss pension plan
34
16
209
(66)
4
0
43
(38)
Operating expenses (adjusted)
13,120
2,300
of which: net expenses for litigation, regulatory and similar matters 7
619
41
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
3,628
3,720
1,912
1,563
23
10
33
(10)
1,350
0
451
508
16
11
166
(5)
6,313
(64)
1,649
1,836
31
25
(270)
(300)
293
208
238
(456)
(122)
425
(7)
(806)
(725)
(609)
165
29,966
84
0
0
3
81
0
(693)
(690)
315
24,222
0
0
3
312
69
(150)
(148)
286
275
0
(241)
23,903
657
5,991
6,063
UUBS
30,213
460
31
25
(270)
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Management
16,287
Personal &
Corporate
Banking
3,925
For the year ended 31.12.17
Asset
Manage-
ment
2,083
153
Investment
Bank
7,794
CC –
Services3
(157)
137
CC – Non-
core and
Legacy
Portfolio
(22)
CC –
Group
ALM
(288)
USD million
Operating income as reported
of which: gains on sale of subsidiaries and businesses
of which: gains on sale of financial assets at fair value through OCI 8
of which: net foreign currency translation losses 9
Operating income (adjusted)
16,287
3,925
1,929
7,658
(157)
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 10
12,717
39
75
474
2,317
7
0
98
1,495
17
22
63
Operating expenses (adjusted)
12,129
2,212
1,393
6,527
39
18
310
26
6,135
of which: net expenses for litigation, regulatory and similar matters 7
174
2
(4)
(42)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
3,571
4,159
1,607
1,713
587
536
1,267
1,523
779
442
532
(954)
759
252
(935)
(915)
(16)
(271)
48
1
0
3
44
0
(336)
(315)
UBS
29,622
153
137
(16)
(22)
29,349
388
0
0
6
382
52
(411)
(405)
24,272
545
647
0
26
23,054
434
5,351
6,295
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Financial and operating performance
Group performance
Performance by business division and Corporate Center unit – reported and adjusted (continued)1,2
For the year ended 31.12.16
USD million
Operating income as reported
Global Wealth
Management
15,249
Personal &
Corporate
Banking
4,035
Asset
Manage-
ment
1,955
of which: gains on sale of financial assets at fair value through OCI 8
31
105
of which: gains on sale of real estate
of which: gains related to investments in associates
of which: net foreign currency translation losses 9
21
of which: losses on sale of subsidiaries and businesses
(24)
Investment
Bank
7,779
77
CC –
Services3
(103)
123
CC – Non-
core and
Legacy
Portfolio
(32)
CC –
Group
ALM
(155)
(84)
UBS
28,729
213
123
21
(84)
(24)
Operating income (adjusted)
15,242
3,909
1,955
7,702
(226)
(71)
(32)
28,480
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)
12,159
61
55
478
2,250
4
0
115
1,498
15
15
72
11,564
2,132
1,397
of which: net expenses for litigation, regulatory and similar matters 7
164
3
(2)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
3,090
3,678
1,785
1,778
457
558
6,765
156
14
416
6,179
42
1,014
1,524
753
526
631
(1,101)
697
2
(856)
(923)
(1)
0
0
0
(1)
0
1,094
1
24,519
763
0
21
715
0
1,073
23,041
595
805
(154)
(70)
(1,126)
(1,105)
4,209
5,439
11 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US
dollars with assets, liabilities and total equity translated to US dollars at closing exchange rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates
prevailing for the relevant periods. Comparatives may additionally differ 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 Reflects a valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline. 5 Related to the increase of stake in and consolidation of UBS
Securities China. Refer to “Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses” in the “Consolidated financial statements” section of this report for more information. 6
Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives for Global Wealth Management and Asset Management in 2018. 7 Reflects the net increase in /
(release of) provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to ”Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of
this report for more information. Also includes recoveries from third parties of USD 29 million, USD 55 million and USD 13 million for the years ended 31 December 2018, 31 December 2017 and 31 December
2016, respectively. 8 Includes a gain on the sale of our investment in the London Clearing House in the Investment Bank in 2017, gains on sales of our investment in IHS Markit in the Investment Bank in 2017
and 2016, and a gain on the sale of our investment in Visa Europe in Global Wealth Management and Personal & Corporate Banking in 2016. Figures presented for periods prior to 2018 relate to financial assets
available for sale. 9 Related to the disposal of foreign branches and subsidiaries. 10 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013.
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2018 compared with 2017
Results
We recorded net profit attributable to shareholders of
USD 4,516 million in 2018, which included a net tax expense
of USD 1,468 million. In 2017, net profit attributable to
shareholders was USD 969 million, which included a net tax
expense of USD 4,305 million, including a USD 2,939 million
net write-down of deferred tax assets following the 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.
Profit before tax increased by USD 640 million, or 12%, to
reflecting higher operating
USD 5,991 million, mainly
income. Operating income increased by USD 591 million, or
2%, reflecting a USD 373 million increase in net fee and
commission income as well as USD 287 million higher net
interest income and other net income from fair value changes
on financial instruments. Operating expenses were broadly
unchanged, mainly as USD 169 million higher expenses for
depreciation, amortization and
impairment of property,
equipment, software and intangible assets were offset by
USD 152 million lower general and administrative expenses.
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. These adjustments
include restructuring expenses related to our CHF 2.1 billion cost
reduction program, completed at the end of 2017 (referred to as
our “legacy cost programs” in this report). We incurred
restructuring expenses in connection with such legacy cost
programs, as well as expenses relating to new restructuring
initiatives, of USD 561 million and expect such amounts to be
approximately USD 0.2 billion for the full year 2019.
For the purpose of determining adjusted results for 2018, we
excluded a gain of USD 460 million related to investments in
associates, gains of USD 31 million on sale of real estate, gains
of USD 25 million on sale of subsidiaries and businesses, a
remeasurement loss of USD 270 million related to the increase
of our shareholding in UBS Securities China, a gain of USD 241
million related to changes to the Swiss pension plan, and net
restructuring expenses of USD 561 million. For 2017, we
excluded gains of USD 153 million on sale of subsidiaries and
businesses, gains of USD 137 million on sale of financial assets
at fair value through OCI, net foreign currency translation losses
of USD 16 million, expenses of USD 26 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 USD 1,192 million.
On this adjusted basis, profit before tax decreased by
USD 232 million, or 4%, to USD 6,063 million, reflecting
USD 849 million higher adjusted operating expenses, partly
offset by USD 617 million higher adjusted operating income.
Operating income
Total operating income was USD 30,213 million compared with
USD 29,622 million. On an adjusted basis, total operating
income increased by USD 617 million, or 2%, to USD 29,966
million, mainly due to a USD 373 million increase in net fee and
commission income as well as USD 287 million higher net
interest income and other net income from fair value changes
on financial instruments.
Net interest income and other net income from fair value changes on financial instruments
USD million
Net interest income from financial instruments measured at amortized cost and fair value through
other comprehensive income (AC / FVOCI)
Net interest income from financial instruments measured at fair value through profit or loss (FVTPL)
Other net income from fair value changes on financial instruments
TTotal
Global Wealth Management
of which: net interest income
of which: transaction-based income from foreign exchange and other intermediary activity 1
Personal & Corporate Banking
of which: net interest income
of which: transaction-based income from foreign exchange and other intermediary activity 1
Asset Management
Investment Bank2
Corporate Client Solutions
Investor Client Services
Corporate Center2
CC – Services
CC – Group ALM
CC – Non-core and Legacy Portfolio
For the year ended
31.12.17
331.12.18
3,710
2,315
5,984
12,008
5,254
4,310
944
2,514
2,106
408
(30)
4,812
1,056
3,756
(541)
(159)
(554)
173
5,018
1,638
5,065
11,721
5,149
4,103
1,046
2,510
2,127
383
(24)
4,363
1,087
3,276
(278)
(43)
(162)
(72)
% change from
31.12.17
(26)
41
18
2
2
5
(10)
0
(1)
6
23
10
(3)
15
95
268
241
31.12.16
5,403
1,084
5,023
11,510
4,893
3,843
1,050
2,563
2,225
337
(29)
4,330
830
3,500
(246)
(90)
(96)
(60)
11 Mainly includes spread-related income in connection with client-driven transactions, foreign currency translation effects and income and expenses from precious metals, which are included in the income statement
line Other net income from fair value changes on financial instruments. The amounts reported on this line are one component of Transaction-based income in the management discussion and analysis of Global
Wealth Management and Personal & Corporate Banking in the “Global Wealth Management” and “Personal & Corporate Banking” sections of this report. 2 Investment Bank and Corporate Center information is
provided at the business line level rather than by financial statement reporting line in order to reflect the underlying business activities, which is consistent with the structure of their management discussion and
analysis in the “Investment Bank” and “Corporate Center” sections of this report.
71
Financial and operating performance
Group performance
Net interest income and other net income from fair value changes
on financial instruments
Total combined net interest income and other net income from fair
value changes on financial instruments increased by USD 287
million to USD 12,008 million. This was mainly driven by increases
in the Investment Bank and Global Wealth Management, partly
offset by a decrease in Corporate Center.
Global Wealth Management
In Global Wealth Management, net interest income increased by
USD 207 million to USD 4,310 million, reflecting an increase in
average margin on deposits and higher loan volumes, partly offset
by the expiration of an interest rate hedge portfolio at the end of
2017, lower net income from Group structural risk management
activities and higher funding costs for long-term debt that
contributes to total loss-absorbing capacity.
Transaction-based income from foreign exchange and other
intermediary activity decreased by USD 102 million to USD 944
million, mainly due to lower client activity.
Personal & Corporate Banking
In Personal & Corporate Banking, net interest income decreased by
USD 21 million to USD 2,106 million, primarily related to the
expiration of an interest rate hedge portfolio at the end of 2017, as
well as higher funding costs for long-term debt that contributes to
total loss-absorbing capacity and lower banking book interest
income. This was partly offset by higher deposit revenues.
Transaction-based income from foreign exchange and other
intermediary activity increased by USD 25 million to USD 408
million, mainly due to higher net income from foreign exchange
transactions.
Investment Bank
In the Investment Bank, net interest income and other net income
from fair value changes on financial instruments increased by
USD 449 million to USD 4,812 million. This was driven by a
USD 480 million increase in Investor Client Services, primarily in
Foreign Exchange, Rates and Credit, mainly due to higher client
activity levels and improved trading performance across the
majority of products. 2018 also included the recognition of net
income of around USD 100 million, comprised mainly of previously
deferred day-1 profits, due to enhanced observability and revised
valuations in the funding curve used to value UBS interest-linked
notes. In addition, there was an increase in Equities, primarily in
Financing Services and Derivatives, driven by increased client
activity. In Corporate Client Solutions, net interest income and
other net income from fair value changes on financial instruments
was broadly stable at USD 1,056 million.
Corporate Center
In Corporate Center, net interest income and other net income
from fair value changes on financial instruments decreased by
USD 263 million, primarily reflecting a USD 392 million decrease in
Corporate Center – Group Asset and Liability Management (Group
ALM), mainly due to higher net interest expense in Group ALM’s
unsecured funding portfolio. In addition, there was a USD 116
million decrease in Corporate Center – Services, primarily driven by
higher funding costs relating to Corporate Center – Services’
balance sheet assets. These decreases were partly offset by a
USD 245 million increase in Corporate Center – Non-core and
Legacy Portfolio, primarily because 2018 included valuation gains
on auction rate securities, which were measured at amortized cost
in 2017 and are now measured at fair value through profit or loss
effective 1 January 2018 upon adoption of IFRS 9.
→ Refer to “Note 3 Net interest income and other net income from
fair value changes on financial instruments” in the
“Consolidated financial statements” section of this report for
more information
Credit loss expense / recovery
We adopted IFRS 9, Financial Instruments, effective 1 January
2018. IFRS 9 introduces a forward-looking expected credit loss
(ECL) approach, which is intended to result in an earlier
recognition of credit losses based on an ECL impairment
approach compared with the incurred-loss impairment approach
for financial instruments under IAS 39, Financial Instruments:
loss-provisioning
Recognition and Measurement, and
approach for financial guarantees and loan commitments under
IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
the
Total net credit loss expenses were USD 118 million in 2018,
reflecting net losses of USD 95 million related to credit-impaired
(stage 3) positions, mainly in Personal & Corporate Banking and
to a lesser extent in the Investment Bank, as well as net
expected credit losses of USD 23 million related to stage 1 and
2 positions.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the adoption of IFRS 9
→ Refer to “Note 23 Expected credit loss measurement” in the
“Consolidated financial statements” section of this report for
more information on credit loss expense / recovery
→ Refer to the “Risk factors” section of this report for more
information
Credit loss (expense) / recovery
USD million
Global Wealth Management
Personal & Corporate Banking
Investment Bank
Corporate Center
of which: Non-core and Legacy Portfolio
TTotal
72
For the year ended
31.12.17
(8)
(20)
(92)
(11)
(11)
(131)
331.12.18
(15)
(56)
(38)
(8)
(8)
(118)
31.12.16
(8)
(6)
(11)
(12)
(12)
(38)
% change from
31.12.17
89
180
(58)
(27)
(33)
(10)
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Net fee and commission income
Net fee and commission income was USD 17,895 million
compared with USD 17,522 million.
Investment fund fees and fees for portfolio management and
related services increased by USD 722 million to USD 12,710
million, mainly in Global Wealth Management, predominantly
driven by higher average invested assets and an increase in
mandate penetration during the year.
M&A and corporate finance fees increased by USD 70 million
to USD 768 million, primarily reflecting an increase in the
Investment Bank due to higher revenues from both private
transactions and merger and acquisition transactions.
Other fee and commission expense increased by USD 220 million
to USD 1,387 million, primarily in Asset Management, mainly due to
the inclusion of fund administration expenses, which were reported
as operating expenses prior to the sale of Asset Management’s fund
administration business in October 2017.
Underwriting fees decreased by USD 192 million to USD 811
million, mainly reflecting lower equity underwriting revenues 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 USD 427 million compared with USD 511
million. Excluding the aforementioned adjusting items, which
consist of gains related to investments in associates, gains on
sales of subsidiaries and businesses, gains on sale of financial
assets at
real estate, a
remeasurement loss related to UBS Securities China and net
foreign currency translation losses, adjusted other income
decreased by USD 56 million. This decrease was mainly due to
higher gains on sale of financial assets at fair value through OCI
in 2017, which were not treated as adjusting items.
through OCI and
fair value
→ Refer to “Note 5 Other income” in the “Consolidated financial
statements” section of this report for more information
→ Refer to “Note 32 Changes in organization and acquisitions,
sales and disposals of subsidiaries and businesses” in the
“Consolidated financial statements” section of this report for
more information on the increase of stake in and consolidation
of UBS Securities China
Operating expenses
Total operating expenses were broadly unchanged at
USD 24,222 million. Excluding net restructuring expenses of
USD 561 million (2017: USD 1,192 million) and a gain of
USD 241 million in 2018 related to changes to the Swiss pension
plan, as well as expenses of USD 26 million in 2017 in the
Investment Bank related to the modification of terms for DCCP
awards granted for the performance years 2012 and 2013,
adjusted total operating expenses increased by USD 849 million,
or 4%, to USD 23,903 million.
Personnel expenses
Personnel expenses decreased by USD 67 million to USD 16,132
million, mainly reflecting a USD 259 million decrease in net
restructuring expenses and a gain of USD 241 million in 2018
related to changes to the Swiss pension plan, largely offset by
higher salary expenses. On an adjusted basis, personnel
expenses increased by USD 459 million.
Adjusted expenses for salaries increased by USD 472 million
to USD 6,273 million, mainly in Corporate Center – Services,
primarily driven by continued insourcing of certain activities and
staff from third-party vendors to our Business Solutions Centers.
This increase in salaries was partly offset by lower general and
administrative expenses. Salary expenses also increased in Global
Wealth Management.
Adjusted expenses for total variable compensation decreased
by USD 75 million, reflecting a decrease of USD 112 million in
expenses for awards related to prior years, partly offset by
USD 38 million higher expenses for current-year awards.
Financial advisor variable compensation was broadly stable at
USD 4,054 million, reflecting lower expenses for compensation
commitments to recruited financial advisors, almost entirely offset
by an increase in expenses due to higher compensable revenues.
Adjusted other personnel expenses increased by USD 72
million, primarily due to an increase in costs for salary-related
add-ons, recruitment and contractors, partly offset by lower
expenses for pension and other post-employment benefit plans.
→ Refer to the “Compensation” section of this report for more
information
→ Refer to “Note 6 Personnel expenses,” ”Note 29 Pension and
other post-employment benefit plans” and “Note 30 Employee
benefits: variable compensation” in the “Consolidated financial
statements” section of this report for more information
General and administrative expenses
General and administrative expenses decreased by USD 152
million to USD 6,797 million. This was mainly due to USD 415
million lower net restructuring expenses, partly offset by
USD 223 million higher net expenses for litigation, regulatory
and similar matters. Net expenses for the UK and German bank
levy were USD 58 million in 2018 and included a USD 45 million
credit related to prior years. In 2017, net expenses for the UK
and German bank levy were USD 20 million and included an
USD 85 million credit related to prior years.
increase
On an adjusted basis, general and administrative expenses
the
increased by USD 263 million, primarily due
aforementioned
litigation,
for
regulatory and similar matters and USD 147 million higher
expenses for rent and maintenance of IT and other equipment.
This was partly offset by USD 66 million lower professional fees
and a USD 52 million decrease in marketing and public relations
costs.
in net expenses
to
73
Financial and operating performance
Group performance
Operating expenses
USD 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: a gain related to changes to the Swiss pension plan 2
of which: expenses from modification of terms for certain DCCP awards 3
General and administrative expenses1
Depreciation and impairment of property, equipment and software1
TTotal adjusting items
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: financial advisor variable compensation 7
of which: other personnel expenses 8
General and administrative expenses
of which: net expenses for litigation, regulatory and similar matters
of which: other general and administrative expenses
% change from
31.12.17
0
(2)
17
(8)
0
For the year ended
31.12.17
331.12.18
16,132
6,797
1,228
65
24,222
45
286
(241)
225
50
319
16,199
6,949
1,053
71
24,272
570
545
26
640
7
1,217
31.12.16
15,913
7,517
997
93
24,519
763
763
705
11
1,479
16,087
6,273
3,167
2,576
592
4,054
2,593
6,572
657
5,916
1,178
65
23,903
15,628
5,801
3,242
2,538
704
4,064
2,521
6,309
434
5,875
1,046
71
23,054
15,150
5,864
3,123
2,281
842
3,740
2,423
6,812
805
6,007
986
93
23,041
3
8
(2)
1
(16)
0
3
4
51
1
13
(8)
4
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
TTotal operating expenses (adjusted)
11 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives for Global Wealth Management and Asset Management in 2018. 2 Refer to “Note 29 Pension
and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. 3 Relates to the removal of the service period requirement for DCCP awards
granted for the performance years 2012 and 2013. 4 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 variable compensation
consists of formulaic compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, new
assets and other variables. 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.
We believe that the industry continues to operate in an
environment in which expenses associated with litigation,
regulatory and similar matters will remain elevated for the
foreseeable future and we continue to be exposed to a number
of significant claims and regulatory matters. The outcome of
many of these matters, the timing of a resolution, and the
potential effects of resolutions on our future business, financial
results or financial condition are extremely difficult to predict.
→ Refer to “Note 7 General and administrative expenses” and
“Note 21 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
Depreciation, amortization and impairment
impairment of property,
Depreciation, amortization and
equipment, software and intangible assets was USD 1,293
million compared with USD 1,124 million, mainly resulting from
higher expenses for internally generated capitalized software,
driven by newly developed software that has been placed in
service over the last 12 months, and higher impairment costs.
On an adjusted basis, depreciation, amortization and
impairment of property, equipment, software and intangible
assets increased by USD 126 million, primarily due to the
aforementioned increase in expenses for internally generated
capitalized software.
→ Refer to “Note 15 Property, equipment and software” and
“Note 16 Goodwill and intangible assets” in the “Consolidated
financial statements” section of this report for more
information
74
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Tax
We recognized an income tax expense of USD 1,468 million for
2018, compared with an income tax expense of USD 4,305
million for 2017.
The 2018 income tax expense reflects current tax expenses of
USD 884 million, which primarily relate to taxable profits of UBS
Switzerland AG and other entities. It also includes a net deferred
tax expense of USD 859 million, which primarily relates to the
amortization of deferred tax assets (DTAs) previously recognized in
relation to tax losses carried forward and deductible temporary
differences to reflect their offset against profits for the year.
In addition, following the corporate tax reform in the US at
the end of 2017 and the reduction in timeframe between the
end of our seven-year profit forecast period and the expiry of
our brought-forward US tax losses, we have reviewed our
approach to the remeasurement of our US DTAs. This review
resulted in the recognition of a net tax benefit during the year of
USD 275 million, comprised of as follows:
– The write-off of a Swiss temporary difference DTA of
USD 1,617 million relating to UBS AG’s investment in our US
intermediate holding company (US IHC), UBS Americas Holding
LLC. The write-off occurred because the temporary difference
between the tax and accounting values in respect of UBS AG’s
investment in the US IHC is no longer expected to reverse in
the foreseeable future, reflecting the expected repatriation of a
significant portion of future US earnings.
– A net increase in DTAs of USD 1,180 million, which is the
sum of two related items. We recognized new US temporary
difference DTAs of USD 2,134 million as a result of tax
elections made in the fourth quarter of 2018 to capitalize
certain historic real estate costs for US tax purposes that will
be amortized over a period of up to 39 years. These elections
also resulted in a reduction in recognized US tax loss DTAs of
USD 954 million, because expected future taxable profits
otherwise available against which to utilize brought-forward
tax losses were reduced by the expected future amount of
capitalized real estate cost amortization.
– A current US state and local tax expense of USD 160 million
resulting from the real estate capitalization elections.
– An increase in recognized US DTAs recorded at the level of
UBS Americas Inc. of USD 1,367 million, reflecting the
elimination of the seven-year profit forecast period limit for
US tax loss DTAs as well as the transfer by UBS AG of US
in certain profitable subsidiaries to UBS
shareholdings
Americas Inc.
– A decrease in recognized US DTAs for UBS AG of USD 495
million, which mainly relates to the transfer of the
shareholdings referred to above.
The 2017 income tax expense of USD 4,305 million included
a deferred tax expense of USD 3,415 million, which primarily
related to a net write-down of DTAs in respect of the US federal
corporate tax rate reduction included in the TCJA enacted in the
fourth quarter of 2017. It also included a current tax expense of
USD 890 million, which related to taxable profits of UBS
Switzerland AG and other entities.
Tax loss DTAs at the level of UBS Americas Inc. will begin to
be amortized with effect from 1 January 2019. For 2019, we
expect a full-year tax rate of approximately 25%, of which 14%
relates to current tax expenses.
→ Refer to “Note 8 Income taxes” in the “Consolidated financial
statements” section of this report for more information
→ Refer to the “Risk factors” section of this report for more
information
Total comprehensive income attributable to shareholders
total
comprehensive
In 2018,
to
shareholders was USD 4,225 million, reflecting net profit of
USD 4,516 million, partly offset by negative other
comprehensive income (OCI), net of tax, of USD 290 million.
income attributable
Foreign currency translation OCI was negative USD 541
million in 2018, mainly resulting from the weakening of the
Swiss franc, the euro and the British pound against the US
dollar. In 2017, OCI related to foreign currency translation was
positive USD 1,564 million.
OCI related to cash flow hedges was negative USD 269
million, mainly reflecting a decrease in net unrealized gains on
hedging derivatives resulting from increases in the relevant long-
term interest rates. In 2017, OCI related to cash flow hedges
was negative USD 635 million.
OCI associated with financial assets measured at fair value
through OCI was negative USD 45 million, compared with negative
USD 91 million, reflecting net unrealized losses following increases
in the relevant US dollar long-term interest rates in 2018.
OCI related to own credit on financial liabilities designated at fair
value was positive USD 509 million and primarily reflected a
widening of credit spreads. In 2017, OCI related to own credit on
financial liabilities designated at fair value was negative USD 317
million, primarily reflecting a tightening of credit spreads.
Defined benefit plan OCI was USD 56 million compared with
USD 296 million. Total pre-tax OCI related to the Swiss defined
benefit plan was negative USD 352 million. This reflected a net gain
of USD 242 million from the remeasurement of the defined benefit
obligation (DBO) which was more than offset by a loss of USD 523
million due to a negative return on plan assets and a loss of USD 71
million related to an increase in the effect of the IFRS asset ceiling.
The net gain of USD 242 million related to the DBO remeasurement
was mainly driven by a gain of USD 776 million due to an increase
in the applicable discount rate, partly offset by an experience loss of
USD 397 million (reflecting the effects of differences between the
previous actuarial assumptions and what actually occurred) and a
loss of USD 124 million due to an increase in the rate of interest
credit on retirement savings.
Total pre-tax OCI related to UK defined benefit plans was
positive USD 132 million, reflecting OCI gains of USD 269 million
from the remeasurement of the DBO, primarily driven by a gain of
USD 220 million due to an increase in the applicable discount rate.
This was partly offset by OCI losses of USD 136 million due to a
negative return on plan assets.
75
Financial and operating performance
Group performance
The total pre-tax OCI loss of USD 220 million was more than
offset by a net tax benefit of USD 276 million, mainly due to
the recognition of temporary difference DTAs in the US in the
fourth quarter of 2018, following our review of the approach
used to remeasure our US DTAs and the timing for recognizing
deferred taxes.
→ Refer to “Statement of comprehensive income” in the
“Consolidated financial statements” section of this report for
more information
→ Refer to ”Note 29 Pension and other post-employment benefit
plans” in the “Consolidated financial statements” section of this
report for more information on defined benefit plans
Sensitivity to interest rate movements
As of 31 December 2018, we estimate that a parallel shift in
yield curves by +100 basis points could lead to a combined
increase in annual net interest income of approximately USD 0.7
billion in Global Wealth Management and Personal & Corporate
Banking. Of this increase, approximately USD 0.3 billion and
USD 0.2 billion would result from changes in US dollar and euro
interest rates, respectively.
The immediate effect on shareholders’ equity of such a shift
in yield curves would be a decrease of approximately USD 2.0
billion recognized in OCI, of which approximately USD 1.5 billion
would result from changes in US dollar interest rates. The
immediate effect on regulatory capital would be immaterial as
OCI from cash flow hedges is not recognized in capital and the
effect from debt instruments measured at fair value through OCI
would be offset by a positive effect from pension fund assets
and liabilities.
The aforementioned estimates are based on a hypothetical
scenario of an immediate increase in interest rates, equal across
all currencies and relative to implied forward rates applied to our
banking book and financial assets measured at fair value
through OCI. 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 USD 7
million in 2018, compared with USD 77 million in the prior
year, mainly because a EUR 600 million non-Basel III-compliant
hybrid tier 1 capital instrument was redeemed in the fourth
quarter of 2017.
For 2019, we currently expect net profit attributable to non-
controlling interests to be less than USD 10 million.
Key figures
Return on tangible equity
The return on tangible equity (RoTE) was 10.0% compared with
2.2%, mainly because the fourth quarter of 2017 included a
USD 2,939 million net write-down of DTAs following a reduction
76
in the US federal corporate tax rate after the enactment of the
TCJA in the US. The adjusted RoTE excluding deferred tax
expense / benefit and DTAs was 12.9% compared with 13.7%,
and was below our 2018 target of approximately 15%.
Return on common equity tier 1 (CET1) capital
The return on CET1 capital (RoCET1) was 13.1% compared with
3.0%, mainly because the fourth quarter of 2017 included the
aforementioned net write-down of DTAs. Excluding this net DTA
write-down from net profit attributable to shareholders, the
RoCET1 would have been 12.0% in 2017.
Cost / income ratio
The cost / income ratio was 79.9% compared with 81.6%. On
an adjusted basis, the cost / income ratio was 79.5% compared
with 78.2%, and was above our over-the-cycle target of below
75%.
Common equity tier 1 capital ratio / risk-weighted assets
Our CET1 capital ratio was 12.9%, a decrease of 0.8 percentage
points compared with 31 December 2017, in line with our
capital guidance, reflecting a USD 0.6 billion increase in CET1
capital and a USD 20.1 billion increase in risk-weighted assets
(RWA).
RWA increased by USD 20.1 billion to USD 263.7 billion as of
31 December 2018, primarily due to a USD 19.1 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
leverage
ratio was 3.77%, an
Common equity tier 1 leverage ratio / leverage ratio denominator
Our CET1
increase of
0.08 percentage points compared with 31 December 2017,
slightly above our guidance of approximately 3.7%, reflecting
the aforementioned increase in CET1 capital and a USD 4.4
billion decrease in the leverage ratio denominator (LRD).
The LRD decreased by USD 4.4 billion to USD 904.6 billion as
of 31 December 2018, primarily driven by decreases from
currency effects of USD 12.1 billion and incremental netting and
collateral mitigation as well as policy changes of USD 1.5 billion,
partly offset by a USD 9.1 billion increase in asset size and other.
→ Refer to the “Investment Bank,” “Corporate Center” and
“Capital management” sections of this report for more
information
Going concern leverage ratio
Our going concern leverage ratio was 5.1%, an increase of
0.4 percentage points compared with 31 December 2017,
reflecting a USD 3.3 billion increase in going concern capital,
partly offset by the aforementioned decrease in LRD.
→ Refer to the “Capital management” section of this report for
more information
Net new money and invested assets
Management’s discussion and analysis on net new money and
invested assets is provided in the “Global Wealth Management”
and “Asset Management” sections of this report.
Seasonal characteristics
Our revenues may show seasonal patterns, notably in the
Investment Bank and Global Wealth Management. These
business divisions typically show the highest client activity levels
in the first quarter, with lower levels throughout the rest of the
year, especially during the summer months and end-of-year
holiday season. 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, which
tend to occur in the fourth quarter.
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Return on equity
USD 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 common equity tier 1 capital 5
Tangible equity attributable to shareholders excluding DTAs
Common equity tier 1 capital
Return on equity
Return on equity (%)
Return on tangible equity (%)
Adjusted return on tangible equity (%)1
Adjusted return on tangible equity excluding deferred tax expense / benefit and DTAs (%)1,6
As of or for the year ended
331.12.18
31.12.17
31.12.16
4,516
65
73
(16)
4,638
(425)
5,062
52,928
6,647
46,281
6,693
39,588
34,119
8.6
10.0
10.1
12.9
969
71
944
(208)
1,776
(3,414)
5,190
52,495
6,563
45,932
6,826
39,106
33,516
1.8
2.2
3.7
13.7
3,348
93
1,230
(271)
4,400
43
4,357
52,916
6,442
46,474
10,059
36,415
30,156
6.1
7.1
9.1
11.3
Return on common equity tier 1 capital (%)7
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. 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 common equity tier 1 (CET1) capital, reflecting DTAs recognized for tax loss carry-forwards of USD
6,107 million as of 31 December 2018 (31 December 2017: USD 5,947 million; 31 December 2016: USD 8,256 million) as well as DTAs on temporary differences, excess over threshold of USD 586 million as of 31
December 2018 (31 December 2017: USD 879 million; 31 December 2016: USD 1,803 million), in accordance with 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 CET1 capital. 7 Calculated as net profit / loss attributable to shareholders divided by average CET1 capital.
13.1
10.9
3.0
77
Financial and operating performance
Group performance
Net new money1
USD billion
GGlobal Wealth Management
AAsset Management
of which: excluding money market flows
of which: money market flows
1 Net new money excludes interest and dividend income.
Invested assets
USD billion
Global Wealth Management
Asset Management
of which: excluding money market funds
of which: money market funds
For the year ended
331.12.18
31.12.17
31.12.16
24.7
32.2
24.8
7.5
44.8
59.5
48.7
10.8
43.0
(16.2)
(23.0)
6.8
31.12.18
2,260
781
696
85
As of
31.12.17
2,403
796
719
78
31.12.16
2,060
645
580
65
% change from
31.12.17
(6)
(2)
(3)
9
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2017 compared with 2016
Results
We recorded net profit attributable to shareholders of USD 969
million in 2017, which included a net tax expense of USD 4,305
million, mainly driven by a deferred tax expense of USD 3,414
million, primarily related to a net write-down of DTAs in respect
of the US federal corporate tax reduction included in the TCJA
enacted in the fourth quarter of 2017. In 2016, net profit
attributable to shareholders was USD 3,348 million, which
included a net tax expense of USD 777 million.
Profit before tax increased by USD 1,142 million, or 27%, to
USD 5,351 million, reflecting higher operating income and a
reduction in operating expenses. Operating income increased by
USD 893 million, or 3%, mainly due to USD 929 million higher
net fee and commission income, primarily in Global Wealth
Management. Operating expenses decreased by USD 247
million, or 1%, mainly due to USD 568 million lower general and
administrative expenses, primarily reflecting USD 371 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
USD 153 million on sale of subsidiaries and businesses, gains of
USD 137 million on sale of financial assets at fair value through
OCI, net foreign currency translation losses of USD 16 million,
expenses of USD 26 million related to the modification of terms
for DCCP awards granted for the performance years 2012 and
2013, and net restructuring expenses of USD 1,192 million. For
2016, we excluded gains of USD 213 million on sale of financial
assets at fair value through OCI, gains of USD 123 million on
sale of real estate, gains of USD 21 million related to
investments in associates, net foreign currency translation losses
of USD 84 million, losses of USD 24 million on sales of
subsidiaries and businesses, and net restructuring expenses of
USD 1,479 million.
On this adjusted basis, profit before tax increased by USD 856
million, or 16%, to USD 6,295 million, reflecting USD 869
million higher adjusted operating income and USD 13 million
higher adjusted operating expenses.
Operating income
Total operating income was USD 29,622 million, compared with
USD 28,729 million. On an adjusted basis, total operating
income increased by USD 869 million, or 3%, to USD 29,349
million, mainly reflecting an increase of USD 929 million in net
fee and commission income.
Net interest income and other net income from fair value
changes on financial instruments
Total combined net interest income and other net income from
fair value changes on financial
increased by
USD 211 million to USD 11,721 million.
instruments
Global Wealth Management
In Global Wealth Management, net interest income increased by
USD 260 million to USD 4,103 million, primarily due to an
increase in average margin on deposits as well as higher loan
volumes, partly offset by higher funding costs for long-term debt
that contributes to total loss-absorbing capacity and lower
banking book interest income.
Transaction-based income from foreign exchange and other
intermediary activity was broadly stable.
Personal & Corporate Banking
Personal & Corporate Banking net interest income decreased by
USD 98 million to USD 2,127 million, mainly due to higher
funding costs for long-term debt that contributes to total loss-
absorbing capacity and lower banking book interest income.
This was partly offset by higher deposit revenues.
Transaction-based income from foreign exchange and other
intermediary activity increased by USD 46 million to USD 383
million, mainly due to higher revenues from foreign exchange
transactions.
Investment Bank
In the Investment Bank, net interest income and other net
income from fair value changes on financial instruments was
broadly stable at USD 4,363 million, reflecting a USD 257 million
increase in Corporate Client Solutions, mainly in Equity Capital
Markets and Risk Management, which was almost entirely offset
by a USD 224 million decrease in Investor Client Services. This
decrease reflected lower revenues in Foreign Exchange, Rates
and Credit, partly offset by higher revenues in Equities.
Corporate Center
In Corporate Center, net interest income and other net income
from fair value changes on financial instruments decreased by
USD 32 million to negative USD 278 million, mainly due to a
USD 66 million decrease in Corporate Center – Group ALM. This
was largely offset by an increase of USD 47 million in Corporate
Center – Services, mainly reflecting higher treasury-related
income from Corporate Center – Group ALM.
Credit loss expense / recovery
The net credit loss expense was USD 131 million compared
with USD 38 million, mainly reflecting USD 81 million higher
expenses in the Investment Bank, primarily resulting from a
margin loan to a single client following a significant decrease
in the value of the collateral.
79
Financial and operating performance
Group performance
Net fee and commission income
Net fee and commission income increased by USD 929 million
to USD 17,522 million.
Adjusted expenses for salaries decreased by USD 63 million
to USD 5,801 million, mainly reflecting our nearshoring and
offshoring initiatives and cost reduction programs.
Adjusted expenses for total variable compensation increased
by USD 119 million, reflecting an increase of USD 257 million
in expenses for current-year awards, partly offset by USD 138
million lower expenses for awards related to prior years.
Adjusted other personnel expenses increased by USD 98
million, primarily due to USD 58 million higher social security
expenses.
Financial advisor variable compensation
increased by
USD 324 million to USD 4,064 million, mainly reflecting higher
compensable revenues and changes we announced in 2016 to
our financial advisor compensation model.
General and administrative expenses
General and administrative expenses decreased by USD 568
million to USD 6,949 million. Excluding net restructuring
expenses of USD 640 million compared with USD 705 million,
adjusted general and administrative expenses decreased by
USD 503 million, primarily reflecting USD 371 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 and German bank levy was USD 20 million in
2017, compared with USD 124 million, primarily because 2017
included an USD 85 million credit related to prior years.
Tax
We recognized an income tax expense of USD 4,305 million for
2017, which included a net Swiss tax expense of USD 562
million and a net non-Swiss tax expense of USD 3,743 million.
The Swiss tax expense included a current tax expense of
USD 455 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 USD 107 million,
which reflected a net decrease in DTAs previously recognized in
relation to tax losses carried forward and temporary differences.
Fees
for portfolio management and
related services
increased by USD 597 million to USD 7,666 million, primarily
driven by Global Wealth Management, mainly related to higher
invested assets.
Underwriting
to
USD 1,003 million, largely due to higher equity underwriting
revenues, mainly in the Investment Bank.
increased by USD 264 million
fees
Other income
Other income was USD 511 million compared with USD 663
million. Excluding the aforementioned adjusting items, which
consist of gains on sales of subsidiaries and businesses, gains
on sales of financial assets at fair value through OCI, gains
related to investments in associates and net foreign currency
translation
income decreased by
USD 178 million. This decrease was mainly due to lower gains
on sale of financial assets at fair value through OCI and a
decrease in other sundry income.
losses, adjusted other
Operating expenses
Total operating expenses decreased by USD 247 million, or 1%,
to USD 24,272 million. Excluding net restructuring expenses of
USD 1,192 million, compared with USD 1,479 million in 2016,
and expenses of USD 26 million in 2017 in the Investment Bank
related to the modification of terms for DCCP awards granted
for the performance years 2012 and 2013, adjusted total
operating expenses were broadly stable at USD 23,054 million.
Personnel expenses
Personnel expenses increased by USD 286 million to USD 16,199
million and included net restructuring expenses of USD 545
million in 2017, mainly related to our transitioning activities to
nearshore and offshore locations, compared with USD 763
million in 2016. In addition, 2017 included expenses of USD 26
million in the Investment Bank related to the modification of
terms for DCCP awards granted for the performance years 2012
and 2013. On an adjusted basis, personnel expenses increased
by USD 478 million to USD 15,628 million.
80
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The non-Swiss tax expense included a current tax expense of
USD 435 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 USD 3,308 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 USD 4,305 million for 2017 was higher
than the tax expense of USD 777 million in 2016, mainly
because 2017 included a net write-down of DTAs of USD 2,939
million resulting from the aforementioned reduction in the US
federal corporate tax rate.
Total comprehensive income attributable to shareholders
total
to
In 2017,
shareholders was positive USD 1,787 million, reflecting net profit
of USD 969 million and positive OCI of USD 818 million.
income attributable
comprehensive
Foreign currency translation OCI was USD 1,564 million,
mainly resulting from the strengthening of the Swiss franc, euro
and British pound against the US dollar. In 2016, foreign
currency translation OCI was negative USD 458 million.
Defined benefit plan OCI was positive USD 296 million
compared with negative USD 829 million. Total pre-tax OCI
related to UK defined benefit plans was positive USD 305
million, reflecting OCI gains of USD 215 million from the return
on plan assets and an OCI gain of USD 90 million due to a net
decrease in the DBO. The OCI gain of USD 90 million from the
net DBO decrease reflected gains of USD 82 million related to
changes in life expectancy assumptions, a gain of USD 60 million
due to a decline in the rate of pension increase and an OCI
experience gain of USD 50 million (reflecting the effects of
differences between the previous actuarial assumptions and
what actually occurred), partly offset by a loss of USD 102
million from a decrease in the applicable discount rate.
Total pre-tax OCI related to the Swiss defined benefit plan
was negative USD 79 million. This reflected an OCI gain of
USD 1,640 million from the return on plan assets, which was
more than offset by an OCI loss of USD 1,417 million,
representing an increase in the excess of the pension surplus
over the estimated future economic benefit, and an OCI loss of
USD 301 million due to the DBO remeasurement. The OCI loss
of USD 301 million related to the DBO remeasurement mainly
reflected a loss of USD 165 million from a decrease in the
applicable discount rate and an OCI experience loss of USD 154
million, reflecting the effects of differences between the
previous actuarial assumptions and what actually occurred.
OCI related to cash flow hedges was negative USD 635
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 USD 684 million.
OCI related to own credit on financial liabilities designated at
fair value was negative USD 317 million compared with negative
USD 130 million, and mainly reflected a tightening of credit
spreads in 2017.
OCI associated with financial assets measured at fair value
through OCI was negative USD 91 million compared with
negative USD 58 million and primarily
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 relevant long-term interest rates.
reflected
Net profit attributable to non-controlling interests
Net profit attributable to non-controlling interests was USD 77
million in 2017 compared with USD 84 million in the prior year.
81
Financial and operating performance
Global Wealth Management
Global Wealth Management
Global Wealth Management1
USD million, except where indicated
Results
Net interest income
Recurring net fee income2
Transaction-based income3
Other income
Income
Credit loss (expense) / recovery4
TTotal operating income
Personnel expenses
Salaries and other personnel costs
Financial advisor variable compensation5,6
Compensation commitments with recruited financial advisors5,7
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 results8
TTotal operating income as reported
of which: gain / (loss) on sale of financial assets at fair value through OCI 9
of which: gain / (loss) on sale of subsidiaries and businesses
of which: gains related to investments in associates
TTotal operating income (adjusted)
TTotal operating expenses as reported
of which: personnel-related restructuring expenses 10
of which: non-personnel-related restructuring expenses 10
of which: restructuring expenses allocated from CC – Services 10
of which: gain related to changes to the Swiss pension plan
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Performance measures11
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Net margin on invested assets (bps)12
Adjusted performance measures8,11
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Net margin on invested assets (bps)13
82
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
4,310
9,585
2,911
151
16,956
(15)
16,941
7,683
3,628
3,470
584
1,724
3,852
3,740
4
50
13,313
3,628
4,103
8,968
3,159
65
16,295
(8)
16,287
7,674
3,610
3,310
754
1,263
3,726
3,626
4
49
12,717
3,571
16,941
16,287
101
16,840
13,313
34
16
209
(66)
13,120
3,628
3,720
1.6
78.5
1.0
15
(10.6)
77.8
1.0
16
16,287
12,717
39
75
474
12,129
3,571
4,159
15.5
78.0
2.2
16
13.1
74.4
2.2
19
3,843
8,472
2,887
55
15,257
(8)
15,249
7,254
3,514
2,931
808
1,221
3,627
3,520
4
54
12,159
3,090
15,249
31
(24)
15,242
12,159
61
55
478
11,564
3,090
3,678
(13.4)
79.7
2.2
15
(3.8)
75.8
2.2
18
5
7
(8)
133
4
89
4
0
1
5
(23)
36
3
3
(2)
2
5
2
4
3
5
8
2
(11)
(5)
(16)
Global Wealth Management (continued)1
USD million, except where indicated
Additional information
Recurring income14
Recurring income as a percentage of income (%)
Average attributed equity (USD billion)15
Return on attributed equity (%)15
Return on attributed tangible equity (%)15
Risk-weighted assets (USD billion)15
of which: held by Global Wealth Management (USD billion)
of which: held by CC – Group ALM on behalf of Global Wealth Management (USD billion) 16
Leverage ratio denominator (USD billion)15
of which: held by Global Wealth Management (USD billion)
of which: held by CC – Group ALM on behalf of Global Wealth Management (USD billion) 16
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
12,315
80.7
6.1
50.7
48.7
48.7
180.4
180.4
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6
3
4
4
2
1
1
(1)
2
13,894
81.9
13.4
27.0
44.0
60.5
58.2
2.3
270.6
207.4
63.2
5.2
24.7
2,260
71
70
2,519
174.7
271.8
2,296
994
23,618
10,677
13,072
80.2
13.0
27.5
45.5
58.1
55.9
2.3
268.7
205.0
63.7
5.1
44.8
2,403
73
73
2,661
172.5
278.0
2,619
580
23,177
10,616
Goodwill and intangible assets (USD billion)
Net new money (USD billion)
Invested assets (USD billion)
Gross margin on invested assets (bps)
Adjusted gross margin on invested assets (bps)
Client assets (USD billion)
Loans, gross (USD billion)17
Due to customers (USD billion)17
Recruitment loans to financial advisors5
Other loans to financial advisors5
Personnel (full-time equivalents)
Advisors (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 Other net income from fair value changes on financial instruments. 4 Upon adoption of IFRS 9 effective 1 January 2018, credit loss expenses include credit
losses on recruitment loans to financial advisors previously recognized in personnel expenses. Prior periods were not restated for this change. 5 Relates to licensed professionals with the ability to provide
investment advice to clients in the Americas. 6 Financial advisor variable compensation consists of formulaic compensation based directly on compensable revenues generated by financial advisors and
supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, new assets and other variables. 7 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. 8 Adjusted results are non-GAAP financial measures as defined by
SEC regulations. 9 Includes a gain on the sale of our investment in Visa Europe in 2016. Figures presented for periods prior to 2018 relate to financial assets available for sale. 10 Reflects restructuring expenses
related to legacy cost programs as well as expenses for new restructuring initiatives in 2018. 11 Refer to the “Performance targets and measurement” section of this report for the definitions of our performance
measures. 12 Calculated as operating profit before tax / average invested assets. 13 Calculated as adjusted operating profit before tax / average invested assets. 14 Recurring income consists of net interest
income and recurring net fee income. 15 Refer to the “Capital management” section of this report for more information. 16 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. Refer to “Equity attribution and return on attributed equity” in
the “Capital management” section of this report for more information. 17 Loans and Due to customers in this table include customer brokerage receivables and payables, respectively, which with the adoption of
IFRS 9 effective 1 January 2018 have been reclassified to a separate reporting line on the balance sheet.
5.0
43.0
2,060
75
75
2,297
151.7
278.1
3,033
462
23,247
10,884
(6)
(3)
(3)
(5)
1
(2)
(12)
71
2
1
Regional breakdown of performance measures1
As of or for the year ended 31.12.18
USD billion, except where indicated
Net new money
Net new money growth (%)
Invested assets
Loans, gross
Americas
(4.1)
(0.3)
1,200
59.53
EMEA
10.4
1.9
500
37.5
Asia Pacific
17.3
Switzerland
3.2
Total of
regions2
26.7
of which: ultra high
net worth (UHNW)
24.8
4.5
357
42.3
1.5
200
35.0
1.1
2,257
174.2
2.1
1,127
Client advisors (full-time equivalents)
1,043 4
1 Refer to the “Performance targets and measurement” section of this report for the definitions of our performance measures. 2 Excluding minor functions with 116 advisors, USD 3 billion of invested assets,
USD 0.5 billion of loans and USD 2 billion of net new money outflows in 2018. 3 Loans include customer brokerage receivables, which with the adoption of IFRS 9 effective 1 January 2018 have been reclassified
to a separate reporting line on the balance sheet. 4 Represents advisors who exclusively serve ultra high net worth clients in a globally managed unit.
10,561
1,837
1,138
6,850
737
83
Financial and operating performance
Global Wealth Management
2018 compared with 2017
Results
Profit before tax increased by USD 57 million, or 2%, to
USD 3,628 million, including a USD 101 million valuation gain
on our equity ownership in SIX related to the sale of SIX
Payment Services to Worldline and a credit of USD 66 million
related to our Swiss pension plan. Adjusted profit before tax
decreased by USD 439 million, or 11%, to USD 3,720 million,
reflecting higher operating expenses, partly offset by higher
operating income.
Operating income
Total operating income increased by USD 654 million, or 4%, to
USD 16,941 million. Excluding the aforementioned valuation
gain, adjusted total operating income increased by USD 553
million, or 3%, to USD 16,840 million, mainly driven by higher
recurring net fee income and net interest income, partly offset
by lower transaction-based income.
Net
income
interest
increased by USD 207 million to
USD 4,310 million, due to an increase in average margin on
deposits, as well as higher loan volumes, partly offset by the
expiration of an interest rate hedge portfolio at the end of 2017,
lower net income from Group structural risk management
activities and higher funding costs for long-term debt that
contributes to total loss-absorbing capacity.
→ Refer to “Corporate Center – Group Asset and Liability
Management” in this section of the report for more information
on net income from Group structural risk management
Recurring net fee income increased by USD 617 million to
USD 9,585 million, predominantly driven by higher average
invested assets and an increase in mandate penetration during
the year.
Transaction-based income decreased by USD 248 million to
USD 2,911 million, mainly due to lower client activity in the
Americas and in Asia Pacific.
Other income increased by USD 86 million to USD 151
million. Excluding the aforementioned valuation gain, adjusted
other income decreased by USD 15 million to USD 50 million.
Operating expenses
Total operating expenses increased by USD 596 million, or 5%,
to USD 13,313 million and adjusted total operating expenses by
USD 991 million, or 8%, to USD 13,120 million.
84
Personnel expenses increased by USD 9 million to USD 7,683
million and, excluding the aforementioned credit related to
changes to our Swiss pension plan, adjusted personnel expenses
increased by USD 79 million to USD 7,714 million. This increase
was mainly due to higher salaries and staff levels, partly offset by
lower variable compensation not related to financial advisors. In
the Americas, higher financial advisor variable compensation
was offset by lower expenses for compensation commitments to
recruited financial advisors.
General and administrative expenses increased by USD 461
million to USD 1,724 million and adjusted general and
administrative expenses
increased by USD 520 million to
USD 1,708 million, predominantly driven by higher provisions for
litigation matters and higher regulatory-related expenses.
Net expenses for services from Corporate Center and other
business divisions increased by USD 126 million to USD 3,852
million and adjusted net expenses for services increased by
USD 392 million to USD 3,643 million, mainly reflecting higher
expenses from Group Technology and Group Risk Control.
Cost / income ratio
The cost / income ratio increased to 78.5% from 78.0%. On an
adjusted basis, the ratio increased to 77.8% from 74.4% and
was above our 2018 target range of 65–75%.
Net new money
Net new money inflows were USD 24.7 billion compared with
inflows of USD 44.8 billion. The net new money growth rate
was 1.0% compared with 2.2%, and was below our 2018
target range of 2–4%. Net new money was predominantly
driven by inflows in Asia Pacific and EMEA, partly offset by
outflows in the Americas, which included a single outflow of
USD 4.5 billion from a corporate employee share program.
Invested assets
Invested assets decreased by USD 143 billion to USD 2,260
billion, due to negative market performance of USD 144 billion,
negative currency effects of USD 19 billion and reclassifications
of USD 12 billion. This was partly offset by net new money
inflows of USD 25 billion and an increase of USD 7 billion related
to the acquisition of subsidiaries and businesses. Mandate
penetration increased to 33.6% from 32.9%.
Personnel
Global Wealth Management employed 23,618 personnel as of
31 December 2018, an increase of 441 compared with 23,177
personnel as of 31 December 2017. The number of advisors
increased by 61 to 10,677.
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Results
Profit before tax increased by USD 481 million, or 16%, to
USD 3,571 million and adjusted profit before tax increased by
USD 481 million, or 13%, to USD 4,159 million, reflecting higher
operating income, partly offset by higher operating expenses.
Operating income
Total operating income increased by USD 1,038 million, or 7%,
to USD 16,287 million and adjusted total operating income
increased by USD 1,045 million, or 7%, to USD 16,287 million,
driven by increases across all income lines.
Net interest income increased by USD 260 million to USD 4,103
million, primarily due to an increase in average margin on deposits
as well as higher loan volumes, partly offset by higher funding
costs for long-term debt that contributes to total loss-absorbing
capacity and lower banking book interest income.
→ Refer to “Corporate Center – Group Asset and Liability
Management” in this section of the report for more information
on net income from Group structural risk management
Recurring net fee income increased by USD 496 million to
USD 8,968 million, predominantly driven by higher average
invested assets and an increase in mandate penetration. This
was partly offset by the effects of cross-border outflows and
shifts into retrocession-free products.
Transaction-based income increased by USD 272 million to
USD 3,159 million, across all regions, mainly due to increased
client activity, most notably in Asia Pacific and in the Americas.
Other income increased by USD 10 million to USD 65 million.
Personnel expenses
Operating expenses
Total operating expenses increased by USD 558 million, or 5%,
to USD 12,717 million, and adjusted total operating expenses
increased by USD 565 million or 5%, to USD 12,129 million.
increased by USD 420 million
to
USD 7,674 million and adjusted personnel expenses increased by
USD 442 million to USD 7,635 million. This increase was mainly
due to higher variable compensation, partly offset by lower
expenses for compensation commitments to recruited financial
advisors in the Americas. The increase of financial advisor
variable compensation reflects higher compensable revenues as
well as changes we announced in 2016 to our financial advisor
compensation model.
General and administrative expenses increased by USD 42
million to USD 1,263 million and adjusted general and
administrative expenses
to
USD 1,189 million, predominantly driven by higher provisions for
litigation matters.
increased by USD 23 million
Net expenses for services from Corporate Center and other
business divisions increased by USD 99 million to USD 3,726
million and adjusted net expenses for services increased by
USD 103 million to USD 3,251 million, mainly reflecting higher
costs for strategic and regulatory initiatives and higher expenses
from control functions.
Cost / income ratio
The cost / income ratio decreased to 78.0% from 79.7%. On an
adjusted basis, the ratio decreased to 74.4% from 75.8% and
was within our 2017 target range of 65–75%.
Net new money
Net new money inflows were USD 44.8 billion compared with
inflows of USD 43.0 billion. The net new money growth rate
remained stable at 2.2% and was within our 2017 target range
of 2–4%. Net new money was predominantly driven by inflows
in Asia Pacific and Europe, Middle East and Africa (EMEA), partly
offset by outflows in the Americas. Cross-border-related net
outflows were USD 12 billion compared with USD 14 billion,
mainly driven by outflows in EMEA. In addition, we incurred net
outflows of USD 8 billion related to the introduction of fees on
euro deposit concentrations in EMEA and Switzerland.
Invested assets
Invested assets increased by USD 343 billion to USD 2,403
billion, mainly due to positive market performance of USD 251
billion, positive currency effects of USD 48 billion and net new
money inflows of USD 45 billion. Mandate penetration increased
to 32.9% from 31.1%.
Personnel
Global Wealth Management employed 23,177 personnel as of
31 December 2017, a decrease of 70 compared with 23,247
personnel as of 31 December 2016. The number of advisors
decreased by 268 to 10,616.
85
Financial and operating performance
Personal & Corporate Banking
Personal & Corporate Banking
Personal & Corporate Banking – in Swiss francs1
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
2,058
625
1,086
419
4,187
(55)
4,133
786
279
1,181
1,255
14
0
2,260
1,873
4,133
359
3,774
2,260
4
0
42
(35)
2,248
1,873
1,526
18.7
54.0
157
4.2
(9.2)
58.7
157
4.2
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
(1)
5
(2)
386
8
186
7
(6)
(4)
4
2
8
(1)
19
7
(2)
(1)
4
19
(9)
0
0
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: gains related to investments in associates
of which: gain on sale of financial assets at fair value through OCI 5
TTotal operating income (adjusted)
TTotal 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: gain related to changes to the Swiss pension plan
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Performance measures7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for Personal Banking (%)8
Adjusted performance measures4,7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for Personal Banking (%)8
86
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Personal & Corporate Banking – in Swiss francs (continued)1
CHF million, except where indicated
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 Personal & Corporate Banking (CHF billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (CHF billion) 10
Leverage ratio denominator (CHF billion)9
of which: held by Personal & Corporate Banking (CHF billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (CHF billion) 10
Business volume for Personal Banking (CHF billion)
Net new business volume for Personal Banking (CHF billion)
Client assets (CHF billion)11
Loans, gross (CHF billion)
Due to customers (CHF billion)
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
6.4
29.1
29.1
57.0
55.9
1.1
190.1
149.6
40.5
156
6.6
638
131.0
141.7
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
5
16
16
4
2
1
4
1
(4)
0
4
92.0
Secured loan portfolio as a percentage of total loan portfolio, gross (%)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)12
Personnel (full-time equivalents)
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 comprises 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 income from fair value changes on
financial instruments. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Includes a gain on the sale of our investment in Visa Europe in 2016. Figures presented for periods
prior to 2018 relate to financial assets available for sale. 6 Reflects restructuring expenses related to legacy cost programs. 7 Refer to the “Performance targets and measurement” section of this report for the
definitions of our performance measures. 8 Calculated as net new business volume for the period / business volume at the beginning of the period. 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. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information. 11 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. 12 Refer to the “Risk management and control”
section of this report for more information on (credit-)impaired exposures.
1.3
5,183
0.6
5,143
0.6
5,102
92.9
92.7
2
87
Financial and operating performance
Personal & Corporate Banking
2018 compared with 2017
Results
Profit before tax increased by CHF 295 million, or 19%, to
CHF 1,873 million, predominantly reflecting a CHF 359 million
valuation gain on our equity ownership in SIX related to the sale
of SIX Payment Services to Worldline. Adjusted profit before tax
decreased by CHF 155 million, or 9%, to CHF 1,526 million, due
to lower operating income and higher operating expenses.
Effective from 1 January 2018, we have reclassified certain
expenses for clearing, credit card add-on services and the client
loyalty program, which are incremental and incidental to
revenues on a prospective basis, to better align these expenses
with their associated revenues within operating income. This
resulted in a CHF 66 million reduction in total operating income,
mainly related to transaction-based income. Total operating
expenses decreased by a broadly corresponding amount,
primarily reflecting a reduction in general and administrative
expenses.
Operating income
Total operating income increased by CHF 283 million, or 7%, to
CHF 4,133 million, mainly
the aforementioned
valuation gain. Excluding this item, adjusted total operating
income decreased by CHF 76 million to CHF 3,774 million,
mainly reflecting lower net interest and transaction-based
income as well as higher credit loss expenses, partly offset by
higher recurring net fee income.
reflecting
Net
interest
income decreased by CHF 28 million to
CHF 2,058 million, mainly due to the expiration of an interest
rate hedge portfolio at the end of 2017, as well as 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.
Recurring net fee income increased by CHF 32 million to
CHF 625 million, mainly reflecting higher custody and mandate
revenues as well as higher fees from bundled products.
Transaction-based income decreased by CHF 18 million to
CHF 1,086 million, mainly due
the aforementioned
reclassification from expenses to revenues. The reclassification
effect was partly offset by higher revenues from foreign
exchange transactions, as well as higher fees received from
Global Wealth Management, reflecting increased shift and
referral volumes.
to
Other income increased by CHF 333 million to CHF 419
million, mainly due to the aforementioned valuation gain.
We recorded a net credit loss expense of CHF 55 million
compared with CHF 19 million, reflecting higher expenses for
newly credit-impaired positions, as well as lower net recoveries
on existing credit-impaired positions, both predominantly in the
Corporate Clients area. The adoption of IFRS 9 on 1 January
88
2018 had no material effect on net credit losses as stage 1 and 2
expected credit losses amounted to net CHF 0 million for 2018.
→ Refer to “Credit risk” in the “Risk management and control” section
of this report for more information on expected credit losses
→ Refer to “Note 1c Changes in accounting policies and comparability
and transition effects from the adoption of IFRS 9, Financial
Instruments” in the “Consolidated financial statements” section of
this report for more information on the adoption of IFRS 9
Operating expenses
Operating expenses were broadly unchanged at CHF 2,260
million, reflecting CHF 57 million lower restructuring expenses and
a credit of CHF 35 million related to changes to our Swiss pension
plan, partly offset by CHF 38 million higher expenses for provisions
for litigation, regulatory and similar matters. Adjusted total
operating expenses increased by CHF 79 million to CHF 2,248
million.
Personnel expenses decreased by CHF 50 million to CHF 786
million, mostly due to the aforementioned pension plan credit,
and adjusted personnel expenses decreased by CHF 11 million to
CHF 817 million, mainly reflecting lower variable compensation.
to CHF 279 million, primarily
General and administrative expenses decreased by CHF 11
the
million
aforementioned reclassification from expenses to revenues,
partly offset by higher expenses for provisions for litigation,
regulatory and similar matters.
reflecting
Net expenses for services from Corporate Center and other
business divisions increased by CHF 48 million to CHF 1,181
million. Adjusted net expenses for services increased by CHF 101
million to CHF 1,138 million, mainly reflecting higher expenses
from Group Technology as well as for strategic and regulatory
initiatives.
Cost / income ratio
The cost / income ratio decreased to 54.0% from 58.7%, mainly
due to the aforementioned valuation gain. On an adjusted basis,
the ratio increased to 58.7% compared with 56.1% and
remained within our 2018 target range of 50–60%.
Net interest margin
The net interest margin remained stable at 157 basis points on
both a reported and adjusted basis as lower net interest income
was offset by lower average loan volume, and remained within
our 2018 target range of 150–165 basis points.
Net new business volume growth for personal banking
The net new business volume growth rate for our personal
banking business was our best on record at 4.2% compared
with 4.0%, above our 2018 target range of 1–4%. Net new
client assets and, to a lesser extent, net new loans were positive.
Personnel
Personal & Corporate Banking employed 5,183 personnel as
of 31 December 2018, an increase of 81 compared with
5,102 personnel as of 31 December 2017.
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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 total 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 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.
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 “Credit risk” in the “Risk management and control”
section of this report for more information on expected credit
losses
Operating expenses
Total operating expenses increased by CHF 48 million to
CHF 2,272 million and adjusted total 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 for services increased by CHF 70
million to CHF 1,037 million, mainly reflecting higher expenses 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 50–60%.
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 140–180 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
1–4%. 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.
89
Financial and operating performance
Personal & Corporate Banking
Personal & Corporate Banking – 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
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: gains related to investments in associates
of which: gain on sale of financial assets at fair value through OCI 5
TTotal operating income (adjusted)
TTotal 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: gain related to changes to the Swiss pension plan
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Performance measures7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for Personal Banking (%)8
Adjusted performance measures4,7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for Personal Banking (%)8
90
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
2,106
640
1,112
420
4,278
(56)
4,222
803
285
1,208
1,285
14
0
2,310
1,912
4,222
359
3,863
2,310
4
0
43
(38)
2,300
1,912
1,563
18.9
54.0
157
4.2
(8.8)
58.7
157
4.2
2,127
605
1,125
87
3,945
(20)
3,925
852
296
1,156
1,251
13
0
2,317
1,607
3,925
3,925
2,317
7
0
98
2,212
1,607
1,713
(10.0)
58.7
157
4.2
(3.7)
56.1
157
4.2
2,225
560
1,041
215
4,042
(6)
4,035
855
287
1,093
1,201
15
0
2,250
1,785
4,035
21
105
3,909
2,250
4
0
115
2,132
1,785
1,778
4.4
55.7
162
3.2
1.8
54.4
162
3.2
(1)
6
(1)
381
8
180
8
(6)
(4)
5
3
8
0
19
8
(2)
0
4
19
(9)
0
0
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Personal & Corporate Banking – in US dollars (continued)1
USD million, except where indicated
Additional information
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 Personal & Corporate Banking (USD billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (USD billion) 10
Leverage ratio denominator (USD billion)9
of which: held by Personal & Corporate Banking (USD billion)
of which: held by CC – Group ALM on behalf of Personal & Corporate Banking (USD billion) 10
Business volume for Personal Banking (USD billion)
Net new business volume for Personal Banking (USD billion)
Client assets (USD billion)11
Loans, gross (USD billion)
Due to customers (USD billion)
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
6.6
29.1
29.1
57.9
56.8
1.1
193.4
152.2
41.2
158
6.7
648
133.3
144.1
6.2
25.8
25.8
50.4
49.3
1.1
191.8
151.9
39.9
159
6.1
684
134.8
139.5
4.1
43.3
40.9
40.9
149.6
149.6
147
4.7
619
131.5
133.6
6
15
15
3
1
0
3
0
(5)
(1)
3
92.0
Secured loan portfolio as a percentage of total loan portfolio, gross (%)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)12
Personnel (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 comprises 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 income from fair value changes on financial instruments. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Includes a
gain on the sale of our investment in Visa Europe in 2016. Figures presented for periods prior to 2018 relate to financial assets available for sale. 6 Reflects restructuring expenses related to legacy cost programs.
7 Refer to the “Performance targets and measurement” section of this report for the definitions of our performance measures. 8 Calculated as net new business volume for the period / business volume at the
beginning of the period. 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. Refer to “Equity attribution and return on attributed equity” in the
“Capital management” section of this report for more information. 11 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. 12 Refer to the “Risk management and control” section of this report for more information on (credit-)impaired exposures.
1.3
5,183
0.6
5,143
0.6
5,102
92.7
92.9
2
91
Financial and operating performance
Asset Management
Asset Management
Asset Management1
USD million, except where indicated
Results
Net management fees2
Performance fees
Gain / (loss) 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: gain / (loss) on sale of subsidiaries and businesses
TTotal operating income (adjusted)
TTotal operating expenses as reported
of which: personnel-related restructuring expenses 4
of which: non-personnel-related restructuring expenses 4
of which: restructuring expenses allocated from CC – Services 4
of which: gain related to changes to the Swiss pension plan
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
Performance measures5
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth excluding money market flows (%)
Net margin on invested assets (bps)6
Adjusted performance measures3,5
Pre-tax profit growth (%)7
Cost / income ratio (%)
Net new money growth excluding money market flows (%)
Net margin on invested assets (bps)8
Information by business line / asset class
NNet new money (USD billion)
Equities
Fixed Income
of which: money markets
Multi Assets & Solutions
Hedge Fund Businesses
Real Estate & Private Markets
TTotal net new money
of which: net new money excluding money markets
92
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
(1)
(38)
(11)
(4)
(14)
(5)
(4)
100
(67)
(6)
(23)
(11)
(4)
(6)
(3)
(23)
(5)
(25)
(14)
1,778
80
1,857
703
202
498
541
2
1
1,406
451
1,857
1,857
1,406
23
10
33
(10)
1,350
451
508
(23.2)
75.7
3.4
6
(0.6)
72.7
3.4
6
20.7
8.3
7.5
1.9
0.4
1.0
32.2
24.8
1,800
130
153
2,083
731
235
524
562
1
3
1,495
587
2,083
153
1,929
1,495
17
22
63
1,393
587
536
28.6
71.8
8.4
8
(2.1)
72.2
8.4
7
18.7
28.6
10.8
4.9
2.2
5.1
59.5
48.7
1,831
124
1,955
736
244
512
537
1
5
1,498
457
1,955
1,955
1,498
15
15
72
1,397
457
558
(24.4)
76.6
(3.9)
7
(8.7)
71.4
(3.9)
9
(10.1)
(3.4)
6.8
(4.3)
(0.3)
1.8
(16.2)
(23.0)
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Asset Management (continued)1
USD million, except where indicated
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
IInvested assets (USD 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 (USD billion)
Americas
Asia Pacific
Europe, Middle East and Africa
Switzerland
TTotal invested assets
Information by channel
IInvested assets (USD billion)
Third-party institutional
Third-party wholesale
UBS’s wealth management businesses
TTotal invested assets
Assets under administration9
Assets under administration (USD billion)10
Net new assets under administration (USD billion)11
Gross margin on assets under administration (bps)
Additional information
Average attributed equity (USD billion)12
Return on attributed equity (%)12
Return on attributed tangible equity (%)12
Risk-weighted assets (USD billion)12
of which: held by Asset Management (USD billion)
of which: held by CC – Group ALM on behalf of Asset Management (USD billion) 13
Leverage ratio denominator (USD billion)12
of which: held by Asset Management (USD billion)
of which: held by CC – Group ALM on behalf of Asset Management (USD billion) 13
Goodwill and intangible assets (USD billion)
Gross margin on invested assets (bps)
Adjusted gross margin on invested assets (bps)
Personnel (full-time equivalents)
285
253
85
120
42
81
781
298
192
141
189
259
781
484
78
219
781
1.7
26.5
139.4
4.2
4.1
0.1
5.1
2.7
2.5
1.4
23
23
300
248
78
130
42
76
796
293
187
163
178
268
796
498
82
216
796
1.7
34.0
186.2
4.1
4.0
0.1
4.9
2.8
2.1
1.4
29
26
216
206
65
119
38
66
645
203
157
127
141
221
645
388
74
183
645
413
0.6
3
1.4
32.2
3.8
3.8
2.6
2.6
1.4
30
30
2,301
2,335
2,308
(5)
2
9
(8)
0
7
(2)
2
3
(13)
6
(3)
(2)
(3)
(5)
1
(2)
0
2
2
0
4
(4)
19
0
(21)
(12)
(1)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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. Beginning 1 January 2018, net management fees additionally include fund and custody expenses
recognized as contra revenues and previously included in operating expenses. Prior periods were not restated for this change. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations.
4 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives in 2018. 5 Refer to the “Performance targets and measurement” section of this report for the
definitions of our performance measures. 6 Calculated as operating profit before tax / average invested assets. 7 Excluding the effect of business exits. Prior-period information for the periods ending
before 1 January 2018 has been restated. 8 Calculated as adjusted operating profit before tax / average invested assets. 9 Following the sale of our fund administration business in Luxembourg and Switzerland
to Northern Trust on 1 October 2017, we no longer report assets under administration. 10 This includes UBS and third-party fund assets for which the fund services unit provided professional services, including
fund set-up, accounting and reporting for traditional investment funds and alternative funds. 11 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits.
12 Refer to the “Capital management” section of this report for more information. 13 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. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of
this report for more information.
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Financial and operating performance
Asset Management
2018 compared with 2017
Results
Profit before tax decreased by USD 136 million, or 23%, to
USD 451 million, mainly as 2017 included a gain of USD 153
million on the sale of our fund administration business. Excluding
this gain, adjusted profit before tax decreased by USD 28 million,
or 5%, to USD 508 million, mainly driven by lower operating
income, partly offset by lower operating expenses.
Operating income
Total operating income decreased by USD 226 million, or 11%,
to USD 1,857 million. Excluding the aforementioned gain on the
sale of our fund administration business, adjusted total
operating income decreased by USD 72 million or 4%. Net
management fees decreased by USD 22 million to USD 1,778
million as higher income from higher average invested assets
was more than offset by the absence of administration fees
following the sale of our fund administration business, the
reclassification of fund and custody expenses from operating
expenses to operating income to better align these costs with
income, and
their associated
continued pressure on margins. In addition, 2017 included an
impairment loss of USD 12 million on a co-investment in an
infrastructure fund.
revenues within operating
Performance fees decreased by USD 50 million to USD 80
million, mainly driven by declines in Equities and Hedge Fund
Businesses.
Operating expenses
Total operating expenses decreased by USD 89 million, or 6%,
to USD 1,406 million and adjusted total operating expenses
decreased by USD 43 million, or 3%, to USD 1,350 million.
to
Personnel expenses decreased by USD 28 million
USD 703 million. Excluding a credit of USD 10 million related
to our Swiss pension plan, recognized in the first quarter of
2018, adjusted personnel expenses decreased by USD 24
million to USD 690 million, driven primarily by reduced
expenses for variable compensation.
General and administrative expenses decreased by USD 33
million to USD 202 million. Adjusted general and administrative
expenses decreased by USD 21 million to USD 192 million,
primarily due to the aforementioned reclassification of fund and
custody expenses to operating income, the exclusion of expenses
associated with the fund administration business that we disposed
of
lower
in October 2017, reduced marketing costs and
professional fees, partly offset by higher research expenses.
Net expenses for services from Corporate Center and other
business divisions decreased by USD 26 million to USD 498
million. Adjusted net expenses for services from Corporate
Center and other business divisions increased by USD 4 million,
primarily reflecting higher expenses from Group Technology,
which were partly offset by reduced expenses from Group
Operations following the sale of our fund administration
business as well as the aforementioned reclassification of
custody expenses to operating income.
Cost / income ratio
The cost / income ratio was 75.7% compared with 71.8%. On
an adjusted basis, the ratio was 72.7% compared with 72.2%,
and was above our 2018 target range of 60–70%.
Net new money
Excluding money market flows, net new money was USD 24.8
billion compared with inflows of USD 48.7 billion, primarily
driven by our third-party institutional channel. The net new
money growth rate, excluding money market flows, was positive
3.4% compared with positive 8.4%, and was within our 2018
target range of 3–5%. Net inflows were mainly driven by
Europe, Middle East and Africa.
Invested assets
Invested assets decreased to USD 781 billion from USD 796
billion, mainly due to negative market performance of USD 33
billion and negative foreign currency translation effects of
USD 15 billion, partly offset by inflows of USD 32 billion,
including money market flows.
Personnel
Asset Management employed 2,301 personnel as of
31 December 2018, a decrease of 34 compared with 2,335
personnel as of 31 December 2017.
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Investment performance
2018 was a challenging year for investments with a record low
number of asset classes providing a positive annual return. Signs
of slowing economic growth and tighter financial conditions led
to a sharp drop across asset values, particularly in corporate
bonds and equities.
In 2018, 60% of our active traditional funds outperformed
their benchmark and 64% outperformed peer averages. Long-
term performance remains strong despite a challenging 2018,
with 86% outperforming
their benchmark and 81%
outperforming peer averages over five years.
Investment performance as of 31 December 2018
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
62
70
10
60
64
80
44
64
70
92
76
81
78
84
69
78
80
92
73
86
94
86
61
81
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 2018. Source of comparison versus peers: Thomson Reuters LIM (Lipper Investment Management). Source of comparison versus benchmark: UBS. Universe represents
approximately 60% of all active fund assets and 16% of all actively managed assets (including segregated accounts) in these asset classes globally as of 31 December 2018. 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 37% of our
total passive invested assets as of 31 December 2018. Source: UBS.
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Net expenses for services from Corporate Center and other
business divisions increased by USD 12 million to USD 524 million.
Adjusted net expenses for services from Corporate Center and other
business divisions increased by USD 20 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 71.8% 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 60–70%.
Net new money
Excluding money market flows, net new money was USD 48.7
billion compared with net outflows of USD 23.0 billion, primarily
driven by our third-party institutional channel. The net new money
growth rate, excluding money market flows, was positive 8.4%
compared with negative 3.9%, and was above our 2017 target
range of 3–5%. Net inflows were mainly driven by Switzerland and
Asia Pacific.
Invested assets
Invested assets increased to USD 796 billion from USD 645 billion,
mainly due to positive market performance of USD 66 billion, and
net new money inflows of USD 60 billion, including money market
flows, and positive foreign currency translation effects of USD 29
billion.
Assets under administration
The aforementioned sale of our fund administration business
concluded our exit from this line of business.
Personnel
Asset Management employed 2,335 personnel as of 31 December
2017, an increase of 27 compared with 2,308 personnel as of
31 December 2016.
Financial and operating performance
Asset Management
2017 compared with 2016
Results
Profit before tax increased by USD 130 million, or 29%, to USD 587
million, primarily driven by a gain of USD 153 million related to the
sale of our fund administration business in Luxembourg and
Switzerland to Northern Trust. Excluding this gain, adjusted profit
before tax decreased by USD 22 million, or 4%, to USD 536 million,
primarily reflecting lower operating income.
Operating income
Total operating income increased by USD 128 million, or 7%, to
USD 2,083 million. Excluding the aforementioned gain on the sale
of our fund administration business, adjusted total operating
income decreased by USD 26 million or 1%. Net management fees
decreased by USD 31 million to USD 1,800 million, reflecting lower
revenues
fund
administration business, the positive effect of fee true-ups of
USD 17 million in 2016 as well as an impairment loss of USD 12
million on a co-investment in an infrastructure fund, partly offset by
the effect of higher average invested assets.
the aforementioned sale of our
following
Performance fees increased by USD 6 million to USD 130
million, with a decline in Real Estate & Private Markets being
more than offset by Equities and Hedge Fund Businesses.
Operating expenses
Total operating expenses decreased by USD 3 million to USD 1,495
million and adjusted total operating expenses decreased by USD 4
million to USD 1,393 million.
Personnel expenses decreased by USD 5 million to USD 731
million and adjusted personnel expenses decreased by USD 7 million
to USD 715 million, mainly driven by lower salary expenses.
General and administrative expenses decreased by USD 9 million
to USD 235 million. Adjusted general and administrative expenses
decreased by USD 16 million to USD 213 million, mainly driven by
lower professional fees.
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Investment Bank
Investment Bank1
USD 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 at fair value through OCI 3
TTotal operating income (adjusted)
TTotal operating expenses as reported
of which: personnel-related restructuring expenses 4
of which: non-personnel-related restructuring expenses 4
of which: restructuring expenses allocated from CC – Services 4
of which: gain related to changes to the Swiss pension plan
of which: expenses from modification of terms for certain DCCP awards 5
TTotal operating expenses (adjusted)
BBusiness division operating profit / (loss) before tax as reported
BBusiness division operating profit / (loss) before tax (adjusted)
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
2,626
717
786
770
279
75
5,562
3,936
1,626
8,188
(38)
8,150
2,941
651
2,889
2,811
8
12
6,501
1,649
8,150
8,150
6,501
16
11
166
(5)
6,313
1,649
1,836
2,870
650
1,075
797
312
36
5,016
3,612
1,405
7,886
(92)
7,794
3,006
675
2,824
2,729
10
12
6,527
1,267
7,794
137
7,658
6,527
39
18
310
26
6,135
1,267
1,523
2,410
699
680
752
365
(86)
5,381
3,525
1,856
7,790
(11)
7,779
3,122
812
2,798
2,707
22
12
6,765
1,014
7,779
77
7,702
6,765
156
14
416
6,179
1,014
1,524
(8)
10
(27)
(3)
(11)
111
11
9
16
4
(58)
5
(2)
(4)
2
3
(17)
5
0
30
5
6
0
3
30
21
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Financial and operating performance
Investment Bank
Investment Bank (continued)1
USD million, except where indicated
Performance measures6
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)7
Adjusted performance measures2,6
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)7
Additional information
Average attributed equity (USD billion)7
Return on attributed tangible equity (%)7
Risk-weighted assets (USD billion)7
of which: held by the Investment Bank (USD billion)
of which: held by CC – Group ALM on behalf of the Investment Bank (USD billion) 8
Return on risk-weighted assets, gross (%)9
Leverage ratio denominator (USD billion)7
of which: held by the Investment Bank (USD billion)
of which: held by CC – Group ALM on behalf of the Investment Bank (USD billion) 8
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
(49.1)
86.8
13.1
(36.5)
80.1
19.7
7.7
69.2
69.2
11.8
227.2
227.2
8
13
14
(16)
(12)
(11)
(19)
30.1
79.4
16.1
20.6
77.1
17.9
25.0
82.8
13.3
(0.1)
79.2
16.0
10.2
16.3
87.3
86.9
0.4
9.7
256.2
240.1
16.1
2.9
0.1
35.9
11
1.5
5,205
9.5
13.6
77.0
76.5
0.5
10.6
290.9
271.0
19.9
2.8
0.1
38.1
10
1.0
4,822
Return on leverage ratio denominator, gross (%)9
Goodwill and intangible assets (USD 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 have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 a gain on the sale of our investment in London Clearing House in 2017 and gains on sales of our investment in IHS Markit in
2017 and 2016. Figures presented for periods prior to 2018 relate to financial assets available for sale. 4 Reflects restructuring expenses related to legacy cost programs. 5 Relates to the removal of the service
period requirement for DCCP awards granted for the performance years 2012 and 2013. 6 Refer to the “Performance targets and measurement” section of this report for the definitions of our performance
measures. 7 Refer to the “Capital management” section of this report for more information. 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. 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. 10 Refer to the “Risk management and control” section of this report for more information on (credit-)impaired loan
exposures.
2.9
0.1
40.1
9
0.9
4,734
91
15
8
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2018 compared with 2017
Results
Profit before tax increased by USD 382 million, or 30%, to
USD 1,649 million, mainly as a result of higher revenues in
Investor Client Services, partly offset by lower revenues in
Corporate Client Solutions. Adjusted profit before tax increased by
USD 313 million or 21% to USD 1,836 million, reflecting higher
operating income, partly offset by higher operating expenses.
Operating income
Total operating income increased by USD 356 million, or 5%, to
USD 8,150 million. Excluding a gain of USD 108 million in 2017
related to the sale of our investment in IHS Markit and a gain of
USD 29 million in 2017 related to the sale of our investment in
London Clearing House, adjusted total operating
income
increased by USD 492 million, or 6%, to USD 8,150 million from
USD 7,658 million. This mainly reflected USD 682 million higher
revenues in Investor Client Services, partly offset by USD 244
million lower revenues in Corporate Client Services. Net credit
loss expense was USD 38 million compared with USD 92 million.
The prior year included an expense 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 on credit loss expenses
Operating income by business unit
Corporate Client Solutions
Corporate Client Solutions revenues decreased by USD 244
million, or 8%, to USD 2,626 million, predominantly reflecting
lower revenues in Equity Capital Markets.
Advisory revenues increased by USD 67 million to USD 717
million, primarily due to higher revenues from merger and
acquisition transactions, where the global fee pool increased 8%.
Equity Capital Markets revenues decreased by USD 289
million to USD 786 million, reflecting a decrease in revenues
from public offerings, where the global fee pool decreased
14%, as well as lower revenues from private transactions.
Debt Capital Markets revenues decreased by USD 27 million
to USD 770 million, mainly due to lower investment grade
revenues, where the global fee pool decreased 10%, partly
offset by higher leveraged finance revenues, against a global fee
pool decrease of 7%.
Financing Solutions revenues decreased by USD 33 million
to USD 279 million, mainly due to lower real estate finance
revenues.
Risk Management revenues were USD 75 million compared
with USD 36 million, mainly reflecting reduced hedging costs
and valuation gains on a restructured debt position.
Investor Client Services
Investor Client Services revenues increased by USD 546 million,
or 11%, to USD 5,562 million. Excluding the aforementioned
gains totaling USD 137 million in 2017, adjusted revenues
increased by USD 682 million, or 14%, to USD 5,562 million,
reflecting higher revenues in both the Equities and Foreign
Exchange, Rates and Credit businesses.
Equities
Equities revenues increased by USD 324 million, or 9%, to
USD 3,936 million, driven by increases across all product lines.
Excluding a gain of USD 27 million in 2017 related to the sale of
our investment in IHS Markit and a gain of USD 29 million in
2017 related to the sale of our investment in London Clearing
House, adjusted revenues increased by USD 381 million, or
11%, to USD 3,936 million.
Adjusted Cash revenues increased by USD 73 million to
USD 1,294 million, reflecting increased client activity.
Derivatives revenues
increased by USD 154 million to
USD 1,038 million, driven by improved client activity as market
volatility increased.
Adjusted Financing Services revenues increased by USD 188
million to USD 1,663 million, mainly due to higher trading
revenues in Equity Finance reflecting increased client activity.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues increased by
USD 221 million, or 16%, to USD 1,626 million and, excluding a
gain of USD 81 million in 2017 related to the sale of our
investment in IHS Markit increased by USD 302 million from
USD 1,324 million on an adjusted basis. This increase was due to
higher client activity levels and improved trading performance
across the majority of products, as well as to the recognition of
net income of around USD 100 million (comprised mainly of
previously deferred day-1 profits), due to enhanced observability
and revised valuations in the funding curve used to value UBS
interest rate-linked notes. In addition, 2018 included revenues of
USD 53 million from Corporate Center – Group Asset and
Liability Management (Group ALM) for the rebalancing of the
Group’s currency exposures in connection with the change in
functional and presentation currencies to US dollars.
Operating expenses
Total operating expenses were broadly unchanged at
USD 6,501 million, and adjusted total operating expenses
increased by USD 178 million, or 3%, to USD 6,313 million.
Personnel expenses decreased to USD 2,941 million from
USD 3,006 million, and adjusted personnel expenses decreased
to USD 2,930 million from USD 2,941 million, mainly driven by
lower variable compensation expenses.
General and administrative expenses decreased by USD 24
million to USD 651 million and on an adjusted basis by USD 17
million to USD 640 million, driven by lower professional fees,
partly offset by higher net expenses for the UK bank levy.
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Financial and operating performance
Investment Bank
Net expenses for services from Corporate Center and other
business divisions increased by USD 65 million to USD 2,889
million, and on an adjusted basis to USD 2,723 million from
USD 2,515 million, driven mainly by higher net expenses from
Group Technology and Group Risk Control.
Cost / income ratio
The cost / income ratio decreased to 79.4% from 82.8%. On an
adjusted basis, the cost / income ratio decreased to 77.1% from
79.2% and was within our 2018 target range of 70–80%.
Leverage ratio denominator
The leverage ratio denominator (LRD), including LRD held by
Corporate Center – Group ALM on behalf of the Investment
Bank, decreased by USD 35 billion to USD 256 billion as of
31 December 2018, mainly due to a decrease in trading
portfolio assets, reflecting client-driven reductions and trade
unwinds, lower prime brokerage receivables, as well as currency
effects. The LRD was within our 2018 guidance of around one-
third of the Group LRD.
→ Refer to the “Capital management” section of this report for
more information
Return on attributed equity
Return on attributed equity for 2018 was 16.1%, and 17.9% on
an adjusted basis, above our 2018 target of over 15%.
Personnel
→ Refer to “Equity attribution and return on attributed equity” in
the “Capital management” section of this report for more
information
Investment Bank employed 5,205 personnel as of
The
31 December 2018, an increase of 383 compared with 4,822
personnel as of 31 December 2017, primarily as a result of the
consolidation of UBS Securities China in December 2018.
Risk-weighted assets
Risk-weighted assets (RWA), including RWA held by Corporate
Center – Group ALM on behalf of the Investment Bank,
increased by USD 10 billion to USD 87 billion as of 31 December
2018. This was driven by an increase in credit and counterparty
credit risk RWA, mostly related to model updates as well as
regulatory add-ons, and an increase in market risk RWA,
reflecting higher average regulatory and stressed value-at-risk
levels. RWA were within our 2018 guidance of around one-third
of the Group RWA.
→ Refer to the “Capital management” section of this report for
more information
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2017 compared with 2016
Results
Profit before tax increased by USD 253 million, or 25%, to
USD 1,267 million, as a result of lower operating expenses.
Adjusted profit before tax was broadly unchanged at USD 1,523
million, as lower operating income was almost entirely offset by
lower operating expenses.
income
Operating income
Total operating
increased by USD 15 million to
USD 7,794 million. Excluding gains of USD 77 million in 2016
and USD 108 million in 2017 related to sales of our investment
in IHS Markit and a gain of USD 29 million in 2017 related to the
sale of our investment in London Clearing House, adjusted total
operating income decreased by USD 44 million, or 1%, to
USD 7,658 million from USD 7,702 million. An increase in
Corporate Client Solutions revenues of USD 460 million was
partly offset by a decrease in Investor Client Services revenues of
USD 424 million. Net credit loss expense was USD 92 million
compared with USD 11 million, mainly related to a margin loan
to a single client following a significant decrease in the value of
the collateral.
Operating income by business unit
Corporate Client Solutions
Corporate Client Solutions revenues increased by USD 460
million, or 19%, to USD 2,870 million, largely driven by higher
revenues in Equity Capital Markets.
Advisory revenues decreased by USD 49 million to USD 650
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 USD 395 million
to USD 1,075 million, mainly as a result of higher revenues from
public offerings as the global fee pool increased 26%, as well as
higher revenues from private transactions.
Debt Capital Markets revenues increased by USD 45
million to USD 797 million, largely reflecting 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 USD 53 million
to USD 312 million, reflecting lower client activity across all
products.
Risk Management revenues were positive USD 36 million
compared with negative USD 86 million, mainly related to lower
costs related to portfolio hedges.
Investor Client Services
Investor Client Services revenues decreased by USD 365 million,
or 7%, to USD 5,016 million. Excluding the aforementioned
gains totaling USD 137 million in 2017 and USD 77 million in
2016, adjusted revenues decreased by USD 424 million, or 8%,
to USD 4,880 million, reflecting lower revenues in Foreign
Exchange, Rates and Credit.
Equities
Equities revenues increased by USD 87 million to USD 3,612
million. Excluding a gain of USD 27 million in 2017 related to
the sale of our investment in IHS Markit and a gain of USD 29
million in 2017 related to the sale of our investment in London
Clearing House, adjusted revenues increased by USD 31 million
to USD 3,555 million.
Adjusted Cash revenues decreased by USD 21 million to
USD 1,220 million, resulting from lower trading revenues.
Derivatives revenues
increased by USD 159 million to
USD 884 million, reflecting increased client activity levels and
stronger trading revenues.
Adjusted Financing Services revenues decreased by USD 72
million to USD 1,476 million, as a result of weaker trading
revenues in Equity Finance.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues decreased by
USD 451 million to USD 1,405 million. Excluding gains of
USD 81 million in 2017 and USD 77 million in 2016, related to
sales of our investment in IHS Markit, adjusted revenues
decreased to USD 1,324 million from USD 1,779 million, mainly
reflecting reduced client activity across the majority of products
reflecting persistent low market volatility.
Operating expenses
Total operating expenses decreased by USD 238 million, or 4%,
to USD 6,527 million, and adjusted total operating expenses
decreased by USD 44 million, or 1%, to USD 6,135 million.
Personnel expenses decreased to USD 3,006 million from
USD 3,122 million, and adjusted personnel expenses decreased
to USD 2,941 million from USD 2,965 million, mainly related to
lower salary expenses as a result of our cost reduction programs,
which were partly offset by higher variable compensation
expenses. In addition, 2017 included an expense of USD 26
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 USD 675
million from USD 812 million, and to USD 657 million from
USD 798 million on an adjusted basis, mainly driven by an
USD 83 million decrease in expenses for provisions for litigation,
regulatory and similar matters. In addition, the net expense for
the UK bank levy was USD 34 million compared with a net
expense of USD 78 million, primarily as 2017 included a USD 43
million credit related to prior years.
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Financial and operating performance
Investment Bank
increased
Net expenses for services from Corporate Center and other
from
business divisions
USD 2,798 million and on an adjusted basis to USD 2,515
million from USD 2,381 million, mainly related to higher costs
for strategic and regulatory initiatives and higher net expenses
from Group Technology and Group Risk Control.
to USD 2,824 million
Cost / income ratio
The cost / income ratio decreased to 82.8% from 86.8%. On an
adjusted basis, the cost / income ratio decreased to 79.2% from
80.1% and was within our 2017 target range of 70–80%.
Leverage ratio denominator
LRD held by the Investment Bank increased by USD 44 billion to
USD 271 billion as of 31 December 2017, mainly as a result of
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 USD 291 billion as of 31 December 2017 and
remained below our 2017 short- to medium-term expectation of
around USD 325 billion.
Return on attributed equity
Return on attributed equity for 2017 was 13.3%, and 16.0% on
an adjusted basis, above our 2017 target of over 15%.
Personnel
Risk-weighted assets
RWA held by the Investment Bank increased by USD 7.3 billion
to USD 76.5 billion as of 31 December 2017, driven by an
increase in credit and counterparty credit risk RWA. This was
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 ALM on behalf of the
Investment Bank, were USD 77.0 billion as of 31 December
2017, below our 2017 short- to medium-term expectation of
around USD 85 billion.
The
Investment Bank employed 4,822 personnel as of
31 December 2017, an increase of 88 compared with 4,734
personnel as of 31 December 2016. This was primarily related
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.
102
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Corporate Center
Corporate Center1
USD 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: gains on sales of real estate
of which: gain / (loss) on sale of subsidiaries and businesses
of which: remeasurement loss related to UBS Securities China
of which: net foreign currency translation gains / (losses) 3
TTotal operating income (adjusted)
TTotal operating expenses as reported
of which: personnel-related restructuring expenses 4
of which: non-personnel-related restructuring expenses 4
of which: restructuring expenses allocated from CC – Services 4
of which: gain related to changes to the Swiss pension plan
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
(957)
4,002
3,935
(8,447)
1,199
2
692
(1,649)
(957)
31
25
(270)
(744)
692
208
238
(450)
(122)
819
(1,649)
(1,562)
(467)
3,935
4,479
(8,230)
1,024
7
1,215
(1,682)
(467)
(16)
(450)
1,215
443
532
(945)
1,185
(1,682)
(1,635)
(290)
3,946
4,953
(8,029)
955
21
1,846
(2,136)
(290)
123
(84)
(328)
1,846
527
631
(1,081)
1,769
(2,136)
(2,098)
105
2
(12)
3
17
(71)
(43)
(2)
105
65
(43)
(31)
(2)
(4)
Additional information
Average attributed equity (USD billion)5
Risk-weighted assets (USD billion)5,6
Leverage ratio denominator (USD billion)5,6
Personnel (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 Reflects restructuring expenses related to legacy cost programs. 5 Refer
to the “Capital management” section of this report for more information. 6 Prior to attributions to business divisions and other Corporate Center units for the purpose of attributing equity.
302.3
30,581
295.4
23,955
278.5
25,817
9
18
57.7
20.5
58.0
23.5
56.1
29.4
(13)
(1)
103
Financial and operating performance
Corporate Center
Corporate Center – Services
Corporate Center – Services1
USD 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 Global Wealth Management
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: gains on sales of real estate
of which: gain / (loss) on sale of subsidiaries and businesses
of which: remeasurement loss related to UBS Securities China
TTotal operating income (adjusted)
TTotal operating expenses as reported before allocations
of which: personnel-related restructuring expenses 3
of which: non-personnel-related restructuring expenses 3
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 3
of which: gain related to changes to the Swiss pension plan
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 (USD billion)4
Risk-weighted assets (USD billion)4
of which: held by CC – Services (USD billion)
Leverage ratio denominator (USD billion)4
of which: held by CC – Services (USD billion)
of which: held by CC – Group ALM on behalf of CC – Services (USD billion) 5
104
As of or for the year ended
% change from
331.12.18
31.12.17
31.12.16
31.12.17
(513)
3,927
3,789
1,199
2
8,917
(8,624)
(3,740)
(1,285)
(541)
(2,811)
(169)
(153)
293
(806)
(513)
31
25
(270)
(300)
8,917
208
238
8,593
(8,624)
(456)
(122)
293
425
(806)
(725)
16.1
31.8
31.8
8.2
7.9
(157)
3,857
4,336
1,024
7
9,224
(8,445)
(3,626)
(1,251)
(562)
(2,729)
(145)
(198)
779
(935)
(157)
(157)
9,224
442
532
8,250
(8,445)
(954)
779
759
(935)
(915)
19.4
29.9
29.9
7.0
6.9
(103)
3,847
4,192
955
21
9,016
(8,263)
(3,520)
(1,201)
(537)
(2,707)
(112)
(227)
753
(856)
(103)
123
(226)
9,016
526
631
7,859
(8,263)
(1,101)
753
697
(856)
(923)
23.0
27.1
27.1
5.7
5.7
228
2
(13)
17
(72)
(3)
2
3
3
(4)
3
16
(23)
(62)
(14)
228
92
(3)
(53)
(55)
4
2
(52)
(62)
(44)
(14)
(21)
(16)
6
6
17
15
0.3
30,364
0.1
25,623
157
19
Personnel (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 restructuring expenses related to legacy cost programs. 4 Refer to the “Capital management” section of this report for more
information. 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. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.
23,750
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2018 compared with 2017
Corporate Center – Services recorded a loss before tax of
USD 806 million compared with USD 935 million, and USD 725
million on an adjusted basis compared with USD 915 million.
Operating income
Operating income was negative USD 513 million compared with
negative USD 157 million. Excluding the remeasurement loss of
USD 270 million related to the increase of our shareholding in
UBS Securities China and the gain on the sale of Widder Hotel of
USD 56 million in 2018, adjusted operating income was negative
USD 300 million compared with negative USD 157 million,
mainly driven 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 decreased by
USD 307 million, or 3%, to USD 8,917 million, including lower
restructuring costs and a credit of USD 122 million related to
changes to our Swiss pension plan. Adjusted total operating
expenses before allocations increased by USD 343 million, or
4%, to USD 8,593 million, mainly due to higher Group
Technology investment as well as increased depreciation and
impairment costs, partly offset by USD 259 million lower net
expenses for provisions for litigation, regulatory and similar
matters.
Personnel expenses
increased by USD 70 million
to
USD 3,927 million including the aforementioned credit of
USD 122 million related to changes to our Swiss pension plan.
On an adjusted basis, personnel expenses increased by USD 426
million to USD 3,841 million mainly driven by continued
insourcing of certain activities and staff from third-party
vendors to our Business Solutions Centers.
General and administrative expenses decreased by USD 547
million to USD 3,789 million and adjusted general and
administrative expenses decreased by USD 209 million, mainly
due to USD 259 million lower net expenses for provisions for
litigation, regulatory and similar matters, lower expenses for
outsourcing and decreased professional fees. These reductions
were partly offset by higher expenses from Group Technology.
Depreciation and impairment of property, equipment and
software increased to USD 1,199 million from USD 1,024
million, reflecting increased depreciation expenses related to
internally generated capitalized software and asset impairment
costs.
Services to / from business divisions and other
Corporate Center units
Corporate Center – Services allocated expenses of USD 8,624
million to the business divisions and other Corporate Center
units compared with USD 8,445 million. Adjusted allocated
expenses were USD 8,168 million compared with USD 7,491
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 USD 293 million
from USD 779 million and to USD 425 million from USD 759
million on an adjusted basis, mainly reflecting a USD 259 million
reduction in expenses for provisions for litigation, regulatory and
similar matters.
105
Financial and operating performance
Corporate Center
2017 compared with 2016
Corporate Center – Services recorded a loss before tax of
USD 935 million compared with USD 856 million, and USD 915
million on an adjusted basis compared with USD 923 million.
Operating income
Operating income was negative USD 157 million compared with
negative USD 103 million, partly as 2016 included gains on sales
of real estate of USD 123 million. On an adjusted basis,
operating income was negative USD 157 million compared with
negative USD 226 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
USD 207 million, or 2%, to USD 9,224 million. Restructuring
expenses were USD 974 million compared with USD 1,157
million and mainly related to our transitioning activities to
nearshore and offshore locations, as well as outsourcing of IT
and other services. Adjusted total operating expenses before
allocations increased by USD 391 million, or 5%, to USD 8,250
million.
Personnel expenses
increased by USD 10 million
to
USD 3,857 million. Excluding restructuring expenses, adjusted
personnel expenses increased by USD 94 million to USD 3,415
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 USD 144
million to USD 4,336 million and adjusted general and
administrative expenses increased by USD 238 million, mainly
due to USD 250 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 USD 1,024 million from USD 955 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 USD 8,445
million to the business divisions and other Corporate Center
units compared with USD 8,263 million. Adjusted allocated
expenses for services to the business divisions and other
Corporate Center units were USD 7,491 million compared with
USD 7,162 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 have been 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 functions 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 USD 779 million
from USD 753 million and to USD 759 million from USD 697
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 the business divisions and other Corporate
Center units in 2016 were lower than the actual costs incurred
by Corporate Center – Services on their behalf.
106
Corporate Center – Group Asset and Liability Management
Corporate Center – Group ALM1
USD 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: Global Wealth Management
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 gains / (losses)3
Other
TTotal operating income as reported
TTotal operating income (adjusted)4
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 5
of which: non-personnel-related restructuring expenses 5
of which: restructuring expenses allocated from CC – Services 5
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)4
Additional information
Average attributed equity (USD billion)6
Risk-weighted assets (USD billion)6
of which: held by CC – Group ALM on behalf of BDs and other CC units (USD billion) 7
Leverage ratio denominator (USD billion)6
of which: held by CC – Group ALM on behalf of BDs and other CC units (USD billion) 7
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As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
378
(302)
(919)
(844)
295
(90)
(56)
(15)
391
(43)
108
(549)
(105)
13
33
(609)
(609)
41
42
0
0
1
84
0
0
3
81
(693)
(690)
726
(121)
(522)
83
(268)
(377)
(184)
(19)
351
(123)
84
(185)
(62)
(13)
(16)
(11)
(288)
(271)
34
27
0
0
(13)
48
1
0
3
44
(336)
(315)
856
45
(553)
348
(517)
(512)
(336)
(7)
264
(37)
112
(167)
38
5
(84)
54
(155)
(71)
31
17
0
0
(49)
(1)
0
0
0
(1)
(154)
(70)
3.2
12.0
4.0
283.5
2.8
11.5
4.0
256.3
4.3
10.4
267.7
(48)
150
76
(76)
(70)
(22)
11
(65)
29
197
69
112
125
18
58
75
87
106
119
14
4
0
11
124.9
173
127.6
143
(2)
21
107
Personnel (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 Reflects restructuring expenses related to legacy cost programs. 6 Refer to the “Capital management” section of this report for more information. 7 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. Refer to “Equity
attribution and return on attributed equity” in the “Capital management” section of this report for more information.
142
Financial and operating performance
Corporate Center
2018 compared with 2017
Corporate Center – Group Asset and Liability Management
(Group ALM) recorded a loss before tax of USD 693 million
compared with a loss of USD 336 million. On an adjusted basis,
the loss before tax was USD 690 million compared with a loss of
USD 315 million, driven by
risk
management net income and higher retained operating expenses.
lower Group structural
Operating income
Total operating income was negative USD 609 million compared
with negative USD 288 million. Adjusted total operating income
retained by Group ALM was negative USD 609 million compared
with negative USD 271 million.
Total risk management net income before allocations
Total risk management net income before allocations to
business divisions and other Corporate Center units was
negative USD 844 million compared with USD 83 million,
mainly reflecting lower net income from business division-
aligned risk management activities and Group structural risk
management, in addition to negative net income from capital
investment and issuance.
Business division-aligned risk management net income
Net income from business division-aligned risk management
activities was USD 378 million compared with USD 726 million,
mainly driven by the ongoing effect of negative Swiss franc
and euro interest rates and the expiration of an interest rate
hedge portfolio in November 2017. In addition, during the
third quarter of 2018, Group ALM’s
interest rate risk
management capability was extended to the management of
Global Wealth Management’s interest rate risk in the US. This
resulted in lower business division-aligned risk management
net income. Previously, this income was realized in Group ALM
and fully allocated to Global Wealth Management. The change
did not have an effect on Global Wealth Management’s net
interest income.
Capital investment and issuance net income
Net income from capital investment and issuance activities was
negative USD 302 million compared with negative USD 121
million. This decrease was due to higher net interest expense as
a result of an increase in total outstanding long-term debt that is
eligible for total loss-absorbing capital and changes we made to
our internal funds transfer pricing rates on these instruments.
Group structural risk management net income
Net income from Group structural risk management activities
was negative USD 919 million compared with negative USD 522
million. This decline was due to increased net interest expense
from the management of Group ALM’s portfolio of internal
funding as a result of higher London Interbank Offered Rate
(LIBOR) rates on floating-rate liabilities and the inclusion of the
interest expense on a portfolio of long-dated cross-currency
swaps, following a change in accounting policy in the first
quarter of 2018. The interest expense of that portfolio was
previously recognized in Other net income from fair value
changes on financial instruments (prior to 1 January 2018: Net
trading income) and reported in Accounting asymmetries related
to economic hedges. These effects were partly offset by the
aforementioned changes made to our internal funds transfer
pricing rates.
Allocations to business divisions and other Corporate Center
units
Combined allocations from risk management activities to
business divisions and other Corporate Center units were
negative USD 295 million compared with positive USD 268
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 the business
divisions, predominantly Global Wealth Management and
Personal & Corporate Banking.
Total risk management net income after allocations
Group ALM retained negative USD 549 million from its risk
management activities after allocations compared with negative
USD 185 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 high-quality liquid assets (HQLA)
portfolio relative to the benchmark rates used to allocate the
costs.
108
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Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting
asymmetries related to economic hedges was negative USD 105
million compared with negative USD 62 million, primarily due to
a loss of USD 35 million compared with a gain of USD 71 million
on certain internal funding transactions due to the widening of
own credit funding spreads. This was partly offset by reduced
expense from the aforementioned change in accounting policy
in the first quarter of 2018 on a portfolio of long-dated cross-
currency swaps, now
risk
management net income.
in Group structural
reported
Hedge accounting ineffectiveness
Net income related to hedge accounting ineffectiveness was
positive USD 13 million compared with negative USD 13 million.
This ineffectiveness primarily arises from changes in the spread
between LIBOR and the overnight index swap (OIS) rate due to
differences in the way these affect the valuation of the hedged
items and hedging instruments through either the benchmark
rate determining cash flows or the discount rate.
Operating expenses
Total operating expenses were USD 84 million compared with
USD 48 million, mainly due to higher temporary regulatory costs.
In addition, from June 2017, Group ALM retained costs related
to Group structural risk management net income to the extent
that such income is not allocated to the business divisions and
other Corporate Center units. Prior to this, Group ALM allocated
all costs to business divisions and other Corporate Center units.
Balance sheet assets
Balance sheet assets increased by USD 28 billion to USD 280
billion as of 31 December 2018, reflecting decreased net
funding consumption by the business divisions. Funding
available in excess of the business divisions’ requirements is
transferred to Group ALM’s balance sheet to be reinvested, or to
be reduced over time if business needs remain lower. 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.
→ Refer to the “Treasury management” section of this report for
more information
Other
Other net income was positive USD 33 million compared with
negative USD 11 million, mainly reflecting higher mark-to-
market effects from hedging activity not designated in hedge
accounting relationships.
Risk-weighted assets
Risk-weighted assets (RWA) remained stable at USD 12 billion.
→ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The leverage ratio denominator (LRD) increased to USD 284
billion from USD 256 billion, consistent with the increase in
balance sheet assets.
→ Refer to the “Capital management” section of this report for
more information
109
Group structural risk management net income
Net income from Group structural risk management activities
was negative USD 522 million compared with negative USD 553
million. An increase in income of USD 130 million from the
management of the Group’s HQLA, mainly due to wider spreads
between certain HQLA and internal funding liabilities, was
largely offset by an increase in net interest expense of USD 109
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
USD 268 million compared with USD 517 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 the business divisions, predominantly Global Wealth
Management and Personal & Corporate Banking.
Total risk management net income after allocations
Group ALM retained negative USD 185 million from its risk
management activities after allocations compared with negative
USD 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.
Financial and operating performance
Corporate Center
2017 compared with 2016
Group ALM recorded a loss before tax of USD 336 million
compared with a loss of USD 154 million. On an adjusted basis,
the loss before tax was USD 315 million compared with a loss of
USD 70 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 USD 288 million compared
with negative USD 155 million. Adjusted total operating income
retained by Group ALM was negative USD 271 million compared
with negative USD 71 million.
Total risk management net income before allocations
Total risk management net income before allocations to business
divisions and other Corporate Center units was USD 83 million
compared with USD 348 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 USD 726 million compared with USD 856 million,
mainly reflecting reduced
interest rate risk management
revenues in the banking book for Global 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 USD 121 million compared with positive USD 45
million. This decrease was due to USD 89 million higher net
interest expense as a result of an increase in total outstanding
long-term debt that is eligible for total loss-absorbing capital and
USD 78 million lower interest income from the investment of the
Group’s equity due to maturing positions being replaced at
lower long-term interest rates.
110
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Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting
asymmetries related to economic hedges was negative USD 62
million compared with positive USD 38 million, primarily due to
a loss of USD 172 million compared with a loss of USD 38
interest rate
million on Group ALM’s cross-currency and
derivatives hedges related to its portfolio of internal funding as
well as lower fair value gains of USD 71 million compared with
USD 179 million on certain internal funding transactions due to
the tightening of own credit funding spreads. This was partly
offset by a gain of USD 39 million compared with a loss of
USD 36 million related to HQLA classified as available for sale.
Hedge accounting ineffectiveness
Net income related to hedge accounting ineffectiveness was
negative USD 13 million compared with positive USD 5 million.
This ineffectiveness primarily arises from changes in the spread
between LIBOR and the OIS rate due to differences in the way
these affect 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 negative USD 11 million compared with
positive USD 54 million, mainly reflecting lower interest income
retained by Group ALM on behalf of non-controlling interests.
Operating expenses
Total operating expenses were USD 48 million compared with
negative USD 1 million. From June 2017, Group ALM retained
costs related to Group structural risk management income to the
extent that such income was 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 USD 10 billion to USD 252
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
Risk-weighted assets
RWA increased by USD 1 billion to USD 12 billion as of 31
December 2017 mainly due to higher credit risk in the Group’s
HQLA portfolio.
Leverage ratio denominator
LRD decreased to USD 256 billion from USD 268 billion,
consistent with the decrease in balance sheet assets.
111
Financial and operating performance
Corporate Center
Corporate Center – Non-core and Legacy Portfolio
Corporate Center – Non-core and Legacy Portfolio1
USD 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 3
of which: non-personnel-related restructuring expenses 3
of which: restructuring expenses allocated from CC – Services 3
TTotal operating expenses (adjusted)
OOperating profit / (loss) before tax as reported
OOperating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (USD billion)4
Risk-weighted assets (USD billion)4
of which: held by CC – Non-core and Legacy Portfolio (USD billion)
Leverage ratio denominator (USD billion)4
As of or for the year ended
331.12.18
31.12.17
31.12.16
% change from
31.12.17
172
(8)
165
35
104
176
153
0
0
315
(150)
165
165
315
0
0
3
312
(150)
(148)
1.2
13.9
13.9
12.5
10.8
(11)
(11)
(22)
44
117
228
198
0
0
388
(411)
(22)
(22)
388
0
0
6
382
(411)
(405)
1.4
16.6
16.5
17.1
15.3
(20)
(12)
(32)
67
744
283
227
0
0
1,094
(1,126)
(32)
(32)
1,094
1
0
21
1,073
(1,126)
(1,105)
2.1
18.6
18.6
22.0
22.0
(33)
(20)
(11)
(23)
(23)
(31)
(100)
(19)
(63)
(19)
(18)
(63)
(64)
(15)
(16)
(16)
(27)
(29)
of which: held by CC – Non-core and Legacy Portfolio (USD billion)
of which: held by CC – Group ALM on behalf of CC – Non-core and Legacy Portfolio
(USD billion) 5
(7)
(15)
Personnel (full-time equivalents)
11 Comparative figures in this table have been restated for the change of the presentation currency from Swiss francs to US dollars with assets, liabilities and total equity translated to US dollars at closing exchange
rates prevailing on the respective balance sheet dates, and income and expenses translated at the respective average rates prevailing for the relevant periods. Comparatives may additionally differ 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 restructuring expenses related to legacy cost programs. 4 Refer to the “Capital management” section of this report for more
information. 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. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.
1.7
44
1.8
52
63
112
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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 category¹
Description
RWA
Total assets²
LRD³
Linear rates
Non-linear rates
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 95% of gross positive replacement values
(PRVs) are collateralized and more than 99% of
uncollateralized exposures are rated investment grade.
30% of gross PRVs are due to mature by the end of
2021.
Remaining positions include an equity investment and
residual loan population with minimal risk exposures.
Consists primarily of a portfolio of CDS positions
referencing ABS assets with related cash and synthetic
hedges to mitigate the effect of directional movements.
The majority of the remaining positions are expected to
settle by 2020.
31.12.18
31.12.17
31.12.18
31.12.17
31.12.18
31.12.17
1.1
1.3
22.1
29.3
4.2
6.4
0.5
0.2
5.8
8.6
1.3
1.2
0.1
0.3
0.0
0.7
0.1
0.9
1.2
1.9
0.6
0.9
0.6
0.8
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
Baa2 or above as of 31 December 2018.
0.4
0.6
1.7
2.2
1.7
2.2
Municipal swaps and options
Other
Operational risk
Total
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 2018.
Diverse portfolio of smaller positions.
Operational risk risk-weighted assets allocated to Non-
core and Legacy Portfolio.
0.4
1.0
9.2
13.9
0.5
1.0
10.6
16.5
1.6
2.9
2.2
3.5
1.0
1.9
1.5
2.3
34.7
47.4
10.8
15.3
1 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. 2 Total assets of USD 34.7 billion as of 31 December 2018 (USD 47.4 billion as of 31 December 2017) include positive
replacement values (gross exposure excluding the effect of any counterparty netting) of USD 29.3 billion (USD 39.0 billion as of 31 December 2017). 3 Swiss SRB leverage ratio denominator.
113
Balance sheet assets
Non-core and Legacy Portfolio total assets decreased by
USD 13 billion to USD 35 billion, mainly due to a reduction in
receivables on derivative
derivatives and cash collateral
instruments, primarily
trade
terminations. Total assets excluding derivatives and cash
collateral receivables on derivative instruments decreased by
USD 1 billion to USD 4 billion.
reflecting maturities
and
Risk-weighted assets
Risk-weighted assets (RWA) decreased by USD 3 billion to
USD 14 billion, mainly as a result of lower operational risk RWA.
→ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The leverage ratio denominator (LRD), including LRD held by
Corporate Center – Group Asset and Liability Management
(Group ALM) on behalf of Non-core and Legacy Portfolio,
decreased to USD 13 billion from USD 17 billion, mainly due to a
reduction in the derivatives portfolio and associated cash
collateral.
→ Refer to the “Capital management” section of this report for
more information
Financial and operating performance
Corporate Center
2018 compared with 2017
Corporate Center – Non-core and Legacy Portfolio recorded a
loss before tax of USD 150 million compared with USD 411
million.
Operating income
Operating income was positive USD 165 million compared with
negative USD 22 million. The improved result was mainly due to
valuation gains on auction rate securities, which were measured
at amortized cost in 2017 and are now measured at fair value
through profit or loss effective 1 January 2018 upon adoption of
IFRS 9.
Operating expenses
Total operating expenses decreased by USD 73 million, or 19%,
to USD 315 million. Net expenses for services from business
divisions and other Corporate Center units decreased by USD 52
million and professional fees declined by USD 28 million.
Furthermore, 2018 included USD 69 million net expenses for
provisions for litigation, regulatory and similar matters compared
with USD 52 million.
114
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2017 compared with 2016
Corporate Center – Non-core and Legacy Portfolio recorded a
loss before tax of USD 411 million compared with USD 1,126
million.
Operating income
Operating income was negative USD 22 million compared with
negative USD 32 million. The improved result was mainly due to
income related to a claim on a defaulted counterparty position,
largely allocated from Group ALM, and lower losses from
novation and unwind activities.
Operating expenses
Total operating expenses decreased by USD 706 million, or
64%, to USD 388 million. 2017 included USD 52 million net
expenses for provisions for litigation, regulatory and similar
matters compared with USD 595 million. Net expenses for
services from business divisions and other Corporate Center
units decreased by USD 55 million as a result of reduced
consumption of shared services. Furthermore, professional fees
declined by USD 42 million and personnel expenses decreased
by USD 23 million due to lower staff levels.
In addition, 2017 reflected a net credit for the UK bank levy
of USD 12 million compared with a net expense of USD 31
million, primarily as 2017 included a USD 23 million credit
related to prior years.
Balance sheet assets
During 2017, total assets decreased by USD 20 billion to USD 47
billion, mainly due to a USD 16 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 USD 4 billion to
USD 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
USD 1.7 billion as of 31 December 2017.
Risk-weighted assets
RWA decreased by USD 2 billion to USD 17 billion.
→ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
LRD, including LRD held by Group ALM on behalf of Non-core
and Legacy Portfolio, decreased to USD 17 billion from USD 22
billion, consistent with the reduction in balance sheet assets.
→ Refer to the “Capital management” section of this report for
more information
115
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.
Signposts
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 audited section, table or chart.
Table of contents
121
125
123
119
119
122
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
133
154 Market risk
Country risk
Operational risk
130
129
165
170
173
173
189
192
193
194
194
196
199
204
207
209
212
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
118
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 resilience, conduct and prevention of
financial crime remain key focus topics.
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
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119
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
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC – Services
CC – Group ALM
CC – Non-core
and Legacy
Portfolio
Key risks
arising from
business
activities
Small amounts of
credit and market
risk
Credit risk from
lending against
securities collateral
and mortgages, and
a small amount of
derivatives trading
activity
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
No material risk
exposures
Credit and mmarket
risk arising from
management of the
Group’s balance
sheet, capital, profit
or loss and liquidity
portfolios
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
USD billion, as of or for the year ended
Risk-weighted assets1
of which: credit and counterparty credit risk
of which: market risk
of which: operational risk
Leverage ratio denominator1
Risk-based capital3
Average attributed tangible equity4
Total assets
Operating profit / (loss) before tax (as reported)
Operating profit / (loss) before tax (adjusted)5
USD billion, as of or for the year ended
Risk-weighted assets1
Global Wealth
Management
58.2
29.3
1.3
27.5
207.4
5.0
8.4
200.0
3.6
3.7
Personal &
Corporate
Banking
56.8
52.7
0.0
4.0
152.2
4.5
6.6
138.8
1.9
1.6
Asset
Management
4.1
1.6
0.0
2.4
2.7
0.4
0.3
24.4
0.5
0.5
31.12.18
Investment
Bank
86.9
49.8
16.8 2
20.2
240.1
6.6
10.2
258.7
1.6
1.8
31.12.17
CC –
Services
31.8
1.9
0.0
11.9
7.9
10.6
16.1
21.7
(0.8)
(0.7)
CC –
Group ALM
12.0
9.2
0.6
2.3
283.5
4.5
3.2
280.1
(0.7)
(0.7)
CC –
Non-core
and Legacy
Portfolio
13.9
3.4
1.3
9.2
10.8
1.7
1.2
34.7
(0.2)
(0.1)
Group
263.7
147.9
20.0
77.6
904.6
33.3
45.9
958.5
6.0
6.1
of which: credit and counterparty credit risk
of which: market risk
of which: operational risk
Leverage ratio denominator1
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 are directly associated with activity managed centrally on behalf of the business divisions and other
Corporate Center units. Calculated in accordance with Swiss systemically relevant bank rules. Refer to the “Capital management” section of this report for more information. 2 As of 31 December 2018, the effect
of portfolio diversification across businesses, which was previously reflected in Corporate Center – Services market risk RWA, was included in the Investment Bank market risk RWA. 3 Refer to “Statistical
measures” in this section for more information on risk-based capital. 4 Attributed tangible equity equals attributed equity less goodwill and intangible assets. 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.
Investment
Bank
76.5
44.0
12.0
20.4
271.0
7.0
9.4
269.7
1.3
1.5
CC –
Services
29.9
1.8
(3.2) 2
13.7
6.9
11.3
19.4
21.4
(0.9)
(0.9)
CC –
Group ALM
11.5
8.2
0.7
2.6
256.3
5.8
2.8
252.1
(0.3)
(0.3)
Personal &
Corporate
Banking
49.3
45.1
0.0
4.1
151.9
3.3
6.2
139.1
1.6
1.7
Asset
Management
4.0
1.5
0.0
2.5
2.8
0.4
0.3
14.6
0.6
0.5
Global Wealth
Management
55.9
26.4
1.7
27.7
205.0
4.9
8.0
195.0
3.6
4.2
Group
243.6
131.8
12.6
81.5
909.0
34.8
47.4
939.3
5.4
6.3
CC –
Non-core
and Legacy
Portfolio
16.5
4.6
1.3
10.6
15.3
2.1
1.4
47.4
(0.4)
(0.4)
120
Risk categories
We categorize the risk exposures of our business divisions and Corporate Center units as outlined in the table below.
Risk definitions
Risk managed
by
Independent
oversight by
Captured in our
risk appetite
framework
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 obliga-
tions toward UBS. This includes settlement risk and loan underwriting risk:
Business
management
Risk Control
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:
Business
management
Group Treasury
Risk Control
Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an issuer to which
we(cid:124)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
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(cid:124)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 US dollars
Group Treasury
Risk Control
Group Treasury
Risk Control
Operational risk: the risk resulting from inadequate or failed internal processes, people and systems, or from external
causes (deliberate, accidental or natural) that have an impact (either financial or non-financial) on UBS, its clients or the
markets in which it operates. Events may be direct financial losses or indirect in the form of revenue forgone as a result of
business suspension. They may also result in damage to our reputation and to our franchise that have longer-term financial
consequences:
Business
management
Legal risk: the financial or reputational implications resulting from the risk of (i) being held liable for a breach of applica-
ble laws, rules or regulations; (ii) being held liable for a breach of contractual or other legal obligations; (iii) an inability
or failure to enforce or protect contractual rights or non-contractual rights sufficiently to protect UBS’s interests, including
the risk of being party to a claim in respect of any of the above (and the risk of loss of attorney-client privilege in the
context of any such claim); (iv) a failure to adequately develop, supervise and resource legal teams or adequately super-
vise external legal counsel advising on business legal risk and other matters; and (v) failure to adequately manage any
potential, threatened and commenced litigation and legal proceedings, including civil, criminal, arbitration and regulatory
proceedings and / or litigation risk or any dispute or investigation that may lead to litigation or threat of any litigation
Conduct risk: the risk that the conduct of the firm or its individuals unfairly impacts clients or counterparties, undermines
the integrity of the financial system or impairs effective competition to the detriment of consumers
Compliance risk: the risk incurred by the firm by not adhering to the applicable laws, rules and regulations, and our own
internal standards
Cyber and information security 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
Financial crime risk: the risk that UBS fails to detect criminal activities, including internal and external theft and fraud,
money laundering, bribery and corruption, fails to comply with sanctions and embargoes, or fails to report or respond to
requests from relevant authorities related to these matters
Group Compliance,
Regulatory &
Governance
(GCRG)
Legal
GCRG
GCRG
Risk Control
GCRG
Pension risk: the risk of a negative impact on our capital as a result of deteriorating funded status from decreases in the
fair(cid:124)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(cid:124)plan designs
Environmental and social risk: the possibility of UBS suffering reputational or financial harm from transactions,
products, services or activities that involve a party associated with environmentally or socially sensitive activities
➔ Refer to “Society” in the “How we create value for our stakeholders” section of this report for more information
Model risk: Model risk is the risk of adverse consequences via financial loss or non-financial impact (e.g., poor business
and / or strategic decision making, or damage to the firm’s reputation) resulting from decisions based on incorrect or misused
model outputs and reports. Model risk may result from a number of sources: inputs, methodology, implementation, or use
Human Resources
Risk Control and
Finance
Business
management
Risk Control
Model owner
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
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121
risk and we are subject to various claims, disputes, legal
proceedings and government investigations, as noted in
“Regulatory and legal risks” in the “Risk factors” section of
this report. Information on litigation, regulatory and similar
matters we consider significant is disclosed in “Note 21
Provisions and contingent liabilities” in the “Consolidated
financial statements” section of this report.
– One of the most critical risks facing the broader industry is
the threat of cyberattacks, which continue to evolve. 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 affect our business.
Additionally, as a result of 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.
Financial crime,
terrorist
financing, sanctions violation, fraud, bribery and corruption,
presents significant risk. Heightened regulatory expectations
and attention require investment in people and systems,
while emerging technologies and changing geopolitical risks
further increase the complexity of identifying and preventing
financial crime. Refer to “Operational risk” in this section and
“Strategy, management and operations risks” in the “Risk
factors” section of this report for more information.
including money
laundering,
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 consider could have an effect on 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 and
macroeconomic risks” 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,
valuation adjustments.
asset
Accordingly, these macroeconomic factors are considered in
the development of stress testing scenarios for our ongoing
risk management activities.
impairments and other
– 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 “Regulatory and
legal risks” 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
122
Risk governance
Our risk governance framework operates along three lines of
defense. Our first line of defense, business management, owns
its risk exposures and is required to maintain effective processes
and systems to manage
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 separate from the business and report directly to the
Group CEO. Control functions provide independent oversight of
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risks, including setting risk appetite and protecting against non-
compliance with applicable laws and regulations.
Our third line of defense, Group Internal Audit, 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 following pages.
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123
authorities are delegated to risk officers according to their
expertise, experience and responsibilities.
The Group Chief Compliance and Governance Officer is
responsible for ensuring that all operational risks, including
compliance and conduct risk, are
identified, owned and
managed in alignment with the firm’s risk appetite, supported
by an effective control framework,
including appropriate
measuring and aggregating processes, as well as appropriate
reporting.
The Group Chief Financial Officer (Group CFO) is responsible
for transparency in, appraisal of, and presentation of the
financial performance of the Group and the business divisions,
and for the Group’s financial reporting, forecasting, planning
and controlling processes in line with regulatory and financial
reporting requirements, corporate governance standards and
global best practice to maintain high quality and timeliness.
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.
Group
Internal Audit
The Group General Counsel (Group GC) is responsible for
managing and reporting all litigation matters and proceedings of
the Group, and for reviewing incidents of materialized legal risk as
well as areas of emerging legal risk.
(GIA)
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 BoD
Audit Committee.
Some of the above roles and responsibilities are replicated for
certain significant legal entities of the Group. The legal entity
risk officers are responsible for independent oversight and
control of primary and consequential risks for certain significant
legal entities of the Group as part of the legal entity control
framework, which complements the Group’s risk governance
framework. (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 related risk
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, and approves the Group’s
risk appetite methodology. 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
to UBS’s societal
concerns and expectations pertaining
performance and
recommends
corporate
appropriate actions to the BoD.
culture, and
The Group Executive Board (GEB) has overall responsibility for
establishing and implementing risk management and control in
the Group. It manages the risk profile of the Group as a whole.
The Group Chief Executive Officer
(Group CEO) has
responsibility and accountability for the management and
performance of the Group, has risk authority over transactions,
positions and exposures, and allocates risk limits approved by the
BoD within the business divisions and Corporate Center units.
The business division Presidents are accountable for the
success, risks, results and value of their business division. 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 inform the
GEB of any activities and issues that may give rise to actual or
potentially material regulatory or reputational concerns.
The Group Chief Risk Officer (Group CRO) is responsible for
independent oversight of credit, market, country, liquidity,
funding, cyber and information security risks as well as model
and environmental and social risk. This includes establishing
methodologies to measure and assess risk, setting risk limits, and
approving credit and market risk transactions and exposures.
Risk Control is also the central function for model risk
management for all models used in the firm. The risk control
process is supported by a framework of policies and authorities.
Business division and regional Chief Risk Officers have delegated
authority for their respective divisions and regions. Moreover,
124
Risk appetite framework
Our risk appetite is defined at the aggregate Group 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 by means of Group, business division and legal
entity policies,
risk appetite
limits and authorities. The
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 the
framework. These elements are described in more detail in this
section.
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 effect of potential
severe adverse economic or geopolitical events. These risk
appetite objectives cover the Group’s minimum capital and
leverage ratios, its 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 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)
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(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)
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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 governed by 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
We focus on maintaining a strong risk culture, which is a
prerequisite for success in today’s highly complex operating
environment and 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.
125
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
know and organize their business, to know their employees and
what they do, to create a good risk culture and to respond to
and resolve issues.
→ Refer to the “How we create value for our stakeholders”
section of this report for more information on our Pillars,
Principles and Behaviors
→ Refer to the Code of Conduct and Ethics of UBS 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 in
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 effect 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
126
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In determining our risk capacity in case of a severe stress
event, 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.
We also adjust our capital to take into account the effect 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 2018. As compared
with previous years, we have removed the going concern
minimum capital and leverage ratio objectives as they would be
satisfied when the corresponding common equity tier 1 (CET1)
objective is met, given the amount of additional tier 1 (AT1)
instruments that have been issued. Our earnings objectives
consider the entire Group 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 legal entity’s and the Group’s regulations. Differences may
exist that reflect the specific nature, size, complexity and
regulations applicable to the relevant legal entity.
127
Risk, treasury and capital management
Risk management and control
Risk appetite following adoption of IFRS 9
The introduction of the expected credit loss (ECL) model under
IFRS 9 has fundamentally changed how credit risk arising from
loans, loan commitments, guarantees and certain revocable
facilities is accounted for. Allowances and provisions (referred to
as provisions in this section) are determined for every asset that
is subject to amortized cost accounting and for financial assets
that are measured at fair value through other comprehensive
income (FVOCI), irrespective of whether the asset is considered
to be credit-impaired. The amount of the provisions varies
depending on changes in the risk perception of individual
instruments, which is particularly relevant once an asset has
been identified as carrying a significantly increased credit risk
compared with the assessment at origination. In this case, the
ECL provisions would have to cover ECL resulting from default
events that are possible over the remaining lifetime of the
financial instrument and not only a maximum period of
12 months after the reporting date, which would be the case if
there were no significant deterioration in credit risk. The ECL
provisions 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.
The effect that the requirement for accelerated recognition of
credit losses has on our risk exposure in stressed conditions has
been accounted for in our estimations. We expect to gain more
insights into the behavior of these provisions once IFRS 9 has
been in place for a longer period and under changing economic
conditions, and may adjust our risk exposure further in the
future.
Based on the current information and the effect IFRS 9 ECL
provisions have on our solvency objectives, we have neither
changed our risk appetite and management practices nor our
strategy toward pricing and structuring of transactions following
the adoption of IFRS 9.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the requirements of the ECL
methodology under IFRS 9
→ Refer to “Note 23 Expected credit loss measurement” in the
“Consolidated financial statements” section of this report for
more information on ECL
→ Refer to “Credit risk” in this section for more information on the
ECL methodology under IFRS 9
128
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 the 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. Risk reports
are also produced for our significant Group entities (entities that
are subject to enhanced standards of corporate governance).
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 or 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 that 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.
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Risk, treasury and capital management
Risk management and control
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 validation. (cid:3)
Models must be approved and are regularly reviewed in
accordance with regulatory requirements as well as internal
policies to test that they 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 to the relevant governance body and, as required,
to regulators.
The ongoing process of assessing model quality and
performance in the production environment comprises two
components: model validation, in which Model Risk Management
& Control (MRMC) independently assesses a model’s fitness for
purpose, 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. 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.
130
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
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 BoD 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, the BoD, the GEB and
FINMA on a monthly basis.
We provide detailed stress loss analyses to FINMA and the
regulators of our legal entities in accordance with their
requirements. For example, in addition to CST, we perform Loss
Potential Analysis (LPA) and Comprehensive Capital Analysis and
Review (CCAR) as prescribed by FINMA and the US Board of
Governors of the Federal Reserve System for the legal entities
regulated by these respective agencies.
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.
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 net of lower expenses. These effects are measured
across all material risk types and all businesses to calculate the
aggregate estimated effect of the scenario on profit or loss,
other comprehensive income, RWA, LRD and, ultimately, our
capital and
in
macroeconomic variables are updated periodically to account for
changes in the current and possible future market environment.
ratios. The assumed changes
leverage
Through 2018, the binding scenario for CST was the internal
Severe Eurozone Crisis scenario. This scenario is characterized by
a crisis in the eurozone; a lack of confidence in the trajectory of
several peripheral European economies leads to a sudden spike
in their bond yields, eventually resulting in their loss of market
access. As Greece leaves the eurozone, emergency measures,
including capital controls, bailouts and debt restructurings are
required.
the ensuing global slowdown and market
turbulence, China suffers a hard landing, which further weighs
on global growth. Central banks in major developed economies
with policy room cut rates back to zero in an attempt to
stimulate growth and restore market confidence; however, this
fails to avert a severe global recession.
In
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 2018.
– Failure of a Major Financial Institution scenario represents
renewed financial market turmoil reflecting 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 updated the Severe Eurozone Crisis scenario to be
used as the binding stress scenario in our CST framework for
2019. In line with the 2018 version of the scenario, the updated
version remains a global scenario with a eurozone crisis at its
core, but with fiscal concerns in Italy now acting as the trigger of
the crisis.
trade
protectionism weigh on the recovery. A China hard landing
remains a feature of the scenario.
In addition, headwinds
from global
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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
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
normally considered, and
thereby potentially challenge
assumptions regarding severity and plausibility.
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 effect 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
131
Risk, treasury and capital management
Risk management and control
Statistical measures
In addition to our scenario-based CST measures, 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, loan underwriting 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
foreign exchange
movements on capital and capital ratios.
the effect of
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. In addition, operational risk concentrations may result from
a single issue that is large on its own (i.e., has the potential to
produce a single high-impact loss or a number of losses that
aggregated together are high-impact) or related issues that may
link together to create a high impact.
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
132
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Credit risk
Key developments
Audited | Main sources of credit risk
We have adopted IFRS 9, Financial Instruments, effective as of
1 January 2018. IFRS 9 introduces a forward-looking expected
credit loss (ECL) approach, which is intended to result in an
earlier recognition of credit losses compared with the incurred-
loss impairment approach for financial instruments under
IAS 39, Financial Instruments: Recognition and Measurement,
and the loss-provisioning approach for financial guarantees and
IAS 37, Provisions, Contingent
loan commitments under
Liabilities and Contingent Assets.
Total net credit loss expenses were USD 118 million in 2018,
reflecting net credit losses of USD 95 million related to credit-
impaired (stage 3) positions, mainly in Personal & Corporate
Banking and to a lesser extent in the Investment Bank, as well as
net expected credit losses of USD 23 million related to stage 1
and 2 positions.
– A substantial portion of our lending exposure arises from our
Swiss domestic business, which offers corporate loans and
mortgage loans secured mainly 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 arises mainly
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 predominantly 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)
→ Refer to “Note 1 Summary of significant accounting policies,”
“Note 10 Financial assets at amortized cost and other positions
in scope of expected credit loss measurement” and “Note 23
Expected credit loss measurement“ in the “Consolidated financial
statements” section of this report for more information on
IFRS 9 and ECL
Our Swiss lending portfolios, which account for approximately
half of our loan exposure, continued to perform well, although we
remain watchful for any signs of deterioration in the Swiss
economy that could affect our counterparties and lead to an
increase in credit loss expenses from the low levels recently
observed.
Within the loan underwriting business in the Investment
Bank, we continued to see a steady flow of transactions as
leveraged loan markets remained relatively strong, although
volatility and credit market weakness led to a general slowdown
toward the year-end.
Audited | Overview of measurement, monitoring and
management techniques
– Credit
from
risk arising
transactions with
individual
is measured based on our estimates of
counterparties
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, internal credit rating and potential loss.
– 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)
133
Risk, treasury and capital management
Risk management and control
Credit risk profile of the Group
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, balances at central
banks and other financial assets at amortized cost. Traded
products comprise over-the-counter derivatives, exchange-
traded derivatives and
transactions,
securities
comprised of securities borrowing and lending, as well as
repurchase and reverse repurchase agreements.
financing
Banking products
The breakdowns of our banking products exposures are shown
gross before allowances and provisions for expected credit losses
and related single-name credit hedges. The effect of portfolio
hedges, such as index credit default swaps, is not reflected.
Guarantees and loan commitments are shown on a notional
basis, without applying credit conversion factors. The gross
exposure for banking products of USD 518 billion corresponds
to the IFRS 9 gross exposure of USD 685 billion, including other
financial assets measured at amortized cost, but excluding cash,
receivables from securities financing transactions, cash collateral
receivables on derivative instruments, financial assets at fair
value through other comprehensive income (FVOCI), irrevocable
committed prolongation of existing
loans, unconditionally
revocable committed credit lines and forward starting reverse
repurchase and securities borrowing agreements.
The “Banking and traded products exposure by business
division and Corporate Center unit” table below and on the
next page was enhanced to reflect the total exposures (stages
1–3) in scope of ECL (adding Other financial assets measured
at amortized cost with an amount of USD 23 billion, which
were previously not included) and to report allowances and
provisions by ECL stages and separately credit-impaired
exposures, gross (stage 3). Total gross banking products
exposure was USD 518 billion as of 31 December 2018,
compared with USD 481 billion at the end of the prior year.
The net change relates mainly to the addition of other financial
assets measured at amortized cost mentioned above and to an
increase in balances at central banks.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the requirements of the expected
credit loss methodology under IFRS 9
→ Refer to “Note 10 Financial assets at amortized cost and other
positions in scope of expected credit loss measurement” and
“Note 23 Expected credit loss measurement” in the
“Consolidated financial statements” section of this report for
more information on the expected credit loss measurement
under IFRS 9
→ Refer to “Note 17a) Other financial assets measured at
amortized cost” in the “Consolidated financial statements”
section of this report for more details
Banking and traded products exposure by business division and Corporate Center unit
331.12.18
USD million
BBanking products1, 2
Gross exposure (IFRS 9)
of which: loans and advances to customers (on-balance sheet)
of which: guarantees and loan commitments (off-balance sheet)
TTraded products3, 4
Gross exposure
of which: over-the-counter derivatives
of which: securities financing transactions
of which: exchange-traded derivatives
OOther credit lines, gross2, 5
Total credit-impaired exposure, gross (stage 3)1, 2
Total allowances and provisions for expected credit losses
(stages 1 to 3)2
of which: stage 1
of which: stage 2
of which: stage 3 (allowances and provisions for credit-impaired
exposures)
GGlobal Wealth
Management
PPersonal &
Corporate
Banking
AAsset
Management
IInvestment
Bank
CCC –
Services
CCC –
Group
ALM
CCC –
Non-core
and Legacy
Portfolio
GGroup
157,178
186,302
170,413 133,253
20,609
6,111
1,150
7
0
39,869
9,090
22,290
1,156
85
77
131,548
8,222
271
517,725
522
55 321,125
0 49,358
10,606
5,960
153
4,494
10,345
873
762
0
111
22,994
625
1,974
223
62
34
697
78
146
0
0
0
0
0
0
0
0
0
3,202
140
108
34
3
30,771
9,441
16,004
5,325
88
0
0
0
0
6
26
3
3
0
42,250
16,163
16,157
9,930
36,634
0
389
3,154
23
0
0
1,054
176
183
695
11 IFRS 9 gross exposure including other financial assets at amortized cost, but excluding cash, receivables from securities financing transactions, cash collateral receivables on derivative instruments, financial assets
at FVOCI, irrevocable committed prolongation of existing loans and unconditionally revocable committed credit lines and forward starting reverse repurchase and securities borrowing agreements. 2 Refer to “Note
1 Summary of significant accounting policies” and “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information on the adoption of IFRS 9 ECL.
3 Internal management view of credit risk, which differs in certain respects from IFRS. 4 As counterparty risk for traded products is managed at counterparty level, no further split between exposures in the
Investment Bank, Corporate Center – Non-core and Legacy Portfolio and Corporate Center – Group ALM is provided. 5 Unconditionally revocable committed credit lines.
474
127
71
23
0
0
0
134
Banking and traded products exposure by business division and Corporate Center unit (continued)
USD million
BBanking products1,2,3,4
Gross exposure (IAS 39, IAS 37, internal risk view)
of which: loans and advances to customers (on-balance sheet)
of which: guarantees and loan commitments (off-balance sheet)
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
CC –
Group
ALM
CC –
Non-core
and Legacy
Portfolio
Group
31.12.17
155,496
177,854
167,811 133,681
19,195
4,770
585
1
0
47,633
12,327
26,323
509
35
109
99,083
7,413
2
92
481,254
90 321,357
2 50,401
TTraded products1,5
Gross exposure
Total credit-impaired exposure, gross
of which: impaired loan exposure, gross
of which: over-the-counter derivatives
of which: securities financing transactions
of which: exchange-traded derivatives
45,679
18,722
18,531
8,425
1,308
1,102
7126
Total allowances and provisions for credit losses
11 Internal management view of credit risk, which differs in certain respects from IFRS. 2 Excludes reclassified securities and similar acquired securities held by Corporate Center – Non-core and Legacy Portfolio and
loans designated at fair value. 3 Upon adoption of IFRS 9 on 1 January 2018, certain Global Wealth Management customer brokerage receivable balances were reclassified from Loans and advances to customers
to a separately reported Brokerage receivables line and are therefore no longer included in this table. For comparability, the corresponding customer brokerage receivable balances as of 31 December 2017, totaling
USD 4.7 billion, have also been excluded from this table. In addition, as a result of certain balance sheet presentation changes, USD 1.1 billion of leasing receivables in Personal & Corporate Banking are no longer
reported within Loans and advances to customers as of 31 December 2017. 4 As of 31 December 2017, Loans and advances to customers reported under IFRS for the Investment Bank and Corporate Center –
Non-core and Legacy Portfolio were USD 11,454 million and USD 2,284 million, respectively. For all other business divisions and Corporate Center units, IFRS Loans and advances to customers exposure was the
same as the internal management view. 5 As counterparty risk for traded products is managed at counterparty level, no further split between exposures in the Investment Bank, Corporate Center – Non-core and
Legacy Portfolio and Corporate Center – Group ALM is provided. 6 Does not include allowances for Other assets of USD 19 million, of which USD 14 million were in Corporate Center – Non-core and Legacy
Portfolio and USD 5 million were in the Investment Bank, as well as allowances of USD 84 million on loans to financial advisors in Global Wealth Management.
35,627
11,740
18,303
5,585
0
0
0
8,708
5,717
228
2,763
187
187
1346
1,344
1,266
0
78
929
752
484
0
0
0
0
0
0
0
143
113
636
49
49
306
0
0
2
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135
Risk, treasury and capital management
Risk management and control
Global Wealth Management
Gross banking products exposure within Global Wealth
Management increased to USD 186 billion from USD 178 billion.
The net change relates mainly to the addition of other financial
assets measured at amortized cost, as previously mentioned, and
increases in mortgage loans.
The portfolio of mortgage loans secured by properties outside
Switzerland, excluding Global Wealth Management Region
Americas, increased to USD 6.5 billion from USD 6.3 billion,
driven mainly by the inclusion of mortgage loans resulting from
acquisitions. The overall quality of this portfolio remained high
over the year.
(Lombard
Our Global Wealth Management loan portfolio is mainly
secured by securities
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
they 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.
In Global Wealth Management Region Americas, the portfolio
of loans secured by residential property consists primarily of
residential mortgage loans offered in the US. Gross exposure
increased to USD 14.9 billion from USD 11.7 billion. The overall
quality of this portfolio remained high, with an average loan-to-
value ratio
(LTV) of 56%, compared with 58% as of
31 December 2017, and we have experienced negligible credit
losses since the inception of the mortgage program in 2009. The
five largest geographic concentrations in the portfolio were in
California (28%), New York (14%), Florida (9%), Texas (4%)
and New Jersey (4%).
Global Wealth Management and Personal & Corporate Banking loans and advances to customers, gross1
USD million
Secured by residential property
Secured by commercial / industrial property
Secured by cash
Secured by securities
Secured by guarantees and other collateral
Unsecured loans and advances to customers
Global Wealth Management
Personal & Corporate Banking
331.12.18
51,251
2,233
15,529
90,946
9,469
986
31.12.17
47,201
2,125
14,904
93,950
8,893
739
331.12.18
96,841
16,887
1,467
1,647
5,754
10,657
31.12.17
97,848
17,049
1,496
1,917
5,512
9,860
TTotal loans and advances to customers, gross
AAllowances2
TTotal loans and advances to customers, net of allowances
11 Balances as of 31 December 2018 are comprised of the balance sheet line “Loans and advances to customers.” Upon adoption of IFRS 9 on 1 January 2018, certain Global Wealth Management customer
brokerage receivable balances were reclassified from “Loans and advances to customers” to a separately reported “Brokerage receivables” line and are therefore no longer included in this table. For comparability,
the corresponding customer brokerage receivable balances as of 31 December 2017, totaling USD 4.7 billion, have also been excluded from this table. In addition, as a result of certain balance sheet presentation
changes, USD 1.1 billion of finance lease receivables in Personal & Corporate Banking are no longer reported within “Loans and advances to customers” as of 31 December 2017. 2 Allowances as of
31 December 2018 were calculated in accordance with the expected credit loss requirements of IFRS 9 (stages 1-3) for the balance sheet line “Loans and advances to customers.” Allowances as of
31 December 2017 were calculated in accordance with IAS 39 and have been adjusted to exclude allowances related to certain customer brokerage receivables and finance lease receivables as described in the
previous footnote. Refer to “Changes in accounting policies and comparability and transition effects from the adoption of IFRS 9, Financial Instruments” in the “Consolidated financial statements” section of this
report for more information on IFRS 9.
133,253
(594)
132,659
170,413
(102)
170,312
133,681
(442)
133,239
167,811
(133)
167,678
136
Personal & Corporate Banking
Gross banking products exposure within Personal & Corporate
Banking increased to USD 157 billion from USD 155 billion.
Net banking products exposure was USD 157 billion, compared
with USD 155 billion, of which approximately 63% was
classified as investment grade compared with 60% in the prior
year. Around 50% of the exposure is categorized in the lowest
loss given default (LGD) bucket of 0–25%, compared with
53% in 2017. The size of Personal & Corporate Banking’s
gross loan portfolio decreased slightly to USD 133 billion. As of
31 December 2018, 92% of this portfolio was secured by
collateral, mainly residential and commercial property. Of the
total unsecured amount, 79% related to cash flow-based
lending to corporate counterparties and 7% related to lending
to public authorities. Based on our internal ratings, 47% of the
unsecured
investment grade,
compared with 51% in 2017.
loan portfolio was
rated
Credit loss expense for banking products remained low in
2018.
Our Swiss corporate banking products portfolio, which
remained at USD 27 billion, consists of loans, guarantees and
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 was 0.3% for the corporate loan
portfolio, compared with 0.6% at the end of 2017. The
reduction is caused by the change in the definition of the
delinquency ratio from “ratio of past due but not impaired loans
to total loans” under IAS 39 to “ratio of past due but not credit-
impaired loans to total loans” under IFRS 9.
→ 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 USD 141 billion
mainly originate from Personal & Corporate Banking, but also
from Global Wealth Management Region Switzerland. USD 129
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 USD 129 billion, USD 94 billion
is related to properties occupied by the borrower, with an
average LTV ratio of 56%, unchanged from the prior period. The
average LTV for newly originated loans for this portion was
66%, compared with 65% in 2017. The remaining USD 35
billion of the Swiss residential mortgage loan portfolio relates to
properties rented out by the borrower and the average LTV of
this portfolio was 55%, compared with 57% as of 31 December
2017. The average LTV for newly originated Swiss residential
mortgage loans for properties rented out by the borrower was
57%, compared with 60% in 2017.
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.
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137
Risk, treasury and capital management
Risk management and control
Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings
and loss given default (LGD) buckets
USD million, except where indicated
331.12.18
LLGD buckets
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
EExposure
97,922
59,256
00–25%
54,255
22,369
226–50% 551–75%
9,455
32,275
776–100%
1,937
23,786
11,063
53,143
20,716
20,524 10,127
4,067
2,046
1,598
55
1,467
1,795
748
187
2,039
1,777
254
8
Total exposure before deduction of allowances and provisions
157,178
76,624
56,062
20,518
3,975
Less: allowances and provisions
(663)
31.12.17
WWeighted
average
LGD (%)
27
35
34
35
40
30
Exposure
92,302
63,195
57,171
4,144
1,879
155,496
(484)
Weighted
average
LGD (%)
26
32
32
32
39
28
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.
156,515
155,013
Personal & Corporate Banking: unsecured loans by industry sector
Construction
Financial institutions
Hotels and restaurants
Manufacturing
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Other
Exposure, gross
31.12.18
USD million
133
2,139
79
1,632
1,489
709
170
2,274
1,774
257
%
1.2
20.1
0.7
15.3
14.0
6.7
1.6
21.3
16.6
2.4
10,657
100.0
31.12.17
USD million
130
1,192
85
1,825
1,402
900
186
2,029
1,868
242
9,860
Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments
and loan-to-value (LTV) buckets
%
1.3
12.1
0.9
18.5
14.2
9.1
1.9
20.6
18.9
2.5
100.0
31.12.17
31.12.18
LTV buckets
Net EAD
as a % of row total
Net EAD
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
≤30%
72.4
59
11.4
64
5.7
63
0.5
66
89.9
60
86.2
59
31–50%
51–60%
61–70%
71–80% 81–100% >100%
Total
Total
33.5
27
4.7
26
2.2
24
0.1
21
40.6
27
39.7
27
9.9
8
1.1
6
0.6
6
0.0
6
11.6
8
11.6
8
5.3
4
0.5
3
0.3
3
0.0
4
6.1
4
6.3
4
2.0
2
0.2
1
0.1
2
0.0
2
2.3
2
2.4
2
0.3
0
0.0
0
0.1
1
0.0
0
0.4
0
0.5
0
0.0
123.4
118.4
0
0.0
0
0.0
0
0.0
0
100
17.9
100
9.0
100
0.7
100
18.4
9.1
0.9
0.0
151.0
146.7
0
100
0.1
146.7
0
100
USD billion, except where indicated
Exposure segment
Residential mortgages
Income-producing real estate
Corporates
Other segments
Mortgage-covered exposure
Mortgage-covered exposure 31.12.17
138
Asset Management
Gross banking products exposure within Asset Management
was USD 1.2 billion as of 31 December 2018, compared with
USD 0.6 billion as of 31 December 2017. The change related
mainly to the inclusion of other financial assets measured at
amortized cost mentioned above. Banking products relate
primarily to cash at banks held by individual Asset Management
legal entities, liquid assets and receivables.
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.
The gross banking products exposure as of 31 December
2018 was USD 40 billion, compared with USD 48 billion as of
31 December 2017. This change relates mainly to the alignment
of the internal risk management view to the IFRS 9 exposure
view, as previously mentioned. Based on our internal ratings,
61% of the Investment Bank’s gross banking products exposure
was classified as investment grade. The vast majority of the
Investment Bank’s gross banking products exposure had an
estimated LGD of between 0% and 50%.
The Investment Bank actively manages the credit risk of this
portfolio and, as of 31 December 2018, held USD 0.6 billion of
single-name credit default swap hedges against its exposures to
corporates and other non-banks, a decrease of USD 1.2 billion
year on year.
Within the loan underwriting business, we continued to see a
steady flow of transactions as leveraged loan markets remained
relatively strong. However, volatility and credit market weakness
led to a general slowdown toward the end of the year. Total
temporary loan underwriting exposure ended 2018 at USD 2.3
billion, USD 0.5 billion lower than the previous year. Overall, our
ability
remained sound. Loan underwriting
exposures are classified as held for trading, with fair values
reflecting market conditions at the end of 2018.
to distribute
→ Refer to “Credit risk models” in this section for more
information on loss given default, rating grades and rating
agency mappings
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139
Risk, treasury and capital management
Risk management and control
Investment Bank: distribution of banking products exposure across internal UBS ratings
and loss given default (LGD) buckets
USD million, except where indicated
331.12.18
LLGD buckets
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
EExposure
24,239
15,630
12,169
3,204
256
00–25%
6,243
4,953
3,681
1,075
197
226–50%
14,364
551–75%
2,482
776–100%
1,150
4,001
2,009
1,992
0
6,595
6,407
138
51
81
72
0
9
WWeighted
average
LGD (%)
39
15
11
30
24
31.12.17
Weighted
average
LGD (%)
49
22
17
33
19
Exposure
21,239
16,351
10,644
5,419
288
11,196
BBanking 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. 2 IFRS 9 banking
products subject to ECL, includes USD 0.1 billion of balances at central banks, USD 7.1 billion of loans and advances to banks and USD 1.3 billion of other financial assets measured at amortized cost. 3 Prior-year
net internal risk view, which excluded balances at central banks, internal risk adjustments and the vast majority of due from banks exposures, after credit protection bought of USD 1.8 billion.
18,365
1,231
9,077
30
37
37,5913
39,8692
Investment Bank: banking products exposure by geographical region
Asia Pacific
Latin America
Middle East and Africa
North America
Switzerland
Rest of Europe
Exposure
31.12.18
USD million
6,123
1,170
471
18,865
2,588
10,652
%
15.4
2.9
1.2
47.3
6.5
26.7
31.12.17
USD million
1,461
168
75
27,788
138
7,962
39,8691
100.0
37,5912
%
3.9
0.4
0.2
73.9
0.4
21.2
100.0
1 IFRS 9 banking products subject to ECL, includes USD 0.1 billion of balances at central banks, USD 7.1 billion of loans and advances to banks and USD 1.3 billion of other financial assets measured at amortized
cost. 2 Prior-year net internal risk view, which excluded balances at central banks, internal risk adjustments and the vast majority of due from banks exposures, after credit protection bought of USD 1.8 billion.
Investment Bank: 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
Exposure1
of which: oil and gas 1
31.12.18
USD million
6,779
711
1,765
14,488
2,342
1,759
706
1,553
2,488
2,372
719
4,188
39,8692
1,582
%
17.0
1.8
4.4
36.3
5.9
4.4
1.8
3.9
6.2
5.9
1.8
10.5
100.0
4.0
31.12.17
USD million
1,435
865
2,488
13,549
4,230
2,826
988
3,426
996
2,756
2,870
1,160
37,5913
4,401
%
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 2018, the USD 1.6 billion Investment Bank banking products exposure to the oil and gas sector comprised USD 1.5 billion related to mining, USD 0.0 billion related to transport and storage
and USD 0.1 billion related to manufacturing. As of 31 December 2017, the USD 4.4 billion Investment Bank banking products exposure to the oil and gas sector comprised USD 2.4 billion related to mining,
USD 1.5 billion related to transport and storage and USD 0.4 billion related to manufacturing. 2 IFRS 9 banking products subject to ECL, includes USD 0.1 billion of balances at central banks, USD 7.1 billion of
loans and advances to banks and USD 1.3 billion of other financial assets measured at amortized cost. 3 Prior-year net internal risk view, which excluded balances at central banks, internal risk adjustments and
the vast majority of due from banks exposures, after credit protection bought of USD 1.8 billion.
140
Corporate Center – Group Asset and Liability Management
Gross banking products exposure within Corporate Center –
Group Asset and Liability Management (Group ALM), which
arises primarily in connection with treasury activities, increased
by USD 32 billion to USD 132 billion. This was driven by an
increase in balances at central banks of USD 20 billion, mainly
resulting from
lower client-driven activity, which reduced
business division consumption.
→ Refer to “Balance sheet assets” in the “Treasury management”
section of this report for more information
Corporate Center – Non-core and Legacy Portfolio
calculated close-out exposure. This is in addition to the variation
in the market value of
margin taken to settle changes
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
trading
counterparties than had been required in the past. These changes
should result in lower close-out risk over time. (cid:3)
to, certain bilateral
from, and posted
→ Refer to “Note 11 Derivative instruments” in the “Consolidated
financial statements” section of this report for more information
on our over-the-counter derivatives settled through central
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→ Refer to the “Corporate Center – Non-core and Legacy
counterparties
Portfolio” section under “Financial and operating performance”
→ Refer to “Note 25 Offsetting financial assets and financial
of this report for more information
Traded products
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
Audited | Counterparty credit risk arising from traded products,
which include over-the-counter (OTC) derivatives, exchange-
traded derivatives (ETD) exposures and securities financing
transactions (SFTs) originating in the Investment Bank, Corporate
Center – Non-core and Legacy Portfolio and Corporate Center –
Group ALM, is generally managed on a close-out basis. This
takes into account the possible effect of market movements on
the exposure and any associated collateral over the 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.
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 law. 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
Credit risk arising from traded products, after the effects of
master netting agreements but excluding credit valuation
adjustments and hedges, decreased by USD 3 billion to USD 42
billion as of 31 December 2018. OTC derivatives accounted for
USD 16 billion, exposures from SFTs were USD 16 billion, and
ETD exposures amounted to USD 10 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.
level, no further split
The majority of the gross traded products exposures were
within the Investment Bank, Corporate Center – Non-core and
Legacy Portfolio and Corporate Center – Group ALM, totaling
USD 31 billion compared with USD 36 billion as of 31 December
2017. As counterparty risk for traded products is managed at
is provided between
counterparty
exposures in the Investment Bank and those in Corporate Center
– Non-core and Legacy Portfolio and Corporate Center – Group
ALM. The traded products exposure includes OTC derivatives
exposures of USD 9 billion
Investment Bank and
Corporate Center – Non-core and Legacy Portfolio, a decrease of
USD 2 billion from the prior year. During 2018, SFT exposures
decreased by USD 2 billion to USD 16 billion and ETD exposures
decreased slightly to USD 5 billion. The tables on the following
page provide more information on the OTC derivatives, SFT and
ETD exposures of the Investment Bank, Corporate Center – Non-
core and Legacy Portfolio and Corporate Center – Group ALM.
in the
141
Risk, treasury and capital management
Risk management and control
Investment Bank, Non-core and Legacy Portfolio and Group ALM: traded products exposure
USD million
OOTC derivatives
SSFTs
331.12.18
EETD
TTotal
Total exposure, before deduction of credit valuation adjustments and hedges
Less: credit valuation adjustments and allowances
Less: credit protection bought (credit default swaps, notional)
NNet exposure after credit valuation adjustments, allowances and hedges
9,440
(136)
(288)
9,016
16,004
0
0
16,004
5,325
0
0
5,325
30,769
(136)
(288)
30,346
TTotal
31.12.17
35,593
(305)
(447)
34,842
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
USD million, except where indicated
31.12.17
31.12.18
LGD buckets
Weighted
average
LGD (%)
46
54
56
45
37
Exposure
10,337
649
232
61
358
Weighted
average
LGD (%)
45
41
62
41
27
45
44
72
44
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%
8,737
220
7,199
1,081
236
280
242
19
19
88
69
8
11
65
62
3
0
30
25
5
0
96
86
3
7
Total net OTC derivatives exposure, after credit valuation adjustments
and hedges
9,016
308
7,265
1,111
332
47
10,987
Net SFT exposure
Investment grade
Sub-investment grade
Total net SFT exposure
15,668
336
16,004
3
8
13,870
1,534
191
2
11
14,060
1,536
262
135
396
41
63
41
17,749
521
18,271
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.
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
Exposure
Net OTC derivatives
Net SFT exposure
31.12.18
31.12.17
31.12.18
31.12.17
USD million
1,309
104
109
2,621
276
4,597
9,016
%
14.5
1.2
1.2
29.1
3.1
51.0
100.0
USD million
1,184
61
147
3,508
300
5,788
10,987
%
10.8
0.5
1.3
31.9
2.7
52.7
100.0
USD million
3,408
62
549
3,014
1,375
7,597
16,004
%
21.3
0.4
3.4
18.8
8.6
47.5
100.0
USD million
3,718
148
638
4,351
791
8,624
18,271
Investment Bank, Non-core and Legacy Portfolio and Group ALM: net OTC derivatives and SFT exposure
by industry sector
Net OTC derivatives
Net SFT exposure
31.12.18
31.12.17
31.12.18
31.12.17
USD million
3,813
5
87
3,425
89
12
1,198
10
284
92
9,016
%
42.3
0.1
1.0
38.0
1.0
0.1
13.3
0.1
3.1
1.0
100.0
USD million
4,677
11
170
3,693
143
7
1,552
9
296
428
10,987
%
42.6
0.1
1.5
33.6
1.3
0.1
14.1
0.1
2.7
3.9
100.0
USD million
3,495
0
0
11,404
0
0
1,102
0
0
3
16,004
%
21.8
0.0
0.0
71.3
0.0
0.0
6.9
0.0
0.0
0.0
100.0
USD million
5,425
0
0
11,267
0
0
1,539
3
0
36
18,271
Banks
Chemicals
Electricity, gas, water supply
Financial institutions, excluding banks
Manufacturing
Mining
Public authorities
Retail and wholesale
Transport, storage and communication
Other
Exposure
142
%
20.3
0.8
3.5
23.8
4.3
47.2
100.0
%
29.7
61.7
8.4
0.0
0.2
100.0
Credit risk mitigation
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
set 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%
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.
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Risk, treasury and capital management
Risk management and control
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
Global Wealth Management Region 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.
A risk limit framework is applied to the Global Wealth
Management Region Americas mortgage portfolio. Limits have
been established to govern exposures within LTV 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 “Global Wealth Management” in this section for more
information on loan-to-value in our Global Wealth
Management Region Americas mortgage portfolio
144
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.
We apply discounts (haircuts) to reflect the collateral’s risk
and to derive the lending value. Haircuts for marketable
securities are calculated to cover the possible change in the
market value over a given close-out period and confidence level.
The haircut applied will vary, depending on the view of the
counterparty’s 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
levels are adjusted
collateral, margin call and close-out
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 extent of the
shortfall increases and exceeds a further trigger level, 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 reduce the value of the collateral,
increase 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
Credit hedging
Audited | We utilize single-name credit default swaps (CDSs), credit
index CDSs, bespoke protection and other instruments to
actively manage credit risk
Investment Bank and
Corporate Center – 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 effect arising from changes in credit valuation
adjustments (CVA).
in the
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 apply certain credit risk mitigants such as proxy hedges
(credit protection on a correlated but different name) or credit
index CDSs to reduce counterparty exposures. 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
relevant
part of our overall credit exposures
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
the credit protection.
Mismatches are routinely reported to credit officers and
mitigating actions are taken when deemed necessary. (cid:3)
the effectiveness of
reduce
the
to
→ Refer to “Note 11 Derivative instruments” 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
not fully eliminate our credit risk
in foreign exchange
transactions resulting from changes in exchange rates prior to
settlement, which is managed as part of our overall credit risk
management of OTC derivatives.
Credit risk models
Basel III – A-IRB 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 (A-IRB) approach of the
Basel III framework governing international convergence of
capital measurement and standards. 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 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on the regulatory capital calculation under the advanced
internal ratings-based approach
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145
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
Corporates: other lending
Investment Bank – all
counterparties
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, sub-sovereigns / public-sector entities
and multilateral development banks / supranationals.
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, including industry
segment, collateral, seniority, legal environment and
bankruptcy procedures. Specific model for sovereign
LGDs based on econometric modelling of past default
events using GDP per capita, government debt, and
other quantitative and qualitative factors such as the
share of multilateral debt service, the size of the
banking sector and institutional quality.
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
2
3
2
NNumber of
years loss
data1
10
24
24
5–10
24
11
20
12
11
11
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.
146
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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 risk weighted assets (RWA), a
3-basis-point PD floor is applied to Banks, Corporates and Retail
exposures as
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.
required under
the Basel
III
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.
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 the
type of counterparty and any credit mitigation by way of
collateral or guarantees. Our estimates are supported by our
internal loss data and external information where available.
Where we hold collateral, such as marketable securities or a
mortgage on a property, loan-to-value ratios 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 Global Wealth Management outside
Region Americas and a 25% LGD floor for Lombard loans in
Global Wealth Management Region Americas. All other LGDs
are subject to a 5% floor.
147
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.
groups of counterparties. The outcome provides an indication of
the level of risk in our portfolio and the way it may develop over
time. Some parameters have to be estimated on a conservative
basis in order to meet the regulatory requirements for banks
applying the internal ratings-based approach to determine RWA.
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
level of
likely exposure measured to a high
maximum
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
between
the
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
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
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 (EL) for regulatory and internal risk control
purposes is a statistical measure used to estimate the average
annual costs we expect to experience from positions that
become impaired. Expected loss is the basis for quantifying
credit risk in all our portfolios. 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,
reflecting statistical uncertainty on the defaulting counterparties
and to systematic default relationships among counterparties
within and between segments. The statistical measure is
sensitive to concentration risks on individual counterparties and
148
IFRS 9 – ECL credit risk models
With a view to the introduction of IFRS 9, which is based on an
expected credit loss (ECL) concept that differs from the other
applications in some important aspects, we have developed
specific parameters and additional models, which are generally
derivations from our standard credit risk models.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the requirements of the expected
credit loss methodology under IFRS 9
Probability of default
The PD represents the likelihood of a default over a specified
time period. A 12-month PD represents the likelihood of default
determined for the next 12 months and a lifetime PD represents
the probability of default over the remaining lifetime of the
instrument. The lifetime PD calculation is based on a series of
12-month point-in-time (PIT) PDs that are derived from through-
the-cycle (TTC) PDs and scenario forecasts. This modeling is
region-, industry- and client segment-specific and considers both
scenario-systematic and client-idiosyncratic
information. To
derive the cumulative lifetime PD per scenario, the series of 12-
month PIT PDs are transformed into marginal PIT PDs, taking any
assumed default events from previous periods into account.
Loss given default
The LGD represents an estimate of the loss at the time of a
potential default occurring during the life of a financial
instrument. The determination of the LGD takes into account
expected future cash flows from collateral and other credit
enhancements, or expected payouts
from bankruptcy
proceedings for unsecured claims and, where applicable, time to
realization of collateral and the seniority of claims. The LGD is
commonly expressed as a percentage of the EAD.
Exposure at default
The EAD represents an estimate of the exposure to credit risk at
the time of a potential default occurring during the life of a
financial instrument. It represents the cash flows outstanding at
the time of default, considering expected repayments, interest
payments and accruals, discounted at the effective interest rate.
Future drawdowns on facilities are considered through a CCF
that is reflective of historical drawdown and default patterns and
the characteristics of the respective portfolios. IFRS 9-specific
CCFs have been modeled to capture client segment- and
product-specific patterns after removing Basel standard-specific
limitations, i.e., conservatism, and focus on a 12-month period
prior to default.
Expected credit loss
ECL for accounting purposes is an adjustment of the gross
carrying value of assets that are accounted for under the
amortized cost approach of IFRS 9 and subject to different
principles and material differences. Rather than focusing on an
average TTC expected annual loss, its purpose is to estimate the
amount of losses inherent in a portfolio based on current
conditions and future outlook (a PIT measure), whereby such
forecast has to include all information that is available without
undue cost and effort, and address multiple scenarios where
there is a perceived non-linearity between changes in economic
conditions and their effect on credit losses. From a credit risk
modeling perspective, ECL parameters are generally a derivation
of the factors assessed for EL.
Comparison of Basel III EL and IFRS 9 ECL
Depending on the application, there are a number of key
differences in the estimation process and the result. Most
notably, regulatory Basel III EL parameters are TTC / downturn
estimates, which might include a margin of conservatism, while
IFRS 9 ECL parameters are typically PIT, reflecting current
economic conditions and future outlook. The main differences
are summarized in the table below.
The estimation of expected (credit) loss is not a forecast of
the annual charge to Credit loss expense resulting from loans
and off-balance sheet exposures that become impaired. The
Basel III EL is not particularly sensitive to prevailing economic
conditions with its TTC / downturn view. ECL, in contrast, is
grounded in PIT economic conditions, but measured as an
average of different scenarios, and for time periods that are
dependent on the maturity profile of the book at reporting date
and the particular stage classification required by IFRS 9. They do
not cover therefore a PIT credit loss expense expectation
measured over a quarter or a calendar year.
Further key aspects of credit risk models
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 effect 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.
In the table below we illustrate the main differences between the two expected loss measures:
BBasel III EL (advanced internal ratings-based approach)
IIFRS 9 ECL
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 (ECL) 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.
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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)
PProbability of default
(PD)
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.
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.
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
In the absence of a significant increase in credit risk (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.
PD estimates will be determined on a point-in-time (PIT) basis, based on
current conditions and incorporating forecasts for future economic
conditions at the reporting date.
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.
149
Risk, treasury and capital management
Risk management and control
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
Main credit models backtesting by regulatory asset class
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
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 statistical level of confidence in the model conservatism.
In addition, we derive a lower and upper bound for the average
default rate. If the portfolio average PD lies outside the derived
interval, the rating tool is, as a general rule, recalibrated.
For LGD, the backtesting statistically tests whether the mean
difference between the observed and predicted LGD is zero. If
the test fails, then there is evidence that our predicted LGD is
too low. In such cases, and where these differences are outside
expectations, models are recalibrated.
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
2018 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
>10
0.00
0.16
0.00
0.31
0.24
0.19
0.00
0.00
4.02
19.98
0.82
64.62
0.00
0.00
0.00
0.15
0.21
0.12
0.00
0.00
12.90
0.00
65.26
0.00
0.53
0.00
0.60
0.29
0.28
0.01
17.07
23.15
1.48
65.26
0.20
0.67
0.18
1.23
0.46
0.53
0.31
57.48
50.29
26.23
21.48
37.02
20.37
27.44
19.05
6.87
44.32
43.13
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.
150
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 2018.
Within Personal & Corporate Banking, we recalibrated the PD
and LGD parameters for the aircraft financing portfolio.
→ Refer to “Risk-weighted assets” in the “Capital management”
section of this report for more information on the effect of the
changes to models and model parameters on credit risk RWA
A new specific model for sovereign LGDs based on
econometric modelling and qualitative factors was introduced.
The model is also applied in the Group Liquidity Reserve. Within
the Investment Bank, besides the introduction of the new
sovereign LGD model, there were no material changes of PD /
LGD methodologies. With regard to the EAD, we implemented
credit conversion factors for Lombard loan facilities that are
entirely undrawn in Global Wealth Management, as well as a
new set of models to simulate equity, interest rates and
exchange rates for OTC derivative exposures in the Investment
Bank portfolio. 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 on
1 January 2022. The updated framework has made a number of
revisions to the internal ratings-based (IRB) approaches, namely:
(i) removing the possibility of using 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, such as for PD and LGD; and (iii) introducing various
requirements to reduce RWA variability, for example, for LGD.
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
Credit policies for distressed assets
We have adopted IFRS 9, Financial Instruments, effective as of
1 January 2018. IFRS 9 introduces a forward-looking expected
credit loss (ECL) approach, which is intended to result in an
earlier recognition of credit losses compared with the incurred-
loss impairment approach for financial instruments under
IAS 39, Financial Instruments: Recognition and Measurement,
and the loss-provisioning approach for financial guarantees and
loan commitments under
IAS 37, Provisions, Contingent
Liabilities and Contingent Assets.
→ Refer to “Note 1 Summary of significant accounting policies,”
“Note 23 Expected credit loss measurement” and “Note 24d
Valuation adjustments” in the “Consolidated financial
statements” section of this report for more information
The “Exposure categorization” chart on the next page
illustrates how we categorize banking products and SFTs as non-
performing, defaulted, credit-impaired and purchased or
originated credit-impaired.
Audited | In line with the regulatory definition, we report a
claim as non-performing when (i) it is more than 90 days past
due; (ii) it is subject to restructuring proceedings, where
preferential conditions concerning interest rates, subordination,
tenor etc. have been granted in order to avoid default of the
counterparty (forbearance); or (iii) the counterparty is subject to
bankruptcy / enforced liquidation proceedings in any form, even
if there is sufficient collateral to cover the due payment.
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151
Risk, treasury and capital management
Risk management and control
UBS applies a single definition of default for classifying assets
and determining the PD of its obligors for risk modeling
purposes. The definition of default is based on quantitative and
qualitative criteria. A counterparty is classified as defaulted at
the latest when material payments of interest, principal or fees
are overdue for more than 90 days, or more than 180 days for
certain exposures in relation to loans to private and commercial
clients in Personal & Corporate Banking, and to private clients of
Global Wealth Management Region Switzerland. UBS does not
consider the general 90-day presumption for default recognition
appropriate for these latter portfolios based on an analysis of the
cure rates, which demonstrated that strict application of the 90-
day criterion would not accurately reflect the inherent credit risk.
Counterparties are also classified as defaulted when bankruptcy,
have
insolvency
commenced; obligations have been restructured on preferential
terms (forbearance); or there is other evidence that payment
obligations will not be fully met without recourse to collateral.
proceedings
liquidation
enforced
or
if
An
is classified as credit-impaired
The latter may be the case even if, to date, all contractual
payments have been made when due. If a counterparty is
defaulted, generally all claims against the counterparty are
treated as defaulted.
instrument
the
counterparty is defaulted, and / or the instrument is identified as
purchased or originated credit-impaired (POCI). An instrument is
POCI if it has been purchased with a material discount to its
carrying amount following a risk event of the issuer or originated
with a defaulted counterparty. Once a financial asset is classified
as defaulted / credit-impaired (except POCI), it is reported as a
stage 3 instrument and remains as such unless all past due
amounts have been rectified, additional payments have been
made on time, the position
is not classified as credit-
restructured, and there is general evidence of credit recovery. A
three-month probation period is applied before a transfer back
to stages 1 or 2 can be triggered. However, most instruments
remain in stage 3 for a longer period. (cid:3)
(cid:39)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:69)(cid:67)(cid:86)(cid:71)(cid:73)(cid:81)(cid:84)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:50)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)
(cid:48)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73) (cid:19)
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(cid:81)(cid:72)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:2)(cid:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:73)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:53)(cid:86)(cid:67)(cid:73)(cid:71)(cid:2)(cid:20)(cid:2)(cid:10)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:11)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(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:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)
(cid:81)(cid:72)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:2)(cid:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:73)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:53)(cid:86)(cid:67)(cid:73)(cid:71)(cid:2)(cid:21)(cid:2)
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(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:67)(cid:84)(cid:71)(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:75)(cid:80)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:2)
(cid:18)(cid:2)(cid:115)(cid:2)(cid:21)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:82)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)
(cid:21)(cid:19)(cid:2)(cid:115)(cid:2)(cid:27)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:82)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)
(cid:27)(cid:19)(cid:2)(cid:115)(cid:2)(cid:19)(cid:26)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:82)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)
(cid:10)(cid:69)(cid:71)(cid:84)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:11)
(cid:47)(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:2)(cid:82)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)
(cid:10)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(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:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:11)
(cid:40)(cid:81)(cid:84)(cid:68)(cid:71)(cid:67)(cid:84)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:17)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:71)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73)(cid:20)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(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:72)(cid:81)(cid:84)(cid:68)(cid:81)(cid:84)(cid:80)(cid:71)(cid:2)(cid:67)(cid:86)(cid:2)(cid:71)(cid:67)(cid:84)(cid:78)(cid:75)(cid:71)(cid:84)(cid:2)(cid:85)(cid:86)(cid:67)(cid:73)(cid:71)(cid:14)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(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:69)(cid:81)(cid:80)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:85)(cid:87)(cid:82)(cid:71)(cid:84)(cid:85)(cid:71)(cid:70)(cid:71)(cid:70)(cid:2)
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(cid:78)(cid:81)(cid:80)(cid:73)(cid:71)(cid:84)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:71)(cid:70)(cid:2)(cid:81)(cid:87)(cid:84)(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:67)(cid:80)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(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:85)(cid:75)(cid:86)(cid:87)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:71)(cid:83)(cid:87)(cid:71)(cid:80)(cid:86)(cid:78)(cid:91)(cid:2)(cid:75)(cid:79)(cid:82)(cid:84)(cid:81)(cid:88)(cid:71)(cid:70)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:71)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:87)(cid:84)(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: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:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:75)(cid:79)(cid:79)(cid:75)(cid:80)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:82)(cid:67)(cid:91)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:2)(cid:81)(cid:84)(cid:2)(cid:75)(cid:80)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)
(cid:50)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:84)(cid:2)(cid:81)(cid:84)(cid:75)(cid:73)(cid:75)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:15)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70)(cid:2)(cid:10)(cid:50)(cid:49)(cid:37)(cid:43)(cid:11)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(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:50)(cid:49)(cid:37)(cid:43)(cid:2)(cid:67)(cid:86)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:73)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(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:85)(cid:75)(cid:86)(cid:87)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:71)(cid:83)(cid:87)(cid:71)(cid:80)(cid:86)(cid:78)(cid:91)(cid:2)(cid:75)(cid:79)(cid:82)(cid:84)(cid:81)(cid:88)(cid:71)(cid:70)
(cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:72)(cid:87)(cid:78)(cid:78)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:68)(cid:71)(cid:71)(cid:80)(cid:2)(cid:70)(cid:81)(cid:87)(cid:68)(cid:86)(cid:72)(cid:87)(cid:78)(cid:2)(cid:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:75)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)
(cid:84)(cid:71)(cid:69)(cid:81)(cid:73)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:19)(cid:2)(cid:39)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:84)(cid:2)(cid:81)(cid:84)(cid:75)(cid:73)(cid:75)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:15)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70)(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:10)(cid:50)(cid:49)(cid:37)(cid:43)(cid:85)(cid:11)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:47)(cid:67)(cid:91)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:2)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:84)(cid:2)(cid:81)(cid:84)(cid:75)(cid:73)(cid:75)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:15)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70)(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:10)(cid:50)(cid:49)(cid:37)(cid:43)(cid:85)(cid:11)(cid:16)
152
Forbearance (credit restructuring)
Audited | Under imminent payment default or where default has
already occurred, we may grant concessions to borrowers in
financial difficulties that we would otherwise not consider in the
normal course of our business, such as preferential interest rates,
extension of maturity, modifying the schedule of repayments,
debt / equity swap, subordination, etc. When a forbearance
measure takes place, each case is considered individually and the
exposure
in default. Forbearance
classification will remain, 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.
is generally classified
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 forborne. (cid:3)
Loss history statistics
Since adopting IFRS 9 on 1 January 2018, an instrument is
classified as credit-impaired if the counterparty has defaulted.
This also includes credit-impaired exposures for which no loss
has occurred or for which no allowance has been recognized
(e.g., because they are expected to be fully recoverable through
the collateral held).
The “Loss history statistics” table below provides a five-year
history of our credit loss experience for loans and advances to
banks and customers, and ratios of those credit losses relative to
our credit-impaired and non-performing loans and advances to
banks and customers. For the years 2014 to 2017, the amounts
are based on IAS 37 and IAS 39; for 2018 the amounts are
based on IFRS 9.
Gross credit-impaired loans and advances (including loans
and advances to banks) were USD 2.3 billion as of 31 December
2018. As of 31 December 2017, impaired loans were USD 1.1
billion. The change is mainly caused by the adoption of IFRS 9,
with the alignment of the term “credit-impaired” as described
before.
The majority of the credit-impaired exposure relates to loans
and advances in our Swiss domestic business. The ratio of credit-
impaired loans and advances to banks and customers to total
loans and advances to banks and customers was 0.7%.
→ Refer “Note 10 Financial assets at amortized cost and other
positions in scope of expected credit loss measurement” and
“Note 23 Expected credit loss measurement” in the
“Consolidated financial statements” section of this report for
more information on the expected credit loss measurement
under IFRS 9
→ Refer to “Note 17a) Other financial assets measured at
amortized cost” in the “Consolidated financial statements”
section of this report for more details
t
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Loss history statistics
USD million, except where indicated
Loans and advances to banks and customers (gross)
Credit-impaired loans and advances to banks and customers
Non-performing loans and advances to banks and customers
ECL allowances and provisions for credit losses1,2
of which: allowances for loans and advances to banks and customers 1
Net write-offs3,4
of which: net write-offs for loans and advances to banks and customers 4
331.12.18
IFRS 9
338,000
2,300
2,419
1,054
780
210
192
(118)
31.12.17
IAS 37, IAS 39
342,604
1,104
2,149
712
678
101
101
(131)
31.12.16
IAS 37, IAS 39
314,485
958
2,357
642
589
121
121
(38)
31.12.15
IAS 37, IAS 39
324,059
1,224
1,627
726
691
116
116
(118)
31.12.14
IAS 37, IAS 39
331,631
1,211
1,611
739
712
125
125
(77)
Credit loss (expense) / recovery5
RRatios
Credit-impaired loans and advances to banks and customers as a percentage of loans and advances to
banks and customers (gross)
Non-performing loans and advances to banks and customers as a percentage of loans and advances to
banks and customers (gross)
ECL allowances as a percentage of loans and advances to banks and customers (gross)
Net write-offs as a percentage of average loans and advances to banks and customers (gross) outstanding
during the period
11 Includes collective loan loss allowances (until 31 December 2017). Until 31 December 2017 did not include allowances for other receivables (31 December 2017: USD 19 million; 31 December 2016: USD 0
million; 31 December 2015: USD 0 million; 31 December 2014: USD 0 million). 2 Includes provisions for ECL of guarantees and loan commitments and allowances for securities financing transactions. 3 Includes
net write-offs for loan commitments and securities financing transactions. 4 The increase in net write-offs was mainly driven by a margin loan to a single client following a significant decrease in the value of the
collateral. 5 Includes credit loss (expense) / recovery for other financial assets at amortized cost, guarantees, loan commitments, and securities financing transactions.
0.7
0.3
0.5
0.2
0.7
0.2
0.6
0.2
0.5
0.2
0.7
0.1
0.0
0.4
0.3
0.0
0.0
0.3
0.4
0.0
153
Risk, treasury and capital management
Risk management and control
Market risk
Key developments
We continued to manage market risks at generally low levels of
management value-at-risk (VaR). Average management VaR
(1-day, 95% confidence level) increased slightly to USD 12
million from USD 11 million in the previous year, despite periods
of significant market volatility. The number of negative
backtesting exceptions within a 250-business-day window
increased from one to two by the end of the year. The FINMA
VaR multiplier for market risk RWA remained unchanged at 3.0
as of 31 December 2018.
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 Corporate
Center – Non-core and Legacy Portfolio and our municipal
securities trading business within Global Wealth Management.
– 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
– 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.
– 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 also covered in the risks controlled by
Market & Treasury Risk Control as set out further below.
– Our primary portfolio measures of market risk are liquidity-
adjusted stress (LAS) loss and VaR. Both are common to all
our business divisions and subject to limits that are approved
by the Board of Directors (BoD).
154
– 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 Market & 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 effect 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 “Currency management” in 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 generated 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 effect 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 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 risk-weighted assets
(RWA), 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
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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.
155
Risk, treasury and capital management
Risk management and control
We also use stressed VaR (SVaR) for the calculation of market risk
RWA. 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 Group portfolio 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 2018 Pillar 3 report 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
increasing slightly to USD 12 million from USD 11 million in the
previous year.
Audited |
Management value-at-risk (1-day, 95% confidence, 5 years of historical data) by business division and Corporate
Center unit and general market risk type1
FFor the year ended 31.12.18
USD million
TTotal management VaR, Group
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
CC – Services
CC – Group ALM
CC – Non-core and Legacy Portfolio
Diversification effect2,3
USD million
MMin.
5
0
0
0
4
0
3
2
Min.
MMax.
AAverage
26
2
0
0
25
0
6
3
331.12.18
12
1
0
0
10
0
6
2
(7)
12
1
0
0
11
0
4
2
(7)
EEquity
3
22
8
5
0
0
0
8
0
0
1
(1)
IInterest
rates
5
11
8
7
CCredit
spreads
5
9
7
5
AAverage (per business division and risk type)
FForeign
exchange
1
13
3
6
CCommodities
1
4
2
2
1
0
0
6
0
4
2
(5)
2
0
0
6
0
1
1
(4)
0
0
0
3
0
1
0
(1)
0
0
0
2
0
0
0
0
For the year ended 31.12.17
Max.
Average
TTotal management VaR, Group
0
Global Wealth Management
0
Personal & Corporate Banking
0
Asset Management
2
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)
11
1
0
0
9
0
6
3
(8)
0
0
0
2
0
1
0
(1)
1
0
0
7
0
5
2
(6)
0
0
0
6
0
0
1
(1)
19
1
0
0
18
0
8
6
5
0
0
0
4
0
3
3
31.12.17
10
1
0
0
8
0
4
3
(6)
Commodities
0
7
2
2
Equity
1
15
6
5
Interest
rates
6
12
10
9
Foreign
exchange
1
5
3
3
Credit
spreads
5
8
6
8
Average (per business division and risk type)
1
0
0
5
0
2
2
(4)
156
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 effect 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.
We also have a 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
VaR backtesting is a performance measurement process in which
the 1-day VaR prediction is compared with the realized 1-day
profit & loss (P&L). We compute backtesting VaR using a 99%
confidence level and one-day holding period for the population
included within regulatory VaR. Since 99% VaR at UBS is
defined as a risk measure that operates on the lower tail of the
P&L distribution, 99% backtesting VaR is a negative number.
Backtesting revenues exclude non-trading revenues, such as
valuation reserves, fees and commissions and revenues from
intraday trading, to provide for a like-for-like comparison. A
backtesting exception occurs when backtesting revenues are
lower than the previous day’s backtesting VaR.
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(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:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)(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:55)(cid:53)(cid:38)(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:23)(cid:18)
(cid:19)(cid:20)(cid:23)
(cid:19)(cid:18)(cid:18)
(cid:25)(cid:23)
(cid:23)(cid:18)
(cid:20)(cid:23)
(cid:18)
(cid:10)(cid:20)(cid:23)(cid:11)
(cid:10)(cid:23)(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:88)(cid:67)(cid:78)(cid:87)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:84)(cid:71)(cid:85)(cid:71)(cid:84)(cid:88)(cid:71)(cid:85)(cid:14)(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: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: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)
157
150
150
125
125
100
100
75
75
50
50
0
0
-25
-25
-50
-50
25
25
VaR model confirmation
In addition to 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 2018
Audited | We did not make any material changes to the VaR model
in 2018. (cid:3)
Future market risk-related regulatory capital developments
In January 2019, the Basel Committee on Banking Supervision
published the final rules on the minimum capital requirements
for market risk (the Fundamental Review of the Trading Book).
The new accord will come into effect starting 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.
Key elements of the revised market risk framework include:
(i) changes to the internal model-based approach, 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 than
four exceptions 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 Chief Risk Officer Market & Treasury Risk.
Backtesting exceptions are also reported to internal and external
auditors and to the relevant regulators.
The “Group: development of regulatory 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 2018. The chart shows both the
99% and the 1% backtesting VaR. 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.
The actual
trading
backtesting revenues, intraday revenues.
revenues
include,
in addition
to
The number of negative backtesting exceptions within a
250-business-day window increased from one to two by the
end of the year. The FINMA VaR multiplier for market risk RWA
remained unchanged at 3.0 as of 31 December 2018.
158
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, Financial assets at fair value not
held for trading, Financial assets measured at amortized cost,
Financial assets measured at
through other
comprehensive income (OCI), Customer deposits, Debt issued
measured at amortized cost, and derivatives, including those
used for cash flow hedge accounting purposes. These positions
may affect OCI or the income statement, depending on their
accounting treatment.
fair value
Our largest banking book interest rate exposures arise from
client deposits and
in Global Wealth
lending products
Management and Personal & Corporate Banking. For Global
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
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 Global
Wealth Management 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 & Treasury
Risk Control. To manage the interest rate risk centrally,
the originating business
from
items with
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-
indefinite
monetary corporate balance sheet
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 2018, the target replication portfolios for equity,
goodwill and real estate were defined as follows: in Swiss francs
with an average duration of approximately three and a half years
and fair value sensitivity of USD 4 million per basis point; in US
dollars with an average duration of approximately four and a
half years and a sensitivity of USD 13 million per basis point.
Corporate Center – Group ALM also maintains a portfolio of
debt investments as part of its management of the Group’s
liquidity needs.
Banking book interest rate exposure in the Investment Bank
arises predominantly from the structured financing business
within Corporate Client Solutions, where transactions are
subject to approval on a case-by-case basis.
Corporate Center – Non-core and Legacy Portfolio assets,
primarily debt securities classified as Financial assets at fair value
not held for trading, also give rise to non-trading interest rate
risk. (cid:3)
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159
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 measured at amortized cost, 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 long-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 measured at amortized cost or at fair value,
and interest rate swaps, whether designated as cash flow
hedges or transacted as economic hedges, on the whole, are
more sensitive to changes in longer-duration interest rates,
whereas our deposits and a significant portion of our loans
Accounting and capital effect of changes in interest rates1
contributing to NII are more sensitive to short-term rates. These
factors are important as yield curves may not shift on a parallel
basis and could, for example, exhibit an initial steepening,
followed by a flattening over time.
By virtue of the accounting treatment and yield curve
sensitivities outlined above, in a rising rate scenario we would
expect to recognize an initial decrease in shareholders’ equity as
a result of fair value losses recognized in OCI. This would be
compensated over time by increased NII as 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 measured 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 a one-year time horizon assuming constant
business volumes. 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 at fair value through other comprehensive income
Derivatives transacted as economic hedges
Derivatives designated as cash flow hedges
Loans and deposits at amortized cost3
TTiming
Immediate
Immediate
Immediate
Gradual
IIncome statement / OCI
OCI
Income statement
OCI2
Income statement
Financial assets at fair value through profit or loss
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)
Other financial assets at amortized cost3
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 affect the income
statement when these instruments roll over and reprice.
Income statement
Gradual
160
At the end of 2018, the following scenarios were analyzed in
detail:
– Negative Interest Rates: Yield curves drop 100 basis points in
parallel with no zero-floor applied and therefore can become
negative, or more negative.
– Rates Bull Flattener: Yield curves across all currencies undergo
a sharp decrease for long tenors, with a modest decrease in
the short end of the curve: -70 basis points for tenors up to 3
months, -100 basis points for the 3-year tenor and -130 basis
points for +10-year tenors.
– Rates Bull Steepener: Yield curves across all currencies
undergo a sharp decrease for short tenors, with a modest
decrease in the long end of the curve: -130 basis points for
tenors up to 3 months, -100 basis points for the 3-year tenor
and -70 basis points for +10-year tenors.
– Rates Bear Steepener: Yield curves across all currencies
undergo a sharp increase for long tenors, with a modest
increase in the short end of the curve: +70 basis points for
tenors up to 3 months, +100 basis points for the 3-year tenor
and +130 basis points for +10-year tenors.
– Rates Bear Flattener: Yield curves across all currencies
undergo a sharp increase for short tenors, with a modest
increase in the long end of the curve: +130 basis points for
tenors up to 3 months, +100 basis points for the 3-year tenor
and +70 basis points for +10-year tenors.
– Parallel +100 basis points: All yield curves rise 100 basis
points in parallel.
– Constant Rates: All rates stay at current levels.
With
the exception of
the Constant Rates scenario,
immediately after the shock, interest rates evolve according to
market-implied forward rates of that scenario.
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. Over a one-year horizon, the most adverse
scenario is the Rates Bull Steepener, resulting in a deterioration
in Baseline NII of approximately 6%, while the most beneficial
scenario is the Rates Bear Flattener which would lead to an
improvement in Baseline NII of approximately 11%. In addition
to the above scenario analysis, we also monitor the sensitivity of
the NII to immediate parallel shocks of –200 and +200 basis
points against the defined thresholds, under the assumption of a
constant balance sheet volume and structure.
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As of 31 December 2018, the baseline NII would have been
approximately 13% lower under a parallel shock of –200 basis
points, whereas under a parallel +200-basis-point shock, the
baseline NII would have been approximately 24% 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 the self-funding of our lending businesses through
our deposit base in Global Wealth Management and Personal &
Corporate Banking, along with appropriate additional
adjustments to our interest rate-linked product pricing. Should
we lose this equilibrium on the balance sheet, for example, due
to unattractive pricing relative to our peers for either our
mortgages or deposits, this could lead to a decrease in our NII in
a persistently low and negative interest rate environment. As we
assume constant business volumes, these risks do not appear in
the aforementioned interest rate 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 Global 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
161
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 2018, 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
both
threshold of 20% of eligible capital
recommended by regulators and the new threshold of 15% of
tier 1 capital applicable as of 2019.
the current
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. 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 Global Wealth Management and Personal & Corporate
Banking client transactions are generally floored at 0%.
Accordingly, for the purpose 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 positive
USD 1.0 million per basis point compared with approximately nil
at prior year-end. This was mainly due to changes in the US
dollar sensitivity. In the third quarter of 2018, we implemented a
transfer process of the interest rate risk from Global Wealth
Management Region Americas to Corporate Center – Group
ALM, and adopted a replication model for the non-maturing
deposits held in the US. This decreased the exposure to rising
rates in Global Wealth Management to negative USD 0.1 million
per basis point from negative USD 1.8 million per basis point.
The sensitivity of the banking book to rising rates includes the
interest rate sensitivities arising from debt investments classified
as Financial assets measured at fair value through OCI. The
sensitivity of these positions to a 1-basis-point parallel increase in
the yields of the respective instruments was approximately
negative USD 2 million, unchanged from the prior year.
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 directly 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 other comprehensive income (OCI) to profit
or loss. These swaps are predominantly denominated in US
dollars, euros and Swiss francs. A 1-basis-point parallel increase
of underlying LIBOR curves would have decreased OCI by
approximately USD 22 million, excluding adjustments for tax. (cid:3)
→ Refer to “Note 14 Financial assets measured at fair value
through other comprehensive income” 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
162
Audited |
Interest rate sensitivity – banking book1
USD million
CHF
EUR
GBP
USD
Other
TTotal effect on fair value of interest rate-sensitive banking book positions
of which: Global Wealth Management
of which: Investment Bank
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
USD million
CHF
EUR
GBP
USD
Other
TTotal effect on fair value of interest rate-sensitive banking book positions
of which: Global Wealth Management
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
331.12.18
(8.5)
(167.9)
(88.2)
(355.3)
8.8
(611.1)
30.5
18.1
(573.0)
(89.5)
(8.5)
(141.3)
(56.0)
(96.5)
3.7
(298.5)
15.0
9.7
(280.6)
(44.1)
0.8
0.1
0.1
0.0
0.1
1.0
(0.1)
(0.1)
0.9
0.4
78.6
6.9
11.1
(73.6)
10.4
33.4
(14.4)
(8.1)
18.8
39.6
158.6
15.6
20.5
(202.3)
21.3
13.6
(28.3)
(17.1)
(9.9)
73.7
–200 bps
–100 bps
+1 bp
+100 bps
+200 bps
31.12.17
(32.7)
(145.8)
(59.1)
27.3
4.4
(205.8)
148.4
33.8
(279.6)
(108.9)
(32.7)
(92.9)
(56.8)
14.8
0.8
(166.8)
60.5
18.8
(193.0)
(53.4)
1.0
0.2
0.1
(1.4)
0.1
0.0
(1.8)
(0.2)
1.5
0.5
100.2
15.6
11.5
(138.5)
5.2
(6.1)
(179.9)
(15.8)
142.3
47.8
196.2
31.9
21.8
(287.8)
10.7
(27.3)
(371.3)
(31.6)
287.2
89.6
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11 In the prevailing negative interest rate environment for the Swiss franc in particular, and to a lesser extent for the euro, interest rates for Global Wealth Management (excluding Americas) and Personal &
Corporate Banking client transactions are generally floored at non-negative levels. Accordingly, for the purpose 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.
(cid:3)
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 24 Fair value measurement” in the “Consolidated
financial statements” section of this report for more
information on own credit
Structural foreign exchange risk
Upon consolidation, assets and
in foreign
operations are translated into US dollars at the closing foreign
exchange rate on the balance sheet date. Value changes (in US
dollars) of non-US dollar 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 11 Derivative instruments” 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 2018, equity investments not in the
trading book may be classified as Financial assets at fair value
not held for trading 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.
163
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 lock-up 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 2018, we held equity investments totaling
USD 2.5 billion, of which USD 1.4 billion were classified as
Financial assets at fair value not held for trading and USD 1.1
billion as Investments in associates. This was broadly unchanged
from the prior year. (cid:3)
→ Refer to “Note 24 Fair value measurement” and “Note 31
Interests in subsidiaries and other entities” in the “Consolidated
financial statements” section of this report for more
information
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the classification of financial
instruments
Debt investments
Audited | Debt investments classified as Financial assets measured
at fair value through OCI as of 31 December 2018 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 measured at fair value through OCI
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 measured at
fair value through OCI had a fair value of USD 6.7 billion as of
31 December 2018 compared with USD 8.1 billion as of
31 December 2017. (cid:3)
→ Refer to “Note 24 Fair value measurement” in the “Consolidated
financial statements” section of this report for more
information
→ Refer to “Interest rate risk sensitivity to parallel shifts in yield
curves” in this section for more information
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 CET1 capital ratio.
→ Refer to “Note 1 Summary of significant accounting policies”
and “Note 29 Pension and other post-employment benefit
plans” in the “Consolidated financial statements” section of this
report for more information on defined benefit plans
UBS own share exposure
Group Treasury holds UBS Group AG shares to hedge future
share delivery obligations related to employee share-based
compensation and participation plans.
the
Investment Bank holds a very limited number of UBS Group AG
shares, primarily in its capacity as a market-maker in UBS Group
AG shares and related derivatives and to hedge certain issued
structured debt instruments.
In addition,
We began a share repurchase program in March 2018. We
may repurchase up to an aggregate of CHF 2 billion of UBS
Group AG shares until March 2021 under the repurchase
program in accordance with Swiss regulations. During 2018, we
acquired shares for aggregate consideration of CHF 750 million
(USD 762 million). Consistent with our capital returns policy, we
intend to establish an additional share repurchase program
when we have completed the current program. Shares acquired
through the share repurchase program are purchased for the
purpose of capital reduction. Until the shareholders of UBS
Group AG approve cancelation of the shares, shares acquired in
the repurchase program will be held in Group Treasury.
→ Refer to “Note 1 Summary of significant accounting policies” in
→ Refer to “UBS shares” in the “Capital management” section of
the “Consolidated financial statements” section of this report
this report for more information
for more information on the classification of financial
instruments
164
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 under “Probability of default” in this 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 effect 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 effect of a severe country
or sovereign crisis. This involves the development of plausible
stress scenarios for combined stress testing and the identification
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of countries that may potentially be subject to a crisis event,
determining potential losses and making assumptions about
recovery rates depending on the types of credit transactions
involved and their economic
importance to the affected
countries.
Our exposures to market risks are also subject to regular
stress tests that cover major global scenarios, which are used for
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 “Credit risk
profile of the Group” in this 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. This
linked to credit
protection we buy or sell, loan or security underwriting
commitments pending distribution and single-stock margin loans
for syndication.
includes those
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.
165
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 banks 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 issuer of the reference asset (presented within
trading 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.
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
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 under “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 2018.
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 2018, and not taking into account the risk-
reducing effect of master netting agreements, we had
purchased approximately USD 7 billion gross notional of single-
name CDS protection on issuers domiciled in Greece, Italy,
Ireland, Portugal and Spain (GIIPS) and had sold USD 8 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 USD 1 billion notional purchased and USD 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 USD 50 million, with no protection purchased
from counterparties domiciled in the same country as the
reference entity.
this equates
166
Exposures to eurozone countries rated lower than AAA / Aaa by at least one major rating agency
Traded products
(counterparty risk from derivatives and
securities financing)
after master netting agreements
and net of collateral
Trading inventory
(securities and potential
benefits / remaining
exposure from
derivatives)
USD million
TTotal
Banking products
(loans, guarantees, loan commitments)
Exposure
before
hedges
79
Net of
hedges1
78
of which:
unfunded
27
Net of
hedges1
298
126
0
136
36
420
38
Net long
per issuer
56
0
0
54
2
58
38
Exposure
before hedges
244
205
Net of
hedges
164
125
3
2
377
27
12
87
27
12
87
10
0
611
10
0
613
55
24
280
55
22
276
284
103
310
5
15
197
3
84
103
3
84
103
284
99
310
276
4
10
276
0
10
299
314
3
35
24
44
938
201
379
205
0
136
38
425
38
35
24
44
1,030
293
35
208
67
3,475
1,880
0
573
1,023
6
0
35
208
67
3,381
1,788
0
573
1,020
4
0
31.12.18
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
Other2
SSpain
Sovereign, agencies and central bank
Local governments
22
Banks
Other2
119
OOther4
27
TTotal
3,331
11 Before deduction of IFRS 9 ECL allowances and provisions. 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.
63
1,030
1,041
31
60
394
556
27
1
63
1,038
1,181
58
62
394
667
27
1
174
23
1,832
1,587
0
55
190
2
0
9
23
262
9
54
18
180
4
1
9
23
292
36
57
18
180
4
1
20
811
127
21
6
2
98
2
7
44
6
1,848
7
44
6
1,646
67
316
257
2,519
67
318
275
2,667
96
479
290
7,497
96
480
307
7,845
3
3
1,100
2
2
1,093
24
3
635
58
24
3
633
58
0
2
199
58
219
518
0
219
518
0
34
196
652
299
312
1
373
279
21
34
203
763
373
389
21
21
0
383
21
0
385
3
0
238
1
0
230
0
2
831
2
0
50
2
0
50
342
518
20
73
32
32
6
0
0
0
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Risk, treasury and capital management
Risk management and control
Exposure from single-name credit default swaps referencing Greece, Italy, Ireland, Portugal or Spain (GIIPS)
Net position
(after application of counterparty master netting
agreements)
PProtection bought
PProtection sold
USD million
31.12.18
Greece
Italy
Ireland
Portugal
Spain
TTotal
of which: counterparty
domiciled in GIIPS
country
of which: counterparty
domicile is the same as the
reference entity domicile
Notional
4
6,161
127
170
542
7,004
RV
0
78
(9)
(2)
(12)
54
Notional
0
0
0
0
50
50
RV
0
0
0
0
0
0
Notional
0
0
0
0
0
0
RV
0
0
0
0
0
0
Notional
(7)
RV
1
(6,672)
(139)
(27)
(204)
(620)
3
2
14
Buy
notional
0
655
109
107
190
Sell
notional
(3)
(1,166)
(9)
(141)
(267)
PRV
0
38
0
1
8
NRV
0
(99)
(7)
(1)
(6)
(7,529)
(120)
1,061
(1,586)
48
(113)
Holding CDS 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 2018
compared with 31 December 2017. Based on the sovereign
rating categories, as of 31 December 2018, 84% of our
emerging market country exposure was rated investment grade,
compared with 79% as of 31 December 2017.
Our direct net exposure to China was USD 6.3 billion, up
USD 1.2 billion from the prior year, mainly in the trading book.
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
USD million
Investment grade
Sub-investment grade
Total
31.12.18
31.12.17
15,763
3,039
18,803
14,384
3,870
18,254
1 Net of credit hedges (for banking products and for traded products); net long per issuer (for trading inventory). Before deduction of IFRS 9 ECL allowances and provisions.
168
Emerging market net exposures by major geographical region and product type
TTotal
Net of hedges1
Banking products
(loans, guarantees, loan
commitments)
Net of hedges1
Traded products
(counterparty risk from derivatives
and securities financing)
after master netting agreements
and net of collateral
Net of hedges
Trading inventory
(securities and potential
benefits / remaining
exposure from derivatives)
Net long per issuer
331.12.18
31.12.17
331.12.18
31.12.17
331.12.18
31.12.17
331.12.18
31.12.17
USD million
EEmerging America
Brazil
Mexico
Panama
El Salvador
Colombia
Other
EEmerging Asia
China
Hong Kong
South Korea
Thailand
India
Other
EEmerging Europe
Turkey
Russia
Azerbaijan
Bulgaria
Ukraine
Other
MMiddle East and Africa
United Arab Emirates
Kuwait
South Africa
Saudi Arabia
Qatar
Other
TTotal
11 Before deduction of IFRS 9 ECL allowances and provisions.
1,505
1,137
174
45
33
30
86
13,890
6,302
2,920
1,282
1,176
909
1,301
1,189
434
400
145
76
53
82
2,219
572
379
362
275
205
427
1,441
834
364
10
30
31
172
12,398
5,150
2,600
1,491
809
879
1,469
1,667
566
624
224
51
62
141
2,747
547
222
909
286
155
629
820
573
102
42
33
22
48
4,307
1,060
1,377
523
147
553
647
410
134
152
3
30
18
73
4,057
724
1,482
541
140
479
691
1,015
1,153
413
270
139
76
50
67
1,245
418
71
73
166
182
336
520
211
216
51
57
96
1,355
257
19
354
140
148
437
262
183
56
2
7
14
1,693
473
442
391
25
144
218
125
4
111
1
10
659
142
308
60
108
22
18
274
231
21
2
4
16
1,749
339
413
623
8
169
197
95
22
52
1
21
828
286
202
126
147
6
61
18,803
18,254
7,387
6,976
2,739
2,946
422
381
16
1
0
1
23
7,890
4,769
1,101
368
1,005
212
435
49
16
19
5
3
6
315
11
229
1
73
8,676
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757
469
193
5
0
8
82
6,591
4,087
703
327
662
231
581
419
24
360
5
4
26
565
3
0
429
0
133
8,331
169
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 a key focus for the firm as we
continually enhance our ability to respond to disruptions and
maintain effective day-to-day business activities. Cybersecurity
and data protection are critical elements of operational
resilience. Our cybersecurity objectives are set in line with
prevailing international standards and our data protection
standards are intended to align with applicable data protection
regulations and standards. We are investing in preemptive and
detection measures to defend UBS against evolving and highly
sophisticated cyberattacks, to achieve our objectives and meet
applicable standards. Our
focus on
increasing readiness to identify and respond to cyber threats and
data loss, employee training and behaviors, and application and
infrastructure security (including vulnerability management).
investment priorities
UBS has not been affected by any significant business
continuity events in 2018; where local events have occurred,
our business continuity procedures have allowed us to monitor
the safety of staff and to continue our operations with minimal
disruption.
risk
conduct
framework,
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
the
embedding
enhancing
management
information and maintaining momentum on
improving culture. Conduct-related management information is
reviewed at the business and regional governance
level,
providing metrics on employee conduct, clients and markets.
Employee conduct is a central consideration in the annual
compensation process. Our incentive schemes distinguish clearly
between quantitative performance
conduct-related
behaviors, so that achievement against financial targets is not
the only determinant of our employees’ performance
assessment. Furthermore, we continue to pursue behavioral
initiatives, such as the “Principles of Good Supervision,” and
provide mandatory compliance and risk training.
and
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 in Financial 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.
170
laundering,
Financial crime
terrorist
(including money
financing, sanctions violations, fraud, bribery and corruption)
continues to present a risk, as technological innovation and
geopolitical developments increase the complexity of doing
business and heightened regulatory attention persists. An
effective financial crime prevention program remains essential
for the firm. Money laundering and financial fraud techniques
are becoming
increasingly sophisticated, while geopolitical
volatility makes the sanctions landscape more complex. During
2018, we made significant progress in strengthening our anti-
money laundering (AML), terrorist financing, sanctions and fraud
control framework capabilities in response to the continued
elevated regulatory and financial crime challenges.
We continue to invest heavily in our detection capabilities and
core systems as part of our financial crime prevention program.
We are 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.
With financial crime and AML as the primary areas of
supervisory concern, in May 2018, the Office of the Comptroller
of the Currency issued UBS a Cease and Desist Order relating to
certain of UBS’s US branches. In response, UBS has developed a
comprehensive and
the
consolidated and strategic remediation of US-relevant Bank
Secrecy Act / AML issues across all US legal entities, in alignment
with our global AML policies.
sustainable program
to drive
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.
Regulatory reporting remains a challenging area due to both
new and increasing reporting requirements and a general trend
toward increasing scrutiny from regulators globally. In 2018, we
continued to focus on this area, updating our regulatory process
management
regulatory
developments tracking.
framework and enhancing our
As the overall regulatory environment continues to
introduction of new
undergo major change with the
regulation,
international collaboration among
increasing
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 2018,
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 ensuring that all our operational risks, including compliance
and conduct risk, are understood, owned and managed to suit
the firm’s risk appetite. C&ORC sits within the Group
Compliance, Regulatory & Governance
function,
reporting to the Group Chief Compliance and Governance
Officer, who is a member of the Group Executive Board. The
operational risk framework establishes general requirements for
managing
including
controlling operational
compliance and conduct risk at UBS. It is built on the following
pillars:
– classifying
taxonomy
the operational
inherent
through
(GCRG)
risks,
risks
and
risk
– assessing the design and operating effectiveness of controls
through the control assessment process
– assessing
inherent and residual risk through the risk
assessment processes with remediation planned to address
identified deficiencies that are outside accepted levels of
residual risk
– defining operational risk appetite through quantitative
metrics and thresholds and qualitative measures, and
identifying levels of operational risk that exceed appetite and
taking appropriate measures to bring residual risk back within
the defined appetite
The operational risk taxonomy provides a clear and logical
classification of our inherent operational, compliance and
conduct risks, across all 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 effect 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 residual operational risk
exposure against the firm’s risk appetite.
Key control deficiencies that surface during the internal
control and risk assessment processes must be reported in the
operational risk inventory, and sustainable remediation has to 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 and measuring aggregated risk exposure,
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.
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171
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.
An entity-specific AMA model has been applied for UBS
Switzerland AG, but for other regulated entities, the basic
indicator or standardized approaches are adopted for regulatory
capital in agreement with local regulators. In addition, the
underlying methodology of the Group AMA is leveraged for
entity-specific Internal Capital Adequacy Assessment Processes
and for UBS Bank USA’s Dodd-Frank Act stress test submissions.
Currently, the model includes 15 AMA units of measure
(UoM), which are aligned with our operational risk taxonomy.
For each of the model’s UoM, a frequency and severity
distribution is calibrated. The modeled distribution functions 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 UoM
determines the required regulatory capital. Currently, we do not
reflect mitigation through insurance or any other risk transfer
mechanism in our AMA model.
A key assumption when calibrating the data-driven frequency
and severity distributions is that historical losses form a
reasonable proxy for future events. In line with regulatory
expectations, the Group AMA utilizes both historical internal
losses and external losses suffered by the broader industry. A
statistical mechanism aims to ensure that only those industry
losses that are statistically consistent with the internal UBS loss
profile are used in modeling.
well as internal factors including changes in business strategy
and internal control framework enhancements. The data-driven
frequency and severity distributions are reviewed by subject
matter experts and where necessary adjusted based on a review
of qualitative information on the Business Environment and
Internal Control Factors as well as expert judgment with the aim
of accurately forecasting loss.
To maintain risk sensitivity, our model is reviewed semi-
annually and has to be recalibrated at least annually. Any
changes to regulatory capital as a result of a recalibration or
methodology changes are presented to FINMA for approval prior
to their utilization for disclosure purposes.
AMA model confirmation
The Group AMA model is subject to an annual independent
validation performed by Model Risk Management & Control in
line with the Group’s model risk management framework.
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 for 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 the implementation
objectives in more detail 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 risk-weighted
AMA model calibration and review
assets
Initial model outputs are reviewed and adjusted to reflect fast-
changing external developments such as new regulations,
geopolitical change, volatile market and economic conditions, as
→ 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
172
Treasury management
Balance sheet, liquidity and funding management
Strategy, objectives and governance
Audited | We manage our balance sheet, liquidity and funding
positions with the overall objective of optimizing the value of
our franchise across a broad range of market conditions while
considering current and future regulatory constraints. We
employ a number of measures to monitor these positions under
normal and stressed conditions. In particular, we use stress
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 and the
net stable funding ratio. 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.
Audited | Liquidity and funding limits and targets are set at
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 for 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. Market &
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
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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, and centralizes the Group’s
general access to wholesale cash markets in Corporate Center –
Group Asset and Liability Management. In addition, should a
crisis require contingency funding measures to be invoked,
Group Treasury
liquidity
generation with representatives of the relevant business areas.
Group Treasury reports on the Group’s overall liquidity and
funding position, including funding status and concentration
risks, at least monthly to the Group ALCO and the Risk
Committee of the BoD.
for coordinating
responsible
is
Adoption of IFRS 9
Effective 1 January 2018, we adopted IFRS 9, Financial Instruments.
The adoption of IFRS 9 has resulted in changes to the classification
and measurement of certain financial instruments, which have been
applied prospectively from 1 January 2018.
The tables below and on the following pages also present the
balances as of 31 December 2017 under IAS 39, and then upon
adoption of IFRS 9 on 1 January 2018. The analysis of movements
in balance sheet assets and liabilities on the following pages has
been performed in comparison with these balances as of
1 January 2018 (i.e., after the adoption of IFRS 9 classification
and measurement changes). The most significant effects from
the adoption of IFRS 9 are outlined below.
→ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report
for more information on the adoption of IFRS 9
173
Risk, treasury and capital management
Treasury management
Lending
USD 3 billion of financial assets previously included within
Lending were reclassified to fair value and are now reflected
under Other financial assets at amortized cost / fair value. In
addition, USD 5 billion of client brokerage receivables were
reclassified from Lending to Brokerage receivables.
Non-financial assets and financial assets for unit-linked
investment contracts
USD 12 billion of financial assets for unit-linked investment
contracts were reclassified from Trading portfolio to Non-
financial assets and financial assets for unit-linked investment
contracts.
Securities financing transactions at amortized cost
USD 5 billion of securities financing transaction assets and USD 5
liabilities were
billion of securities
reclassified to fair value. As a result, these assets and liabilities
are now reflected under Other financial assets at amortized cost
/ fair value and Other financial liabilities at amortized cost / fair
value, respectively.
transaction
financing
Trading portfolio
USD 12 billion of financial assets for unit-linked investment
contracts were reclassified from Trading portfolio to Non-
financial assets and financial assets for unit-linked investment
contracts in the table below.
Other financial assets at amortized cost / fair value
As previously mentioned, USD 3 billion of financial assets and
USD 5 billion of securities financing transaction assets formerly
included within Lending and Securities financing transactions at
amortized cost, respectively, were reclassified to fair value and
are now reflected under Other financial assets at amortized cost
/ fair value. These increases were offset by a decrease related to
USD 20 billion of brokerage receivables, which were reclassified
from Other financial assets at amortized cost to the new
reporting line Brokerage receivables.
Customer deposits
USD 5 billion of client brokerage payables previously included
within Customer deposits were reclassified to fair value and are
now reflected under the new reporting line Brokerage payables.
Other financial liabilities at amortized cost / fair value
USD 5 billion of securities financing transaction liabilities were
reclassified to fair value and are now reflected under the
reporting line Other financial liabilities at amortized cost / fair
value. This increase was more than offset by a decrease of
USD 30 billion of brokerage payables, which were reclassified
from Other financial liabilities at amortized cost to Brokerage
payables.
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 businesses.
Our liquid assets are managed using limits and targets to
maintain an appropriate level of diversification (issuer, tenor and
other risk characteristics) in response to any anticipated or
unanticipated volatility in funding availability or requirements
caused by adverse market, operational or other firm-specific
events. The liquid asset portfolio size is managed to operate
within the risk appetite of the Board of Directors and relevant
local authorities at Group and legal entity level. (cid:3)
Assets
As of
USD billion
Cash and balances at central banks
Lending2
Securities financing transactions at amortized cost
Trading portfolio3,4
Derivatives and cash collateral receivables on derivative instruments
Brokerage receivables
Other financial assets at AC / FV5
Non-financial assets and financial assets for unit-linked investment contracts4
TTotal assets
Total assets excluding derivatives and cash collateral
11 Opening balance sheet upon adoption of IFRS 9 on 1 January 2018. Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more
information. 2 Consists of loans and advances to banks and customers. 3 Consists of financial assets at fair value held for trading. 4 As of 1 January 2018, financial assets for unit-linked investment contracts
are reported with non-financial assets. Prior to 1 January 2018, these assets were reported within the trading portfolio. 5 Primarily held in Group ALM. Consists of financial assets at fair value not held for trading,
financial assets measured at fair value through other comprehensive income and other financial assets measured at amortized cost, but excludes financial assets for unit-linked investment contracts (from 1 January
2018) and cash collateral receivables on derivative instruments.
331.12.18
(IFRS 9)
108.4
337.2
95.3
104.4
149.8
16.8
90.5
56.1
958.5
808.7
31.12.17
(IAS 39)
90.0
340.8
92.0
129.4
145.3
0.0
107.2
34.6
939.3
794.0
1.1.18
(IFRS 9)1
90.0
332.6
86.9
118.3
145.3
24.4
95.1
46.3
938.8
793.5
% change from
1.1.18
(IFRS 9)
20
1
10
(12)
3
(31)
(5)
21
2
2
174
Balance sheet assets
Group (31 December 2018 vs 1 January 2018)
As of 31 December 2018, balance sheet assets totaled
USD 958 billion, an increase of USD 20 billion from 1 January
2018, driven mainly by increases in cash and balances at central
banks, non-financial assets and financial assets for unit-linked
investment contracts and receivables for securities financing
transactions at amortized cost, which were partly offset by
decreases in trading portfolio assets and brokerage receivables.
Total assets excluding derivatives and cash collateral receivables
on derivative
increased by USD 15 billion to
USD 809 billion as of 31 December 2018. Excluding currency
effects, total assets excluding derivatives and cash collateral
receivables on derivative instruments increased by USD 26
billion.
instruments
Cash and balances at central banks increased by USD 18
billion, mainly in Corporate Center – Group Asset and Liability
Management (Group ALM), primarily resulting from changes in
client activity, which reduced net funding consumption by the
business divisions. Funding available in excess of the business
divisions’ requirements is transferred to Group ALM’s balance
sheet to be reinvested, or to be reduced over time if business
needs remain lower. This increase was partly offset by maturities
of short-term borrowings and a shift to receivables from
securities financing transactions.
Non-financial assets and financial assets for unit-linked
investment contracts increased by USD 10 billion, driven by an
increase
in Asset
Management, with a related increase in the associated liabilities.
in unit-linked
investment
contracts
from
securities
financing
Receivables
transactions at
amortized cost increased by USD 8 billion, mainly in Group ALM,
reflecting a reinvestment of higher cash balances resulting from
the aforementioned changes
in business division funding
consumption, partly offset by client-driven decreases and fair
value movements in the Investment Bank.
Lending increased by USD 5 billion, mainly in Global Wealth
Management, mainly reflecting an increase in the mortgage
portfolio in the Americas and Switzerland and an increase in the
Investment Bank relating to segregated deposits, partly offset by
currency effects.
Derivatives and cash collateral receivables on derivative
instruments increased by USD 4 billion, mainly in the Equities
and Foreign Exchange, Rates and Credit businesses in the
Investment Bank, reflecting increased client activity, partly offset
by a decrease in Corporate Center – Non-core and Legacy
Portfolio, mainly reflecting maturities and trade terminations.
These increases were partly offset by a USD 14 billion
decrease in trading portfolio assets, mainly reflecting client-
driven reductions and trade unwinds in our Equities and Foreign
Exchange, Rates and Credit businesses in the Investment Bank.
Brokerage receivables decreased by USD 8 billion, relating to
client-driven reductions in the Investment Bank.
Other financial assets measured at amortized cost and fair
value decreased by USD 5 billion, mainly reflecting fair value
changes in our Corporate Client Solutions business in the
Investment Bank.
→ Refer to the “Consolidated financial statements” section of this
report for more information
Investment Bank (31 December 2018 vs 1 January 2018)
Investment Bank total assets decreased by USD 11 billion to
USD 259 billion.
Trading portfolio assets in the Investment Bank decreased by
USD 12 billion, mainly
in our Equities business, primarily
reflecting client-driven reductions and trade unwinds. Brokerage
receivables were USD 7 billion lower, resulting from lower client
activity. Receivables from securities financing transactions at
amortized cost decreased by USD 4 billion as a result of lower
client activity as well as a reduction in the stock borrowings used
to hedge certain financing transactions, resulting from fair value
movements in the underlying share price. Other financial assets
measured at amortized cost and fair value decreased by USD 3
billion, primarily related to fair value changes.
Derivatives and cash collateral receivables on derivative
instruments increased by USD 14 billion, mainly in the Equities
and Foreign Exchange, Rates and Credit businesses, reflecting
increased client activity on higher market volatility.
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Asset Management total assets increased by USD 10 billion to
USD 24 billion, reflecting an increase in financial assets for unit-
linked investment contracts driven by net new money inflows,
with an increase in the corresponding liabilities.
Personal & Corporate Banking total assets were stable at
USD 139 billion.
High-quality liquid assets
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. Our HQLA predominantly consist
of assets that qualify as Level 1 in the liquidity coverage ratio
(LCR) framework, including cash, central bank reserves and
government bonds. Group HQLA are held by UBS AG and its
subsidiaries, and may include amounts that are available to meet
funding and collateral needs in certain jurisdictions, but are not
readily available for use by the Group as a whole. These
regulatory
limitations are
local
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, USD 34 billion of assets were
excluded from our daily average Group HQLA for the fourth
quarter of 2018. 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
USD 12 billion to USD 173 billion.
Risk, treasury and capital management
Treasury management
in client activity, which
Group ALM (31 December 2018 vs 1 January 2018)
increased by USD 28 billion to
Group ALM total assets
USD 280 billion, primarily reflecting an USD 18 billion increase in
cash and balances at central banks that mainly resulted from
changes
funding
consumption by the business divisions, partly offset by maturities
of short-term borrowings and a shift to receivables from
securities financing transactions. In addition, receivables from
securities financing transactions at amortized cost increased by
USD 13 billion, reflecting a reinvestment of higher cash balances
resulting from the aforementioned changes in business division
funding consumption.
reduced net
Non-core and Legacy Portfolio (31 December 2018 vs 1 January
2018)
Non-core and Legacy Portfolio total assets decreased by USD 12
billion to USD 35 billion, mainly driven by an USD 11 billion
reduction in derivatives and cash collateral receivables on
derivative instruments, primarily as a result of maturities and
trade terminations. Total assets excluding derivatives and cash
collateral receivables on derivative instruments decreased by
USD 1 billion to USD 4 billion.
Other business divisions (31 December 2018 vs 1 January 2018)
Global Wealth Management total assets increased by USD 5
billion, mainly driven by an increase of USD 3 billion in
derivatives and cash collateral
receivables on derivative
instruments reflecting higher client activity. In addition, lending
increased by USD 3 billion, driven by higher mortgage loans,
partly offset by a decrease in Lombard lending.
176
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 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.
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 changes to the circular have been effective since
1 January 2018.
liquidity
Our daily average LCR for the fourth quarter of 2018 was
136%, compared with 143% in the fourth quarter of 2017,
remaining above the 110% Group LCR minimum communicated
by FINMA. The decrease in the LCR mainly reflected reduced
HQLA, primarily driven by an increase in assets subject to
transfer restrictions in the US branches of UBS AG. In addition,
net cash outflows decreased, mainly driven by lower net cash
outflows from unsecured wholesale funding, partly offset by a
decrease of inflows from fully performing exposures and a
decrease in other cash outflows related to the aforementioned
revised regulatory requirements in 2018.
→ Refer to the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on the liquidity coverage ratio
→ Refer to the “Significant regulated subsidiary and sub-group
information” section of this report for more information on the
liquidity coverage ratio of UBS AG and UBS Switzerland AG
Liquidity coverage ratio
USD billion, except where indicated
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 4Q181
Average 4Q171
96
78
173
26
102
76
42
246
79
29
10
119
173
104
81
185
27
106
80
45
257
84
33
10
128
185
Net cash outflows
130
143
LLiquidity coverage ratio (%)
11 Calculated based on an average of 64 data points in the fourth quarter of 2018 and 63 data points in the fourth quarter of 2017. 2 Calculated after the application of haircuts. 3 Includes cash and balances at
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.
127
136
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Risk, treasury and capital management
Treasury management
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 26 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, derivative
financial assets, 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.
178
Asset encumbrance as of 31 December 2018
USD million
OOn-balance sheet assets
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
of which: cash collateral on securities borrowed
of which: reverse repurchase agreements
Cash collateral receivables on derivative instruments
Loans and advances to customers
of which: mortgage loans
Other financial assets measured at amortized cost
TTotal financial assets measured at amortized cost
FFinancial assets at fair value held for trading1
of which: trading assets – treasury bills / bonds
of which: trading assets – mortgage-backed securities
of which: trading assets – other asset-backed securities
of which: trading assets – other bonds
of which: trading assets – investment fund units
of which: trading assets – equity instruments
of which: loans
DDerivative financial instruments
BBrokerage receivables
of which: customer brokerage
of which: prime brokerage
FFinancial assets at fair value not held for trading1
TTotal financial assets measured at fair value through profit or loss
FFinancial assets measured at fair value through other comprehensive income
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
TTotal non-financial assets
TTotal on-balance sheet assets
USD million
OOff-balance sheet assets
FFair value of assets received that can be sold or repledged
of which: money market paper as collateral
of which: other debt instruments as collateral
of which: equity instruments as collateral
of which: investment fund units as collateral
of which: other
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)
108,370
11,703
5,140
3,205
935
197
9,477
3,589
187
898
2,504
18,804
18,804
18,804
43,2922
4,776
1,660
3,541
33,315
13,446
121,816
53,924
6,385
258
134
4,921
5,277
36,949
43,292
23,514
27,104
171
39,186
93,110
6,495
294,307
151,301
1,091
307,101
3,566
3,566
9,826
13,392
1,099
9,348
6
6
36,758
4,298
4,298
225,719
10,447
330,940
62,096
Encumbered
Assets
otherwise
restricted and
not available
to secure
funding
14,954
390
11,204
3,356
4
Assets
pledged
as collateral
356,745
10,110
211,156
130,853
4,621
5
Unencumbered
Cash and
securities
available to
secure funding
on a Group
and/or legal
entity level
Other
realizable
assets
2,678
109,310
3,922
87,788
16,598
1,003
335,029
184,361
2,678
333,618
302,976
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95,349
13,061
82,288
20,397
6,306
7,828
129,905
126,210
16,840
4,384
12,457
10,163
153,213
6,647
10,105
3,106
19,858
302,976
108,370
16,868
95,349
13,061
82,288
23,602
320,352
170,105
22,563
587,104
104,370
11,161
258
134
6,768
9,716
72,768
3,566
126,210
16,840
4,384
12,457
82,690
330,110
6,667
1,099
9,348
6,647
10,105
7,410
34,608
958,489
Assets that
cannot be
pledged as
collateral
Total Group
assets (IFRS)
483,688
14,421
310,148
150,807
5,628
2,683
TTotal on- and off-balance sheet assets as of 31 December 2018
418,841
51,712
of which: high-quality liquid assets
11 Financial assets for unit-linked investment contracts were reclassified from Financial assets at fair value held for trading to Financial assets at fair value not held for trading upon adoption of IFRS 9 as of 1 January
2018. Refer to “Changes in accounting policies and comparability and transition effects from the adoption of IFRS 9, Financial Instruments” in the “Consolidated financial statements” section of this report for more
information on IFRS 9. 2 Includes USD 32,121 million of assets pledged as collateral that may be sold or repledged by counterparties.
179
Risk, treasury and capital management
Treasury management
Asset encumbrance as of 31 December 2017
USD million
OOn-balance sheet assets
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
of which: cash collateral on securities borrowed
of which: reverse repurchase agreements
Cash collateral receivables on derivative instruments
Loans and advances to customers
of which: mortgage loans
Other financial assets measured at amortized cost
TTotal financial assets measured at amortized cost
FFinancial assets at fair value held for trading
of which: trading assets – treasury bills / bonds
of which: trading assets – mortgage-backed securities
of which: trading assets – other asset-backed securities
of which: trading assets – other bonds
of which: trading assets – investment fund units
of which: trading assets – equity instruments
of which: loans
DDerivative financial instruments
BBrokerage receivables
of which: customer brokerage
of which: prime brokerage
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
90,045
Other
realizable
assets
Assets that
cannot be
pledged as
collateral
Total Group
assets (IFRS)
28
91,951
12,713
79,238
20,120
12,015
27,266
151,379
3,364
10,702
18,087
18,087
18,087
47,4143
4,510
8
2,367
2,559
37,970
3,921
1,289
60
8,633
12,591
979
768
10,843
295,355
149,256
1,086
307,143
3,946
9,403
99,448
65,456
8,676
153
216
6,204
6,554
43,653
3,946
121,285
90,045
14,094
91,951
12,713
79,238
24,040
326,746
167,343
37,815
584,691
129,407
13,186
161
216
9,550
9,881
92,466
3,946
121,285
60,457
311,148
8,889
1,045
9,057
6,563
10,056
7,830
34,551
939,279
481,265
12,290
274,022
184,711
5,552
4,690
FFinancial assets at fair value not held for trading
TTotal financial assets measured at fair value through profit or loss
FFinancial assets measured at fair value through other comprehensive income
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
TTotal non-financial assets
TTotal on-balance sheet assets
174
47,588
2,669
15,260
253
46,284
111,739
8,637
10,709
14,655
621
121,906
1,045
9,057
37
37
24,183
4,681
4,681
224,505
10,102
331,899
65,676
6,563
10,056
3,112
19,731
293,016
USD million
OOff-balance sheet assets
FFair value of assets received that can be sold or repledged
of which: money market paper as collateral
of which: other debt instruments as collateral
of which: equity instruments as collateral
of which: investment fund units as collateral
of which: other
Encumbered
Assets
otherwise
restricted and
not available
to secure
funding
13,341
784
9,373
3,184
Assets
pledged
as collateral
346,243
9,799
188,792
144,099
3,535
18
TTotal on- and off-balance sheet assets as of 31 December 2017
411,919
37,524
of which: high-quality liquid assets
33 Includes USD 36,277 million of assets pledged as collateral that may be sold or repledged by counterparties.
180
Unencumbered
Cash and
securities
available to
secure funding
on a Group
and/or legal
entity level
117,097
1,707
75,856
37,429
2,017
88
341,602
176,849
Assets that
cannot be
pledged as
collateral
Total Group
assets (IFRS)
Other
realizable
assets
4,584
4,584
336,484
293,016
Unencumbered assets available to secure funding on a Group and / or legal entity level by currency
USD 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 effect 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 myriad 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 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.
331.12.18
79,595
131,838
36,874
86,720
335,029
31.12.17
64,827
143,312
43,860
89,603
341,602
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Acute scenario
The acute scenario represents an extreme stress event that
combines a firm-specific crisis with market disruption. This
scenario assumes: (i) substantial outflows on otherwise stable
client deposits, mainly due on demand, (ii) inability to renew or
replace maturing unsecured wholesale funding, (iii) unusually
large drawdowns on loan commitments, (iv) reduced capacity to
generate liquidity from trading assets, (v) liquidity outflows
corresponding to a three-notch downgrade in our long-term
credit rating and a corresponding downgrade in our short-term
rating,
to unwind
triggering contractual obligations
derivative positions or to deliver additional collateral, and
(vii) additional
adverse
movements in the market values of derivatives. It is run daily to
project potential cash outflows under an acute scenario and is
assessed as part of ongoing risk management activities.
requirements due
collateral
(vi)
to
Contingency Funding Plan
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)
181
Risk, treasury and capital management
Treasury management
Liabilities and funding management
Audited | Group Treasury regularly monitors our funding status,
including concentration risks, to ensure we maintain a well-
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)
The funding strategy of UBS Group AG is set annually in the
Funding Plan and is reviewed on a quarterly basis under its
Funding Management Policy governance framework. The
Funding Plan is developed by Group Treasury and approved by
the Group ALCO considering factors such as currency, market
and tenor diversification. The operational execution of funding
transactions defined in the Funding Plan for specific product
types is delegated to the business divisions (e.g., structured
notes to the Investment Bank). Nevertheless, Group Treasury
retains overall responsibility and oversight over all product types.
Group Treasury proposes, sets and oversees limits and targets
for funding generation including concentration limits, weighted
average maturity floors and volume. To ensure effective
diversification and address potential funding concentration,
actual results (monthly and year-to-date activity) are monitored
on a monthly basis and are aggregated in the Group Treasury
Report. Funding diversification is monitored continuously, with a
focus on product type, single-counterparty exposure (as a
percentage of the total), maturity profile, as well as overall
contribution of a particular funding source to the liability mix.
Balance sheet liabilities (31 December 2018 vs 1 January 2018)
Total liabilities increased by USD 19 billion to USD 905 billion as
of 31 December 2018. Non-financial liabilities and amounts due
under
by
USD 10 billion, driven by an increase in liabilities for unit-linked
in
investment contracts, with a corresponding
associated assets.
investment
unit-linked
increased
contracts
increase
Long-term debt issued, which represented 22% of our
funding sources as of 31 December 2018, increased by
USD 9 billion. This reflected a USD 6 billion increase in debt
issued designated at fair value, driven by higher issuances of
structured debt. In addition, long-term debt held at amortized
cost increased by USD 2 billion, primarily as a result of the
issuance of USD 3.4 billion equivalent of euro- and Japanese
yen-denominated senior unsecured debt that contributes to our
total loss-absorbing capacity (TLAC), the issuance of USD 9.7
billion equivalent of senior unsecured debt, and the issuance of
USD 2.5 billion equivalent of US dollar- and Singapore dollar-
denominated high-trigger loss-absorbing additional tier 1 capital
instruments. These issuances were partly offset by the maturity
or early redemption of USD 10.0 billion equivalent of senior
unsecured debt and USD 1.5 billion equivalent of a tier 2 capital
instrument.
Customer deposits increased by USD 6 billion, mainly driven
by higher deposits in Personal & Corporate Banking and in
Global Wealth Management, partly offset by currency effects. As
of 31 December 2018, customer deposits represented 60% of
our funding sources and our ratio of customer deposits to
outstanding loan balances was 131% (31 December 2017:
128%). Derivatives and cash collateral payables increased by
USD 4 billion, in line with the aforementioned increase in
derivative assets and cash collateral receivables.
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.
Short-term borrowings decreased by USD 10 billion, mainly
reflecting net redemptions of commercial paper and certificates
of deposit, related to a reduction in business division net funding
consumption. Short-term borrowings represented 7% of our
funding sources.
Global Wealth Management and Personal & Corporate
Banking provide significant, cost-efficient and reliable sources of
funding. These include core deposits and Swiss covered bonds,
which use (as a pledge) a portion of our portfolio of Swiss
residential mortgages as collateral to generate
long-term
funding. 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. 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.
→ 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
182
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Liabilities and equity
As of
USD billion
Short-term borrowings2
Securities financing transactions at amortized cost
Customer deposits
Long-term debt issued3
Trading portfolio4
Derivatives and cash collateral payables on derivative instruments
Brokerage payables
Other financial liabilities at AC / FV5
Non-financial liabilities and amounts due under unit-linked investment contracts
TTotal liabilities
Total liabilities excluding derivatives and cash collateral
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income6
TTotal equity attributable to shareholders
Equity attributable to non-controlling interests
TTotal equity
TTotal liabilities and equity
11 Opening balance sheet upon adoption of IFRS 9 on 1 January 2018. Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more
information. 2 Consists of short-term debt issued measured at amortized cost and amounts due to banks. 3 Consists of long-term debt issued measured at amortized cost and debt issued designated at fair
value. The classification of debt issued into short-term and long-term does not consider any early redemption features. 4 Consists of financial liabilities at fair value held for trading. 5 Consists of other financial
liabilities measured at amortized cost and other financial liabilities designated at fair value, but excludes cash collateral payables on derivative instruments and amounts due under unit-linked investment contracts.
6 Excludes defined benefit plans and own credit that are recorded directly in Retained earnings.
331.12.18
(IFRS 9)
50.0
10.3
419.8
150.3
28.9
154.6
38.4
18.8
34.2
905.4
750.8
0.3
20.8
(2.6)
30.4
3.9
52.9
0.2
53.1
958.5
31.12.17
(IAS 39)
60.0
17.5
419.6
141.7
31.3
150.2
0.0
42.1
24.5
886.7
736.6
0.3
23.6
(2.2)
25.9
4.8
52.5
0.1
52.6
939.3
1.1.18
(IFRS 9)1
60.0
12.3
414.1
141.7
31.3
150.2
35.8
16.9
24.6
886.9
736.6
0.3
23.6
(2.2)
25.4
4.8
51.9
0.1
52.0
938.8
% change from
1.1.18
(IFRS 9)
(17)
(16)
1
6
(7)
3
7
11
39
2
2
0
(12)
19
20
(17)
2
200
2
2
(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:55)(cid:53)(cid:38)(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:26)
(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:27)
(cid:20)(cid:18)(cid:20)(cid:18)
(cid:20)(cid:18)(cid:20)(cid:19)
(cid:20)(cid:18)(cid:20)(cid:20)(cid:115)(cid:20)(cid:18)(cid:20)(cid:21)
(cid:59)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)
(cid:20)(cid:18)(cid:20)(cid:22)(cid:115)(cid:20)(cid:18)(cid:20)(cid:26)
(cid:20)(cid:18)(cid:20)(cid:27)(cid:115)(cid:20)(cid:18)(cid:21)(cid:26)
(cid:67)(cid:72)(cid:86)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:21)(cid:26)
(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)
183
Risk, treasury and capital management
Treasury management
Funding by product and currency
Short-term borrowings
of which: due to banks
of which: short-term debt issued 1
Securities financing transactions
Cash collateral payables on derivative
instruments
Customer deposits
of which: demand deposits
of which: retail savings / deposits
of which: time deposits
of which: fiduciary deposits
Long-term debt issued2
Brokerage payables
TTotal
UUSD billion
AAll currencies
331.12.18
50.0
11.0
39.0
10.3
31.12.17
60.0
7.7
52.3
17.5
28.9
419.8
181.9
165.8
53.6
18.6
150.3
38.4
697.7
31.0
419.6
193.5
166.0
48.6
11.5
141.7
30.4
700.2
AAll currencies
331.12.18 31.12.17
8.6
1.1
7.5
2.5
7.2
1.6
5.6
1.5
4.1
60.2
26.1
23.8
7.7
2.7
21.5
5.5
4.4
59.9
27.6
23.7
6.9
1.6
20.2
4.3
100.0
100.0
AAs a percentage of total funding sources (%)
CCHF
331.12.18 31.12.17
0.5
0.4
0.1
0.0
UUSD
331.12.18 31.12.17
3.7
0.3
3.4
2.0
EEUR
331.12.18 31.12.17
3.1
0.1
2.9
0.3
1.7
0.2
1.4
0.0
4.0
0.5
3.5
1.2
0.5
0.4
0.0
0.0
1.9
20.5
5.8
7.8
4.9
2.0
6.8
3.8
38.2
2.1
22.4
8.1
8.3
4.6
1.4
12.1
2.5
44.8
0.1
26.0
9.9
15.2
0.8
0.1
1.4
0.1
28.0
0.1
24.9
9.1
14.6
1.0
0.1
1.8
0.1
27.4
1.3
8.0
6.7
0.8
0.1
0.4
4.3
0.4
1.4
7.2
6.4
0.8
0.1
0.0
4.8
0.5
OOther
331.12.18 31.12.17
1.3
0.2
1.1
0.2
1.0
0.4
0.7
0.3
0.8
5.7
3.6
0.0
1.9
0.2
9.1
1.2
0.8
5.5
4.0
0.0
1.3
0.1
1.5
1.3
15.7
17.3
18.1
10.5
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.
(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:55)(cid:53)(cid:38)(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:20)(cid:23)
(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:67)(cid:86)(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:78)(cid:81)(cid:67)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:70)(cid:88)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:85)
(cid:27)(cid:23)
(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:18)(cid:22)
(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:19)(cid:25)
(cid:21)(cid:20)(cid:18)
(cid:36)(cid:84)(cid:81)(cid:77)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:84)(cid:71)(cid:69)(cid:71)(cid:75)(cid:88)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)
(cid:46)(cid:81)(cid:67)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:70)(cid:88)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:85)
(cid:19)(cid:25)(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:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:11)
(cid:55)(cid:53)(cid:38)(cid:2)(cid:26)(cid:23)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)
(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:21)(cid:19)(cid:7)(cid:2)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)
(cid:55)(cid:53)(cid:38)(cid:2)(cid:27)(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:36)(cid:84)(cid:81)(cid:77)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)
(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: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:26)
(cid:23)(cid:18)
(cid:19)(cid:18)
(cid:20)(cid:27)
(cid:21)(cid:26)
(cid:19)(cid:26)(cid:20)
(cid:22)(cid:20)(cid:18)
(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:19)(cid:24)(cid:24)
(cid:85)
(cid:86)
(cid:75)
(cid:85)
(cid:81)
(cid:82)
(cid:71)
(cid:70)
(cid:2)
(cid:84)
(cid:71)
(cid:79)
(cid:81)
(cid:86)
(cid:85)
(cid:87)
(cid:37)
(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: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: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:38)(cid:71)(cid:68)(cid:86)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70)(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:38)(cid:71)(cid:68)(cid:86)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(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:19)(cid:23)(cid:18)
(cid:23)(cid:22)
(cid:19)(cid:27)
(cid:23)(cid:25)
(cid:27)(cid:21)
(cid:26)(cid:20)
(cid:23)(cid:21)
(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:54)(cid:81)(cid:86)(cid:67)(cid:78)(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)
184
Equity
Effective from 1 October 2018, the functional currency of UBS
Group AG and UBS AG’s Head Office in Switzerland changed
from Swiss francs to US dollars and that of UBS AG’s London
Branch from British pounds to US dollars. The presentation
currency of UBS Group AG’s consolidated financial statements
has also changed from Swiss francs to US dollars to align with
the functional currency changes of significant Group entities.
Prior periods have been restated for this presentation currency
change. This has resulted in a change in our foreign currency
translation other comprehensive
life-to-date
balance, with offsetting effects on other components of equity.
→ Refer to “Note 1b Changes in accounting policies, comparability
and other adjustments, excluding the effects of adoption of
income
(OCI)
IFRS 9, Financial Instruments” in the “Consolidated financial
statements” section of this report for more information
Equity attributable to shareholders increased by USD 432
million to USD 52,928 million as of 31 December 2018. This
increase included the effects from the adoption of new
accounting standards, which decreased equity attributable to
shareholders by USD 617 million.
Total comprehensive income attributable to shareholders was
positive USD 4,225 million, reflecting net profit of USD 4,516
million and negative OCI of USD 290 million. Negative OCI
included foreign currency translation losses of USD 541 million,
net losses on cash flow hedges of USD 269 million and negative
OCI related to financial assets measured at fair value through
OCI of USD 45 million, partly offset by own credit gains of
USD 509 million and net gains on defined benefit plans of
USD 56 million.
Share premium decreased by USD 2,755 million, primarily as
a result of the distribution of USD 2,440 million out of the
capital contribution reserve and a reduction of USD 1,009
million from the delivery of treasury shares under share-based
compensation plans, which were partly offset by an increase of
USD 676 million due to the amortization of deferred equity
compensation awards in the income statement.
Net treasury share activity decreased equity attributable to
shareholders by USD 421 million, mainly as a result of share
repurchases of USD 762 million in 2018 under our share
buyback program, which were partly offset by the net disposal
of
share-based
shares
compensation awards.
employee
treasury
related
to
Pro forma net stable funding ratio
USD billion, except where indicated
Available stable funding
Required stable funding
PPro forma net stable funding ratio (%)
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Equity attributable to non-controlling interests increased by
USD 117 million to USD 176 million, primarily related to the
increase of our stake in UBS Securities China from 24.99% to
51% in 2018, resulting in consolidation of this entity and
recognition of non-controlling interest.
→ Refer to “Note 1c Changes in accounting policies and
comparability and transition effects from the adoption of
IFRS 9, Financial Instruments” in the “Consolidated financial
statements” section of this report for more information
→ Refer to the “Group performance” and “Consolidated financial
statements” sections of this report for more information
funding,
short-term wholesale
Net stable funding ratio
The net stable funding ratio (NSFR) framework is intended to
to
limit overreliance on
encourage a better assessment of funding risk across all on- and
off-balance sheet items and to promote funding stability. The
NSFR has 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. 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 2018, the Swiss Federal
Council informed that the introduction of the NSFR, which was
originally planned for 1 January 2018, will be reconsidered at
the end of 2019.
As of 31 December 2018, our estimated pro forma NSFR was
110%, an increase of 5 percentage points from 31 December
2017. This primarily reflected a USD 10 billion decrease in
required stable funding, mainly related to a reduction in trading
assets and prime brokerage receivables as well as an increase in
available stable funding, mainly driven by new issuances and
deposit increases.
331.12.18
31.12.17
469
426
110
458
436
105
185
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 effect 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 derivative positions and
other obligations. Based on our credit ratings as of 31 December
2018, USD 0.0 billion, USD 0.4 billion and USD 1.2 billion would
have been required for such contractual obligations in the event
of a one-notch, two-notch and three-notch reduction in long-
term credit ratings, respectively. Of these, the portion related to
additional collateral is USD 0.0 billion, USD 0.3 billion and
USD 1.0 billion, respectively.
There were three main rating actions on UBS Group AG’s and
UBS AG’s solicited credit ratings in 2018.
On 29 January 2018, Standard & Poor’s Global Ratings
downgraded UBS Group AG’s high-trigger additional tier 1
capital instruments rating to BB (stable outlook) from BB+.
On 18 June 2018, Moody’s Investors Service (Moody’s)
upgraded UBS AG’s long-term senior unsecured debt ratings to
Aa3 (stable outlook) from A1, following the ratings being placed
on review for upgrade on 5 April 2018. Moody’s rates the TLAC-
eligible senior unsecured debt guaranteed by UBS Group AG on
an unsolicited basis (issuance out of UBS Group Funding
(Switzerland) AG). Moody’s also upgraded its long-term rating
for this debt to A3 (stable outlook) from Baa1 on 18 June 2018.
On 22 November 2018, Rating and Investment Information
(R&I) affirmed UBS Group AG’s issuer rating of A while revising
its outlook from stable to positive.
→ 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 tables on the following pages provide 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 includes the effect of
callable features. The presentation of liabilities at carrying value
in this table differs from “Note 27 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.
Derivative financial instruments and Financial assets and
liabilities at fair value held for trading are assigned to the column
Due within 1 month, noting that the respective contractual
maturities may extend over significantly longer periods.
Assets held to hedge unit-linked
investment contracts
(presented within Financial assets at fair value not held for
trading) are assigned to the column Due within 1 month,
consistent with the maturity assigned to the related amounts
due under unit-linked investment contracts (presented within
Other financial liabilities designated at fair value).
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.
186
Maturity analysis of assets and liabilities
USD billion
Assets
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
TTotal financial assets measured at amortized cost
Financial assets at fair value held for trading
of which: assets pledged as collateral that may be sold or
repledged by counterparties
Derivative financial instruments
Brokerage receivables
Financial assets at fair value not held for trading
TTotal financial assets measured at fair value through
profit or loss
FFinancial assets measured at fair value through other
comprehensive income
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
TTotal assets as of 31 December 2018
TTotal assets as of 31 December 2017
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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
108.3
15.4
67.6
23.6
118.5
5.2
338.6
104.4
32.1
126.2
16.8
34.3
281.7
0.1
6.1
626.5
589.1
0.8
17.5
35.1
0.7
54.1
8.8
8.8
0.2
0.4
4.8
13.0
0.4
18.4
5.4
5.4
0.4
0.1
2.6
7.7
0.7
11.2
5.5
5.5
0.3
0.1
1.7
10.2
0.7
12.7
6.1
6.1
0.1
0.0
1.3
25.5
2.0
28.8
7.8
7.8
0.8
0.1
0.0
47.2
8.3
55.6
2.4
2.4
4.2
0.0
63.2
4.5
67.7
11.0
11.0
0.6
63.0
72.5
24.2
26.5
17.0
18.0
18.9
23.5
37.4
36.0
1.3
80.6
86.6
0.0
62.2
59.0
Total
108.4
16.9
95.3
23.6
320.4
22.6
587.1
104.4
32.1
126.2
16.8
82.7
1.4
1.4
330.1
6.7
1.1
9.3
6.6
10.1
7.4
958.5
939.3
1.1
9.3
6.6
10.1
28.6
28.1
187
Risk, treasury and capital management
Treasury management
Maturity analysis of assets and liabilities (continued)
USD billion
Liabilities
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
TTotal financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
Derivative financial instruments
Brokerage payables designated at fair value
Debt issued designated at fair value
Other financial liabilities designated at fair value
TTotal financial liabilities measured at fair value through
profit or loss
Provisions
Other non-financial liabilities
TTotal liabilities as of 31 December 2018
TTotal liabilities as of 31 December 2017
GGuarantees, commitments and forward starting transactions
Loan commitments
Guarantees
Reverse repurchase agreements
Securities borrowing agreements
TTotal as of 31 December 2018
TTotal as of 31 December 2017
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
7.9
9.5
28.9
395.8
4.5
6.9
453.5
28.9
125.7
38.4
15.9
30.1
239.1
3.5
3.6
699.7
684.8
34.1
19.8
9.0
0.0
63.0
71.9
1.0
0.5
13.0
5.4
0.6
0.3
4.5
17.4
0.7
1.2
13.3
0.2
0.0
1.2
7.5
0.0
0.5
0.0
2.3
18.4
1.8
30.7
0.0
24.8
10.2
19.9
22.8
15.3
9.0
20.7
33.0
24.9
10.2
18.0
0.4
18.4
3.2
41.4
41.8
4.8
1.0
5.8
2.2
0.1
2.3
2.8
0.0
2.7
1.8
1.2
2.9
4.6
0.1
4.7
7.1
0.8
7.8
28.6
31.6
17.6
16.2
11.7
15.0
23.6
14.3
37.7
38.9
32.7
35.3
2.3
12.5
8.8
0.3
0.2
0.1
0.3
0.2
0.2
0.1
0.1
0.1
0.1
0.0
0.2
0.0
0.0
0.1
0.0
0.0
0.0
0.0
Total
11.0
10.3
28.9
419.8
132.3
6.9
609.2
28.9
125.7
38.4
57.0
33.6
283.7
3.5
9.0
905.4
886.7
34.7
19.8
9.0
0.0
63.6
72.5
188
Off-balance sheet
Off-balance sheet arrangements
In the normal course of business, we enter into transactions that
may not be recognized in whole or in part on our balance sheet
in accordance with International Financial Reporting Standards.
These transactions include derivative instruments, guarantees
and similar arrangements, as well as some purchased and
retained interests in non-consolidated structured entities, 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.
Off-balance sheet1
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 31 Interests in subsidiaries and other
entities” in the “Consolidated financial statements” section of
this report for more information
Off-balance sheet development in 2018
Forward starting reverse repurchase agreements decreased by
USD 4 billion and forward starting repurchase agreements were
stable at USD 8 billion. Guarantees increased by USD 1 billion,
primarily in Global Wealth Management. Loan commitments
decreased by USD 5 billion, primarily reflecting a decrease in our
Corporate Client Solutions business in the Investment Bank
resulting from commitments that were funded, canceled or
syndicated during the year.
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% change from
31.12.17
USD billion
Total guarantees2
4
Loan commitments2
(13)
Forward starting reverse repurchase agreements
(31)
Forward starting repurchase agreements
(1)
11 The information provided in this table is aligned with the scope disclosed in “Note 34 Guarantees, commitments and forward starting transactions” in the “Consolidated financial statements” section of this
report. 2 Total guarantees and Loan commitments are shown net of sub-participations.
331.12.18
17.0
34.1
9.0
8.3
31.12.17
16.4
39.0
13.0
8.4
As of
The paragraphs on the next page provide more information on
several distinct off-balance sheet arrangements. Additional off-
balance sheet information is primarily provided in Notes 10, 11,
21, 23, 24i, 26, 31 and 33 in the “Consolidated financial
statements” section of this report, as well as in the 31 December
2018 Pillar 3
report under “Pillar 3 disclosures” at
www.ubs.com/investors.
189
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.
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
100,000 and below EUR 210.1 million per depositor in the event
that a German bank becomes unable to meet its obligations.
The
aforementioned deposit
requirements
represent a contingent payment obligation and expose us to
additional risk. As of 31 December 2018, we considered the
probability of a material loss from our obligations to be remote.
insurance
Risk, treasury and capital management
Treasury management
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 2018, the Group did not provide material support, financial or
otherwise, to unconsolidated investment funds when the Group
was not contractually obligated to do so, nor does the Group
have an intention to do so.
Guarantees and similar arrangements
In the normal course of business, we issue various forms of
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 or expected credit losses is required.
As of 31 December 2018, the net exposure (gross values less
sub-participations) from guarantees and similar instruments was
USD 17.0 billion compared with USD 16.4 billion as of
31 December 2017. Fee income from issuing guarantees was
not significant to total revenues in 2018 and 2017.
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 2018, we
recognized net credit loss expenses of USD 12 million related to
loan commitments, guarantees and other credit facilities in
scope of expected credit loss measurement compared with a net
credit loss recovery of USD 22 million in 2017. Provisions
recognized
loan commitments were
USD 116 million as of 31 December 2018 and USD 34 million as
of 31 December 2017.
for guarantees and
→ Refer to “Note 10 Financial assets at amortized cost and other
positions in scope of expected credit loss measurement” and
“Note 23 Expected credit loss measurement” in the “Consolidated
financial statements” section of this report for more information
on provisions for loan commitments and guarantees
190
Contractual obligations
USD million
Long-term debt obligations
Finance lease obligations
Operating lease obligations
Purchase obligations
TTotal as of 31 December 2018
Payment due by period
Within 1 year
56,118
3
684
1,057
57,862
1–3 years
37,271
2
1,189
820
39,283
3–5 years
Over 5 years
Total
27,457
45,749
166,595
0
938
266
18
1,877
180
24
4,688
2,324
28,661
47,823
173,630
Contractual obligations
The table above summarizes payments due by period under
contractual obligations as of 31 December 2018.
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 33
Operating leases and finance leases” in the “Consolidated
financial statements” section of this report.
Long-term debt obligations as of 31 December 2018 were
USD 167 billion. They consisted of debt issued designated at fair
value (USD 59 billion) and long-term debt issued (USD 107
billion) and represent estimated future interest and principal
payments on an undiscounted basis.
→ Refer to “Note 27 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
in
amount of these interest rate swaps was USD 64 billion as of
31 December 2018. Debt issued designated at fair value mainly
consists of structured notes and is generally economically
hedged, but it would not be practicable to 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 Amounts
due to banks, Payables from securities financing transactions,
Cash collateral payables on derivative instruments, Customer
deposits, Other financial liabilities measured at amortized cost,
Financial liabilities at fair value held for trading, Derivative
financial instruments, Brokerage payables designated at fair
value, Other financial
liabilities designated at fair value,
Provisions and Other non-financial liabilities are excluded from
the table above.
→ Refer to the respective Notes, including “Note 28 Hedge
accounting,” in the “Consolidated financial statements” section
of this report for more information
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191
Risk, treasury and capital management
Treasury management
Currency management
Strategy, objectives and governance
Beginning 1 October 2018, the US dollar has become the
presentation currency of the Group. As a result of the change,
our Group currency management activities have been
recalibrated to reduce adverse currency effects on our reported
financial results in US dollars, 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-US dollar assets and liabilities; (ii) sell-down of non-US dollar
profits and losses; and (iii) selective hedging of anticipated non-
US dollar profits and losses to further mitigate the effect of
structural imbalances in the balance sheet. Non-trading foreign
exchange risks arising from transactions denominated in a
currency other than the reporting entity’s functional currency are
managed under market risk limits. Activities performed by Group
ALM include the management of the structural currency
composition at the consolidated Group level.
Currency-matched funding and investment of non-US dollar
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-US dollar assets and liabilities.
Net investment hedge accounting is applied to non-US dollar
core investments to balance the effect of foreign exchange
movements on both common equity tier 1 (CET1) capital and
the CET1 capital ratio.
→ Refer to “Note 1a Significant accounting policies” and “Note 11
Derivative instruments” in the “Consolidated financial
statements” section of this report for more information
Sell-down of non-US dollar reported profits and losses
Income statement items of foreign subsidiaries and branches
with a functional currency other than the US dollar are
translated into US dollars on a monthly basis using the relevant
month-end rate. To reduce earnings volatility on the translation
of previously recognized earnings in foreign currencies, Group
ALM centralizes the profits and losses arising in UBS AG and its
branches and sells or buys the profit or loss for US dollars. 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 US
dollar are integrated and managed as part of our net investment
hedge accounting program.
Hedging of anticipated non-US dollar 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
192
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 2018, cash and cash equivalents totaled
USD 126.1 billion, an
increase of USD 21.2 billion from
31 December 2017, driven by net cash inflows from operating
activities, partly offset by net cash outflows from investing
activities.
Operating activities
In 2018, net cash inflows from operating activities were
USD 28.9 billion. Net operating cash flow, before changes in
operating assets and liabilities and income taxes paid, was an
outflow of USD 0.2 billion. Changes in operating assets and
liabilities resulted in net cash inflows of USD 29.1 billion, mainly
driven by an USD 11.4 billion net inflow related to brokerage
receivables and payables, a USD 11.1 billion net inflow from
financial assets at fair value not held for trading and other
financial assets and liabilities, a USD 11.1 billion inflow from
financial assets and liabilities at fair value held for trading and
derivative financial instruments, and a USD 9.1 billion inflow
from customer deposits. These inflows were partly offset by a
net outflow from securities financing transactions of USD 11.2
billion and a net outflow from lending balances to customers of
USD 5.2 billion.
In 2017, net cash outflows from operating activities were
USD 52.1 billion. Net operating cash flow, before changes in
operating assets and liabilities and income taxes paid, was an
inflow of USD 6.7 billion. Changes in operating assets and
liabilities resulted in net cash outflows of USD 58.8 billion,
mainly driven by a USD 23.5 billion net outflow related to
financial assets and liabilities at fair value held for trading and
derivative financial instruments, a USD 14.5 billion net outflow
from loans and advances to customers, and a USD 13.0 billion
net outflow from customer deposits.
Investing activities
Investing activities resulted in a net cash outflow of USD 6.1
billion in 2018, primarily related to net cash outflows of USD 3.8
billion from the purchase and redemption of debt securities
measured at amortized cost.
In 2017, investing activities resulted in a net cash inflow of
USD 5.2 billion, primarily related to gross cash inflows of
USD 15.3 billion from the disposal and redemption of financial
assets measured at fair value through other comprehensive
income, partly offset by gross cash outflows of USD 8.6 billion
related to the purchase of financial assets measured at fair value
through other comprehensive income.
Financing activities
Financing activities resulted in a net cash inflow of USD 0.2
billion in 2018, mainly due to the net issuance of USD 16.3
billion of long-term debt, which includes debt issued designated
at fair value, partly offset by net repayments of USD 12.2 billion
of short-term debt, a dividend distribution to shareholders of
USD 2.4 billion and net cash used to acquire treasury shares of
USD 1.4 billion.
In 2017, financing activities resulted in a net cash inflow of
USD 27.0 billion, mainly due to the net issuance of USD 24.5
billion of short-term debt and USD 6.3 billion of long-term debt,
which includes debt issued designated at fair value, partly offset
by a dividend distribution to shareholders of USD 2.3 billion.
→ Refer to “Primary financial statements” in the “Consolidated
financial statements” section of this report for more
information on cash flows
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Statement of cash flows (condensed)
USD 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
For the year ended
331.12.18
28,913
(6,132)
190
(1,726)
21,245
126,079
31.12.17
(52,099)
5,186
26,988
5,745
(14,180)
104,834
193
Risk, treasury and capital management
Capital management
Capital management
Capital management objectives, planning and activities
We have adopted IFRS 16, Leases, as of 1 January 2019,
which will increase RWA and leverage ratio denominator (LRD)
by approximately USD 3.5 billion, respectively.
→ Refer to the “Our strategy” and “Performance targets and
measurement” sections of this report for more information on
our capital and resource guidelines 2019 –2021
→ 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 to
achieve 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. Effective
1 January 2019, changes in resource allocation from Corporate
Center to the business divisions will be reflected in the equity
attribution to the business divisions, alongside other updates to
the equity attribution framework.
→ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on the
alignment of the equity attribution framework to the revised
resource allocation methodology
→ Refer to “Equity attribution and return on attributed equity” in
this section for more information on how equity is attributed to
our business divisions
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 2018, our common equity tier 1 (CET1)
capital ratio and our CET1 leverage ratio were 12.9% and 3.8%,
respectively, each of which is in line with our capital guidance
and above the requirements for Swiss systemically relevant
banks (SRBs) as well as the Basel Committee on Banking
Supervision (BCBS) requirements. We believe that our capital
strength is a source of confidence for our stakeholders,
contributes to our strong credit ratings and is one of the
foundations of our success.
implement
In December 2017, the BCBS announced the finalization of
the Basel III framework, which we expect to be implemented by
FINMA into national law with an effective date of 1 January
2022. During 2018, we established a multi-year program to
assess, design and eventually
the applicable
requirements prescribed by FINMA. We are currently assessing
the final revisions of the market risk framework issued by the
BCBS in January. Until the assessment is complete, we continue
to estimate that the introduction of the revised Basel III
framework will likely lead to a further net increase in risk-
weighted assets (RWA) of approximately USD 35 billion, before
taking into account mitigating 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 and we have
assessed the effect of incorporating elements of the regulatory
Loss Potential Analysis in our consolidated stress test.
194
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
future TLAC
the current and potential
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.
→ Refer to “Capital and capital ratios of our significant regulated
subsidiaries” in this section for more information
Audited | In 2018, we continued to focus on meeting the Swiss
SRB capital requirements applicable as of 1 January 2020.
Therefore, we executed a series of transactions, including:
– the issuance of USD 2.5 billion equivalent of high-trigger loss-
instruments
absorbing additional
(AT1) capital
denominated in US dollars and Singapore dollars;
tier 1
– the issuance of USD 3.4 billion equivalent of TLAC-eligible
senior unsecured debt denominated in euros and Japanese
yen,
– the issuance of USD 0.4 billion of high-trigger loss-absorbing
AT1 capital instruments related to DCCP awards granted for
the performance year 2018; and
– the call of USD 1.4 billion equivalent of low-trigger tier 2
capital instruments.(cid:3)
As of 31 December 2018, these transactions contributed to
our TLAC ratio amounting to 31.7% of our RWA and 9.3% of
our LRD compared with the respective minimum requirements of
26.3%, excluding countercyclical buffer requirements, and
9.2%, which are applicable as of 1 January 2020. These
minimum requirements include the current applicable rebates.
→ Refer to the “Swiss SRB going and gone concern requirements
– time series” table in this section for more information
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195
Risk, treasury and capital management
Capital management
Swiss SRB total loss-absorbing capacity framework
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 Swiss SRB rules applicable as of 1 January 2020,
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
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 2018
for UBS Group AG consolidated,
the
31 December 2018 Pillar 3 report under “Pillar 3 disclosures” at
www.ubs.com/investors.
is provided
in
as
and
other
Capital
Capital
regulatory
information
of
31 December 2018 for UBS AG consolidated is provided in the
UBS Group AG and UBS AG Annual Report 2018 under “Annual
reporting” and in the 31 December 2018 Pillar 3 report under
“Pillar 3 disclosures” at www.ubs.com/investors.
other
of
31 December 2018 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 2018 Pillar 3
report under “Pillar 3 disclosures” at www.ubs.com/investors.
information
regulatory
and
as
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. Effective from 1 January 2018, these filters are fully phased
in and entirely reflected in our capital, RWA and capital ratios.
196
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 countercyclical buffer requirements implemented
in other Basel Committee member jurisdictions. The requirements
were phased in by and became fully effective on 1 January 2019.
The effect as of 31 December 2018 was immaterial.
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 CET1 capital, loss-absorbing AT1 or certain low-
trigger tier 2 capital instruments are used to meet the gone
concern requirements, such requirements may be reduced by up
to 2.86 percentage points for the RWA-based requirement and
up to 1 percentage point for the LRD-based requirement. The
combined reduction applied for resolvability measures and the
aforementioned gone concern requirement reduction for the use
of low-trigger loss-absorbing AT1 and tier 2 capital instruments
may not exceed 5.72 percentage points for the RWA-based
requirement of 14.3% and 2 percentage points for the LRD-
based requirement of 5%. The amount of the rebate for
improved resolvability is assessed annually by FINMA, and will be
phased in until 1 January 2020. Based on actions we completed
up to December 2017 to improve resolvability, FINMA granted a
rebate on the gone concern requirement of 40% of the
aforementioned maximum rebate in the fourth quarter of 2018,
which resulted in a reduction of 2.29 percentage points for the
RWA-based requirement and 0.8 percentage points for the LRD-
based requirement. We also qualify for an additional rebate for
the use of low-trigger tier 2 capital instruments to fulfill gone
concern requirements, and have agreed with FINMA to quantify
this rebate at a later date.
In this report, we refer to the RWA-based gone concern
requirements as gone
capacity
concern
requirements, and the RWA-based gone concern ratio is referred
to as the gone concern loss-absorbing capacity ratio.
loss-absorbing
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Swiss SRB going and gone concern requirements – time series1
GGoing concern
Minimum capital
Buffer capital including applicable add-ons2
TTotal going concern
of which: common equity tier 1 capital 2
of which: maximum high-trigger loss-absorbing additional tier 1 capital
RRisk-weighted assets (%)
RRequirements
11.1.19
331.12.18
11.1.20
331.12.18
LLeverage ratio (%)
RRequirements
11.1.19
8.00
5.15
13.15
9.75
3.40
8.00
5.58
13.58
9.68
3.90
8.00
6.30
14.30
10.00
4.30
3.00
1.00
4.00
2.90
1.10
3.00
1.50
4.50
3.20
1.30
11.1.20
3.00
2.00
5.00
3.50
1.50
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 40% of the maximum rebate on the gone concern requirements, which was granted by FINMA due to improved resolvability. This resulted in a reduction of 2.29 percentage
points for the RWA-based requirement and 0.8 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 tier 2 capital instruments to meet the gone concern requirements. 2 Going concern capital ratio requirements as of 31 December 2018 include a countercyclical buffer requirement of 0.29%.
Requirements for subsequent periods exclude the effect of the countercyclical buffer requirement, as potential future countercyclical buffer requirements are not yet known.
7.48
7.48
20.62
9.74
9.74
23.32
12.01
12.01
26.31
2.52
2.52
6.52
3.36
3.36
7.86
4.20
4.20
9.20
197
Risk, treasury and capital management
Capital management
Swiss SRB going and gone concern requirements and information1
As of 31.12.18
USD 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: 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 31.12.18
USD 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
RRequirement (%)
9.75
RRWA
AActual (%)
12.94
RRequirement
25,711
EEligible
34,119
RRequirement (%)
2.90
LLRD
AActual (%)
3.77
RRequirement
26,233
EEligible
34,119
3.40
6.89
8,967
18,167
1.10
2.01
9,951
18,167
3.71
0.90
2.28
19.82
11.93
11.93
31.75
9,790
2,369
6,008
52,287
31,452
31,452
83,738
34,678
19,718
19,718
54,396
13.154
7.486
7.48
20.62
1.08
0.26
0.66
5.78
3.48
3.48
9.26
9,790
2,369
6,008
52,287
31,452
31,452
83,738
36,184
22,796
22,796
58,980
4.005
2.526
2.52
6.52
RRequirement (%)
10.29
RRWA
AActual (%)
12.94
RRequirement
27,135
EEligible
34,119
RRequirement (%)
3.50
LLRD
AActual (%)
3.77
RRequirement
31,661
EEligible
34,119
SSwiss SRB as of 1.1.20
4.30
4.61
11,341
12,160
1.50
1.34
13,569
12,160
3.71
9,790
1.08
9,790
0.90
17.55
2,369
46,279
0.26
5.12
2,369
46,279
5.008
14.597
38,476
12.019
12.01
26.60
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 40% of the maximum rebate on the gone concern requirements, which was granted by FINMA and will be phased in until 1 January 2020. This table does not include a rebate
for the usage of low-trigger loss-absorbing 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. 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 5.15%, including the effect of countercyclical buffers of 0.29%. 5 Consists of a minimum leverage ratio requirement of 3% and a buffer leverage ratio requirement of 1%. 6 Includes
applicable add-ons of 0.72% for RWA and 0.25% for LRD and a rebate of 1.42% for RWA and 0.48% for LRD. 7 Consists of a minimum capital requirement of 8% and a buffer capital requirement of 6.59%,
including the effect of countercyclical buffers of 0.29% 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 2.29% for RWA and 0.80% for LRD.
37,460
37,460
83,738
37,460
37,460
83,738
31,681
31,681
70,158
37,993
37,993
83,223
14.20
14.20
31.75
4.209
4.20
9.20
4.14
4.14
9.26
45,230
198
Total loss-absorbing capacity
Swiss SRB going and gone concern information
USD million, except where indicated
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 capital4
TTotal tier 2 capital
TTotal going concern capital
Gone concern loss-absorbing capacity5
High-trigger loss-absorbing tier 2 capital
Low-trigger loss-absorbing tier 2 capital4
Non-Basel III-compliant tier 2 capital6
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
SSwiss SRB, including
transitional arrangements
SSwiss SRB as of 1.1.20
331.12.18
31.12.171
331.12.18
31.12.17
34,1192
9,790
2,369
12,160
46,279
0
6,008
6,008
52,287
771
693
1,464
29,988
31,452
36,412
7,034
1,1153
8,150
44,562
447
8,077
8,524
53,086
388
707
1,095
27,937
29,032
34,1192
9,790
2,369
12,160
46,279
33,516
7,034
2,445
9,479
42,995
46,279
42,995
6,779
693
7,471
29,988
37,460
223
8,466
707
9,396
27,937
37,333
83,738
82,118
83,738
80,328
263,747
904,598
244,559
910,591
263,747
904,598
243,636
909,032
19.8
12.9
11.9
31.7
21.7
14.9
11.9
33.6
17.5
12.9
14.2
31.7
17.6
13.8
15.3
33.0
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Leverage ratios (%)
Going concern leverage ratio
of which: common equity tier 1 leverage ratio
4.7
3.69
4.1
Gone concern leverage ratio
Total loss-absorbing capacity leverage ratio
8.8
11 As of 31 December 2017, the phase-in deduction applied for the purpose of the CET1 capital calculation was 80%. These effects are fully phased in from 1 January 2018. Prudential filters applied to RWA and LRD
are also fully phased in from 1 January 2018. 2 IFRS 9 expected credit loss effects are considered on a phased-in basis in accordance with the FINMA guidance. Refer to “Introduction and basis for preparation” of
our 31 December 2018 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 3 Low-trigger loss-absorbing additional tier 1 capital of USD 2,445 million was partly offset by
required deductions for goodwill of USD 1,329 million. 4 Under the transitional rules of the Swiss SRB framework, 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. 5 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. 6 Non-Basel III-compliant tier 2 capital instruments qualify as gone concern instruments.
5.1
3.77
4.1
9.3
5.8
3.77
3.5
9.3
5.8
4.00
3.2
9.0
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Risk, treasury and capital management
Capital management
Audited |
Reconciliation of IFRS equity to Swiss SRB common equity tier 1 capital
USD million
TTotal IFRS equity
Equity attributable to non-controlling interests
Defined benefit plans, net of tax
Deferred tax assets recognized for tax loss carry-forwards
Deferred tax assets on temporary differences, excess over threshold
Goodwill, net of tax1
Intangible assets, net of tax
Compensation-related components (not recognized in net profit)
Expected losses on advanced internal ratings-based portfolio less provisions2
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 debt instruments at fair value through OCI, net of tax
Prudential valuation adjustments
Accruals for proposed dividends to shareholders
Other
TTotal common equity tier 1 capital
331.12.18
53,103
(176)
0
(6,107)
(586)
(6,514)
(251)
(1,652)
(368)
(109)
(397)
(4)
(120)
(2,648)
(52)
34,119
31.12.17
52,554
(59)
0
(5,947)
(879)
(6,646)
(220)
(1,662)
(650)
(360)
136
(198)3
(61)
(2,501)
8
33,516
11 Includes goodwill related to significant investments in financial institutions of USD 176 million (31 December 2017: USD 359 million) presented on the balance sheet line “Investments in associates.” 2 From
1 January 2018, provisions have been calculated in accordance with IFRS 9. Provisions in prior periods have been calculated in accordance with International Accounting Standard (IAS) 39. 3 As of 31 December
2017 related to equity and debt instruments available for sale.
(cid:3)
Total loss-absorbing capacity and movement under Swiss
SRB rules applicable as of 1 January 2020
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.
Our CET1 capital increased by USD 0.6 billion to USD 34.1
billion as of 31 December 2018, mainly as a result of operating
profit before tax, partly offset by accruals for capital returns to
shareholders and our share repurchase program.
→ Refer to “UBS shares” in this section for more information on
the share repurchase program
Our loss-absorbing additional tier 1 (AT1) capital increased by
USD 2.7 billion to USD 12.2 billion as of 31 December 2018,
primarily due to the issuance of USD 2.5 billion equivalent of US
capital
dollar- and Singapore dollar-denominated AT1
instruments and a USD 0.4 billion increase related to Deferred
Contingent Capital Plan
(DCCP) awards granted for the
performance year 2018, partly offset by currency effects.(cid:3)
Gone concern loss-absorbing capacity and movement
Audited | Our total gone concern loss-absorbing capacity included
USD 30.0 billion of TLAC-eligible senior unsecured debt, and
increased by USD 0.1 billion to USD 37.5 billion as of
31 December 2018.(cid:3) The issuance of USD 3.4 billion of TLAC-
eligible senior unsecured debt during the year was offset by a
call of a low-trigger tier 2 capital instrument in the amount of
USD 1.4 billion, a USD 1.1 billion decrease in eligibility of DCCP
awards and two TLAC-eligible senior unsecured bonds due to
the shortening of the residual tenor, and currency effects.
Loss-absorbing capacity and leverage ratios
Our CET1 capital ratio was 12.9%, a decrease of 0.8 percentage
points compared with 31 December 2017, reflecting a USD 0.6
billion increase in CET1 capital and a USD 20.1 billion increase in
risk-weighted assets (RWA).
Our CET1 leverage ratio increased 0.08 percentage points to
3.8% as of 31 December 2018, reflecting the aforementioned
increase in CET1 capital and a USD 4 billion decrease in the
leverage ratio denominator (LRD).
Our gone concern loss-absorbing capacity ratio decreased
1.1 percentage points to 14.2%, primarily driven by the
aforementioned RWA increase. Our gone concern leverage ratio
remained at 4.1%.
200
Swiss SRB total loss-absorbing capacity movement1
USD million
Going concern capital
CCommon equity tier 1 capital as of 31.12.17
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
IFRS 9 transition effect
IFRS 15 transition effect
CCommon equity tier 1 capital as of 1.1.18
Operating profit before tax
Current tax (expense) / benefit
Foreign currency translation effects
Compensation- and own shares-related capital components (including share premium)
Defined benefit plans
Share repurchase program2
Accruals for proposed dividends to shareholders
Other
CCommon equity tier 1 capital as of 31.12.18
LLoss-absorbing additional tier 1 capital as of 31.12.17
Goodwill, additional phase-in effect
LLoss-absorbing additional tier 1 capital as of 1.1.18
Issuance of high-trigger loss-absorbing additional tier 1 capital
Foreign currency translation and other effects
LLoss-absorbing additional tier 1 capital as of 31.12.18
TTier 2 capital as of 31.12.17
Call of a low-trigger loss-absorbing tier 2 capital instrument
Amortization due to shortening of residual tenor
Amortization of Deferred Contingent Capital Plan (DCCP) awards
Foreign currency translation and other effects
TTier 2 capital as of 31.12.18
TTotal going concern capital as of 31.12.17
TTotal going concern capital as of 31.12.18
Gone concern loss-absorbing capacity
TTier 2 capital as of 31.12.17
Amortized portion, which qualifies as gone concern loss-absorbing capacity
Call of a low-trigger loss-absorbing tier 2 capital instrument
Decrease in eligibility due to shortening of residual tenor
Foreign currency translation and other effects
TTier 2 capital as of 31.12.18
TTLAC-eligible senior unsecured debt as of 31.12.17
Issuance of TLAC-eligible senior unsecured debt instruments
Decrease in eligibility due to shortening of residual tenor
Foreign currency translation and other effects
TTLAC-eligible senior unsecured debt as of 31.12.18
TTotal gone concern loss-absorbing capacity as of 31.12.17
TTotal gone concern loss-absorbing capacity as of 31.12.18
SSwiss SRB, including
transitional arrangements
SSwiss SRB as of 1.1.20
36,412
(1,189)
(377)
(1,329)
(284)
(28)
33,204
5,991
(1,043)
(399)
38
(220)
(762)
(2,648)
(42)
34,119
8,150
1,329
9,479
2,931
(251)
12,160
8,524
(1,438)
(379)
(431)
(269)
6,008
53,086
52,287
1,095
379
(10)
1,464
27,937
3,394
(877)
(466)
29,988
29,032
31,452
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33,516
(284)
(28)
33,204
5,991
(1,043)
(399)
38
(220)
(762)
(2,648)
(42)
34,119
9,479
9,479
2,931
(251)
12,160
42,995
46,279
9,396
(1,438)
(228)
(258)
7,471
27,937
3,394
(877)
(466)
29,988
37,333
37,460
Total loss-absorbing capacity
TTotal loss-absorbing capacity as of 31.12.17
TTotal loss-absorbing capacity as of 31.12.18
11 The movement table line items, except operating profit before tax, current taxes and foreign currency translation effects, represent the sum of the respective first quarter to third quarter 2018 movements (under
the presentation currency Swiss franc translated at spot rates prevailing at each quarter end to US dollars) and the respective fourth quarter 2018 movements (under the presentation currency US dollars) disclosed in
the fourth quarter 2018 report. 2 Refer to “UBS shares” in this section for more information.
82,118
83,738
80,328
83,738
201
Risk, treasury and capital management
Capital management
Additional information
Active management of sensitivity to currency movements
Corporate Center – Group Asset and Liability Management
(Group ALM) is mandated to minimize adverse effects from
changes in currency rates on our CET1 capital and CET1 capital
ratio. A significant portion of our capital and RWA are
denominated in Swiss francs, euros, British pounds and other
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
these currencies, a significant
appreciation of the US dollar against these currencies could
benefit our capital ratios, while a significant depreciation of the
US dollar 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 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 US
dollar against other currencies.
the capital
in
Sensitivity to currency movements
Risk-weighted assets
We estimate that a 10% depreciation of the US dollar against
other currencies would have increased our RWA by USD 11
billion and our CET1 capital by USD 1.2 billion as of
31 December 2018 and reduced our CET1 capital ratio by 9
basis points. Conversely, we estimate that a 10% appreciation
of the US dollar against other currencies would have reduced
our RWA by USD 10 billion and our CET1 capital by
USD 1.1 billion and increased our CET1 capital ratio by 9 basis
points.
202
Leverage ratio denominator
is also sensitive to foreign exchange
leverage ratio
Our
movements as a result of 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 US
dollar against other currencies is actively monitored.
We estimate that a 10% depreciation of the US dollar against
other currencies would have increased our LRD by USD 57 billion
and reduced our Swiss SRB going concern leverage ratio by 15
basis points. Conversely, we estimate that a 10% appreciation
of the US dollar against other currencies would have reduced
our LRD by USD 51 billion and increased our Swiss SRB going
concern leverage ratio by 16 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
21 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
associated with
at
USD 4.5 billion as of 31 December 2018, a reduction of USD 0.3
billion from 31 December 2017. 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.
→ Refer to “Operational risk” in the “Risk management and
these operational
categories
risk
control” section of this report for more information
→ Refer to “Note 21 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
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 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more capital and
other regulatory information on our significant regulated
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 Global 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.
The joint liability amounts have declined as obligations
matured, terminated or were novated following the transfer
date. As of 31 December 2018, the liability of UBS Switzerland
AG amounted to less than CHF 25.6 billion (or the US dollar
equivalent of 26.1 billion). The respective liability of UBS AG has
been substantially extinguished.
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Risk, treasury and capital management
Capital management
Risk-weighted assets
RWA development in 2018
As of 31 December 2018, RWA increased by USD 20.1 billion to
USD 263.7 billion, mainly driven by a USD 16.2 billion increase in
credit and counterparty credit risk and a USD 7.4 billion increase
in market risk, partly offset by a USD 3.9 billion decrease in
operational risk.
The
total RWA
increase was primarily driven by a
USD 19.1 billion increase from model updates and methodology
and policy changes, primarily relating to credit and counterparty
credit risk. RWA also increased by USD 5.3 billion from asset size
and other movements. These increases were partly offset by
a decrease in currency effects of USD 2.6 billion and from lower
net regulatory add-ons of USD 1.7 billion, whereby USD 5.9
billion lower regulatory add-ons for credit and counterparty
credit risk were partly offset by USD 4.3 billion higher regulatory
add-ons for market risk.
→ Refer to the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on RWA movements and definitions of RWA movement key
drivers
Movement in risk-weighted assets by key driver
USD billion
Credit and counterparty credit risk2
Non-counterparty-related risk
Market risk
Operational risk
TTotal
RWA as of
31.12.17
131.8
17.8
12.6
81.5
243.6
Currency
effects
(2.3)
Methodology
and policy
changes
4.0
Model
updates /
changes
18.5
Regulatory
add-ons
(5.9)
Asset size
and other1
1.8
RRWA as of
31.12.18
147.9
(0.3)
0.0
0.0
(2.6)
0.0
0.0
0.0
4.0
0.0
0.0
(3.4)
15.1
0.0
4.3
0.0
(1.7)
0.8
3.2
(0.5)
5.3
18.3
20.0
77.6
263.7
11 Includes the Pillar 3 categories “Asset size,” “Credit quality of counterparties,” “Acquisitions and disposals” and “Other.” Refer to the 31 December 2018 Pillar 3 report 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.
Credit and counterparty credit risk
Credit and counterparty credit risk RWA increased by USD 16.2
billion to USD 147.9 billion as of 31 December 2018. This
increase was primarily driven by increases from model updates
of USD 18.5 billion, methodology and policy changes of USD 4.0
billion and asset size of USD 3.2 billion, and partly offset by
decreases in regulatory add-ons of USD 5.9 billion, asset quality
of USD 1.7 billion, currency effects and other changes.
Movement in credit and counterparty credit risk RWA by key driver1
USD billion
Total credit and counterparty credit risk RWA as of 31.12.17
Asset size
Asset quality
Model updates
Methodology and policy changes
Regulatory add-ons
Acquisitions and disposals
Foreign exchange movements
Other
Total movement
Total credit and counterparty credit risk RWA as of 31.12.18
Global
Wealth
Management
26.4
Personal &
Corporate
Banking
45.1
Asset
Management
1.5
1.3
0.3
2.8
0.1
(1.8)
0.5
(0.3)
0.0
2.9
29.3
1.9
(2.8)
15.6
0.3
(6.7)
0.0
(0.4)
(0.3)
7.6
52.7
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
1.6
Investment
Bank
44.0
(0.5)
1.2
0.1
3.5
2.6
0.1
0.1
0.0
0.0
0.0
0.0
0.0
(1.3)
(0.1)
0.0
5.8
49.8
0.0
0.0
1.9
CC –
Services
1.8
CC –
Group ALM
8.2
CC – Non-
core and
Legacy
Portfolio
4.6
0.9
0.1
0.0
0.1
0.0
0.0
(0.1)
0.0
1.0
9.2
(0.5)
(0.5)
0.0
0.0
0.0
0.0
(0.1)
0.0
(1.2)
3.4
GGroup
131.8
3.2
(1.7)
18.5
4.0
(5.9)
0.6
(2.3)
(0.3)
16.2
147.9
1 Refer to the 31 December 2018 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for the definitions of credit and counterparty credit risk RWA movement categories.
204
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Model updates
The increase in credit and counterparty credit risk RWA from
model updates of USD 18.5 billion was driven by the
implementation of revised probability of default (PD) and loss
given default (LGD) models, as part of our continuous efforts to
enhance models to reflect market developments, and newly
available data for residential mortgages and income-producing
real estate, as well as a new LGD model for unsecured financing
and commercial self-used real estate, resulting in an increase of
USD 15.2 billion in Personal & Corporate Banking and USD 2.5
billion in Global Wealth Management. In addition, RWA
increased by USD 0.8 billion due to the implementation of credit
conversion factors for Lombard loan facilities that are entirely
undrawn in Global Wealth Management, amounting to USD 0.3
billion, by USD 0.4 billion in Personal & Corporate Banking from
the calibration of aircraft leasing PD and LGD parameters and by
net USD 0.1 billion in the Investment Bank due to an increase of
USD 0.3 billion from the revision of the modeled exposure
methodology and a decrease of USD 0.2 billion from the LGD
parameter update for sovereigns.
In the first quarter of 2019, we expect that there will be
further regulatory-driven increases in credit risk RWA of USD 3
billion as well as an accounting-driven increase of USD 3.5 billion
due to the implementation of IFRS 16, Leases. 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
Methodology changes
Upon adoption of IFRS 9, equity instruments were reclassified
from fair value through other comprehensive income (available
for sale) to fair value through profit or loss as unrealized gains
on such instruments (previously deducted) are now added back
for the purpose of the RWA exposure calculation, resulting in a
USD 0.7 billion increase in RWA. Additionally, the methodology
applied for structured margin lending transactions was revised,
as agreed with FINMA, thus leading to a USD 3.3 billion increase
of RWA.
→ Refer to the “Risk management and control” section of this
report and the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on credit and counterparty credit risk developments
Market risk
Market risk RWA increased by USD 7.4 billion to USD 20.0
billion as of 31 December 2018, mainly driven by USD 4.3 billion
higher regulatory add-ons and a USD 3.2 billion increase
resulting from asset size and other movements.
The USD 4.3 billion higher RWA from regulatory add-ons
reflected a combination of the concluding changes to our risks-
not-in-VaR (RniV) framework as of the third quarter of 2018, as
well as updates from the monthly RniV assessment, and higher
levels of regulatory VaR and stressed VaR.
increase
The USD 3.2 billion
in asset size and other
movements was primarily driven by higher average VaR and
stressed VaR levels observed during the fourth quarter, mainly
from increased market volatility and client flow in the Investment
Bank’s Equities business.
control” section of this report for more information on model
→ Refer to the “Risk management and control” section of this
updates
Regulatory add-ons
The net RWA decrease from regulatory add-ons of USD 5.9
billion was primarily driven by the reduction of USD 8.5 billion
following the aforementioned model updates to PD and LGD
parameters for residential mortgages in Personal & Corporate
Banking and Global Wealth Management. The decrease was
partly offset by a USD 2.6 billion increase resulting from a
higher internal ratings-based multiplier on Investment Bank
exposures to corporates.
report and the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on market risk developments
risk RWA decreased by USD 3.9 billion
Operational risk
Operational
to
USD 77.6 billion as of 31 December 2018, driven by USD 3.4
billion from changes to the advanced measurement approach
(AMA) model used for the calculation of operational risk capital
as well as a consequential one-time translation effect of USD 0.5
billion due to the change of our presentation currency from
Swiss franc to US dollar.
→ Refer to “Operational risk” in the “Risk management and control”
section of this report for more information on the AMA model
205
Risk, treasury and capital management
Capital management
Risk-weighted assets by business division and Corporate Center unit
USD billion
CCredit and counterparty credit risk1
NNon-counterparty-related risk2
MMarket risk
OOperational risk
TTotal4
RWA held by CC – Group ALM on behalf of business
divisions and other CC units5
RRWA after allocation from CC – Group ALM to business
divisions and other CC units
CCredit and counterparty credit risk1
NNon-counterparty-related risk2
MMarket risk
OOperational risk
TTotal4
RWA held by CC – Group ALM on behalf of business
divisions and other CC units5
RRWA after allocation from CC – Group ALM to business
divisions and other CC units
CCredit and counterparty credit risk1
NNon-counterparty-related risk2
MMarket risk
OOperational risk
TTotal4
GGlobal Wealth
Management
PPersonal &
Corporate
Banking
AAsset
Manage-
ment
IInvestment
Bank
331.12.18
CCC –
Services
29.3
0.1
1.3
27.5
58.2
2.3
660.5
26.4
0.1
1.7
27.7
55.9
2.3
558.1
2.9
0.0
(0.4)
(0.2)
2.3
52.7
0.1
0.0
4.0
56.8
1.1
557.9
45.1
0.1
0.0
4.1
49.3
1.1
550.4
7.6
0.0
0.0
0.0
7.5
1.6
0.1
0.0
2.4
4.1
0.1
44.2
1.5
0.1
0.0
2.5
4.0
0.1
44.1
0.1
0.0
0.0
0.0
0.1
49.8
0.0
16.83
20.2
86.9
0.4
887.3
331.12.17
44.0
0.0
12.0
20.4
76.5
0.5
777.0
331.12.18 vs 31.12.17
5.8
0.0
4.8
(0.1)
10.4
1.9
18.1
0.0
11.9
31.8
0.0
331.8
1.8
17.6
(3.2)3
13.7
29.9
0.0
229.9
0.0
0.5
3.2
(1.8)
1.9
CCC – Non-
core and
Legacy
Portfolio
CCC –
Group
ALM
9.2
0.0
0.6
2.3
3.4
0.0
1.3
9.2
TTotal
RWA
147.9
18.3
20.0
77.6
12.0
13.9
263.7
(4.0)
0.0
0.0
88.0
113.9
2263.7
8.2
0.0
0.7
2.6
11.5
(4.0)
77.5
1.0
0.0
(0.1)
(0.3)
0.5
4.6
0.0
1.3
10.6
16.5
131.8
17.8
12.6
81.5
243.6
0.0
0.0
116.6
243.6
(1.2)
0.0
(0.1)
(1.4)
(2.7)
16.2
0.5
7.4
(3.9)
20.1
RWA held by CC – Group ALM on behalf of business
divisions and other CC units5
RRWA after allocation from CC – Group ALM to business
divisions and other CC units
77.6
11 Includes settlement risk, credit valuation adjustments, equity exposures in the banking book and securitization exposures in the banking book. 2 Non-counterparty-related risk includes deferred tax assets
recognized for temporary differences (31 December 2018: USD 8.8 billion; 31 December 2017: USD 8.6 billion), property, equipment and software (31 December 2018: USD 9.3 billion; 31 December 2017: USD 9.0
billion) and other items (31 December 2018: USD 0.2 billion; 31 December 2017: USD 0.2 billion). 3 As of 31 December 2018, the effect of portfolio diversification across businesses, which was previously
reflected in Corporate Center – Services market risk RWA, was included in the Investment Bank market risk RWA. 4 Represents RWA held by the respective business division or Corporate Center unit.
5 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. Refer to “Equity
attribution and return on attributed equity“ in this section for more information.
((2.7)
(0.1)
110.3
220.1
00.5
00.1
11.9
22.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
206
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Leverage ratio denominator
The leverage ratio denominator (LRD) decreased by USD 4 billion to USD 905 billion as of 31 December 2018, primarily driven by
decreases from currency effects of USD 12 billion and incremental netting and collateral mitigation as well as policy changes of
USD 2 billion, partly offset by an increase of USD 9 billion from asset size and other sources.
Movement in leverage ratio denominator by key driver
USD 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
31.12.17
663.6
Currency
effects
(8.2)
100.6
127.4
31.9
(14.5)
(2.1)
(1.4)
(0.3)
0.0
Incremental
netting and
collateral
mitigation
(1.4)
Policy
changes
(0.6)
Asset size
and
other
8.3
(1.8)
5.0
(2.5)
0.1
0.5
LLRD as of
31.12.18
663.1
95.4
130.9
29.0
(13.8)
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.
(12.1)
909.0
904.6
(0.1)
(1.4)
9.1
The LRD movements described below exclude currency effects.
On-balance sheet exposures (excluding derivative exposures
and securities financing transactions (SFTs)) increased by USD 8
billion as a result of asset size and other movements. The net
increase in Corporate Center – Group Asset and Liability
Management (Group ALM) was driven by an increase in cash
and balances at central banks due to lower client-driven activity
that reduced funding consumption by the business divisions,
especially the Investment Bank, and partly offset by maturities of
short-term borrowings and a shift to receivables from securities
financing transactions. Conversely, client-driven reductions and
trade unwinds in the Investment Bank’s Equities business
reduced trading portfolio assets.
SFTs increased by USD 5 billion as a result of asset size and
other movements, primarily reflecting the increase in Corporate
Center – Group ALM due to reinvestment of higher cash
balances resulting from the aforementioned changes in business
division funding consumption, and partly offset by a decrease in
our Investment Bank business, driven by lower prime brokerage
receivables in the Equities business.
These increases were partly offset by a decrease in derivative
exposures of USD 2 billion, because of asset size and other
movements, primarily resulting from lower notional amounts
and add-on exposures under the current exposure method
driven by a net increase of client-driven trade terminations and
maturities across the Equities and the Foreign Exchange, Rates
and Credit businesses within the Investment Bank. Furthermore,
a decrease of USD 1 billion was driven by incremental netting
and collateral mitigation, mainly reflecting enhanced yields due
to add-on netting benefits in the Investment Bank’s Foreign
Exchange, Rates and Credit business.
Off-balance sheet items decreased by USD 3 billion, primarily
due to client-driven reductions of unutilized credit facilities
within the
Investment Bank’s Corporate Client Solutions
business and termination of forward starting transactions in
Corporate Center – Group ALM.
→ Refer to “Balance sheet, liquidity and funding management” in
the “Treasury management” section of this report for more
information on balance sheet movements
207
Risk, treasury and capital management
Capital management
Leverage ratio denominator by business division and Corporate Center unit
USD 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
TTotal3
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
TTotal3
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
GGlobal Wealth
Management
PPersonal &
Corporate
Banking
AAsset
Management
200.0
(0.2)
(8.8)
191.1
8.6
2.7
5.0
138.8
0.0
(0.8)
138.0
1.2
0.0
13.0
207.4
152.2
63.2
2270.6
195.0
(0.2)
(4.9)
189.9
8.3
2.3
4.5
0.0
205.0
63.7
2268.7
41.2
1193.4
139.1
0.0
(1.2)
137.8
1.8
0.0
12.2
151.9
39.9
1191.8
24.4
(21.7)
0.0
2.6
0.0
0.0
0.0
2.7
2.5
55.1
14.6
(11.9)
0.0
2.8
0.0
0.0
0.0
2.8
2.1
44.9
IInvestment
Bank
331.12.18
258.6
(0.4)
(135.8)
122.3
75.2
32.0
10.6
240.1
16.1
2256.2
31.12.17
269.7
(0.3)
(134.0)
135.5
74.9
45.7
14.9
271.0
19.9
2290.9
31.12.18 vs 31.12.17
CCC – Non-
core and
Legacy
Portfolio
CCC –
Group
ALM
CCC –
Services
280.1
0.1
(96.0)
184.2
3.9
95.0
0.4
34.7
0.0
(31.5)
3.2
6.4
1.2
0.0
283.5
10.8
TTotal
958.4
(22.3)
(273.0)
663.1
95.4
130.9
29.0
(13.8)
904.6
(124.9)
1.7
0.0
1158.6
112.5
9904.6
252.1
0.2
(80.1)
172.1
6.0
78.1
0.1
47.4
(0.1)
(43.0)
4.3
9.7
1.3
0.0
256.3
15.3
939.3
(12.5)
(263.2)
663.6
100.6
127.4
31.9
(14.5)
909.0
(127.6)
1.8
0.0
1128.7
117.1
909.0
21.7
(0.1)
0.0
21.6
0.0
0.0
0.1
(13.8)
7.9
0.3
88.2
21.4
(0.1)
0.0
21.3
0.0
0.0
0.1
(14.5)
6.9
0.1
77.0
5.0
0.0
(3.9)
1.2
0.3
0.5
0.5
(0.3)
0.0
0.4
0.2
(0.6)
0.0
0.8
9.7
(9.9)
0.0
(0.1)
0.0
0.0
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
TTotal3
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
((4.4)
11.6
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 derivative financial instruments, cash collateral
receivables on derivative instruments, receivables from securities financing transactions, and margin loans as well as prime brokerage receivables and financial assets at fair value not held for trading, both 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. Refer to “Equity attribution and return on attributed equity“ in this section for more information.
19.1
(9.8)
(9.8)
(0.5)
(5.3)
3.6
(2.8)
0.7
(4.4)
(11.2)
(0.1)
(1.9)
(13.2)
0.4
(13.7)
(4.3)
(12.7)
0.1
11.5
(1.0)
(3.2)
(0.2)
0.0
28.0
0.0
(15.9)
12.1
(2.1)
17.0
0.3
0.3
0.1
0.0
0.4
0.0
0.0
0.0
0.7
1.0
(30.8)
((34.7)
(0.1)
(4.4)
27.2
((4.6)
(3.8)
(0.5)
(0.1)
229.9
0.3
2.4
11.2
00.2
11.9
1.3
2.7
0.0
0.2
0.4
208
Equity attribution and return on attributed equity
Change in equity attribution framework as of 1 January 2019
We have updated our equity attribution framework by revising
the capital ratio for RWA from 11% to 12.5% and incrementally
allocating to business divisions approximately USD 2 billion of
attributed equity that is related to certain CET1 deduction items
such as compensation-related
previously held centrally,
components and the expected loss on advanced internal ratings-
based portfolio less general provisions.
We continue to allocate tangible equity based on a
weighting of 50% each for average RWA and average LRD,
and apply a floor for business divisions if the attributed
tangible equity calculated under the weighted-driver approach
is less than the CET1 capital equivalent of RBC. Also, we
continue to allocate equity to our businesses to support
goodwill and intangible assets.
Given these changes, as well as changes in resource
allocation from Corporate Center to the business divisions, we
expect to allocate approximately USD 7 billion of additional
the business divisions, of which
attributed equity
approximately USD 3 billion will be allocated to the Investment
Bank. The remaining attributed equity retained in Corporate
Center will primarily relate to deferred tax assets, dividend
accruals and Corporate Center – Non-core and Legacy Portfolio.
to
All of these changes are effective as of 1 January 2019, and
we will provide restated prior-period information in advance of
our first quarter results.
→ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on the
alignment of the equity attribution framework with the revised
resource allocation methodology
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Average equity attributed to business divisions and Corporate
Center decreased by USD 1.5 billion to USD 52.4 billion in 2018,
primarily driven by 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 fourth
quarter of 2017.
Equity attribution framework in 2018
Under our equity attribution framework, tangible equity is
attributed based on a weighting of 50% each for average risk-
weighted assets (RWA) and average leverage ratio denominator
(LRD). Average RWA and LRD were converted to their common
equity tier 1 (CET1) capital equivalents based on capital ratios of
11% and 3.75%, respectively. If the attributed tangible equity
calculated under the weighted-driver approach were less than
the CET1 capital equivalent of risk-based capital (RBC) for any
business division, the CET1 capital equivalent of RBC was used
as a floor for that business division.
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 were allocated to those business divisions and other
Corporate Center units for the purpose of equity attribution.
This allocation was primarily based on the level of high-quality
liquid assets that was needed to meet the Group’s minimum
liquidity coverage ratio requirement of 110%. Corporate Center
– Group ALM retains 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 allocated equity to our
businesses to support goodwill and intangible assets.
Furthermore, we attributed all remaining Basel III capital
deduction items to Corporate Center Group items. These
deduction items included DTAs recognized for tax loss carry-
forwards and DTAs on temporary differences in excess of the
threshold, which together constituted the largest component of
Corporate Center Group items, dividend accruals, unrealized
gains from cash flow hedges and compensation- and own
shares-related components.
209
For the year ended
31.12.17
331.12.18
31.12.16
13.4
6.6
1.7
10.2
20.5
16.1
14.3
3.2
1.2
52.4
13.0
6.2
1.7
9.5
23.5
19.4
17.6
2.8
1.4
53.9
6.1
4.1
1.4
7.7
29.4
23.0
21.6
4.3
2.1
48.8
8.4
6.6
0.3
10.2
20.5
16.1
14.3
3.2
1.2
45.9
8.0
6.2
0.3
9.4
23.5
19.4
17.6
2.8
1.4
47.4
AAverage tangible equity attributed to business divisions and Corporate Center
11 Of the USD 14.3 billion of average equity attributed to Group items for the fourth quarter of 2018, USD 6.1 billion related to average DTAs recognized for tax loss carry-forwards and USD 0.4 billion related to
average DTAs on temporary differences in excess of the 10% of CET1 capital threshold. Dividend accruals are also included in Group items. DTA amounts and dividend accruals represent average amounts.
2 Attributed tangible equity equals attributed equity less goodwill and intangible assets. 3 Attributed tangible equity is shown for the period for which return on attributed tangible equity is available. This is a
measure introduced in 2017, accordingly no comparative-period information is available.
Risk, treasury and capital management
Capital management
Attributed equity
USD billion
Average attributed equity
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center
of which: CC – Services
of which: Group items 1
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
AAverage equity attributed to business divisions and Corporate Center
Average attributed tangible equity2, 3
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center
of which: CC – Services
of which: Group items 1
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
210
Return on attributed equity1
In %
Return on (attributed) equity11
Reported
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
UUBS Group
Adjusted3
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
UUBS Group
Return on (attributed) tangible equity11,2
Reported
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
UUBS Group
For the year ended
331.12.18
31.12.17
31.12.16
50.7
43.3
32.2
13.1
6.1
60.3
43.1
39.4
19.7
7.8
27.0
29.1
26.5
16.1
8.6
27.7
23.8
29.8
17.9
8.7
44.0
29.1
139.4
16.3
10.0
27.5
25.8
34.0
13.3
1.8
32.0
27.5
31.0
16.0
3.2
45.5
25.8
186.2
13.6
2.2
Adjusted3
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
UUBS Group
11 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 is not shown, as it is not meaningful. 2 Attributed tangible equity is shown for the period for which return on attributed tangible
equity is available. This is a measure introduced in 2017, accordingly no comparative-period information is available. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations.
45.0
23.8
156.7
18.2
10.1
52.8
27.5
170.0
16.3
3.7
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211
Risk, treasury and capital management
Capital management
UBS shares
UBS Group AG shares
Audited | As of 31 December 2018, IFRS equity attributable to
shareholders amounted to USD 52,928 million, represented by
3,855,634,749 shares
increased by
issued. Shares
2,538,146 shares in 2018, reflecting 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 (USD)1
Diluted earnings per share (USD)1
Basic earnings per share (CHF)2
Diluted earnings per share (CHF)2
Equity attributable to shareholders (USD million)
Less: goodwill and intangible assets (USD million)
Tangible equity attributable to shareholders (USD million)
Total book value per share (USD)
Tangible book value per share (USD)
Share price (USD)3
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. All shares are
fully paid up. As the Articles of Association of UBS Group AG
indicate, there are no other classes of shares and no preferential
rights for shareholders. (cid:3)
→ Refer to the “Corporate governance” section of this report for
more information on UBS shares
As of or for the year ended
331.12.18
31.12.17
% change from
31.12.17
3,855,634,749
166,467,802
3,689,166,947
3,853,096,603
132,301,550
3,720,795,053
1.21
1.18
1.18
1.14
52,928
6,647
46,281
14.35
12.55
12.44
0.26
0.25
0.26
0.26
52,495
6,563
45,932
14.11
12.34
18.40
0
26
(1)
365
372
354
338
1
1
1
2
2
(32)
Market capitalization (USD million)4
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 Basic and diluted earnings per share in Swiss francs
are calculated based on a translation of net profit / (loss) under our US dollar presentation currency. As a consequence of the restatement to a US dollar presentation currency, amounts may differ from those
originally published in our quarterly and annual reports. 3 Represents the share price as listed on the SIX Swiss Exchange, translated to US dollars using the respective spot rate. 4 The calculation of market
capitalization has been amended to reflect total shares outstanding multiplied by the share price at the end of the period. The calculation was previously based on total shares issued multiplied by the share price at
the end of the period. Market capitalization has been reduced by USD 2.1 billion as of 31 December 2018 and by USD 2.4 billion as of 31 December 2017 as a result.
45,907
68,477
(33)
212
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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 and also holds shares purchased under
the share repurchase program, which will be canceled by
means of a capital reduction to be proposed at future annual
general meetings. 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 2018, we held a total
of 166,467,802
(31 December 2017:
132,301,550), or 4.3% (31 December 2017: 3.4%) of shares
issued.
treasury
shares
Share delivery obligations related to employee share-based
totaled 146 million shares as of
compensation awards
31 December 2018 (31 December 2017: 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 2018, the
number of UBS Group AG shares that could have been issued
out of conditional capital for this purpose was 125 million
(31 December 2017: 128 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 purchases
Month of purchase
January 2018
February 2018
March 2018
April 2018
May 2018
June 2018
July 2018
August 2018
September 2018
October 2018
November 2018
December 2018
Share repurchase program1
Other treasury shares purchased2
Number of shares
Average price in CHF
Remaining volume of
share repurchase
program in CHF million
Number of shares
Average price in USD
1,900,000
16,613,000
16,247,000
6,299,500
6,000,000
1,259,300
16.61
16.15
15.39
15.87
13.68
14.23
1,968
1,700
1,450
1,450
1,450
1,350
1,268
1,250
1,2503
100
12,000,000
20,000,000
13.43
13.91
12.45
11 On 22 January 2018, UBS announced its intention to buy back its own registered shares over three years starting from March 2018, amounting to a maximum of CHF 2 billion. The share repurchase information in
this table is disclosed in Swiss francs as the share buybacks are transacted in Swiss francs on a separate trading line on the SIX Swiss Exchange. 2 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 888,572 UBS Group AG shares
during the year and held 16,711,587 UBS Group AG shares as of 31 December 2018. 3 The remaining volume of the share repurchase program as of 31 December 2018 was USD 1,271 million. This was
calculated based on the remaining volume of CHF 1,250 million as of 31 December 2018 and the respective foreign currency rate as of this date.
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
For the year ended
31.12.18
31.12.17
31.12.16
3,277,995
3,084,804
3,761,294
13,165
166,728
664
12,290
146,902
585
14,808
160,887
638
213
Risk, treasury and capital management
Capital management
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 2018, the average daily trading volume of UBS Group
AG shares was 13.2 million shares on the SIX and 0.7 million
shares on the NYSE. The SIX is expected to remain the main
venue for determining the movement in our share price because
of 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
214
Corporate
governance 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.
Corporate governance 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, 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 to the Organization Regulations of UBS Group AG
at www.ubs.com/governance for more information
→ The SIX Swiss Exchange’s Directive on Information Relating to
Corporate Governance is available at www.six-exchange-
regulation.com, the Swiss Code of Best Practice for Corporate
Governance is available at www.economiesuisse.ch and the
NYSE rules are available at www.nyse.com
Differences from corporate governance standards relevant
to US-listed companies
According to the NYSE listing standards on corporate governance,
foreign private issuers are required to disclose any significant ways
in which their corporate governance practices differ from those
that have to be followed by domestic companies. These
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.
216
Responsibility of the Compensation Committee for performance
evaluations of senior management of UBS Group AG
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
members of the Compensation Committee at the AGM. Under
NYSE standards, it is the responsibility of the Compensation
Committee to evaluate senior management performance and to
determine and approve, as a committee or together with the
other independent directors, its compensation.
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. Shareholder approval is only mandatory if
equity-based compensation plans require an increase in capital.
No shareholder approval is required if shares for such plans are
purchased in the market.
→ Refer to “Board of Directors” in this section for more
information on the Board of Directors’ committees
→ Refer to “Share capital structure” in this section for more
information on UBS Group AG’s capital
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217
Corporate governance and compensation
Corporate governance
Group structure and shareholders
Operational Group structure
Listed and non-listed companies belonging to the Group
As of 31 December 2018, the operational structure of the Group
is comprised of the Global Wealth Management, Personal &
Corporate Banking, Asset Management and Investment Bank
business divisions, as well as Corporate Center with its units
Corporate Center – Services (comprising the Group functions
Group Chief Operating Officer area, Group Finance, Group Risk
Control, Group Legal, Group Compliance, Regulatory &
Governance, Communications & Branding and UBS in society),
Corporate Center – Group Asset and Liability Management
(ALM) 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.
Beginning with our first quarter 2019 report, we will provide
results for total Corporate Center only and will not separately
report Services, Group ALM and Non-core and Legacy Portfolio.
→ Refer to “Our businesses” in the “Our strategy, business model
and environment” section from page 19 of this report for more
information
→ Refer to the sections under “Financial and operating
performance” from page 63 and to “Note 2 Segment reporting”
in the “Consolidated financial statements” section from page
377 of this report for more information
→ Refer to the “Our evolution” section from page 12 of this report
for more information
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 212 of this report for information on UBS Group AG’s
market capitalization and shares held by Group entities
→ Refer to “Note 31 Interests in subsidiaries and other entities” in
the “Consolidated financial statements” section from page 485
of this report for more information on the significant
subsidiaries of the Group
Significant shareholders
General rules
Under the Swiss Federal Act on Financial Market Infrastructures
and Market Conduct in Securities and Derivatives Trading of
19 June 2015 (FMIA), anyone directly or indirectly, or acting in
concert with third parties, 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. 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.
Pursuant to the Swiss Code of Obligations, we 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.
218
Shareholders not registered in the UBS share register
According to the FMIA disclosure notifications filed with UBS
Group AG and the SIX, as of 31 December 2018, the following
entities held more than 3% of the total share capital of UBS
Group AG: Dodge & Cox, San Francisco, disclosed a holding of
3.03% of the total share capital of UBS Group AG on
30 November 2018; BlackRock Inc., New York, disclosed a
holding of 4.99% on 28 August 2018; and MFS Investment
Management, Boston, disclosed a holding of 3.05% on
10 February 2016. The above disclosures have not been
subsequently superseded, and no new disclosures of significant
shareholdings have been made since 31 December 2018.
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.
Information on disclosures under the FMIA is available at
www.six-exchange-regulation.com/en/home/publications/
significant-shareholders.html.
Shareholders registered in the UBS share register
The shareholders (acting in their own name or in their capacity
as nominees for other investors or beneficial owners) listed in
the table 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 2018.
Cross-shareholdings
UBS Group AG has no cross-shareholdings where reciprocal
ownership would be in excess 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.
331.12.18
31.12.17
31.12.16
12.08
7.23
4.14
11.16
6.64
4.11
9.43
6.62
3.88
(cid:3)
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219
Corporate governance and compensation
Corporate governance
Share capital structure
Ordinary share capital
At year-end 2018, UBS Group AG had 3,855,634,749 issued
shares with a par value of CHF 0.10 each, leading to a share
capital of CHF 385,563,474.90.
Under Swiss company law, shareholders must approve in a
general meeting of shareholders an ordinary share capital
increase or the creation of conditional or authorized share
capital. In 2018, our shareholders were not asked to approve an
ordinary share capital increase or the creation of conditional or
authorized share capital.
Share capital increased during the year by 2,538,146 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 2017
Issue of shares out of conditional capital due to employee options exercised in 2018
AAs of 31 December 2018
SShare capital in CHF
NNumber of shares
Par value in CHF
385,309,660
253,815
385,563,475
3,853,096,603
2,538,146
3,855,634,749
0.10
0.10
0.10
Distribution of UBS shares
As of 31 December 2018
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
5,000,001–38,556,347 (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
25,017
120,927
75,145
7,158
594
87
26
4
0
0
1
21
228,961
%
10.9
52.8
32.8
3.1
0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1,403,306
57,443,935
216,419,373
170,930,404
169,267,430
178,688,459
321,024,783
203,199,804
0
0
159,517,521
744,583,467
100.0
2,222,478,4822
1,633,156,267
3,855,634,749
0.0
1.5
5.6
4.4
4.4
4.6
8.3
5.3
0.0
0.0
4.1
19.3
57.6
42.4
100.0
1 On 31 December 2018, Chase Nominees Ltd., London, entered as a fiduciary / nominee, was registered with 12.08% of all UBS shares issued. However, according to the provisions of UBS Group AG, voting rights
of fiduciaries / 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 7.23% 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, 403,358,353 shares did not carry voting rights. 3 Shares not entered in the UBS share register as of
31 December 2018.
220
Conditional share capital
At year-end 2018, 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, originally approved at the AGM of UBS
AG on 14 April 2010. The BoD has not made use of such
allowance.
issued
– a maximum of CHF 12,512,647.60
represented by
125,126,476 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 2018
Employee equity participation plans
Conversion rights / warrants granted in connection with bonds
TTotal
MMaximum number of shares to
be issued
125,126,476
Year approved by Extraor-
dinary General Meeting
2014
380,000,000
505,126,476
2014
%% of shares issued
3.24
9.85
13.10
Authorized share capital
Ownership
UBS Group AG had no authorized capital available to issue on
31 December 2018.
Changes in capital
to shareholders amounted
In accordance with International Financial Reporting Standards,
Group equity attributable
to
USD 52.9 billion as of 31 December 2018 (2017: USD 52.5
billion; and 2016: USD 52.9 billion). UBS Group AG
shareholders’ equity was represented by 3,855,634,749 issued
shares as of 31 December 2018 (2017: 3,853,096,603 shares;
and 2016: 3,850,766,389 shares).
→ Refer to “Statement of changes in equity” in the “Consolidated
financial statements” section from page 320 of this report 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 2018, 1,819,120,129 UBS Group AG
shares were registered in the share register and carried voting rights,
403,358,353 shares were registered in the share register without
voting rights, and 1,633,156,267 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.
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Corporate governance and compensation
Corporate governance
Shareholders, legal entities and nominees: type and geographical distribution
AAs of 31 December 2018
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
223,901
4,832
228
%
97.8
2.1
0.1
228,961
100.0
IIndividual shareholders
LLegal entities
NNominees
TTotal
Number
5,309
4,683
5,334
12,586
4,123
4,719
3,532
212
200,672
%
2.3
2.0
2.3
5.5
1.8
2.1
1.5
0.1
87.6
Number
148
78
114
271
35
7
226
3
4,299
%
0.1
0.0
0.1
0.1
0.0
0.0
0.1
0.0
1.9
Number
104
98
21
65
4
6
55
0
38
%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Number
5,561
4,859
5,469
12,922
4,162
4,732
3,813
215
205,009
%
2.4
2.1
2.4
5.6
1.8
2.1
1.7
0.1
89.5
223,901
97.8
4,832
2.1
228
0.1
228,961
100.0
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.
As of 31 December 2018, UBS employees held an estimated
6% of UBS shares outstanding (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 2018, an estimated 34% of all employees
held UBS shares through the firm’s employee share participation
plans.
→ Refer to the “Compensation” section from page 250 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).
Each registered share has a par value of CHF 0.10 and carries
one vote
set out under
“Transferability, voting rights and nominee registration” on the
following page.
restrictions
subject
the
to
We have no participation certificates outstanding.
At year-end 2018, UBS owned 166,467,802 UBS Group AG
registered shares, which corresponded to 4.32% of the total share
capital of UBS Group AG. At the same time, we had acquisition and
disposal positions relating to 190,587,619 and 165,817,208 voting
rights of UBS Group AG, corresponding to 4.95% and 4.30% of
the total voting rights of UBS Group AG, respectively. Of the
disposal positions, 3.88% 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 Swiss Financial Market Supervisory Authority Ordinance on
Financial Market Infrastructure, 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
USD / CHF 300,000. Employees other than GEB members 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
222
IIndividual shareholders
LLegal entities
NNominees
Number of shares
6,385,407
4,870,353
24,680,132
43,878,796
13,210,617
21,015,786
9,030,071
622,322
380,203,199
455,147,534
0
455,147,534
%
0.2
0.1
0.6
1.1
0.3
0.5
0.2
0.0
9.9
11.8
11.8
Number of shares
74,857,806
57,225,479
62,031,827
24,198,354
782,505
1,600,836
21,615,948
199,065
452,991,140
614,079,127
0
614,079,127
%
1.9
1.5
1.6
0.6
0.0
0.0
0.6
0.0
11.7
15.9
15.9
Number of shares
363,352,991
363,022,386
9,346,083
754,218,087
18,795,660
704,288,756
31,133,671
0
26,334,660
1,153,251,821
0
1,153,251,821
%
9.4
9.4
0.2
19.6
0.5
18.3
0.8
0.0
0.7
29.9
29.9
SShares registered
Number
455,147,534
614,079,127
1,153,251,821
2,222,478,482
1,633,156,267
3,855,634,749
TTotal
Number of shares
444,596,204
425,118,218
96,058,042
822,295,237
32,788,782
726,905,378
61,779,690
821,387
859,528,999
2,222,478,482
1,633,156,267
3,855,634,749
%
11.8
15.9
29.9
57.6
42.4
100.0
%
11.5
11.0
2.5
21.3
0.9
18.9
1.6
0.0
22.3
57.6
42.4
100.0
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.
→ Refer to “UBS shares” in the “Capital management” section from
page 212 of this report for more information
Distributions to shareholders
The decision to pay a dividend and the amount of any dividend
depends on a variety of factors, including our profits, cash flow
generation and capital ratios.
At the 2019 AGM, UBS’s BoD intends to propose to
shareholders for approval a dividend of CHF 0.70 per share for
the financial year 2018, to be paid out of the capital
contribution reserve.
In March 2018, UBS initiated a share repurchase program of
up to CHF 2 billion over a three-year period. The UBS shares
repurchased under the program will be canceled by means of a
capital reduction, to be proposed at future annual general
meetings. During 2018, UBS repurchased shares totaling
CHF 750 million, exceeding the 2018 target of up to
CHF 550 million.
→ Refer to “UBS shares” in the “Capital management” section
from page 212 of this report for more information on the share
repurchase program
Transferability, voting rights and nominee registration
We do not apply any restrictions or
limitations on the
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,
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, which applied as of
31 December 2018 to The Depository Trust Company in New
York.
→ Refer to “Shareholders’ participation rights” in this section for
more information
Convertible bonds and options
As of 31 December 2018, there were no contingent capital
securities or convertible bonds outstanding requiring the
issuance of new shares.
→ Refer to the “Capital management” section from page 194 of
this report for more information on our outstanding capital
instruments
As of 31 December 2018, there were 12,527,179 employee
options outstanding, including stock appreciation rights. Options
and stock appreciation rights equivalent to 3,705,363 shares
were in the money and exercisable. Option-based compensation
plans are sourced by issuing new shares out of conditional
capital. As mentioned above, as of 31 December 2018,
125,126,476 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 30 Employee benefits: variable compensation” in
the “Consolidated financial statements” section from page 477
of this report for more information on outstanding options and
stock appreciation rights
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223
Corporate governance and compensation
Corporate governance
Shareholders’ participation rights
We are committed to shareholder participation in our decision-
making process. During 2018, we continued to enhance the
online voting platform to offer our registered shareholders a
more convenient log-in and online voting process. Registered
shareholders are sent personal invitations to the general
meetings of shareholders. Together with the invitation materials,
they receive a personal one-time password and a QR code to
easily log in to our online voting platform, where they can enter
their voting instructions or order an admission card for the
general meeting.
Shareholders who choose not to receive the comprehensive
invitation materials are informed of the upcoming general
meeting by a short letter containing a personal one-time
password and a QR code for the online voting as well as 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
to an
independent proxy in accordance with article 15 of the Articles
of Association (AoA) or by appointing another registered
shareholder of
their behalf.
Alternatively, registered shareholders may issue their voting
instructions to the independent proxy 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.
to vote on
their choice
instructions
→ Refer to the articles 14 and 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 fiduciaries, 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 fiduciaries 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.
224
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. In 2019, the AGM will take place on 2 May.
Around 230,000 shareholders are directly registered in the UBS
share register and some 140,000 US shareholders are registered
via nominee companies.
Extraordinary General Meetings (EGMs) 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 EGM to be convened to address a specific issue
they put forward.
A personal invitation including a detailed agenda is made
available to every registered shareholder at least 20 days ahead
of the scheduled general meeting. The agenda items are also
published in the Swiss Official Gazette of Commerce as well as
at www.ubs.com/agm.
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, 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 prior to 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 such data is
permitted only in specific and limited instances. In line with the
Swiss Federal Act on Data Protection, the disclosure of personal
data as defined thereunder 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 for 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 prior to a
general meeting of shareholders. 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 general meeting of shareholders. Such
technical closure of our share register only facilitates the
determination of the actual voting rights of every shareholder
that issued a voting 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.
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225
Corporate governance 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 3 May 2018, Michel Demaré, David Sidwell,
Reto Francioni, Ann F. Godbehere, Julie G. Richardson, Isabelle
Romy, Robert W. Scully, Beatrice Weder di Mauro and Dieter
Wemmer were re-elected as members of the BoD. As a result of
his new role as Chairman of UBS Americas LLC, William G.
Parrett did not stand for re-election. Jeremy Anderson and Fred
Hu were elected for their first term. At the same time, Axel A.
Weber was re-elected Chairman of the Board of Directors, and
Ann F. Godbehere, Michel Demaré, Julie G. Richardson and
Dieter Wemmer were elected as members of the Compensation
Committee. Additionally, ADB Altorfer Duss & Beilstein AG was
elected as 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.
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 2018, 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 the Group; 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 2018, UBS AG’s BoD had three committees: the Audit
Committee, the Compensation Committee and the Risk
Committee.
226
Axel A. Weber
Michel Demaré
David Sidwell
German, born 1957
Belgian and Swiss, born 1956
American (US) and British, born 1953
Functions at UBS Group AG
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
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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 of the Governance and
Nominating Committee since 2010. He became a member of
the Compensation Committee in 2013. Mr. Demaré was
Chairman of the Board of Syngenta from 2013 to June 2017
and retired as its Vice Chairman in December 2017. He
joined ABB in 2005 as Chief Financial Officer (CFO) and as a
member of the Group Executive Committee. Mr. Demaré
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 division. He began his career as an officer in the
multinational banking division of Continental
Illinois
National Bank of Chicago, and was based in Antwerp.
Mr. Demaré graduated with an MBA from the Katholieke
Universiteit Leuven, Belgium, and holds a degree in applied
economics from the Université Catholique de Louvain, Belgium.
Other activities and functions
– Board member of Vodafone Group Plc
– Board member of Louis-Dreyfus Commodities Holdings BV
– Vice Chairman of the Supervisory Board of IMD, Lausanne
– Advisory Board member of the Department of Banking and
Finance, University of Zurich
Professional history and education
Axel A. Weber was elected to the Board of Directors (BoD) of
UBS AG at the 2012 AGM and of UBS Group AG in
November 2014. He is Chairman of the BoD of both UBS AG
and UBS Group AG. He has chaired the Governance and
Nominating Committee since 2012 and became Chairperson
of the Corporate Culture and Responsibility Committee in
2013. Mr. Weber was president of the German Bundesbank
between 2004 and 2011, during which time he also served
as a member of the Governing Council of the European
Central Bank, as a member of the Board of Directors of the
Bank for International Settlements, as German governor of
the International Monetary Fund, and as a member of the
G7 and G20 Ministers and Governors. He was a member of
the steering committees of the European Systemic Risk
Board in 2011 and the Financial Stability Board from 2010
to 2011. From 2002 to 2004, Mr. Weber served as a
member of the German Council of Economic Experts. His
academic career encompasses professorships in international
economics, monetary economics and economic theory at the
universities of Cologne, Frankfurt am Main, Bonn and
Chicago. Mr. Weber holds a master’s degree in economics
from the University of Constance and a PhD in economics
from the University of Siegen, where he also received his
habilitation. He holds honorary doctorates
the
universities of Duisburg-Essen and Constance.
from
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
– 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
227
Corporate governance and compensation
Corporate governance
Jeremy Anderson
Reto Francioni
Ann F. Godbehere
British, born 1958
Swiss, born 1955
Canadian and British, born 1955
Functions at UBS Group AG
Chairperson of the Audit Committee / member of the
Corporate Culture and Responsibility Committee
Functions at UBS Group AG
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
the
the heart of digitalization within
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 and of 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, placing him
at
industry.
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. There he drove a fundamental
transformation to shape it as a world leader in technology.
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 (Senior Independent
Non-Executive Director)
– 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
to 2007.
as CFO of Swiss Re Group
Ms. Godbehere was CFO of its Property & Casualty division
in Zurich for two years. Previously, 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.
from 2003
Other activities and functions
– Board member of Rio Tinto plc (Senior Independent
Director and chairman of the audit committee)
– Board member of Rio Tinto Limited (Senior Independent
Director and chairman of the audit committee)
– Board member of Royal Dutch Shell plc
Professional history and education
Jeremy Anderson was elected to the BoD of UBS AG and
UBS Group AG at the 2018 AGM. He has chaired the Audit
Committee and has been a member of the Corporate Culture
and Responsibility Committee since 2018. He was chairman
of Global Financial Services at KPMG International from
2010 to 2017. He has spent over 30 years working with the
banking and insurance industry in an advisory capacity,
covering a broad range of topics, including strategy, audit
and risk management, technology-enabled transformation,
mergers and bank restructuring. Jeremy Anderson was the
founding sponsor of KPMG’s Global Fintech Network in
2014 and is a regular participant at fintech events across
Europe, the US and Asia. He joined KPMG International in
2004 and was Head of Financial Services KPMG Europe from
2006 to 2011 as well as Head of Clients and Markets KPMG
Europe from 2008 to 2011. From 2004 to 2008 he was in
charge of its UK Financial Services Practice. Prior to that, he
served as a member of Atos Origin’s Group Management
Board and as Head of its UK operations after Atos acquired
KPMG Consulting UK in 2002. In this capacity he managed
Atos’ consulting, systems integration and IT outsourcing
services in the UK. Mr. Anderson joined KPMG’s UK
consulting business in 1985 and led the firm as CEO from
2000 to 2002, having previously been a partner in its
financial services business. He started his career as a
software developer with Triad Computing Systems in 1980.
Mr. Anderson graduated with a bachelor’s degree in
economics from University College London.
Other activities and functions
– Trustee of the UK’s Productivity Leadership Group
– Trustee of Kingham Hill Trust
– Trustee of St. Helen’s Bishopsgate
228
Fred Hu
Chinese, born 1963
Function at UBS Group AG
Member of the Board of Directors
Julie G. Richardson
Isabelle Romy
American (US), born 1963
Swiss, born 1965
Functions at UBS Group AG
Member of the Compensation Committee / Member of the
Risk Committee
Functions at UBS Group AG
Member of the Audit Committee / member of the
Governance and Nominating Committee
in
investments
Professional history and education
Fred Hu was elected to the BoD of UBS AG and UBS Group
AG at the 2018 AGM. He has been chairman of Primavera
Capital Group, a China-based global investment firm, since
leading
2010. Through his numerous
technology companies over the years, he has obtained
profound knowledge in the areas of mobile internet,
digitalization and cybersecurity. Prior to founding Primavera,
Fred Hu held various senior positions at Goldman Sachs from
1997 to 2010, where he was instrumental in building the
firm’s franchise in the region. He was partner and chairman
of Greater China from 2008 to 2010 and partner and co-
head Investment Banking China from 2004 to 2008. Before
that, he held the position of Goldman Sachs’ chief
economist. From 1991 to 1996, he served as an economist
at the International Monetary Fund in Washington, DC, and
after that was co-director of the National Center for
Economic Research and professor at Tsinghua University. He
holds a master in engineering science from Tsinghua
University, and a master and PhD in economics from Harvard
University.
Other activities and functions
– Non-executive Chairman of the Board of Yum China
Holdings
– Board member of Hong Kong Exchanges and Clearing Ltd.
– Board member of China Asset Management
– Board member of Minsheng Financial Leasing Co.
– Trustee of the China Medical Board
– Governor of the Chinese International School
– Co-Chairman of the Nature Conservancy Asia Pacific
Council
– Director and member of the Executive Committee of China
Venture Capital and Private Equity Association Ltd.
– Global Advisory Board member of the Council on Foreign
Relations
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specializing
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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 and a member of the
Compensation Committee since 2018. From 2003 to 2012,
Ms. Richardson was a Partner and Head of the New York
Office of Providence Equity Partners, 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. Throughout her career, she has spent
significant time with both incumbent and new technology
companies, including as a board member of a digital
knowledge management company since 2015. After
graduating, she started 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,
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 of 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 a 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.
Other activities and functions
– Board member of Froriep Legal AG
– Vice Chairman of the Sanction Commission of SIX Swiss
Exchange
Inc. (chairman of the audit committee)
– Member of the Fundraising Committee of the Swiss
– Board member of Yext (chairman of the audit committee)
– Board member of Vereit, Inc. (chairman of the
compensation committee)
National Committee for UNICEF
– Supervisory Board member of the CAS program Financial
Regulation of the University of Bern and University of
Geneva
229
Corporate governance and compensation
Corporate governance
Robert W. Scully
Beatrice Weder di Mauro
Dieter Wemmer
American (US), born 1950
Italian and Swiss, born 1965
Swiss and German, born 1957
Function at UBS Group AG
Member of the Risk Committee
Functions at UBS Group AG
Member of the Audit Committee / member of the Corporate
Culture and Responsibility Committee
Functions at UBS Group AG
Member of the Compensation Committee / Member of the
Risk Committee
Professional history and education
Robert W. Scully was elected to the BoD of UBS AG and UBS
Group AG at the 2016 AGM. He has been a member of the
Risk Committee since 2016. Mr. Scully served as a member
of the Office of the Chairman of Morgan Stanley from 2007
to 2009 and was its co-President responsible for Asset
Management, Discover Credit Cards from 2006 to 2007.
Prior to assuming the position of co-President, he was
Chairman of Global Capital Markets from 2004 to 2006,
Vice Chairman of Investment Banking from 1999 to 2006,
and Managing Director from 1996 to 2009. Mr. Scully was
Managing Director at Lehman Brothers from 1993 to 1996,
having worked for Scully Brothers Foss & Wight from 1989
to 1993 as Managing Director and for Salomon Brothers in
Investment Banking and Capital Markets from 1980 to
1989, where he became a Managing Director in 1984. He
began his career in the banking industry with Chase
Manhattan Bank in 1972 and then worked as an investment
banker for Blyth Eastman Dillon & Co. from 1977 to 1980.
Mr. Scully graduated in 1972 with a bachelor’s degree in
psychology from Princeton University and holds an MBA
from Harvard University.
Other activities and functions
– Board member of Chubb Limited
– Board member of Zoetis, Inc.
– Board member of KKR & Co. Inc.
– Board member of Teach For All
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 a member of the
Risk Committee from 2013 to 2017. Since July 2018,
Ms. Weder di Mauro has been President of the Center for
Economic Policy Research, a network of more than 1,000
academic economists based in Europe. She is Research
Professor and Distinguished Fellow at the Emerging Markets
Institute at INSEAD in Singapore. From 2001 to 2018, she
held the chair of international macroeconomics at the
Johannes Gutenberg University of Mainz and was a member
of the German Council of Economic Experts from 2004 to
2012. She held visiting positions at the International
Monetary Fund (IMF) in Washington, DC, at the National
Bureau of Economic Research in Cambridge, MA, and at the
United Nations University in Tokyo. Prior to this, she worked
as an economist at the IMF and the World Bank in
Washington, DC. She received a PhD and a habilitation in
economics from the University of Basel. Since 2005,
Ms. Weder di Mauro has served as an independent director
on the boards of globally leading companies in development
finance, pharmaceuticals, technology and insurance.
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
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 and a member of the
Compensation Committee since 2018. 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
– Board member of Ørsted A/S
– Member of the Berlin Center of Corporate Governance
– Senior advisor, Texas Pacific Group
Markus Baumann
Swiss, born 1963
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
BoD as of January 2017. He has been with UBS for 40 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 BoD 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.
230
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 10 consecutive terms of
office. In exceptional circumstances, the BoD may extend this
limit.
→ 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 the
respective committee 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 2018, a total of 24
BoD meetings and calls were held, 16 of which were attended
by GEB members. Average participation in BoD meetings and
calls was 99%. In addition to the BoD meetings attended by
GEB members, the Group CEO attended some of the meetings
of the BoD without GEB participation. The average duration of
the meetings and calls was 170 minutes. In 2018, the frequency
and length of the combined meetings were the same for UBS
Group AG and UBS AG. Additionally, five ad hoc calls were held,
four of which were without GEB members.
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.
In response to the growing importance of legal entity
governance, standalone meetings of the UBS AG BoD were held.
In 2018, three UBS AG meetings were held with members of the
Executive Board in attendance. Standalone meetings will be held
on a regular basis going forward to discuss and agree on legal
entity governance and other topics related to UBS AG.
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Corporate governance and compensation
Corporate governance
Performance assessment
At least once a year, the BoD reviews its own performance as
well as the performance of each of its committees. This review
contains an assessment of the BoD’s effectiveness overall under
the auspices of the Governance and Nominating Committee and
includes an assessment of each of the BoD committees. The
assessment evaluates the following dimensions, covering both
formal and material aspects of BoD and committees: meeting
structure, frequency and duration; composition; information
timeliness, volume and quality; priorities; fulfillment of duties,
including succession planning; and dynamics. The committees
review
the
Organization Regulations. In addition, for a number of the
committees a systematic comparison to best-practice standards
is undertaken. The last self-assessment, which was concluded in
May 2018, determined that the BoD and its committees were
functioning effectively and efficiently. The results of the self-
assessment also served as a key source for the definition of the
Board’s priorities for 2018 / 2019, including adjustments to the
BoD agenda. A particular focus was thereby put on the work
with management on strategic priorities, the transformation of
the Group structure, the culture within the Group and the
regulatory and control environment. The BoD also continued to
responsibilities and authorities against
their
prioritize succession planning, and supported and monitored the
talent development measures across the Group. At least every
three years, the BoD assessments include an appraisal by an
external expert. The next external appraisal will cover the BoD
period for 2018 / 2019 and will be concluded by May 2019. The
results will be incorporated in the Annual Report 2019.
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. The committees meet
as often as their 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 2018, a total of nine
joint committee meetings were held for UBS Group AG (eight
joint committee meetings were held for UBS AG).
Board of Directors
Members in 2018
Axel A. Weber, Chairman
Michel Demaré
David Sidwell
Jeremy Anderson¹
Reto Francioni
Ann F. Godbehere
Fred Hu¹
William G. Parrett²
Julie G. Richardson
Isabelle Romy
Robert W. Scully
Beatrice Weder di Mauro
Dieter Wemmer
Meeting attendance
without GEB3
Meeting and call
attendance with GEB4
Key responsibilities include:
8/8
8/8
8/8
6/6
8/8
8/8
5/6
2/2
8/8
8/8
8/8
8/8
8/8
100%
100%
100%
100%
100%
100%
83%
100%
100%
100%
100%
100%
100%
16/16
16/16
16/16
11/11
16/16
16/16
10/11
5/5
16/16
16/16
16/16
16/16
16/16
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%
91%
100%
100%
100%
100%
100%
100%
1 Jeremy Anderson and Fred Hu were elected to the BoD at the 2018 AGM; indicated are attended and total meetings after their election. 2 William G. Parrett did not stand for re-election at the 2018 AGM; indicated
are his attended and total meetings up to the AGM. 3 Additionally, four ad hoc calls took place in 2018. 4 Additionally, one ad hoc call took place in 2018.
232
Audit Committee
five BoD members
The Audit Committee consisted of
throughout 2018, 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,
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 2018, the Audit Committee held eight committee
meetings and nine calls with a participation rate of 100%. On
average the duration of each of the meetings and calls was
approximately 130 minutes. In 2018, 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, the Group
Controller and Chief Accounting Officer and some of the
meetings were attended by the Group CEO. In 2018, the
Chairperson and the committee met on a regular basis with core
supervisory authorities.
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 and Rule 10A-3 under the US Securities Exchange
Act set more stringent independence requirements for members
of audit committees than for the other members of the BoD.
Throughout 2018, all members of the Audit Committee, in
addition to satisfying our independence criteria, satisfied these
requirements, in that they did not receive, directly or indirectly,
any consulting, advisory or compensatory fees from any member
of the Group other than in their capacity as a BoD member, did
not hold, directly or indirectly, UBS Group AG shares in excess of
5% of the outstanding capital, and (except as noted below) did
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, provided that all BoD members determine
that such simultaneous service does not impair the member’s
ability to effectively serve on each committee and to fulfill his
or her obligations. Considering
credentials of
William G. Parrett, the BoD granted him such an exemption.
the
Audit Committee
Members in 2018
Meeting and
call attendance
Key responsibilities include:
Jeremy Anderson (Chairperson)¹
William G. Parrett (Chairperson)²
9/9
8/8
100%
Michel Demaré
Ann F. Godbehere
Isabelle Romy
17/17
100%
17/17
100%
17/17
100%
Beatrice Weder di Mauro
17/17
100%
100% The function of the Audit Committee is to serve as an independent and objective body with oversight of:
(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
1 Following his election at the 2018 AGM, Jeremy Anderson became Audit Committee Chairperson; indicated are attended and total meetings after his election. 2 William G. Parrett did not stand for re-election at the
2018 AGM; indicated are his attended and total meetings up to the AGM.
233
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Corporate governance and compensation
Corporate governance
Compensation Committee
The Compensation Committee consisted of four independent
BoD members throughout 2018 as indicated in the table below.
In addition to the key responsibilities indicated in the same table,
the Compensation Committee
the compensation
disclosures included in this report.
reviews
During 2018, 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. In 2018, the Chairperson met on a regular
basis with core supervisory authorities.
→ Refer to “Board of Directors governance and compensation” in
the “Compensation” section from page 280 of this report for
more information on the Compensation Committee’s decision-
making procedures
Corporate Culture and Responsibility Committee
Throughout 2018, the Corporate Culture and Responsibility
Committee consisted of the Chairperson and three independent
BoD members as listed in the table below. The Group CEO and
the Head UBS in society are permanent guests of the Corporate
Culture and Responsibility Committee, while senior regional
representatives (chairmen or Presidents) attended two of the
meetings as guests. During 2018, six meetings were held with
an average participation rate of 96%. On average the duration
of each of the meetings was approximately 100 minutes.
Compensation Committee
Members in 2018
Ann F. Godbehere (Chairperson)
Michel Demaré
Reto Francioni¹
William G. Parrett¹
Julie G. Richardson²
Dieter Wemmer²
Meeting and
call attendance
Key responsibilities include:
9/9
9/9
2/2
2/2
7/7
7/7
100% The Compensation Committee is responsible for:
100%
100%
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
1 Reto Francioni and William G. Parrett were members of this committee until the 2018 AGM; indicated are attended and total meetings up to the AGM. 2 Julie G. Richardson and Dieter Wemmer were elected to this
committee at the 2018 AGM; indicated are attended and total meetings after their election.
Corporate Culture and Responsibility Committee
Members in 2018
Axel A. Weber (Chairperson)
Jeremy Anderson¹
Reto Francioni
William G. Parrett²
Beatrice Weder di Mauro
Meeting
attendance
Key responsibilities include:
6/6
4/4
6/6
1/2
6/6
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%
50%
100%
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
1 Following the 2018 AGM, Jeremy Anderson became a member of this committee; indicated are attended and total meetings after his election. 2 William G. Parrett did not stand for re-election at the 2018 AGM;
indicated are his attended and total meetings up to the AGM.
234
Governance and Nominating Committee
In 2018, the Governance and Nominating Committee consisted
of the Chairperson and three independent members as listed in
the table below. During 2018, 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 60
minutes. All meetings of the Governance and Nominating
Committee were attended by the Group CEO.
Risk Committee
In 2018, the Risk Committee comprised five independent BoD
members as listed in the table below. During 2018, 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 2018,
the frequency and length of the meetings were the same for
both UBS Group AG and UBS AG. Usually, the Group CEO, the
Group CFO, the Group Chief Risk Officer and the Group General
In 2018, the
Counsel attended the meetings and calls.
Chairperson and the committee met on a regular basis with core
supervisory authorities.
Governance and Nominating Committee
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 in 2018
Axel A. Weber (Chairperson)
Michel Demaré
Isabelle Romy
David Sidwell
Risk Committee
Members in 2018
Meeting and
call attendance
Key responsibilities include:
David Sidwell (Chairperson)
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
Reto Francioni
Julie G. Richardson
Robert W. Scully
Dieter Wemmer
12/12
100%
12/12
100%
12/12
100%
12/12
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
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235
Corporate governance and compensation
Corporate governance
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 “Employees” in the “How we create value for our
stakeholders” section from page 37 and to the contents page of
this report for more information on our Pillars, Principles and
Behaviors
In 2018, the Chairman met on a regular basis with core
supervisory authorities in all major regions where UBS is active.
Meetings with important supervisory authorities in other regions
were scheduled on an ad hoc or needs-driven basis.
Roles and responsibilities of the Vice Chairmen and the
Senior Independent Director
The BoD appoints one or more Vice Chairmen and a Senior
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
with advice. In conjunction with the Chairman and the Governance
and Nominating Committee, they facilitate good Group-wide
corporate governance, as well as 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 2018, two
without the participation of the Chairman.
independent BoD meetings were held for UBS Group AG and UBS
AG with an average participation rate of 95% and an average
duration of approximately 180 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” and the NYSE rules.
In 2018, our BoD met the standards of the Organization
Regulations for the percentage of directors that are considered
independent under the criteria described above. Since our
Chairman is employed full time 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 35 Related parties” in the “Consolidated financial
statements” section on page 496 of this report for more
information
236
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.
We asked our BoD 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, cybersecurity
– regulatory authority, 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)
Supervision and control of the GEB remains with the BoD.
The authorities and responsibilities of the two bodies are
governed by the Articles of Association and the Organization
Regulations.
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.
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. In accordance with the Swiss Code of Best Practice for
Corporate Governance, we seek appropriate professional
backgrounds and experience as well as diversity among the
members of the BoD, including gender diversity. 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 firm’s business exposure, risk profile,
strategy and geographic reach.
For 2018, competencies in all 12 categories were represented
in our BoD. Particularly strong levels of experience and expertise
existed in these areas:
– financial services
– finance, audit, accounting
– risk management
Furthermore, nine of the 12 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 123 of this report for information on
our risk governance framework
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Terms of office
Geographic diversity1
Gender
Experience and competencies2
3 < 3 years
3 3–6 years
3 7–9 years
3 > 9 years
42% Switzerland
25% Europe
25% USA
8% Asia
67% male
33% female
Financial services:
a
b
c
10
Finance, audit and risk management:
Technical and functional know-how:
f
g
d
h
15
e
j
13
i
Leadership:
k
l
9
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, cybersecurity –
i) regulatory authority, 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 applies. 2 The bars represent the main strengths of the BoD, up to a maximum of four competencies per member.
237
Corporate governance and compensation
Corporate governance
Succession planning
Information and control instruments vis-à-vis the Group
Executive Board
Succession planning is one of the key responsibilities of both the
BoD and the GEB. Across all divisions and regions, an inclusive
talent development and succession planning process is in place
that is intended to foster the personal development and Group-
wide mobility of our employees. Succession plans for all
leadership positions, up to and including all positions on the
GEB, are managed under the lead of the Group CEO. The BoD
reviews and approves the succession plans of the GEB and the
management layer below.
For the BoD, the Chairman leads a systematic succession
planning process as illustrated in the chart below.
(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:111)(cid:2)(cid:85)(cid:87)(cid:69)(cid:69)(cid:71)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:82)(cid:78)(cid:67)(cid:80)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:71)(cid:85)(cid:85)
(cid:53)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:91)(cid:2)(cid:17)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:49)(cid:80)(cid:68)(cid:81)(cid:67)(cid:84)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:39)(cid:90)(cid:75)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:68)(cid:81)(cid:67)(cid:84)(cid:70)(cid:2)
(cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:35)(cid:41)(cid:47)
(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:53)(cid:71)(cid:67)(cid:84)(cid:69)(cid:74)
(cid:53)(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)
tenure of
Our strategy and the business environment constitute the
main drivers in our succession planning process for new BoD
members as they define the key competencies required on the
BoD. Taking diversity and
the existing BoD
composition into account, the Governance and Nominating
Committee defines the recruiting profile for the search. Both
external and internal sources contribute to identifying suitable
candidates. The Chairman and the members of the Governance
and Nominating Committee meet with potential candidates and,
with the support of the full BoD, nominations are submitted to
the AGM for approval. New BoD members follow an in-depth
onboarding process that is designed to enable them to integrate
efficiently and become effective in their new role. As a result of
this succession planning process, the composition of the BoD
includes a broad spectrum of skills, educational backgrounds,
experience and expertise,
the demanding
in
requirements of a leading global financial services firm.
line with
The BoD is kept informed of the activities of the GEB in
various ways,
including regular meetings between the
Chairman and the Group CEO. The Group CEO and other
GEB members also update the BoD on all significant issues at
BoD meetings. Furthermore, the BoD receives comprehensive
reports on a monthly basis, covering financial, capital,
legal
funding,
developments, as well as performance against plan and
forecasts for the remainder of the year. For important
developments, BoD members are also updated by the GEB in
between meetings. In addition, the Chairman receives the
material and minutes of the GEB meetings.
compliance and
regulatory,
liquidity,
At BoD meetings, BoD members may request from other BoD
or GEB members any information about matters concerning the
Group that they require to fulfill their duties. Outside of
meetings, BoD members may request information from other
BoD and GEB members. Such requests must be routed through
the Group Company Secretary and addressed to the Chairman.
The BoD
is supported
in discharging
its governance
responsibilities by Group Internal Audit (GIA), which assesses the
reliability of financial and operational information and the
effectiveness of processes for compliance with legal, regulatory
and statutory requirements.
The Head GIA reports directly to the Chairman. In addition,
GIA 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 audit plan and objectives
for the year and monitors GIA’s discharge of these objectives.
The committee is also in regular contact with the Head GIA.
GIA issues quarterly reports that provide: a broad overview of
significant audit results and key issues; control themes and
individual audit results; continuous risk
trends based on
assessment; and 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. Furthermore, 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 129 of this report for information on
reporting to the BoD
238
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
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 2018, the
GEB held 16 meetings for UBS Group AG and for UBS AG, while
a further two standalone meetings were held for UBS AG.
Additionally, two off-site meetings and four strategy workshops
took place.
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
Group,
its business divisions and Corporate Center. The
Organization Regulations additionally specify which powers of
the GEB are delegated to the Group ALCO. In 2018, 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.
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. On 25 September 2018, we announced that
Piero Novelli and Robert Karofsky had been appointed co-
Presidents Investment Bank, both joining the GEB. Andrea
Orcel, former President Investment Bank, stepped down from
the GEB. These changes were made effective on 1 October
2018. On 25 October 2018, we announced that Markus
Ronner would be joining the GEB as Group Chief Compliance
and Governance Officer, effective 1 November 2018.
Furthermore, we announced the decision of Kathryn Shih to
retire after 32 years at UBS. Edmund Koh took over as
President UBS Asia Pacific, joining the GEB of UBS Group AG
and UBS AG as of 1 January 2019.
The biographies on the following pages provide information
about the GEB members currently in office and those in office
on 31 December 2018. 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 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
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
2018, no member of the GEB reached the aforementioned
thresholds.
in companies
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 Axel Lehmann, as
President UBS Switzerland AG. 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.
At present no specific diversity policy is required or applied
with respect to the composition of the GEB and UBS AG’s
Executive Board.
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239
Corporate governance and compensation
Corporate governance
Sergio P. Ermotti
Martin Blessing
Christian Bluhm
Swiss, born 1960
German, born 1963
German, born 1969
Function at UBS Group AG
Group Chief Executive Officer
Function at UBS Group AG
Co-President Global Wealth Management
Function at UBS Group AG
Group Chief Risk 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. His career began at Merrill
Lynch in 1987, where he held various positions within equity
derivatives and capital markets until 2003. In his last two
years there, he served as co-Head of Global Equity Markets
and as a member of the Executive Management Committee
for Global Markets & Investment Banking. 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 UBS Optimus Foundation Board
– Chairman of the Fondazione Ermotti, Lugano
– Chairman and President of the Board of the Swiss-
American Chamber of Commerce
Professional history and education
Martin Blessing was appointed co-President 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. Prior to that, 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
– Board member of the Global Apprenticeship Network
– Member of the Institut International d’Etudes Bancaires
– Member of the Saïd Business School Global Leadership
Talks
Council, University of Oxford
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 Switzerland AG
– Chairman of the Foundation Board – International
Financial Risk Institute
240
Markus U. Diethelm
Kirt Gardner
Robert Karofsky
Swiss, born 1957
American (US), born 1959
American (US), born 1967
Function at UBS Group AG
Group General Counsel
Function at UBS Group AG
Group Chief Financial Officer
Function at UBS Group AG
Co-President Investment Bank
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
– 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
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
Robert Karofsky is co-President Investment Bank of UBS
Group AG and UBS AG and became a member of the GEB in
October 2018. He joined UBS in 2014 as Global Head
Equities and has been President UBS Securities LLC since
2015. From 2011 to 2014, he was Global Head of Equity
Trading at AllianceBernstein. He began his career at Morgan
Stanley in 1994 and joined Deutsche Bank as Head of North
American Equities in 2005, later becoming co-Head of
Global Equities from 2008 to 2010. Mr. Karofsky holds a
bachelor’s in economics from Hobart and William Smith
Colleges and an MBA in finance and statistics from the
University of Chicago’s Booth School of Business.
Other activities and functions
– Board member of UBS Securities LLC
– Trustee of the UBS Americas Inc. Political Action
Committee
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241
Corporate governance and compensation
Corporate governance
Sabine Keller-Busse
Swiss and German, born 1965
Function at UBS Group AG
Group Chief Operating Officer
Professional history and education
Sabine Keller-Busse was appointed Group Chief Operating
Officer of UBS Group AG and UBS AG as well as President of
the Executive Board of UBS Business Solutions AG in 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
– Board member of UBS Business Solutions AG
– 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
New GEB member
Edmund Koh
Singaporean, born 1960
Function at UBS Group AG
President UBS Asia Pacific as of 1 January 2019
Ulrich Körner
German and Swiss, born 1962
Functions at UBS Group AG
President Asset Management and President UBS Europe,
Middle East and Africa
Professional history and education
Edmund Koh became a member of the GEB and was
appointed President UBS Asia Pacific of UBS Group AG and
UBS AG in January 2019. He was Head Wealth Management
Asia Pacific from 2016 to 2018 as well as Country Head
Singapore from 2012 to 2018. Mr. Koh has more than 30
years’ experience in senior roles in financial services. He
joined UBS in 2012 as Head Wealth Management South
East Asia and Asia Pacific Hub and Country Head Singapore
from Taiwan-based Ta Chong Bank, where he served as
President and Director from 2008 to 2011. From 2001 to
2008, Mr. Koh was Managing Director and Regional Head
Consumer Banking of DBS Bank in Singapore. In 2001, he
became CEO of Alverdine Pte Ltd and two years earlier he
held the same position for Prudential Assurance, both
companies based in Singapore. Mr. Koh holds a bachelor of
science degree in psychology from the University of Toronto.
Professional history and education
Ulrich Körner has been President Asset Management of UBS
Group AG 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 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
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.
in business administration
Other activities and functions
– Member of the Wealth Management Institute at Nanyang
Technological University, Singapore
– Member of the Ministry of Finance’s Committee on the
Future Economy Sub-Committees
– Board member of Next50 Limited
– Trustee of the Cultural Matching Fund
– Board member of Medico Suites (S) Pte Ltd
– Board member of Medico Republic (S) Pte Ltd
Other activities and functions
– Member of the Supervisory Board of UBS Europe SE
– Chairman of the Foundation Board of the UBS Pension
Fund
– 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
242
Axel P. Lehmann
Swiss, born 1959
Tom Naratil
American (US), born 1961
Piero Novelli
Italian, born 1965
Functions at UBS Group AG
President Personal & Corporate Banking and President UBS
Switzerland
Functions at UBS Group AG
Co-President Global Wealth Management and President UBS
Americas
Function at UBS Group AG
Co-President Investment Bank
Professional history and education
Piero Novelli is co-President Investment Bank of UBS Group
AG and UBS AG and became a member of the GEB in
October 2018. He was appointed co-Executive Chairman
Global Investment Banking, Corporate Client Solutions, in
2017, and the year before became sole Global Head
Advisory Services including Global Mergers and Acquisitions
(M&A). Mr. Novelli rejoined UBS in 2013 as Chairman
Global M&A as well as Group Managing Director. From
2011 to 2012, Mr. Novelli was Global co-Head of M&A at
Nomura, having worked as Global Head M&A at UBS
between 2004 and 2009. Before that he worked for Merrill
Lynch and held the position of Head of European M&A and
Head of European Industrials. Mr. Novelli holds a master‘s
degree in management from the MIT Sloan School of
Management and a master’s degree
in mechanical
engineering from Università degli Studi di Roma.
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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 and 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
Investment Products Group.
Mr. Naratil holds an MBA in economics from New York
University and a bachelor of arts in history from Yale
University.
the
Other activities and functions
– Board member of UBS Americas Holding LLC
– Board member of the American Swiss Foundation
– Member of the Board of Consultors for the College of
Nursing at Villanova University
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
in Milan.
visiting professor at Bocconi University
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.
Other activities and functions
– Co-Chair of the Global Future Council on Financial and
Monetary Systems of WEF
– Adjunct professor and Chairman of the Board of the
Institute of Insurance Economics at the University of
St. Gallen
– Member of the HSG Advisory Board of the University of
St. Gallen
– Vice Chairman of the Swiss Finance Institute Foundation
Board
– Member of the IMD Foundation Board, Lausanne
– Member of the Swiss-American Chamber of Commerce
Chapter Doing Business in USA
243
Corporate governance and compensation
Corporate governance
Member of the GEB until 31 December 2018
Markus Ronner
Swiss, born 1965
Kathryn Shih
British, born 1958
Function at UBS Group AG
Group Chief Compliance and Governance Officer
Function at UBS Group AG
President UBS Asia Pacific until 31 December 2018
Professional history and education
Markus Ronner is Group Chief Compliance and Governance
Officer of UBS Group AG and UBS AG and became a
member of the GEB in November 2018. In this role, he is
responsible at Group level for compliance and operational
risk control, governmental and regulatory affairs as well as
investigations and governance matters. He became Head
Group Regulatory and Governance in 2012. During his 37
years with UBS, Markus Ronner has held various positions
across the bank, including: Group-wide program manager
“too big to fail” (2011–2013); Chief Operating Officer
(COO) Wealth Management & Swiss Bank (2010–2011);
Head Products and Services of Wealth Management & Swiss
Bank (2009–2010); COO Asset Management (2007–2009);
and Head Group Internal Audit (2001–2007). Mr. Ronner
joined the firm as an apprentice in 1981 and holds a Swiss
Banking Diploma.
Professional history and education
Kathryn Shih was a member of the GEB and President UBS
Asia Pacific of UBS Group AG and UBS AG from January
2016
to December 2018. She was Head Wealth
Management Asia Pacific from 2002 to 2015, and CEO of
UBS Hong Kong from 2003 to 2008. Prior to this, she held
various leadership positions in Wealth Management Asia
Pacific. She was with the firm for over 30 years, having
joined Swiss Bank Corporation in 1987 as a client advisor
and then served 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. She 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)
244
Change of control and defense measures
Our Articles of Association do not provide any measures for
delaying, deferring or preventing a change of control.
Clauses on change of control
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.
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
250 for more information
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245
Corporate governance 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)
supervise the effectiveness of audit work.
→→ Refer to “Board of Directors” in this section for more
information on the Audit Committee
based on interviews with senior management as well as survey
feedback from stakeholders across the Group. 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.
External independent auditors
At the Annual General Meeting (AGM) in 2018, Ernst & Young
Ltd (EY) was re-elected as auditors for the Group for a one-year
term of office. EY assumes 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 because of prior audit service to the Group in another role.
Marc Ryser has been the co-signing partner for the FINMA audit
since 2012. He will be succeeded in 2019 by Daniel Martin, with
an incumbency limit of seven years.
During 2018, 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
Fees paid to external independent auditors
Special auditor for capital increase
At the AGM on 3 May 2018, BDO AG was reappointed as
special auditors for a three-year term of office. The special
auditors provide audit opinions in connection with potential
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 USD 30.3 million in 2018
(USD 29.4 million in 2017) 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 2018
included several engagements for which EY was 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.
USD 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 audit1
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
31.12.18
31.12.17
54,716
16,595
71,310
8,711
5,390
3,261
60
1,212
53,557
13,217
66,774
12,272
6,496
5,132
645
1,572
All other fees
Total non-audit1
1 Total audit and non-audit fees amounted to USD 81,770 thousand for UBS Group AG consolidated as of 31 December 2018 (31 December 2017: USD 82,562 thousand), of which USD 56,493 thousand related to
UBS AG consolidated (31 December 2017: USD 62,137 thousand).
10,459
15,788
1,943
536
246
→
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 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 2018 operated with an approved
average headcount of 450 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;
– the effectiveness of governance processes;
– the effectiveness of risk management, including whether risks
are appropriately identified and managed;
– the effectiveness of internal controls, specifically whether they
are commensurate with the risks taken;
– the soundness of the risk and control culture;
– the effectiveness and sustainability of remediation activities,
originating from any source;
– the 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
– the 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 effect 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 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
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.
for Group
GIA enhances the efficiency of its work through coordination
and close cooperation with the external auditors.
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247
Corporate governance and compensation
Corporate governance
Information policy
We provide regular information to our shareholders and to the
financial community.
Financial disclosure principles
Financial reports for UBS Group AG are expected to be
published as follows
First quarter 2019
Second quarter 2019
Third quarter 2019
25 April 2019
23 July 2019
22 October 2019
The Annual General Meeting of shareholders of UBS
Group AG will take place as follows
2019
2020
2 May 2019
29 April 2020
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
→ Refer to the corporate calendar at www.ubs.com/investors for
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
– 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 Financial Stability
Board’s Enhanced Disclosure Task Force in 2012. We regard the
improvement of our disclosures as an ongoing commitment.
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 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 can download all our financial publications at
www.ubs.com/investors. Shareholders may opt to receive a
printed 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.
→ Refer to www.ubs.com/investors for a complete set of
published reporting documents and a selection of senior
management industry conference presentations
→ Refer to the “Information sources” section on page 535 of this
report for more information
→ Refer to “Corporate information” and “Contacts” in the
introductory part of this report for more information
248
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 327
of this report for more information on the basis of accounting
We are committed to maintaining the transparency of our
reported results and to allowing 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, the 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 2018. 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 301 of this report for more information
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249
Advisory vote
Compensation
Dear shareholders,
The Board of Directors and I wish to thank
you for your support once again at last
year’s Annual General Meeting and for
sharing your views on our compensation
practices over the past year.
Throughout 2018, the BoD Compensation
Committee continued to oversee the
compensation activities and ensure that
reward reflects performance, prudent risk-
taking and supports alignment with our
shareholders and other stakeholders. I am
pleased to present our Compensation
Report for 2018, which provides further
information about our compensation
philosophy and approach.
Shareholder engagement
In 2018, we continued our engagement
with shareholders and other stakeholders to
listen to their perspectives about our
compensation philosophy and framework.
We have considered this valuable feedback
in the regular review of our compensation
framework and disclosure approach. We
concluded that our current framework,
which has remained broadly unchanged
since 2012, continues to be best suited for
our compensation philosophy and aligns
with the interests of our investors, clients
and employees.
While the feedback was overall positive, it
also highlighted opportunities to further
increase our transparency and to provide
more clarity on certain aspects of our
compensation philosophy and framework.
Consequently, we have enhanced our
Compensation Report by introducing,
among others, the following sections:
– a new ”at a glance” section with key
financial and compensation figures
providing a clearer perspective on pay
alignment with performance
– a new ”shareholder engagement”
section outlining frequent questions from
stakeholders and our responses
– a new disclosure of the realized vs.
awarded pay for the Group Chief
Executive Officer (CEO) demonstrating
our rigorous deferral approach
– a more transparent description of the
judgment exercised by the Compensation
Committee regarding compensation-
related aspects such as performance
award pool adjustments
– a revised structure and sequence of the
Compensation Report enhancing
readability and transparency
2018 performance
In 2018 we delivered strong financial results
in overall challenging market conditions,
demonstrating the soundness of our
strategic choices and the strength of our
diversified franchise.
Pre-tax growth was strong, resulting in an
increase of 16% in net profit attributable to
shareholders to USD 4.5 billion (CHF 4.4
billion), when excluding the effect of the US
tax law change in the fourth quarter of
2017. We maintained a strong capital
position with a CET1 capital ratio of 12.9%
and a CET1 leverage ratio of 3.8%, and also
met our 2020 capital requirements one year
earlier than plan.
Our focus on sustainable performance,
balancing cost and capital efficiency
supported increased capital returns to
investors. Our capital efficiency is reflected
in an adjusted1 return on tangible equity
excluding DTAs at 12.9%, and return on
CET1 capital at 13.1%.
In 2018, we bought back CHF 750 million of
UBS shares, exceeding our target by
CHF 200 million. The BoD intends to
propose a dividend of CHF 0.70 per share
for the financial year 2018, an increase of
8% compared with 2017.
While UBS continues to be one of the few
European banks with a share price trading
around or above tangible book value per
share, we are as disappointed as our
shareholders about the absolute share price
performance. We believe the share price
movement in 2018 does not reflect our
overall financial performance and the value
of our franchise.
At our Investor Update in October, we
presented our strategy for cost and capital
efficient growth, along with updated
financial targets for the Group and business
divisions. We are confident that we can
continue to deliver profitable growth via
cost discipline and leveraging technology to
drive higher returns and create long-term
value for our shareholders.
2018 performance award pool
and expenses
The Compensation Committee considered
the following primary drivers for pay
decisions:
– Overall results for the Group and
business division
– Quality of results (including
developments on and provisions for
litigation, regulatory and similar matters)
– Performance relative to peers
– Affordability
– Competitiveness in pay position
We continue to strongly differentiate
individual compensation through our pay for
performance approach. Pay decisions reflect
performance differences by business and
geography, as well as consideration for critical
roles that drive and support both current and
future sustainable performance.
Based on these considerations, the
performance award pool for the Group is
down about 1% at USD 3.1 billion / CHF 3.0
billion (compared with USD 3.2 billion /
CHF 3.1 billion in the prior year).
The modest decrease of the performance
award pool, while reflecting the strong
performance of the firm in challenging
market conditions, also demonstrates our
disciplined approach in managing
compensation over business cycles without
compromising our competitive pay position.
After careful consideration the Committee
has maintained the base salaries for the
Group Executive Board (GEB) including the
Group CEO at current levels. These salary
levels have not been changed since 2011.
1 Refer to ”Group performance” in the ”Financial and operating performance” section of this report for more information on adjusted results.
250
The GEB performance award pool, including
the Group CEO, was CHF 73.3 million (for
reference USD 74.8 million), a reduction of
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%.
Reflecting the long-term nature of our
deferral program, the Group CEO’s realized
pay was higher for 2018 than for 2017 due
to the first vesting of the Deferred
Contingent Capital Plan (awarded in 2012)
and vesting of deferred shares under the
Equity Ownership Plan (awarded in 2014
and earlier).
Culture and behaviors
At UBS, we believe that the right strategy and
a strong culture drive strong performance.
The three keys to success – our Pillars,
Principles and Behaviors – embody the
foundation of our strategy and culture. They
define what we stand for both as a firm and
individually. Six years ago we redefined our
three keys and we can now say that they are
well embedded across UBS. They are at the
core of our bank – for all of us, every day. In a
fundamental way, they represent our
philosophy and the culture of the
organization.
Ann F. Godbehere
Chair of the Compensation
Committee of the Board of
Directors
Compensation Committee membership
In 2018 Bill Parrett and Reto Francioni stood
down from the Committee. I want to thank
them both for their valuable input and
perspectives that they provided to the
Committee over the years. Also in 2018 we
welcomed Julie Richardson and Dieter
Wemmer to the Committee.
2018 compensation philosophy
and framework
Our compensation philosophy aligns the
interests of our investors, clients and
employees. The consistency of our approach
(largely unchanged since 2012) continues to
reinforce 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.
Variable compensation is earned over the
performance year and is subject to mandatory
deferral for many employees. This deferral
approach creates a strong direct alignment of
interests between employees and
stakeholders.
To incentivize sustainable performance
without inappropriate or excessive risk-taking,
the Compensation Committee sets
performance thresholds for deferred awards
at levels to demonstrate the long-term quality
of the past year’s performance is sustainable.
If the minimum performance thresholds are
not achieved, employees are subject to partial
or full forfeiture. This approach is intended to
discourage short-term profit making at the
expense of longer-term performance.
We believe UBS has one of the most rigorous
deferral regimes in the industry with a
deferral period of up to five years, or longer
for certain regulated employees. Our deferred
share awards are without upside leverage and
are directly aligned with share price returns.
The recognition of behaviors and culture is an
important element of our framework. To
reinforce the behaviors framework
established by the BoD and the GEB, we
reward not only what results were achieved,
but also how they were achieved. We reward
doing the right thing; collaborating across the
bank and speaking up to identify
opportunities and risks. We penalize instances
of behavior that do not reflect our values.
Gender-related initiatives
UBS remains committed to hiring, retaining
and promoting more women at all levels
across the firm. The Compensation
Committee systematically reviews any gender
pay gap for equivalent roles across the
workforce. Our policies and practices are
impartial and equal, and we are committed to
ensuring that all employees are paid fairly.
In 2018, we continued to develop career
support, Human Resources processes and
technology solutions to help better attract,
develop and retain women at all stages of
their careers.
Overall, while we are making progress
towards our aspiration of increasing the ratio
of women in management roles to one third,
progress takes time and we must continue
our focus on seeing more women progress
into senior roles.
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Annual General Meeting 2019
At the 2019 Annual General Meeting (AGM)
on 2 May, we will seek your support on the
following compensation-related items:
–
the maximum aggregate amount of
compensation for the BoD for the period
from 2019 AGM to 2020 AGM
the maximum aggregate amount of fixed
compensation for the GEB for 2020
the aggregate amount of variable
compensation for the GEB for 2018
shareholder endorsement in an advisory
vote for the Compensation Report
–
–
–
Finally, this will be my last report as the
Committee chair. I advised the board in
February 2019 that, after 10 years’ service, I
will retire at the 2019 AGM. It has been my
privilege to serve in the capacity of chair of
this Committee and I want to take this
opportunity to thank our shareholders for
their valued input and support and to
recognize the tremendous support I have had
from management over the years. I wish my
successor and the other Committee members
every success in the future.
Ann F. Godbehere
Chair of the Compensation Committee of
the Board of Directors
251
Advisory vote
Corporate governance and compensation
Compensation
Performance and compensation at a glance
Financial achievements and strategic highlights
The following highlights the main financial achievements for the
performance year 2018:
– delivered strong 2018 financial results in overall challenging
market conditions
– Group profit before tax increased by 12% and net profit
attributable to shareholders increased by 16%1
– maintained a strong capital position and met the 2020 capital
requirements one year early
– achieved strong return on CET1 capital of 13.1%2
– repurchased CHF 750 million of UBS shares, exceeding the
2018 target of up to CHF 550 million
2018
USD 6,063 million
Adjusted Group profit before tax
Profitability
Capital
12.9%
Adjusted Group RoTE excl.
DTAs3
USD 4,516 million
Net profit attributable to
shareholders
12.9%
CET1 capital ratio
79.5%
Adjusted Group cost /
income ratio
USD 5,991 million
Group profit before tax
3.8%
CET1 leverage ratio
11 Excluding the USD 2,939 million net write-down of deferred tax assets (DTAs) following the enactment of the US Tax Cuts and Jobs Act (TCJA) in the fourth quarter of 2017. 2 Net profit / loss attributable to
shareholders divided by average CET1 capital. 3 Calculated as adjusted net profit / loss attributable to shareholders excluding amortization and impairment of goodwill and intangible assets and deferred tax
expense / benefit, such as the net write-down due to the TCJA enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as CET1
capital.
.
Performance award year-on-year development
– Group performance award pool decreased by 1% compared
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to previous year
– Group CEO performance award of CHF 11.3 million, of which
CHF 2 million in cash, bringing his total compensation to
CHF 13.8 million (excluding benefits and contributions to
retirement benefit plans), a decrease of 1% compared with
2017
– Group Executive Board (GEB) performance award pool, including
the Group CEO, of CHF 73.3 million, a decrease of 1%
Compensation decision-making approach
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To support sustainable shareholder value creation, our performance award decisions are based on business performance (including absolute
achievement as well as relative achievement compared with prior year, established performance targets and our peers). When adjusting
(positively or negatively) the performance award pool, the Compensation Committee considers the following dimensions:
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Pay for performance
Our compensation philosophy is to align the interests of investors and clients with those of our employees, thereby linking pay to
longer-term sustainable performance.
SSustainable
shareholder value
PPay delivery
mechanisms
Strong overall performance with net profit attributable to shareholders of USD 4.5 billion, an increase of 16%1
Increased capital returns to investors with proposed dividend per share up 8% and a buyback of CHF 750 million of UBS shares, exceeding our target by
CHF 200 million
Managed operating expenses while investing for future growth
Overall employee pay levels are aligned to pay competitively for comparable performance, while considering our capital position (including dividends and share
buybacks)
Compensation structure is aligned with strategic priorities and focused on sustainability of results
A significant portion of variable compensation is delivered through a mandatory deferral over a period of five years
Awarded pay is aligned with adjusted pre-tax profit and capital returns to shareholders over multiple years
Realized pay cannot exceed the award granted (other than for market movements and return of the instruments)
CConsistent approach
and strong governance
Compensation framework is largely unchanged since 2012
Compensation framework approved by shareholders since 2014 (annual advisory vote at AGM)
GEB compensation is governed by a rigorous process under Compensation Committee and BoD oversight
1 Excluding the USD 2,939 million net write-down of DTAs following the enactment of the TCJA in the fourth quarter of 2017.
Aggregate amounts of GEB compensation are subject to shareholder approval (annual binding say-on-pay vote at AGM)
Specific additional pay for performance safeguards are in place for GEB members:
Cap on individual performance awards (performance award for the Group CEO is capped
at five times his fixed compensation and for the other GEB members at seven times)
Cap on total GEB performance award pool (2.5% of adjusted profit before tax)
Cap on individual cash performance award of USD / CHF 2 million
Share ownership requirements
GEB compensation pay for performance safeguards
At least 80% of awards are at risk of forfeiture
Six-month notice period in employment contracts
Long-term deferral and no leverage in compensation plans
No hedging strategies allowed
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253
Advisory vote
Corporate governance and compensation
Compensation
Shareholder engagement and say on pay
regarding our
UBS is committed to an ongoing dialog on developments and
trends in compensation and corporate governance matters.
Through regular interaction with shareholders and other external
stakeholders, we garner their perspectives, questions and
compensation philosophy and
concerns
framework. This feedback is important to us when we review
our compensation framework, including related disclosures, to
confirm that it aligns with the interests of our investors as well
as those of our employees. We have summarized frequent
questions we received from different stakeholders and our
responses below.
How does the Compensation Committee use its discretion
to determine the performance award pool?
We enhanced the Compensation Report to better explain how the
Compensation Committee applies judgment when determining
the firm’s overall performance award pool. The performance
award pool funding begins with a direct link to risk-adjusted profit
as described later in this report. The Compensation Committee
then applies discretionary adjustments that reflect a range of
factors such as capital returns to investors, risk profile, strategic
initiatives, affordability, market position and trends. Consequently,
the decision balances consideration of financial performance with
a range of qualitative factors including discretion to consider the
quality of earnings. With regards to developments on and
provisions for litigation, regulatory and similar matters, it is
important to distinguish between legacy matters and financial and
operating performance for the year. To enable future growth
through disciplined execution of our strategy and creation of
sustainable shareholder value, it is essential that pay decisions are
not driven by the potential impact of legacy matters, which may
take several years to be resolved. At the same time, we are
mindful of the potential costs of such matters, the prudent
management of them and the effect on our share price.
financial measures and goals
How is the performance of the GEB members measured?
We assess the Group Executive Board (GEB) members’ including
the Group CEO’s performance against a number of financial
targets and goals related to our Pillars, Principles, and Behaviors.
reflect our strategic
The
performance targets, which are disclosed in our Annual Report
2018. To provide further context, we enhanced the performance
assessment disclosure for the Group CEO and included details
on the weighting of the financial targets as well as three years of
actual results.
254
is awarded based on
How are share price developments reflected in pay
decisions?
Compensation
the assessment of
performance achievement while also considering risk profile,
capital returns to shareholders, strategic initiatives, affordability
and the competitiveness of our pay levels and approach as
described in the “at a glance“ section. We do not consider
absolute share price performance, either positive or negative,
directly in our pay decisions as it is not a direct measure of
total
performance. Nevertheless, we do consider
shareholder returns in our decision-making process. Additionally,
we consider other factors that evaluate the quality of the share
price, such as that UBS continues to be one of the few European
banks with a share price trading around or above tangible book
value per share.
relative
Our mandatory share-based deferral program creates direct
alignment with shareholder returns and therefore many
employees are directly impacted by the share price. While we are
disappointed with our share price performance, we believe the
share price movement in 2018 does not reflect the significant
progress made during the year, nor the absolute financial
performance. We expect that ultimately the value of our
franchise and the quality of our earnings will be positively
reflected in our share price.
How does UBS set minimum performance thresholds for
their deferred awards?
To incentivize sustainable performance and avoid inappropriate
or excessive risk-taking, the Compensation Committee sets for
selected populations of employees minimum performance
thresholds at levels that demonstrate that the long-term quality
of the past year’s performance is sustainable. Our approach
reflects a level of performance that is ambitious and at the same
time sustainable in terms of longer-term performance.
Each year, the Compensation Committee reviews thresholds
relative to historical performance, our financial plan and our
ambitions, and establishes vesting with minimum performance
thresholds for our Equity Ownership Plan (EOP) awards. If the
minimum performance thresholds are not achieved over a multi-
year period, an employee’s award is subject to partial or even full
forfeiture.
At the time of the award, several performance conditions
relating to the respective performance year guide the level of
granted variable compensation components. We believe that
employees should not have to earn their variable compensation
twice through the achievement of future performance targets
beyond the minimum threshold level as this may encourage
excessive risk-taking. Our approach is intended to discourage
longer-term
short-term profit making at the expense of
performance.
Why does UBS use a deferral instead of a long-term
incentive (LTI) plan?
The Compensation Committee regularly reviews our framework
to confirm it remains competitive and aligned with stakeholders’
interests. In our 2018 review, we concluded that our approach
with a deferred annual performance award subject to time-
based vesting and minimum performance thresholds for a
selected population
is best suited for our compensation
philosophy. We believe our deferral approach is simple and
transparent compared with alternatives such as separate annual
incentives and LTI awards.
In our review of alternative approaches, including where
individuals would
receive additional payouts based on
achievement of stretch targets, we concluded these approaches
are neither simple nor transparent. They are often accompanied
by additional leverage where multiples of the awards are
delivered for achieving these targets and are granted to
employees at a discounted value. They may also encourage
excessive risk-taking and are often only available to a small
population of employees.
Our compensation framework has no upward leverage, such
as multiplier factors, and consequently does not encourage
excessive risk-taking but supports sustainable performance and
responsible risk-taking. The same instruments are granted to all
eligible employees, although stricter performance conditions are
applied to our more senior employees. This approach has
allowed us to attract, retain and
incentivize a talented
workforce.
How does UBS set the maximum aggregate amount of
fixed compensation for the GEB members?
We set the maximum aggregate amount of fixed compensation
or budget to support the total fixed pay for each individual GEB
member. Each GEB member receives a fixed base salary, which is
reviewed annually by the Compensation Committee. The Group
CEO’s annual base salary for 2018 was CHF 2.5 million and has
remained unchanged since his appointment in 2011. The other
GEB members received a base salary of CHF 1.5 million (or local
currency equivalent), also unchanged since 2011. Relative to our
competitors for equivalent roles, we believe this level is
appropriate. A few GEB members are considered Material Risk
Takers (MRTs) for UK / European entities or Senior Management
Functions (SMFs) and receive role-based allowances in addition
to their base salary as part of their fixed compensation. The
budget also includes benefits in line with local practices for other
employees. Finally, as the budget is a maximum spend, we
include a reserve to consider potential future changes in GEB
composition or role changes, and potential additional role-based
allowances.
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255
Advisory vote
Corporate governance and compensation
Compensation
Say-on-pay votes at the AGM
Approved compensation
For the performance year 2018, at the 2017 AGM, shareholders
approved a maximum aggregate fixed compensation amount of
CHF 31,500,000 for the members of the GEB, including base
standard
salaries and
contribution to retirement benefit plans, other benefits and a
buffer. The aggregate fixed compensation paid in 2018 to the
GEB members did not exceed the approved amount for 2018.
role-based allowances, estimated
→ Refer to “2018 total compensation for the GEB members” in the
“Compensation for the Group CEO and the other GEB members”
section of this report
In line with the Swiss Ordinance against Excessive Compensation
in Listed Stock Corporations, we seek binding shareholder
approval for the aggregate compensation for the GEB and for
the BoD. The BoD believes that prospective approval for the
fixed remuneration for the BoD and the GEB provides the firm
and its governing bodies with the certainty necessary to operate
effectively. Furthermore, retrospective approval for the GEB’s
variable compensation awards aligns total compensation for the
GEB to performance and contribution, and to developments in
the marketplace 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.
→ 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 2018 AGM
2018 AGM say-on-pay voting schemes
2018 AGM actual shareholder votes
Binding vote on GEB variable compensation
Shareholders approved CHF 74,150,000 for the financial year 20171, 2, 3
Binding vote on GEB fixed compensation
Shareholders approved CHF 31,500,000 for the financial year 20193
Binding vote on BoD remuneration
Shareholders approved CHF 14,500,000 for the period from the 2018 AGM to the 2019 AGM1, 2, 4
Advisory vote on compensation report
Shareholders approved the UBS Group AG Compensation Report 2017 in an advisory vote
Vote “for”
82.6%
84.8%
86.1%
81.4%
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 our Annual Report 2017. 2 Excludes the
portion related to the legally required employer’s social security contributions. 3 Thirteen GEB members were in office on 31 December 2018 including two new GEB members appointed on 1 October 2018 and one
on 1 November 2018; two GEB members stepped down on 31 December 2017 and 30 September 2018, respectively; and twelve GEB members were in office on 31 December 2017. 4 Twelve BoD members were in
office on 31 December 2018.
256
Compensation-related proposals for 2019
At the 2019 AGM, we will ask our shareholders to vote on the
variable compensation for the GEB for 2018, the fixed
compensation for the GEB for 2020 and the compensation for
the BoD from the 2019 AGM to the 2020 AGM. In addition, we
will also ask our shareholders for an advisory vote on our
Compensation Report, which describes our compensation
framework, governance and policy. Both the advisory vote on
our compensation policy and the binding votes on compensation
reflect our commitment to transparent say on pay for our
shareholders. The table below outlines our compensation
proposals and includes supporting rationales that we intend to
submit to the 2019 AGM for binding votes (in line with the
Swiss Ordinance against Excessive Compensation in Listed Stock
Corporations and our Articles of Association).
Compensation-related proposals for binding votes at the 2019 AGM
Item
GEB variable
compensation
Proposal
Rationale
The Board of Directors proposes an aggregate amount of
variable compensation of CHF 73,300,000 for the members
of the GEB for the financial year 2018.
GEB fixed
compensation
The Board of Directors proposes a maximum aggregate
amount of fixed compensation of CHF 33,000,000 for the
members of the GEB for the financial year 2020.
The proposed amount reflects a decrease of 1% compared with the prior year. This modest
decrease is in line with the decrease in the overall performance award pool of the firm and
demonstrates our disciplined approach in managing GEB compensation over business cycles
without compromising our competitive pay position. The proposed amount further reflects the
GEB members’ achievements in delivering sustainable performance, maintaining a strong
capital position and increasing payouts to shareholders in a year with challenging market
conditions.
The proposal to increase the budget by CHF 1,500,000 reflects the expanded GEB following
the new appointments in 2018. The base salaries for the Group CEO and other GEB members
have remained at the same level since 2011. The requested increase amount is aligned with
the base salary for one GEB member, resulting in a reduction of the reserve amount while
maintaining flexibility in light of evolving EU regulation, Brexit and competitive considerations
for a potential role-based allowance.
1
3
2
4
BoD compensation
The Board of Directors proposes a maximum aggregate
amount of compensation of CHF 14,500,000 for the
members of the Board of Directors for the period from the
2019 AGM to the 2020 AGM.
The proposed amount is unchanged compared to the previous 2018 / 19 period, reflecting the
stable number of BoD members. The amount includes the Chairman’s compensation, which
has remained unchanged since 2015, as well as fees paid to the independent BoD members.
The fixed base fees are unchanged from the 2018 / 19 period and have been broadly flat since
1998.
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257
Advisory vote
Corporate governance and compensation
Compensation
Compensation philosophy and framework
Our compensation philosophy
Total Reward Principles
Our compensation philosophy is to align the interests of our
investors with those of our clients and employees, 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 aligns the interests of our stakeholders with those of
Total Reward Principles
our employees and encourages our employees to focus on our
clients, create sustainable value and achieve the highest
standards of performance. Moreover, we reward behaviors that
help build and protect the firm’s reputation – specifically
integrity, collaboration and challenge. We strive for excellence
and
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.
sustainable performance
in
Our Total Reward Principles apply to all employees globally. They may vary in certain locations according to local legal requirements
and regulations. The table below provides a summary of our Total Reward Principles.
Attract and retain 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
258
Our Total Reward approach
At UBS, we apply a holistic approach to compensation. Our Total
Reward approach consists of fixed compensation (base salary
and role-based allowances, if applicable), performance awards
(cash performance award and, for employees with total
compensation exceeding USD / CHF 300,000, Equity Ownership
Plan and Deferred Contingent Capital Plan awards), 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
(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)
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 approach supports alignment of
employee and investor interests, our capital base and the
creation of sustainable shareholder value.
Illustrative overview
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:37)(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)
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
Delivery and deferral
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
– Pillars, 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
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Additional GEB pay-for-performance safeguards:
– Cap on individual performance awards and total
GEB performance award pool
– Allocations based on a performance assessment
considering financial targets and goals 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 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
259
Advisory vote
Corporate governance and compensation
Compensation
Compensation framework for GEB members
The graph below illustrates the compensation elements, pay mix and pay for performance safeguards for GEB members.
2018 compensation framework for GEB members (illustrative example)
Up to 20% of the annual performance award is paid in the form of 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.
Payout of performance award¹
Key features
Pay for performance and safeguards
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
Our compensation framework is designed to pay for
performance. A performance award is based on the
individual’s performance assessment against a number of
fi nancial targets and goals related to Pillars, Principles and
Behaviors measures
At least 80% of the performance award is at risk
of forfeiture
30%
Notional interest payments will be made annually, where
regulation permits, subject to review and confirmation
by the firm
Compensation plan forfeiture provisions enable the fi rm to
reduce the unvested deferred portion if the compensation
plans’ relevant performance conditions are not met
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,
subject to a cash cap of USD / CHF 2 million. Any amount
above the cash cap is granted under the EOP
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 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
DCCP
30%
EOP
at
least
50%
20%
Cash
up to
20%
Base
salary3
2018
2019
2020
2021
2022
2023
2024
Share
retention
1
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 annually between years 3 and 7. Material Risk Takers (MRTs) have an additional
12-month blocking period on their awards post vest. 2 UK MRTs receive 50% in the form of blocked shares. 3 May include role-based allowances in line with market practice in response to regulatory requirements.
2
3
260
GEB share ownership requirements
To align GEB members’ interests with those of our shareholders
and to demonstrate commitment to the firm, we require the
Group CEO and the other GEB members to hold a substantial
number of UBS shares. GEB members must build up their
minimum shareholding within five years from their appointment
and retain it throughout their tenure. The total number of UBS
shares held by a GEB member consists of any vested or unvested
shares and any privately held shares. GEB members may not sell
any UBS shares before they reach the minimum ownership
thresholds mentioned below. At the end of 2018, GEB members
met their share ownership requirements, except for those
Share ownership requirements
appointed during 2016 and 2018, who need to build up and
meet the required share ownership level by 2021 and 2023,
respectively.
that are subject
Other employees have no binding
share ownership
requirements. However, employees
to
mandatory deferral for their performance award, receive a
significant portion of pay in shares. In addition, through our
employee share purchase program, employees below the rank of
Managing Director may voluntarily defer a portion of their salary
and / or performance award for the purchase of UBS shares.
Further, many of our employees choose to retain shares after
they are vested and free of restrictions.
Group CEO
min. 1,000,000 shares
Other GEB members
min. 500,000 shares
Must be built up within five years from their appointment and retained throughout
their tenure.
Caps on the GEB performance award pool
Benchmarking for the Group CEO and other GEB members
The size of the GEB performance award pool may not exceed
2.5% of the adjusted Group profit before tax. This limits the
overall GEB compensation based on the firm’s profitability.
For 2018, the Group’s adjusted profit before tax was USD 6.1
billion and the total GEB performance award pool was USD 74.8
million. 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 on the
proportion of fixed pay to variable pay for all GEB members
(introduced in 2013), 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 GEB members who are
also Material Risk Takers (MRTs)). For 2018, performance awards
for GEB members and the Group CEO were, on average, 3.2
times
(excluding benefits and
contributions to retirement benefit plans).
fixed compensation
their
1
1
2
2
3
3
GEB employment contracts
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
during that performance year 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.
→ Refer to the “Compensation for the Group CEO and the other
GEB members” section of this report for more information on
performance assessment
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 a
financial industry peer group selected for the comparability of
their size, business mix, geographic presence and the extent to
which they compete with us for talent. The Compensation
Committee also considers our peers’ strategies, practices, pay
levels and regulatory environment, and may periodically
reference other firms’ pay levels or pay practices, including both
financial and non-financial sector peers. The total compensation
for a GEB member’s specific role considers the compensation
paid by our peers for a comparable role and performance. The
Compensation Committee periodically reviews and approves the
peer group for executive compensation.
The table below presents the composition of our peer group
for 2018, which has been reviewed and approved by the
Compensation Committee for the performance year 2018:
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Bank of America
Barclays
BlackRock
BNP Paribas
Citigroup
Credit Suisse
Goldman Sachs
HSBC
JPMorgan Chase
Julius Baer
Morgan Stanley
Standard Chartered
Deutsche Bank
State Street
261
Advisory vote
Corporate governance and compensation
Compensation
Compensation framework for employees other than GEB members
The graph below provides an overview of the compensation elements, pay mix and specific pay for performance safeguards for our
employees other than GEB members, except where otherwise noted in this section.
2018 compensation framework for employees other than GEB members (illustrative example)
A mandatory deferral framework applies to employees that receive performance awards with total compensation in excess of USD /
CHF 300,000. A significant portion of the performance award is deferred over a period of five years, with at least 60% of the
deferred performance award granted under the EOP and up to 40% under the DCCP1, 2.
Payout of performance award¹,²
Key features
Pay for performance and safeguards
Notional additional tier 1 (AT1) instruments
Not more than 40% of the deferred performance award
is granted under the DCCP. The award vests in year 5,
subject to forteiture if a capital ratio trigger or viability
event occurs
40%
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 shares5
At least 60% of the deferred performance award is
granted under the Equity Ownership Plan (EOP).
The award vests in equal installments after the years
2 and 3, subject to continued employment and
harmful acts provsions
Awards granted to GMDs, KRTs (including Highly Paid
Employees) and SMFs are also subject to forteiture if
Group and respective business division performance
conditions over the performance period are not met6
Dividend equivalents, where regulation permits, are
subject to the same terms as the underlying EOP award
Mandatory deferral framework applies to employees with
total compensation in excess of USD / CHF 300,000
Cash incentive is graduated, based on the relevant
deferral mix. Higher performance awards result in a
higher deferral rate. 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 fi nancial targets and goals related to Pillars, Principles
and Behaviors
At least 60% of the deferred 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 performance conditions are not met or harmful
acts provisions apply
– a mix of shorter-term and longer-term performance
awards with a focus on deferral
– 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
30%
30%
DCCP3
up to
40%
EOP3
at
least
60%
Cash
Base
salary4
2018
2019
2020
2021
2022
2023
2024
11 Asset Management employees in investment areas receive at least 75% of their deferred performance awards in notional funds under the EOP and up to 25% under the DCCP; Asset Management employees in
1
non-investment areas receive at least 50% of their deferred performance awards in notional funds plus at least 25% in notional UBS shares under the EOP, and up to 25% under the DCCP. 2 Certain regulated
employees, such as UK SMFs or MRTs, are subject to additional requirements (e.g., more stringent deferral requirements, additional blocking periods). 3 Graduated, based on updated 2018/19 deferral mix. 4 May
include role-based allowances in line with market practice in response to regulatory requirements. 5 Notional funds for Asset Management employees. 6 Includes Asset Management employees who are Group
Managing Directors (GMDs) or Key Risk Takers (KRTs) including Highly Paid Employees.
2
5
6
4
3
262
Benchmarking for employees other than GEB members
Compensation for US financial advisors in Global Wealth
Management
We generally consider market practice in our pay decisions and
framework. Our market review reflects a number of factors,
including the comparability of the business division, location,
scope and the diversity of our businesses. 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.
Employee share purchase program
The Equity Plus Plan is our employee share purchase program. It
allows employees below the rank of Managing Director to
voluntarily defer up to 30% of their base salary and / or up to
35% of their performance award (up to USD / CHF 20,000
annually) for the purchase of UBS shares. Eligible employees may
buy UBS shares at market price and receive one additional share
for every three shares purchased through the program. The
additional 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 30 Employee benefits: variable compensation” in
the “Consolidated financial statements” section of this report
for more information
In line with market practice for US wealth management
businesses, the compensation for US financial advisors in Global
Wealth Management 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 generally vest over a six-year period. 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.
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1
1
5
5
3
3
6
6
2
2
4
4
Advisory vote
Corporate governance and compensation
Compensation
Compensation elements
Overall, we look across all elements of pay when making our
decisions on total compensation. We regularly review our
principles and compensation framework to remain competitive
and aligned with stakeholders. For 2018, we made no material
changes to our overall framework. We will continue to review
our approach to salaries and performance awards in light of
market developments, affordability, our performance and our
commitment to deliver sustainable returns to our shareholders.
Our policies and practices are impartial and equal, and we are
committed to ensuring that all employees are paid fairly.
At the Annual General Meeting, shareholders are asked to
approve the maximum aggregate amount of fixed compensation
for the members of the GEB for the following financial year. The
amount requested includes a reserve to consider potential future
changes in GEB composition or role changes, and potential
additional role-based allowances.
→ Refer to the “Supplemental information” section of this report
for more information on MRTs and Senior Management
Functions (SMFs)
→ Refer to the “Shareholder engagement and say on pay” section
of this report for more information on the shareholders’ vote
Base salary and role-based allowance
on the GEB compensation
Employees’ fixed compensation (e.g., base salary) reflects their
level of skill, role and experience, as well as local market
practice. Base salaries are usually paid monthly or fortnightly in
line with local market practice. We offer our employees
competitive base salaries that reflect the location, function and
role. Salary increases generally consider promotions, skill set,
performance and overall responsibility.
Each GEB member receives a fixed base salary, which is
reviewed annually by the Compensation Committee. The Group
CEO’s annual base salary for 2018 was CHF 2.5 million and has
remained unchanged since his appointment in 2011. The other
GEB members received a base salary of CHF 1.5 million (or local
currency equivalent), also unchanged since 2011.
In addition to a base salary and as part of fixed
compensation, some employees may receive a role-based
allowance. This allowance represents a shift in the compensation
mix between fixed and variable compensation and not an
increase in total compensation. It 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. Similar to previous years, 2018
role-based allowances consisted of a cash portion and, where
applicable, a blocked UBS share award.
A few GEB members are considered Material Risk Takers
(MRTs) for UK / European entities due to their impact on those
entities, regardless of personal domicile. In addition to base
salary,
fixed
compensation.
role-based allowances are part of
their
Pensions and benefits
For all employees, we offer certain benefits such as health
insurance and
retirement benefits. These benefits 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.
For GEB members, pension contributions and benefits are in
line with local practices for other employees. No enhanced or
supplementary pension contributions exist for the GEB.
Performance award
Most of our employees are eligible for an annual performance
award. The level of the award, where applicable, generally
depends on the firm’s overall performance, the employee’s
business division, team and
individual performance, and
behavior, reflecting their overall contribution to the firm’s
results.
In addition to the firm’s Pillars and Principles, 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.
264
Our deferred compensation plans
philosophy
To reinforce our culture, risk management approach and
emphasis on sustainable performance, we deliver part of our
annual variable compensation through a deferral. We believe
our approach with a single incentive decision and a deferral is
simple and transparent, and is best suited to implementing our
compensation
sustainable
performance. This aligns our employees’ and stakeholders’
interests and appropriately links compensation to longer-term
sustainable performance. Deferred compensation is delivered
through two plans: (i) the Equity Ownership Plan (EOP), which
primarily aligns employee
those of our
shareholders, and (ii) the Deferred Contingent Capital Plan
(DCCP), which aligns employee interest with the interests of
debt holders.
interest with
delivering
and
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 our deferral regime
has one of the longest vesting periods in the industry. The
average deferral period is 4.4 years for GEB members and 3.5
years for employees below GEB level.
To further promote sustainable performance, our deferred
compensation components include malus conditions. These
enable the firm to forfeit unvested deferred awards under
certain circumstances, including performance and harmful acts.
/ notional
Additionally, deferred awards granted to our most senior
employees and to Highly Paid Employees (employees with a total
compensation exceeding USD / CHF 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
interest payments. From
performance year 2017, European Banking Authority guidelines
no longer permit MRTs to receive dividend or interest payments
on instruments awarded as deferred variable remuneration.
Where dividend payments are not permitted, the grant price of
the EOP award is adjusted for the expected dividend yield over
the vesting period to reflect the fair value of the non-dividend
bearing award. Similarly, where interest payments are not
permitted, the DCCP award reflects the fair value of the granted
non-interest bearing award.
regulated employees. Of
For employees other than GEB members, a portion of
performance awards above a total compensation of USD /
CHF 300,000 is deferred in UBS notional shares and / or UBS
notional instruments over a period of five years, or longer for
certain
the deferred annual
performance award, at least 60% is deferred in UBS notional
shares under the EOP and up to 40% in notional capital
instruments under the DCCP. Asset Management employees in
investment areas continue to receive at least 75% of their
deferred performance awards in notional funds under the EOP
and up to 25% under the DCCP. From performance year 2018,
Asset Management employees in non-investment areas will
receive at least 50% of their deferral in notional funds plus at
least 25% in notional UBS shares under the EOP, and up to 25%
under the DCCP. This aligns Asset Management employee
compensation more closely with industry standards and also
aligns the non-investment areas to Group performance.
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 cash is capped at USD / CHF 2
million (or the equivalent in other currencies). Amounts in excess
of the cash cap are deferred in notional shares under the EOP.
The effective deferral rate therefore depends on the amount of
the performance award and the amount of total compensation.
For each GEB member, at least 80% of the performance
award is deferred, while a maximum of 20% can be paid out in
cash, which is capped to defer a higher portion and thus further
aligns GEB members’ and shareholders’ interests. For the
performance year 2018, 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 DCCP. For the
GEB member whose role was considered in 2018 a UK Senior
Management Function (SMF), additional provisions applied that
are described under “UK Senior Managers and Certification
Regime” in the “Supplemental information“ section of this
report.
→ Refer to the “Performance conditions for EOP awards granted in
2019“ section of this report for more information on
performance conditions
→ Refer to “Note 30 Employee benefits: variable compensation” in
the “Consolidated financial statements” section of this report
for more information
→ Refer to the “Supplemental information” section of this report
for more information on MRTs and SMFs
→ Refer to “Vesting of outstanding awards granted in prior years
subject to performance conditions” in the “Supplemental
information” section of this report for more information
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If the Group performance measure 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 Group performance measure
is 0% or negative, the installment will be fully forfeited
regardless of any business division’s individual performance. If
the Group performance measure 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.
The secondary measure to determine vesting of EOP awards is
business division adjusted RoAE. If the business division adjusted
RoAE performance threshold (refer to the table on the next
page) is met, the EOP award will vest in accordance with the
achievement of the Group performance. However, if the
business division adjusted RoAE is 0% or below, the respective
awards of employees in this business division are subject to
complete forfeiture. If the business division adjusted RoAE is
between 0% and the business division threshold, these awards
are subject to forfeiture of up to 40%. The Compensation
Committee determines whether the performance conditions
have been met.
is
One of our key objectives
to deliver sustainable
performance, and therefore we link the EOP award vesting with
minimum performance thresholds over a multi-year time
horizon. Unlike many of our competitors, who set maximum
targets for their LTI plans, our deferred awards have no upward
leverage. Consequently our awards are aligned with sustainable
results and do not encourage excessive risk-taking. This
approach promotes sustainable performance by establishing a
minimum level of performance, below which awards are subject
to full or partial forfeiture.
→ Refer to “Vesting of outstanding awards granted in prior years
subject to performance conditions” in the “Supplemental
information” section of this report for more information
Advisory vote
Corporate governance and compensation
Compensation
Equity Ownership Plan
The Equity Ownership Plan (EOP) is a mandatory deferral plan for
all employees with
than
USD / CHF 300,000. For the performance year 2018, we granted
EOP awards to 4,130 employees.
compensation greater
total
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.
For GEB members, Group Managing Directors (GMDs), Key
Risk Takers (KRTs) (including Highly Paid Employees) and Senior
Management Functions (SMFs), the EOP awards granted will
only vest if both Group and business division performance
conditions are met. For all awards granted for the performance
years 2017 (awarded in early 2018) and prior, the Group
performance condition was based on the average adjusted
return on tangible equity (RoTE) excluding deferred tax assets
(DTAs) over the performance period. Starting with the EOP
awards granted in 2019 for the performance year 2018, the
Group performance condition is based on the average reported
return on CET1 capital (RoCET1), consistent with our revised
performance targets and ambitions, which became effective at
the beginning of 2019. Business division performance
is
measured on the basis of their average adjusted return on
attributed equity (RoAE). For Corporate Center employees, it is
measured on the basis of the average operating businesses’
adjusted RoAE. The Group and business division thresholds for
Performance EOP awards granted in 2019 reflect the changes
announced at our 2018 Investor Update and demonstrate our
commitment to sustainable performance. At the same time, it
reflects moving from an adjusted to a reported Group
performance measure, as well as pushing out additional costs
from Corporate Center and increasing attributed equity for
business divisions. On a
like-for-like basis the thresholds
established for 2019 are comparable to prior year thresholds.
The primary measure to determine vesting of EOP awards is
the average adjusted Group RoTE excluding DTAs and from
2019 onwards the average reported Group RoCET1.
266
Performance conditions for EOP awards granted in 2019
the
At the time of the Equity Ownership Plan (EOP) award, several
performance conditions relating to the respective performance
level of granted variable compensation
year guide
components. In addition, the Compensation Committee sets for
selected populations of employees minimum future performance
thresholds at levels to demonstrate that the long-term quality of
the past year’s performance is sustainable.
Each year the Compensation Committee reviews thresholds
relative to historical performance, our financial plan and our
ambitions and establishes vesting with minimum performance
thresholds for our EOP awards. If the minimum performance
thresholds are not achieved over a multi-year period, an
employee’s award is subject to partial or full forfeiture.
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 and 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
2019, 2020 and 2021
2020, 2021 and 2022
2021, 2022 and 2023
2019 and 2020
2019, 2020 and 2021
1 Senior Management Functions have extended deferral periods, with the deferred performance awards vesting in equal installments between years 3 and 7 (including DCCP).
Average reported Group RoCET1 performance threshold
Average reported Group RoCET1
Business division adjusted RoAE performance thresholds
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center1
1 For Corporate Center employees, average operating businesses adjusted RoAE performance threshold.
≥8%
≥19%
≥12%
≥20%
≥8%
≥12%
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267
Advisory vote
Corporate governance and compensation
Compensation
Illustrative example for EOP performance conditions
The final amount of any award vesting under the EOP can vary;
firstly, according to the level of achievement of the average
reported RoCET1 relative to threshold, and secondly, subject to
business division adjusted RoAE performance thresholds being
satisfied, as applicable. In the event that average reported
RoCET1
threshold
requirement, and additionally, if the business division adjusted
the minimum performance
is below
RoAE is 0% or below, the respective awards of employees in this
business division are subject to full forfeiture. If the business
division adjusted RoAE is between 0% and the business division
performance threshold, these awards are subject to forfeiture of
up to 40%. The table below illustrates full-vest, partial vest and
full-forfeiture scenarios.
Group Performance (RoCET1)
≤ 0%
Between 0% and threshold
≥ threshold
≤ 0%
Full forfeiture
Full forfeiture
Full forfeiture
Divisional Performance
(RoAE)
Between 0% and threshold
Full forfeiture
Partial vest
Partial vest
≥ threshold
Full forfeiture
Partial vest
Full vest
268
Deferred Contingent Capital Plan
The Deferred Contingent Capital Plan (DCCP) is a mandatory
deferral plan for all employees with total compensation greater
than USD / CHF 300,000. For the performance year 2018, we
granted DCCP awards to 4,093 employees.
Employees are awarded notional additional tier 1 (AT1)
capital instruments, which at the discretion of the firm can be
settled as either a cash payment or a perpetual, marketable AT1
capital instrument. Prior to granting, 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. Awards are
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.
Additionally, 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.
As an additional performance condition, GEB members forfeit
20% of their award for each loss-making year during the vesting
period. This means that 100% of the award is subject to risk of
forfeiture. Like the EOP, the DCCP also has provisions that allow
the firm to apply malus conditions 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 2019 was 3.40% for awards
denominated
for awards
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 Compensation Committee.
francs and 6.85%
in Swiss
Over the last five years, USD 2.0 billion of DCCP was issued,
contributing to the Group’s total loss-absorbing capacity (TLAC).
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 TLAC ratio.
→ Refer to the “Supplemental information” section of this report
for more information on performance award- and personnel-
related expenses
→ Refer to the “Supplemental information” section of this report
for more information on longer vesting and clawback periods
for MRTs and SMFs
Impact of the Deferred Contingent Capital Plan on our loss-absorbing capacity1
USD million, except where indicated
DDeferred Contingent Capital Plan (DCCP)
of which: high-trigger loss-absorbing additional tier 1 capital
of which: high-trigger loss-absorbing tier 2 capital 2
331.12.18
2,005
2,005
31.12.17
2,160
1,714
31.12.16
2,231
1,356
0
0.8
447
0.9
875
1.0
DCCP contribution to the total loss-absorbing capacity ratio (%)
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 Relates to
DCCP awards granted for the performance years 2012 and 2013 - based on Swiss SRB framework including transitional arrangements (phase-in) as of 31 December 2017 and 31 December 2016; based on the
former Swiss SRB framework for 31 December 2015. As of 31 December 2018, both of these DCCP awards no longer meet the grandfathering treatment under Swiss TBTF capital requirements.
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Advisory vote
Corporate governance and compensation
Compensation
Other variable compensation components
to compensate employees
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 stay, particularly during critical periods for the firm such as
a sale or wind-down of business.
– On a 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 generally 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 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
USD 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 2018
oof which: expenses
recognized in 2018 5
of which: expenses
to be recognized in
2019 and later
TTotal 2017
NNumber of beneficiaries
30
7
72
19
48
12
165
20
4
7
2
26
5
165
11
4
65
16
22
7
0
34
25
96
52
37
20
222
22018
178
6
299
11
54
5
1,524
2017
149
15
278
27
39
9
2,205
of which: Key Risk Takers
6
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 2018. Key Risk Takers include employees with a
total compensation exceeding USD / CHF 2.5 million (Highly Paid Employees). 3 No GEB member received replacement payments or guarantees for 2018 or 2017. 4 Severance payments include legally obligated
and standard severance. 5 Expenses before post-vesting transfer restrictions.
18
4
4
0
2
270
Corporate governance and compensation
Compensation
To support hiring and retention, particularly at senior levels, we
responsibility may go up to the Compensation Committee,
may offer certain other compensation components. These
depending on the amount or type of such payments.
include:
Employees who are made redundant may receive severance
– Replacement payments
to compensate employees
for
payments. Our severance terms comply with the applicable local
deferred awards forfeited as a result of joining the firm. Such
laws (legally obligated severance). In certain locations, we may
payments are industry practice and are often necessary to
provide severance packages that are negotiated with our local
attract senior candidates, who generally have a significant
social partners and may go beyond the applicable minimum
portion of their awards deferred at their current employer,
legal requirements (standard severance). Such payments are
where continued employment is required to avoid forfeiture.
governed by location-specific severance policies. In addition, we
– Retention payments made to key employees to induce them
may make severance payments that exceed legally obligated or
to stay, particularly during critical periods for the firm such as
standard severance payments (supplemental severance) where
a sale or wind-down of business.
we believe that they are aligned with market practice and
– On a limited basis, guarantees may be required to attract
appropriate under the circumstances. No severance payments
individuals with certain skills and experience. These awards
are made to members of the GEB.
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 generally 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.
USD million, except where indicated
Total sign-on payments1
of which: Key Risk Takers 2
Total replacement payments3
of which: Key Risk Takers 2
Total guarantees3
of which: Key Risk Takers 2
Total severance payments1,4
of which: Key Risk Takers
30
7
72
19
48
12
165
4
20
4
7
2
26
5
165
4
11
4
65
16
22
7
0
0
34
25
96
52
37
20
222
2
2018
178
6
299
11
54
5
1,524
18
2017
149
15
278
27
39
9
2,205
6
1 GEB members are not eligible for sign-on or severance payments. 2 Expenses for Key Risk Takers are full-year amounts for individuals in office on 31 December 2018. Key Risk Takers include employees with a
total compensation exceeding USD / CHF 2.5 million (Highly Paid Employees). 3 No GEB member received replacement payments or guarantees for 2018 or 2017. 4 Severance payments include legally obligated
and standard severance. 5 Expenses before post-vesting transfer restrictions.
Other variable compensation components
These other variable compensation components are subject to
a comprehensive governance process. Authorization and
2018 performance and compensation funding
2018 performance and compensation funding
Our performance in 2018
Our performance in 2018
We delivered strong 2018 financial results in overall challenging
We delivered strong 2018 financial results in overall challenging
market conditions, reflecting the strength of our business model.
market conditions, reflecting the strength of our business model.
Profit before tax increased by 12% to USD 6.0 billion, mainly
Profit before tax increased by 12% to USD 6.0 billion, mainly
reflecting higher operating income and a reduction in operating
reflecting higher operating income and a reduction in operating
expenses. Adjusted1 profit before tax decreased by 4% to
expenses. Adjusted1 profit before tax decreased by 4% to
USD 6.1 billion due to higher adjusted operating expenses,
USD 6.1 billion due to higher adjusted operating expenses,
partly offset by an increase in adjusted operating income. For
partly offset by an increase in adjusted operating income. For
further details on our Group and business division performance
further details on our Group and business division performance
refer to the “Financial and operating performance” section of
refer to the “Financial and operating performance” section of
this report.
this report.
Net profit attributable to shareholders increased by 16% to
Net profit attributable to shareholders increased by 16% to
USD 4.5 billion (excluding the effect of the US tax law change in
USD 4.5 billion (excluding the effect of the US tax law change in
the fourth quarter of 2017). Adjusted1 return on tangible equity
the fourth quarter of 2017). Adjusted1 return on tangible equity
excluding deferred tax assets (DTAs) was 12.9%. Reported
excluding deferred tax assets (DTAs) was 12.9%. Reported
return on common equity tier 1 (CET1) capital was 13.1%,
return on common equity tier 1 (CET1) capital was 13.1%,
which compares well with our peers.
which compares well with our peers.
Our capital position remained strong with a CET1 capital ratio
Our capital position remained strong with a CET1 capital ratio
at 12.9% and a CET1 leverage ratio of 3.8%, both in line with
at 12.9% and a CET1 leverage ratio of 3.8%, both in line with
our capital guidance of around 13% and 3.7%, respectively. We
our capital guidance of around 13% and 3.7%, respectively. We
increased our total loss-absorbing capacity by USD 3.4 billion to
increased our total loss-absorbing capacity by USD 3.4 billion to
USD 83.7 billion.
USD 83.7 billion.
For the financial year 2018, the Board of Directors intends to
For the financial year 2018, the Board of Directors intends to
propose a dividend of CHF 0.70 per share, an increase of 8% on
propose a dividend of CHF 0.70 per share, an increase of 8% on
the prior year. During 2018, we repurchased CHF 750 million of
the prior year. During 2018, we repurchased CHF 750 million of
shares, exceeding the 2018 target of up to CHF 550 million.
shares, exceeding the 2018 target of up to CHF 550 million.
Sign-on payments, replacement payments, guarantees and severance payments
of which: expenses
to be recognized in
of which: expenses
Total 2018
recognized in 2018 5
2019 and later
Total 2017
Number of beneficiaries
Adjusted profit before tax
USD million
Adjusted return on tangible equity
excluding DTAs2
in %
Total loss-absorbing capacity
USD billion
(4%)
(80 bps)
4%
6,295
6,063
8,000
4,000
0
13.7
12.9
20.0
10.0
0
80
40
0
80.3
83.7
2017
2018
2017
2018
2017
2018
1 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results. 2 The adjusted return on tangible equity excluding DTAs is calculated as
1 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results. 2 The adjusted return on tangible equity excluding DTAs is calculated as
the adjusted net profit / loss attributable to shareholders excluding amortization and impairment of goodwill and intangible assets and deferred tax expense / benefit, such as the net write-down due to the TCJA
the adjusted net profit / loss attributable to shareholders excluding amortization and impairment of goodwill and intangible assets and deferred tax expense / benefit, such as the net write-down due to the TCJA
enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as CET1 capital.
enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as CET1 capital.
270
271
271
271
15
12
9
6
3
0
7999.9998
6666.6665
5333.3332
3999.9999
2666.6666
1333.3333
0.0000
79.999998
66.666665
53.333332
39.999999
26.666666
13.333333
0.000000
Advisory voteCorporate governance and compensation Advisory vote
Corporate governance and compensation
Compensation
Performance award pool funding
Our performance award pool funding framework is based on
is measured across multiple
business performance, which
dimensions as outlined below.
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
to
performance award being available
shareholders or growing the Group’s capital. In years where
performance declines,
the performance award pool will
generally decrease; however, funding rates may increase.
for distribution
in an
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 against our strategic objectives,
quality of earnings, affordability, returns to investors and market
competitiveness. Business division performance is adjusted for
items that do not represent underlying performance (for
example, gains or losses on the sale of a property or a business).
linked to overall Group
performance and reflects headcount, workforce location and
demographics. For each functional area, quantitative and
qualitative
risk
evaluate
management and financial achievements. To help evaluate
into the
service quality, business divisions provide
evaluation and assessment of Corporate Center areas; however,
Corporate Center funding
assessments
quality,
service
input
is
control functions are evaluated independently of the divisions
they oversee, supervise or monitor. Ultimately, our pay decisions
reflect the overall and individual performance as well as the
competitive market for talent in these areas, to ensure an
efficient and effective Corporate Center.
to
the performance award pool,
Before making its final recommendation to the BoD, the
Compensation Committee can apply positive or negative
discretion
including
recommending a zero award. When adjusting the pool, the
Compensation Committee considers various factors such as
relative performance, market environment, shareholder returns,
the effect of changes in financial accounting standards, litigation
and regulatory costs as well as competitive pressure. The
Compensation Committee decision balances consideration of
financial performance with a range of qualitative factors and
takes account of the quality of earnings including developments
on and provisions for litigation, regulatory and similar matters. In
that regard, it is important to distinguish between legacy
matters and financial and operating performance for the year.
To enable future growth through disciplined execution of our
strategy and creation of sustainable shareholder value, it is
essential that pay decisions are not driven by the potential
impact of legacy matters which may take several years to be
resolved. At the same time, we are mindful of the potential costs
of such matters, the prudent management of them and the
effect on our share price.
reflecting
As described above,
the aforementioned
considerations, over the past six years, the Compensation
Committee
the
discretionary
performance award pool of between -6% and +2%, resulting in
a downward adjustment in all but one year.
adjustments
applied
to
An illustrative overview with more details on the process is
presented in the chart on the next page.
→ Refer to “Group performance” in the “Financial and operating
performance” section of this report for more information on
adjusted results
272
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
measures
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, which excludes items that are not reflective of
the underlying business performance
Risk-adjusted business
division performance
award pool
Predetermined business division-specific funding rates are applied to risk-adjusted performance, incorporating market, credit and operational
(including conduct) risk
Business division measures
Each division is assessed based on specific measures (e.g., net new money growth rate, return on attributed equity)
Qualitative, risk and
regulatory assessment
Qualitative assessment (e.g., quality of earnings), 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,
capital 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 recommendations of the Group CEO (upward or downward, including recommending a zero award) before making its fi nal recommendation
to the BoD
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
273
Advisory vote
Corporate governance and compensation
Compensation
Compensation for the Group CEO and the
other GEB members
Performance assessment
Annual performance awards for the Group CEO and the other
Group Executive Board (GEB) members are based on the GEB
compensation determination process as illustrated below and, in
aggregate, subject to shareholder approval at the AGM.
We assess the GEB members’ performance against a number
of financial targets and goals related to Pillars, Principles, and
Behaviors. The financial measures for the Group CEO are based
on overall Group performance. For the 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.
The weighting between Group, business division, regional
and functional measures varies depending on a GEB member’s
role. A significant weight is given to Group measures for all GEB
members. The achievements relative to goals related to Pillars
and Principles are additional factors for assessing the overall
quality and sustainability of the financial results. The financial
measures including Pillars and Principles account for 65% of the
assessment, while Behaviors account for 35%.
The “Overview of the performance assessment measures”
table in this section outlines the measures on which the
performance assessment is based.
Overview of the GEB compensation determination process
The compensation for the Group CEO and the other GEB members is governed by a rigorous process under Compensation
Committee and BoD oversight. The illustration below shows how compensation for all GEB members is determined.
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274
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 and competitors, and
considers the Group CEO’s recommendation. The Compensation
Committee’s recommendations are then reviewed and subject to
the approval of the BoD. The Compensation Committee, and then
the full BoD, follows a similar process in setting the compensation
for the Group CEO, except that the recommendation is from the
Chairman of the BoD.
Overview of the performance assessment measures
The table below presents the measures for the 2018 performance assessment of the Group CEO and GEB members.
Performance measures
Group measures
A range of financial measures including adjusted Group profit before tax, adjusted Group cost / income ratio, adjusted Group return
on tangible equity excluding DTAs, CET1 ratios
Business division, regional and / or functional
measures (if applicable)1
Business division and / or regional measures vary but may include: net new money growth rate, adjusted divisional / regional profit
before tax, adjusted cost / income ratio, net new business volume growth rate, net interest margin, adjusted RoAE, Basel III RWA
and LRD expectations
Pillars
Capital strength
Establishes and maintains capital. Generates efficiencies and deploys our capital more efficiently and effectively
Specific functional measures for Corporate Center GEB members
Efficiency 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-identified and
focuses on the individual’s success to comply with all the various regulatory frameworks. Helps shape the firm’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 firm to our clients
Excellence
Human Capital Management – develops successors for the most senior positions, facilitates talent mobility within the firm and
promotes a diverse and inclusive workforce
Product and Service Quality – strives for excellence in the products and services we offer to our clients
Sustainable performance
Brand and Reputation – protects the Group’s reputation and reinforces full compliance with our standards and principles
Culture and Growth – takes a personal role in making Principles and Behaviors front and center of the business requirements,
including a focus on sustainable growth. 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 reinforcing our collective
behaviors
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Behaviors
Integrity
Collaboration
Challenge
Is responsible and accountable for what they say and do; cares about clients, investors, and colleagues; acts as a role model
Places the interests of clients and the firm before their own and those of their business; works across the firm; respects and values
diverse perspectives
Encourages self and others to constructively challenge the status quo; learns from mistakes and experiences
1 Both regional and functional measures may include qualitative measures.
275
Advisory vote
Corporate governance and compensation
Compensation
2018 compensation for the Group Chief Executive Officer
The performance award for the Group CEO, Sergio P. Ermotti, is
based on the achievement of financial targets plus goal
achievements relative to Pillars, Principles, and Behaviors, 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, cost / income ratio, capital
position and adjusted return on tangible equity, as well as a
range of measures to assess the quality and sustainability of the
performance. Financial measures, including consideration of
Pillars and Principles, account for 65% of Mr. Ermotti’s
performance assessment, while the remaining 35% is based on
behavioral measures. The
following page
summarizes
to assess Mr. Ermotti’s
performance as Group CEO for 2018.
the metrics used
table on
the
The BoD recognized Mr. Ermotti’s continued focus on
managing the Group for the
long term and delivering
sustainable performance. In a year with challenging market
conditions, he led the improvement in the firm's overall
performance while maintaining its strong capital position,
enabling the BoD to increase payouts to shareholders. Net profit
attributable to shareholders increased 16% year-on-year to USD
4.5 billion, excluding the USD 2.9 billion net write-down in the
fourth quarter of 2017 of deferred tax assets (DTAs) following
the enactment of the US Tax Cuts and Jobs Act. Group profit
before tax increased by 12% to USD 6.0 billion while adjusted1
profit before tax decreased by 4% to USD 6.1 billion. In
addition, despite market headwinds and legacy issues leading to
higher provisions for litigation, regulatory and similar matters,
our overall financial results for the year were near plan.
Under Mr. Ermotti’s stewardship, UBS’s profitability remained
strong, with adjusted1 return on tangible equity excluding DTAs
at 12.9%, and reported return on CET1 capital at 13.1%. The
CET1 capital ratio of 12.9% and CET1 leverage ratio of 3.8%
were both in line with our capital guidance and UBS met 2020
capital requirements one year early. The Group’s total loss-
absorbing capacity was further strengthened by USD 3.4 billion
to USD 83.7 billion. During 2018, UBS repurchased CHF 750
million of shares, exceeding the 2018 target of up to CHF 550
million.
The BoD also acknowledged Mr. Ermotti’s achievements in
2018 as exceeding expectations related to our Pillars, Principles
and Behaviors. He continued to lead cost- and capital-efficient
execution, successfully sharpened the Group’s clear strategy,
and spearheaded initiatives to deliver future growth. At the
same time, Mr. Ermotti maintained a clear tone from the top in
setting and demanding high standards in risk management and
risk remediation.
Mr. Ermotti successfully focused the organization on growth
with the development of innovative solutions and digital
offerings for clients across all businesses. He further extended his
significant personal engagement with clients and promoted
client centricity in the firm’s decision-making.
In 2018, Mr. Ermotti reshaped the GEB. Reflecting his strong
attention to talent development, succession planning and
internal mobility to support continuity across the organization,
all four new leadership appointments to the GEB were internal
candidates. He also remained committed to further improve
diversity at senior levels.
The BoD recognized Mr. Ermotti at the forefront of the firm's
culture and behavior program. He personally championed the
behavior principles across the organization and consistently
emphasized the significance of these topics to employees and in
public forums. Further he continued to display a strong
commitment to culture as a strategic differentiator with
continuous improvement through constructive challenge and
delivering the whole bank to clients through effective cross-
divisional collaboration.
In determining the annual compensation for the Group CEO,
the BoD assessment balances consideration of
financial
performance with a range of qualitative factors and takes into
account the quality of earnings including developments on and
provisions for litigation, regulatory and similar matters, while
distinguishing between
legacy matters and financial and
operating performance for the year. Recognizing Mr. Ermotti’s
achievements in 2018, the BoD approved the proposal by the
Compensation Committee to grant him a performance award of
CHF 11.3 million, resulting in a total compensation for the year
of CHF 13.8 million (excluding benefits and contributions to his
retirement benefit plan). The performance award is subject to
shareholder approval as part of the aggregate GEB 2018 variable
compensation and will be delivered 18% (CHF 2 million) in cash
and the remaining 82% (CHF 9.3 million) subject to deferral and
forfeiture provisions, as well as meeting performance threshold
conditions over five years.
→ Refer to the “Compensation philosophy and framework”
section of this report for more information
11 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
276
Performance assessment for the Group CEO
The chart below illustrates the 2018 assessment of the Group
CEO’s performance. When assessing the financial performance,
the Compensation Committee considers additional factors to
judge the quality and sustainability of the financial results. These
additional factors are based on the Group CEO’s achievement of
goals related to Pillars and Principles,
including relative
performance, market conditions, client satisfaction and talent
management. For additional details on the assessment, refer to
the description on the previous page.
Weighting
Performance Measures
2016 results
2017 results
2018 results
Weighting
2018 Assessment Vs Plan
100%
Adjusted Group profi t before tax
USD 5,439 million
USD 6,295 million
USD 6,063 million
40%
Adjusted Cost / income ratio
80.8%
78.2%
79.5%
20%
Adjusted Group return on
tangible equity excluding DTAs1
11.3%
65%
13.7%
12.9%
20%
Capital management
CET1 capital ratio
CET1 leverage ratio
Post-stress CET1 ratio
13.8%
3.5%
Achieved
13.8%
3.7%
Achieved
12.9%
3.8%
Achieved
20%
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Pillars and Principles
35%
Behaviors
Integrity
Collaboration
Challenge
Achievements
Overall performance exceeded expectations, given:
Mr. Ermotti’s continued focus on managing the Group for the long-term and delivering sustainable performance. In a year with
challenging market conditions, he led the improvement in the firm’s overall performance while maintaining its strong capital
position, enabling the BoD to increase payouts to shareholders. Further, Mr. Ermotti continued to lead cost and capital efficient
execution, successfully sharpened the Group’s clear strategy, and spearheaded initiatives to deliver future growth. He also
extended further his significant personal engagement with clients and promoted client centricity across the firm. Mr. Ermotti
set and demanded high standards in risk management and risk remediation. In 2018 he reshaped his GEB, reflecting his
strong attention to talent development, succession planning, and internal mobility; and he remained committed to further
improve diversity at senior levels.
Overall performance exceeded expectations, given clear tone from top and:
Mr. Ermotti remained at the forefront of the firm’s culture and behavior program. He personally championed the behavior
principles across the organization and consistently emphasized the significance of these topics to employees and in public forums.
Mr. Ermotti continued to display a strong commitment to culture as a strategic differentiator with continuous improvement
through constructive challenge, and delivering the whole bank to clients through effective cross divisional collaboration. The BoD
further acknowledged Mr. Ermotti as a role model in considering the views of clients, investors and colleagues alike, and in
treating others with respect. In addition, he continued to communicate in a clear and highly consistent manner, maintained an
excellent track record of delivering on his commitments, and took decisive yet considerate actions that are consistently in the
best interest of the firm.
1 Calculated as adjusted net profit / loss attributable to shareholders excluding amortization and impairment of goodwill and intangible assets and 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 CET1 capital.
277
1
Advisory vote
Corporate governance and compensation
Compensation
2018 total compensation for the GEB members
The GEB performance awards are subject to approval by the BoD
based on the assessment of financial targets as well as goals
related to Pillars, Principles and Behaviors and, in aggregate,
subject to shareholder approval. The aggregate 2018 performance
award pool for the GEB was CHF 73.3 million (for reference
USD 74.8 million), a decrease of 1% compared with the prior
year. This decrease is in line with the decrease in the overall
performance award pool of the firm. Group profit before tax
increased by 12% to USD 6.0 billion while adjusted profit before
tax decreased by 4% to USD 6.1 billion.
The Compensation Committee has
that
performance conditions for all GEB members’ awards due to
vest in March 2019 have been satisfied, and thus the awards will
confirmed
vest in full.
At the 2019 AGM, shareholders will vote on the aggregate
2018 total variable compensation for the GEB in Swiss francs.
Therefore, the tables below provide the awarded compensation
for the Group CEO and the GEB members in Swiss francs, and
for reference, the total amounts in US dollars for comparability
with financial performance. The individual variable performance
awards for each GEB member will only be confirmed upon
shareholder approval at the AGM.
→ Refer to the Provisions of the Articles of Association related to
compensation in the “Supplemental Information” section of this
report for more information
Audited |
Total compensation for GEB members1
Group CEO, Sergio P. Ermotti (highest paid)
CHF
USD (for reference) 2
Contribution
to
retirement
benefit
plans3
261,181
FFor the
year
22018
Base salary
2,500,000
TTotal fixed
compensa-
tion
2,823,994
Cash5
2,000,000
Performance
award
under EOP6
5,910,000
Performance
award
under
DCCP7
3,390,000
TTotal
variable
compensa-
tion
11,300,000
TTotal fixed
and vari-
able com-
pensation8
14,123,994
Total fixed
compensa-
tion
Total
variable
compensa-
tion
2,882,971 11,535,991
Total fixed
and vari-
able com-
pensation8
14,418,962
Benefits4
62,813
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
Aggregate of all GEB members9,10,11
CHF
Contribution
to
retirement
benefit
plans3
Benefits4
2,540,085 2,042,509
FFor the
year
22018
Base
salary12
22,948,016
TTotal fixed
compensa-
tion
Performance
award
under
DCCP7
27,530,610 14,269,889 37,040,111 21,990,000
Performance
award
under EOP6
Cash55
USD (for reference) 2
TTotal
variable
compensa-
tion
73,300,000
TTotal fixed
and vari-
able com-
pensation8
100,830,610
Total fixed
compensa-
tion
Total fixed
and vari-
able com-
pensation8
28,105,565 74,830,812 102,936,377
Total
variable
compensa-
tion
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
11 Local currencies have been translated into Swiss francs at the relevant year-end closing exchange rates, or at the performance award currency exchange rate. 2 Swiss franc amounts have been translated into US
dollars for reference at the 2018 performance award currency exchange rate of CHF / USD 1.02. 3 Includes the portion related to the employer’s contribution to the statutory pension scheme. 4 All benefits are
valued at market price. 5 For GEB members who are also MRTs or SMFs, the cash portion includes blocked shares. 6 For EOP awards for the performance year 2018, the number of shares has been determined by
dividing the amount by CHF 12.622 or USD 12.610, the average closing price of UBS shares over the last ten trading days leading up to and including the grant date. For EOP awards for the performance year 2017,
the number of shares was 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. Starting with performance year
2017, GEB members who are also MRTs are no longer permitted to receive dividend payments on EOP awards. Accordingly, the number of shares for these GEB members 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 2018, the notional interest rate is set at 6.85% for awards denominated in US
dollars and 3.40% for awards denominated in Swiss francs. 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. Starting with performance year 2017, GEB members who are also MRTs are 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 2018 and 2017, which are estimated at grant at CHF 5,175,418
and CHF 5,181,559, respectively, of which CHF 886,455 and CHF 893,257, 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 Thirteen GEB members were in office on 31 December 2018 including two new GEB members appointed on 1 October 2018 and one on 1 November 2018; two GEB
members stepped down on 31 December 2017 and 30 September 2018 respectively; and 12 GEB members were in office on 31 December 2017. 10 2018 includes compensation for six months paid under the
employment contract during the notice period to one GEB member who stepped down on 31 December 2017, as well as compensation for one GEB member who stepped down on 30 September 2018 for nine
months in office as a GEB member plus for three months paid under the employment contract during the notice period. No payments during notice period were made in 2017. 11 2018 includes compensation for
two newly appointed GEB members for three months in office as GEB members, and for one newly appointed GEB member for two months in office as a GEB member. 12 Includes role-based allowances in line with
market practice in response to regulatory requirements.
(cid:3)
278
Total realized compensation for Sergio P. Ermotti
To further illustrate the effect of our lengthy deferral approach
realized
in place since 2012, we disclose
compensation of Sergio P. Ermotti, including a multi-year
comparison with his total awarded compensation.
the annual
granted and approved by shareholders in previous years. Since
our compensation plans have no upward leverage, such as
multiplier factors, the potential realized pay cannot exceed the
award granted (other than for market movements and returns).
The realized compensation reflects the total amount paid out
in the year. It includes the base salary, cash performance award
payments, and all deferred performance awards vested in the
year. As such, realized pay is the natural culmination of awards
The table below provides information on the total awarded
and realized compensation paid out to Sergio P. Ermotti since his
appointment (excluding 2011 salary earned).
Total realized compensation vs awarded compensation for Sergio P. Ermotti¹
CHF
FFor the year
22018
22017
22016
22015
22014
22013
22012
11 Appointed on 24 September 2011 as Group CEO ad interim and confirmed on 15 November 2011. 2 Paid out based on previous performance year. For 2012 this includes Cash Balance Plan installments
(discontinued in 2012). 3 Cash Balance Plan installments. For 2012, due to applicable UK FSA regulations, deferred cash includes blocked shares. 4 Excludes dividend / interest payments. 5 Includes all
installments paid out under the EOP, Senior Executive Equity Ownership Plan (SEEOP, discontinued in 2012) and Performance Equity Plan (PEP, discontinued in 2012). 6 Excludes contributions to retirement
benefit plans and benefits. Includes social security contributions paid by Sergio P. Ermotti but excludes the portion related to the legally required social security contributions paid by UBS.
Base salary
2,500,000
2,500,000
2,500,000
2,500,000
2,500,000
2,500,000
2,500,000
Cash award2
2,000,000
1,000,000
1,000,000
0
1,000,000
0
553,2003
Deferred cash
award3,4
0
0
0
0
373,441
349,622
553,200
Performance
award under
equity plans4,5
4,986,563
2,951,043
1,667,128
1,018,440
537,217
423,623
0
Performance
award under
DCCP4
2,440,000
0
0
0
0
0
0
RRealized
TTotal realized
fixed and variable
compensation6
11,926,563
6,451,043
5,167,128
3,518,440
4,410,658
3,273,245
3,606,400
AAwarded
Total awarded
fixed and variable
compensation6
13,800,000
13,900,000
13,400,000
14,000,000
10,900,000
10,400,000
8,600,000
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The chart below further illustrates the effect of our deferral
approach over time. The bars for realized pay show which
components (base salary, cash, equity plans, DCCP) deliver the
realized compensation and in which year the respective component
had been awarded. The bars for awarded compensation show the
split between fixed compensation (base salary) and variable
compensation (cash component and deferred awards) and highlight
that a significant portion of the variable compensation is deferred.
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3
4
1 Excludes contributions to retirement benefit plans and benefits. Includes social security contributions paid by Sergio P. Ermotti but excludes the portion related to the legally required social security contributions paid
by UBS. 2 Paid out based on previous performance year. 2012, 2013 and 2014 include Cash Balance Plan installments. 3 Includes all installments paid out under respective EOP, SEEOP and PEP plans, excludes
dividend payments. 4 The first DCCP installment was paid out in March 2018 (awarded in March 2012), excludes interest payments.
279
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Advisory vote
Corporate governance and compensation
Compensation
Board of Directors governance and
compensation
Our compensation governance
Board of Directors and Compensation Committee
the compensation
The Board of Directors (BoD) is ultimately responsible for
the
approving
Compensation Committee, which determines compensation-
related matters in line with the principles set forth in the Articles
of Association.
strategy proposed by
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
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;
280
/
– approves
remuneration
for external
fee
supervisory board members of Significant Group Entities and
periodically reviews remuneration / fee frameworks for external
supervisory board members of Significant Regional Entities; and
– reviews the compensation report and approves any material
frameworks
public disclosures on compensation matters.
The Compensation Committee meets at least four times a year.
In 2018, the Compensation Committee held seven meetings and
two conference calls. All meetings were fully attended. The
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 Chair 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 that same individual’s compensation.
Such decisions are subject to approval of the Compensation
Committee and the BoD.
After the meetings, the Chair 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 2018, the Compensation Committee
members were Ann F. Godbehere, who chairs the committee,
Michel Demaré, Julie G. Richardson and Dieter Wemmer.
External advisors
The Compensation Committee may retain external advisors to
support it in fulfilling its duties. In 2018, 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
pay levels, including in relation to GEB and BoD compensation.
Various subsidiaries of Willis Towers Watson provide similar data
to Human Resources in relation to compensation for employees
below the BoD and GEB level. Willis Towers Watson holds no
other compensation-related mandates with UBS.
The Risk Committee’s role in compensation
The Risk Committee, a committee of the BoD, works closely with
the Compensation Committee to reinforce that our approach to
compensation reflects proper risk management and control. The
risk
Risk Committee
sets appropriate
supervises and
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
involvement
reviews
→ Refer to www.ubs.com/governance for more information
Compensation Committee 2018 / 2019 key activities and timeline
This table provides an overview of the Compensation Committee’s key activities from the 2018 AGM to the 2019 AGM.
June
July
Sept
Oct
Nov
Dec¹
Jan
Feb
Strategy, policy and governance
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
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Compensation framework
Compensation framework and deferred compensation matters
(cid:3)
(cid:3)
(cid:3)
Risk and regulatory
Risk management in the compensation approach and joint meeting with
BoD Risk Committee
Regulatory activities impacting employees and engagement with regulators
1 The Compensation Committee held two meetings in December 2018.
(cid:3)
(cid:3)
Compensation governance
The table below provides an overview of compensation governance by specific role.
(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)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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Recipients
Chairman of the BoD
Compensation recommendations proposed by
Approved by
Chairperson of the Compensation Committee
Compensation Committee1
Independent BoD members
(remuneration system and fees)
Compensation Committee and Chairman of the BoD
Group CEO
Compensation Committee and Chairman of the BoD
Other GEB members
Compensation Committee and Group CEO
BoD1
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.
281
Advisory vote
Corporate governance and compensation
Compensation
2018 compensation for the Board of Directors
Chairman of the BoD
Independent BoD members
Under the leadership of the Chairman, Axel A. Weber, the BoD
determines, among other things, the strategy for the Group
based on recommendations by the Group CEO, exercises
ultimate supervision over management and appoints all 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.
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 fees 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 fee of
CHF 250,000. Independent BoD members must use a minimum
of 50% of their fees to purchase UBS shares, which 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
of the 10 trading days leading up to and including the grant
date. 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.
The Chairman’s total compensation is contractually fixed at
CHF 5.7 million, excluding benefits and pension
fund
contributions. His total compensation for 2018, which has
remained unchanged since 2015, consisted of a cash payment
of CHF 3.5 million and a share component of CHF 2.2 million
delivered in 174,298 UBS shares at CHF 12.622 per share. The
shares are blocked from distribution for four years. Accordingly,
his
fund
contributions for his service as Chairman for the full year 2018,
was CHF 6,033,422.
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
Base fees, committee fees and any other payments to be
received by independent BoD members are subject to an annual
review based on a proposal submitted by the Chairman of the
BoD to the Compensation Committee, which in turn submits a
recommendation to the BoD for approval. The BoD proposes at
each AGM for shareholder approval the aggregate amount of
BoD remuneration in Swiss francs, including compensation of
the Chairman, which applies until the subsequent AGM.
the
Therefore,
compensation for the Chairman and the independent BoD
members in Swiss francs, and for reference the total amounts in
US dollars.
the next page provide
tables on
the
The “Remuneration details and additional information for
independent BoD members” table shows the remuneration for
each independent BoD member for the period from the 2018
AGM to the 2019 AGM. The fixed base fees are unchanged
from the 2017 / 2018 period and have been broadly flat since
1998.
282
2018 / 2019 remuneration framework for independent BoD members
CHF, except where indicated
Base fees as well as fees for committee chair or membership and / or specific roles are paid per annum. At least 50% of the total
amounts must be used to purchase UBS shares, which are blocked for four years.
Fixed base fee
Senior Independent Director
Vice Chairman
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.
2018
2019
2020
2021
2022
2023
Audited |
Total payments to BoD members
CHF, except where indicated
Aggregate of all BoD members
For the year
Total1
USD
(for reference)
Total1,2
2018
2017
13,458,422
13,739,490
13,133,565
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 2018 is estimated at grant at CHF
831,746 and for 2017 at CHF 664,074. 2 Swiss franc amounts have been translated into US dollars for reference at the 2018 performance award currency exchange rate of CHF / USD 1.02.
Audited |
Compensation details and additional information for non-independent BoD members
CHF, except where indicated
Name, function1
Axel A. Weber, Chairman
For the year
2018
2017
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
72,241
72,384
Total5
6,033,422
6,033,565
(cid:3)
USD
(for reference)
Total5,6
6,159,425
1 Axel A. Weber was the only non-independent member in office on 31 December 2018 and on 31 December 2017, 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 2018 is
estimated at grant at CHF 369,966 and for 2017 at CHF 367,999. The legally required social security contributions paid by the non-independent BoD members are included in the amounts shown in this table, as
appropriate. 6 Swiss franc amounts have been translated into US dollars for reference at the 2018 performance award currency exchange rate of CHF / USD 1.02.
n
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(cid:3)
283
Advisory vote
Corporate governance and compensation
Compensation
Audited |
Remuneration details and additional information for independent BoD members
CHF, except where indicated
e
e
t
t
i
m
m
o
C
g
n
i
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a
n
m
o
N
i
d
n
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c
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a
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o
G
M
M
M
M
M
M
e
e
t
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i
m
m
o
C
t
i
d
u
A
M
M
C
M
M
C
M
M
M
M
Name, function1
Michel Demaré,
Vice Chairman
David Sidwell,
Senior Independent Director
Jeremy Anderson,
member
Reto Francioni,
member
Ann F. Godbehere,
member
Fred Hu,
member
William G. Parrett,
former member
Julie G. Richardson,
member
Isabelle Romy,
member
Robert W. Scully,
member
Beatrice Weder di Mauro,
member
Dieter Wemmer,
member
n
o
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t
a
s
n
e
p
m
o
C
M
e
e
t
t
i
m
m
o
C
M
M
C
C
M
M
M
e
e
t
t
i
m
m
o
C
y
t
i
l
i
b
i
s
n
o
p
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R
d
n
a
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r
u
t
l
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C
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M
M
M
M
M
M
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t
i
m
m
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C
k
s
i
R
C
C
M
M
M
M
M
M
M
M
FFor the period
AGM to AGM
22018/2019
Base fee
325,000
Committee
fee(s)
400,000
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
22017/2018
22018/2019
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
325,000
325,000
325,000
325,000
325,000
325,000
325,000
400,000
500,000
500,000
350,000
–
250,000
350,000
500,000
500,000
–
–
–
450,000
300,000
200,000
300,000
300,000
200,000
200,000
250,000
250,000
300,000
200,000
TTotal 2018/2019
Total 2018/2019 in USD
(for reference)7
TTotal 2017/2018
Legend: C = Chairperson of the respective Committee, M = Member of the respective Committee
Share
percentage4
100
Number of
shares5,6
86,010
50
50
50
50
–
50
50
50
50
50
–
–
50
50
50
50
50
50
50
50
50
50
50
31,864
50,097
35,133
31,456
–
26,796
22,060
38,447
26,962
15,145
–
–
25,328
29,126
17,157
29,126
20,426
24,466
17,157
26,796
18,792
29,126
17,157
Additional
payments2
250,000
250,000
250,000
250,000
TTotal3
975,000
975,000
1,075,000
1,075,000
675,000
––
575,000
675,000
825,000
825,000
325,000
––
––
775,000
625,000
525,000
625,000
625,000
525,000
525,000
575,000
575,000
625,000
525,000
7,425,000
7,580,065
7,100,000
11 Eleven independent BoD members were in office on 31 December 2018. At the 2018 AGM, Jeremy Anderson and Fred Hu were newly elected and William G. Parrett did not stand for re-election. Ten independent
BoD members were in office on 31 December 2017. 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 2018 AGM to the 2019 AGM is estimated at grant at CHF 461,780 and which for the period from the 2017 AGM to the 2018 AGM was estimated at
grant at CHF 296,075. 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 2018, UBS shares, valued at CHF 12.622 (average closing price
of UBS shares over the last 10 trading days leading up to and including the grant date), were granted with a price discount of 15%. These shares are blocked for four years. 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. 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 Swiss franc amounts have been translated into US dollars for reference at the 2018 performance award currency exchange rate of CHF / USD 1.02.
(cid:3)
284
Supplemental information
Fixed and variable compensation for GEB members
Fixed and variable compensation for GEB members1, 2, 3
CHF million, except where indicated
AAmount
%%
AAmount
TTotal for 2018
NNot deferred
TTotal compensation
Amount5
Number of beneficiaries
FFixed compensation5, 6
Cash-based
Equity-based
VVariable compensation
Cash7
Equity Ownership Plan (EOP)8
96
15
23
21
2
73
14
37
100
24
22
2
76
15
39
37
23
21
2
14
14
0
%%
39
100
19
DDeferred4
AAmount
59
0
0
0
59
0
37
%%
61
0
81
Total for 2017
Amount
96
12
21
20
2
74
15
37
22
Deferred Contingent Capital Plan (DCCP)8
11 The figures relate to all GEB members in office during 2018. Thirteen GEB members were in office on 31 December 2018 including two new GEB members appointed on 1 October 2018 and one on 1 November
2018; two GEB members stepped down on 31 December 2017 and 30 September 2018 respectively; and twelve GEB members were in office on 31 December 2017. 2 2018 includes compensation for six months
paid under the employment contract during the notice period to one GEB member who stepped down on 31 December 2017, as well as compensation for one GEB member who stepped down on 30 September
2018 for nine months in office as a GEB member plus for three months paid under the employment contract during the notice period. No payments during notice period were made in 2017. 3 2018 includes
compensation for two newly appointed GEB members for three months in office as GEB members, and for one newly appointed GEB member for two months in office as a GEB member. 4 Based on the specific
plan vesting and reflecting the total award value at grant, which may differ from the accounting expenses. 5 Excludes benefits and employer’s contribution to retirement benefit plans. Includes social security
contributions paid by GEB members but excludes the portion related to the legally required social security contributions paid by UBS. 6 Includes base salary and role-based allowances, rounded to the nearest
million. 7 Includes allocation of vested but blocked shares, in line with the remuneration section of the UK Prudential Regulation Authority Rulebook. 8 For the GEB members who are also MRTs, the awards
starting with performance year 2017 are no longer permitted to include dividend and interest payments. Accordingly, the amounts reflect for the EOP the fair value of the non-dividend-bearing awards and for the
DCCP the fair value of the granted non-interest-bearing awards.
22
23
22
0
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285
Advisory vote
Corporate governance and compensation
Compensation
Regulated staff
Key Risk Takers
Key Risk Takers (KRTs) are defined as those employees who, by
the nature of their roles, have been determined to materially set,
commit or control significant amounts of the firm’s resources
and / or exert significant influence over its risk profile. This
includes employees who work in front-office roles, logistics and
control functions. Identifying KRTs globally is part of our risk
control framework and an important element in ensuring we
incentivize only appropriate risk-taking. For 2018, in addition to
all GEB members, 675 employees were classified as KRTs
throughout the UBS Group globally, including all GMDs and all
employees with a total compensation exceeding USD / CHF 2.5
million (Highly Paid Employees) who may not have been
identified as KRTs during the performance year.
functions.
the control
In line with regulatory requirements, the performance of
employees identified as KRTs during the performance year is
evaluated by
In addition, 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. Consistent with all other employees, the
deferred portion of KRTs’ compensation is also subject to
forfeiture or reduction if the KRT commits harmful acts.
Fixed and variable compensation for Key Risk Takers1
USD million, except where indicated
TTotal for 2018
AAmount
NNot deferred
%%
AAmount
TTotal compensation
Amount3
Number of beneficiaries
FFixed compensation3,4
Cash-based
Equity-based
VVariable compensation
Cash5
Equity Ownership Plan (EOP)6
1,250
100
675
417
395
22
833
341
305
33
32
2
67
27
24
758
417
395
22
341
341
0
%%
61
100
41
DDeferred2
AAmount
492
0
0
0
492
0
305
%%
39
0
59
Total for 2017
Amount
1,327
707
435
408
28
891
372
320
Deferred Contingent Capital Plan (DCCP)6
11 Includes employees with a total compensation exceeding USD / CHF 2.5 million (Highly Paid Employees), excluding GEB members who were in office during the performance year 2018, except the three new GEB
members appointed during 2018, who are included for their compensation received for their roles as KRTs prior to their GEB member appointments. 2 Based on the specific plan vesting and reflecting the total
value at grant, which may differ from the accounting expenses. 3 Excludes benefits and employer's contribution to retirement benefits plan. Includes social security contributions paid by KRTs but excludes the
portion related to the legally required social security contributions paid by UBS. 4 Includes base salary and role-based allowances. 5 Includes allocation of vested but blocked shares, in line with the remuneration
section of the UK Prudential Regulation Authority Rulebook. 6 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 the EOP the fair value of the non-dividend-bearing awards and for the DCCP the fair value of the granted non-interest-bearing awards.
186
186
200
15
0
286
Material Risk Takers
UK Senior Managers and Certification Regime
the
requirements,
For relevant EU-regulated entities we identify individuals who are
deemed to be Material Risk Takers (MRTs) based on local
regulatory
respective EU Commission
Delegated Regulation and the EU Capital Requirements Directive
of 2013 (CRD IV). 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 2018, UBS identified 754 MRTs across its
EU entities.
Variable compensation awarded to MRTs is subject to specific
requirements from local regulators such as a maximum variable
to fixed compensation ratio which is set at 100% unless
approved to be increased to 200% by the shareholders of the
respective legal entity. UBS has obtained approval as appropriate
through relevant shareholders’ votes to increase the variable to
fixed pay
regulatory
requirements for this population include a minimum deferral
rate of 40% to 60% on performance awards and the delivery of
at least 50% of any upfront performance award in UBS shares
that vest immediately but are blocked for 12 months.
to 200%. Other applicable
ratio
Any notional shares granted to MRTs under the EOP and
notional DCCP awards for their performance in 2018 are subject
to a six- or 12-month blocking period post vesting and do not
pay out dividends or interest during the deferral period.
these provisions,
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 in other EU jurisdictions as
applicable. Under
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 or corporate structure in scope, a material downward
restatement of disclosed results, or engaged in misconduct and /
or failed to take expected actions that contributed to significant
reputational harm.
the
The Senior Managers and Certification Regime (SMCR) of the UK
Prudential Regulation Authority and Financial Conduct Authority
requires
responsibilities,
performing certain significant functions and / or those in certain
other identified categories be designated as Senior Management
Functions (SMFs).
individuals with
specified
that
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 annual
installments between years three and seven. 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
Our control functions must be independent in order to monitor
risk effectively. Therefore, their compensation is determined
separately from the revenue producers that they oversee,
supervise or monitor. Their performance award pool is based not
on the performance of these businesses, but on the performance
of the Group as a whole. In addition, we consider other factors,
such as how effectively the function has performed, and our
market 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 GIA and approved by the Chairman of the
BoD. Upon proposal by the Chairman, total compensation for the
Head GIA is approved by the Compensation Committee in
consultation with the Audit Committee.
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287
Advisory vote
Corporate governance and compensation
Compensation
2018 performance award pool and expenses
Performance awards granted for the 2018 performance year
The “Variable compensation” table below shows the amount of
variable compensation awarded
the
the number of
performance year 2018,
granted.
award
each
beneficiaries
together with
to employees
type
for
for
of
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
USD 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
22018
2017
2,089
2,088
373
217
131
25
399
239
135
25
TTotal variable compensation – performance award pool
2,461
2,487
Variable compensation – other2
162
151
Expenses deferred to
future periods4
22018
2017
0
585
325
238
22
585
180
0
594
329
238
27
594
196
Adjustments4
22018
2017
0
71
0
73
71 5
73 5
0
0
71
((96)6
0
0
73
(80)6
Total
22018
2017
Number of beneficiaries
2017
22018
2,089
2,088
51,809
45,664
1,029
1,067
613
369
47
642
373
52
3,967
3,768
3,934
284
4,922
4,483
4,891
439
3,118
3,154
51,819
45,671
246
268
3,080
3,266
Financial advisor (FA) variable compensation3
TTotal variable compensation including FA variable
compensation
11 Expenses under “Variable compensation – other” and “Financial advisor variable 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 and remeasurements related to the Deferred Contingent Capital Plan. 3 Financial advisor compensation consists of formulaic compensation
based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, new assets and other variables. It also
includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to vesting requirements. 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 USD 96 million
(2017: USD 80 million) in interest expense and remeasurements 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 amount is adjusted out in the analysis.
6,850
7,114
3,750
1,250
5,889
5,718
3,605
7,027
1,316
6,822
(25)
484
525
(6)
0
0
2018 performance award pool and expenses
Performance award pool and expenses
The performance award pool, which includes performance-
based variable awards for 2018, was USD 3.1 billion, reflecting a
decrease of 1% compared with 2017. Consistent with prior
years, the movements in deferred tax assets (DTA), whether
positive or negative, do not affect the funding of the
performance award pool as DTAs do not reflect the underlying
business performance and are not within management’s control.
Performance award expenses for 2018 decreased by 5% to
USD 3.0 billion. This decrease reflects the change in the
performance award pool for 2018 as well as 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 “2018 performance and compensation funding”
section of this report for more information
USD billion
3.2
(1%)1
3.2
(0.7)
0.7
2.5
Awards for
performance
year deferred
to future
periods2
(including
accounting
adjustments)
3.1
Amortization
of prior-year
awards
Award
expenses for
performance
year
3.0
0.5
2.5
Amortization
of prior-year
awards
Award
expenses for
performance
year
(0.7)
Awards for
performance
year deferred
to future
periods2
(including
accounting
adjustments)
Performance
award pool
2017
Performance
award expenses
Performance
award pool
2018
Performance
award expenses
(5%)
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.
288
Amortization of deferred compensation
Amortization of deferred compensation
USD billion
Performance award expenses include all immediate expenses
related to 2018 compensation awards as well as expenses
deferred to 2018 related to awards made in prior years. The
chart “Amortization of deferred compensation” shows the
amount at the end of 2018 of awards to be amortized in
subsequent years. This was USD 1.2 billion as of 31 December
2018 and USD 1.3 billion as of 31 December 2017.
→ Refer to “Note 30 Employee benefits: variable compensation” in
the “Consolidated financial statements” section of this report
for more information
(4%)
(0.1)
(3%)
0.6
(0.5)
1.3
1.2
(0.5)
GEB and KRTs deferred compensation
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 28 December
2018. For notional funds, it is determined using the latest
available market price for the underlying funds at year-end
2018, 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 2018” table on the next page
shows the value of actual ex-post explicit and
implicit
adjustments to outstanding deferred compensation in the
financial year 2018. 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 affect
the value of an award. The total value of ex-post explicit
adjustments made to UBS shares in 2018, based on the
approximately 6.2 million shares forfeited during 2018, is a
reduction of USD 76.8 million. The size of implicit adjustments is
mainly due to a decrease in the share price. 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 2018.
Amortized
Forfeited
and other
adjustments
31.12.17
Awards to be
amortized,
including awards
granted in
1Q18 for the
performance
year 2017
Expected
amortization
of prior-year
awards in 2019
Annual
awards
granted,
including
awards
granted in
1Q19 for the
performance
year 2018
31.12.18
Awards to be
amortized,
including
awards
granted in
1Q19 for the
performance
year 2018
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289
Advisory vote
Corporate governance and compensation
Compensation
GEB and KRTs deferred compensation1,2
USD million, except where indicated
GGEB
Deferred Contingent Capital Plan7
Equity Ownership Plan (including notional
funds, if applicable)7
Discontinued deferred compensation plans8
KKRTs
RRelating to awards
for 20183
Relating to
awards for prior
years4
22
38
0
96
107
0
Total
119
145
0
of which: exposed to
ex-post explicit and /
or implicit adjustments
Total deferred
compensation
year-end 20175
Total amount of
deferred compensation
paid out in 20186
100%
100%
100%
104
181
0
13
29
0
865
186
1,051
305
0
Deferred Contingent Capital Plan
Equity Ownership Plan (including notional
funds) 7
Discontinued deferred compensation plans7
TTotal GEB and KRTs
11 Based on the 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 30 Employee benefits: variable compensation” in the
“Consolidated financial statements” section of this report for more information. 3 Where applicable, amounts are translated into USD at the performance award currency exchange rate. For GEB members who
were appointed to the GEB during 2018, awards have been pro-rated between KRT and GEB entries accordingly. 4 Takes into account the ex-post implicit adjustments, given the share price movements since
grant. For GEB members who were appointed to the GEB part way through 2018, awards have been fully reflected in the GEB entries. Where applicable, amounts are translated from award currency into USD using
FX rates as at 31 December 2018. 5 Values from the 2017 Compensation Report in CHF have been translated to USD using the 31 December 2017 FX rate. 6 Valued at distribution price and FX rate for all
awards distributed in 2018. For GEB members who were appointed to the GEB during 2018, value of the awards paid out according to their role at the time of distribution. 7 Starting with performance year 2017,
GEB members and KRTs who are also MRTs are no longer permitted to receive dividend and interest payments. Accordingly, the amounts reflect for the EOP the fair value of the non-dividend-bearing awards and for
the DCCP the fair value of the granted non-interest-bearing awards. 8 Senior Executive Equity Ownership Plan (SEEOP) and Incentive Performance Plan (IPP).
100%
100%
1,535
0
429
0
979
0
674
0
100%
2,294
1,742
1,148
2,967
551
113
584
GEB and KRTs ex-post explicit and implicit adjustments to deferred compensation in 2018
USD 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
31.12.18
31.12.17
Ex-post implicit adjustments
to unvested awards2
31.12.18
31.12.17
0
0
0
(17)
(13)
0
0
0
0
(7)
(6)
0
0
(28)
0
0
(166)
0
0
26
0
0
214
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 2018 (USD 12.38) for 2018. The 2017 data is valued using the share price on 31 December
2017 (CHF 17.94) and translated to USD using the 31 December 2017 FX rate. For the notional funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in
2018 and 2017. For the DCCP, the fair value at grant of the forfeited awards during the year is reflected. For GEB members who were appointed to the GEB during 2018, awards have been fully reflected in the GEB
entries. 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 2018 and 2017. For GEB members who were appointed to the GEB during 2018, awards have been fully reflected in the GEB entries. Values from 2017
Compensation Report in CHF have been converted to USD using the 31 December 2017 FX rate.
(194)
(30)
(13)
240
290
Total personnel expenses for 2018
As of 31 December 2018, there were 66,888 employees (on a full-
time equivalent basis), an increase of 9% compared with the prior
year. This increase largely reflects our insourcing activities, which
are part of our integrated workforce strategy, where roles
previously performed by external staff have been brought back
inside UBS in permanent employee positions. The “Personnel
expenses” table below shows our total personnel expenses for
2018. It includes salaries, pension contributions and other
personnel costs, social security contributions and variable
compensation. Variable compensation includes cash performance
awards paid in 2019 for the 2018 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 reflects the value of performance
awards granted relating to the 2018 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 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 future amortization (including accounting
adjustments) of unvested deferred awards granted in 2019
for the performance year 2018
– addition for the 2018 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 2017
and 2018.
→ Refer to “Note 6 Personnel expenses” and “Note 30 Employee
benefits: variable compensation” in the “Consolidated financial
statements” section of this report for more information
Personnel expenses
USD 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
FFinancial advisor variable compensation2,6
Expenses recognized in the IFRS income statement
RRelated to the
performance year 2018
6,448
2,089
373
217
131
25
0
2,461
26
7
0
123
33
0
162
489
788
457
RRelated to prior
performance years
0
(32)
565
309
226
28
2
534
17
64
(136)
0
33
119
80
0
3
0
TTotal expenses
recognized in
2018
6,448
Total expenses
recognized in
2017
6,154
Total expenses
recognized in
2016
6,305
2,057
938
526
357
53
2
2,062
1,088
583
444
57
4
1,799
1,215
708
435
66
6
2,995
3,151
3,013
43
72
(136)
123
66
119
243
489
791
457
36
72
(107)
113
63
111
252
460
814
723
30
87
(74)
220
76
115
425
426
755
678
3,740
3,266
789
4,054
4,064
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OOther personnel expenses
TTotal personnel expenses7
11 Includes role-based allowances. 2 Refer to “Note 30 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 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. 6 Consists of
formulaic compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, new assets and other
variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to vesting requirements. 7 Includes net restructuring
expenses of USD 286 million, USD 545 million and USD 763 million for the years ended 31 December 2018, 31 December 2017 and 31 December 2016, respectively. Refer to “Note 32 Changes in organization and
acquisitions and disposals of subsidiaries and businesses” in the “Consolidated financial statements” section of this report for more information.
14,700
16,132
15,913
16,199
1,432
628
654
570
581
26
291
Advisory vote
Corporate governance 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 2019.
Equity Ownership Plan (EOP) 2013 / 2014, EOP 2014 / 2015,
EOP 2015 / 2016 and EOP 2016 / 2017
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
2013 / 2014, the third and final installment for the Group Executive Board (GEB)
members vests in full. For the EOP 2014 / 2015, 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 2015 / 2016, 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 2016 / 2017, 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). Furthermore, DTAs, when positive, have never had an impact on the performance award vesting.
Deferred Contingent Capital Plan (DCCP) 2013 / 2014
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 2013 / 2014 vests in
full
100%
Discontinued deferred compensation plans
The table below lists discontinued compensation plans that had outstanding balances as of 31 December 2018. The firm has not granted
any options and SARs since 2009. The strike price for stock options awarded under prior compensation plans has not been reset.
→ Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of the Annual Report
2018 for more information
Plan
Key Employee Stock Appreciation
Rights Plan (KESAP) and Key
Employee Stock Option Plan (KESOP)
Years
granted
2002–2009
Eligible employees
Instrument
Performance conditions
Vesting period and other
conditions
Status as of March
2019
Selected employees
(approximately
17,000 employees
between 2002 and
2009)
Share-settled
stock
appreciation
rights (SARs) or
stock options
None
Expired (some
options / SARs
remain exercisable)
Vests in full three years
after grant, subject to
continued employment,
non-solicitation of clients
and employees and non-
disclosure of proprietary
information
292
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
294
294
295
295
296
297
297
297
293
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Advisory vote
Corporate governance 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
Robert Karofsky, Co-President Investment Bank
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
Piero Novelli, Co-President Investment Bank
Andrea Orcel, former President Investment Bank
Markus Ronner, Group Chief Compliance and Governance
Officer
Kathryn Shih, President UBS Asia Pacific
TTotal
oon
31 December
22018
Number of
unvested
shares / at risk2
1,715,430
Number of
vested shares
1,757,766
TTotal number of
shares
3,473,196
Potentially
conferred
voting
rights in %
0.191
Potentially
conferred
voting
rights in %4
0.000
NNumber of
options3
0
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
1,632,464
256,356
460,377
0
2,092,841
256,356
65,761
259,745
131,520
614,222
589,659
343,120
264,718
500,902
–
259,762
244,676
910,951
881,979
307,090
156,180
1,132,938
1,047,311
471,049
–
–
1,328,113
161,152
–
503,772
581,546
0
0
0
317,516
194,000
107,472
61,652
254,119
–
263,362
176,602
95,597
95,597
277,978
277,978
484,075
422,298
256,367
–
–
251,439
173
–
150,000
0
65,761
259,745
131,520
931,738
783,659
450,592
326,370
755,021
––
523,124
421,278
1,006,548
977,576
585,068
434,158
1,617,013
1,469,609
727,416
––
––
1,579,552
161,325
––
653,772
581,546
7,436,489
3,964,425
11,400,914
6,923,927
1,939,943
8,863,870
0.121
0.014
0.004
0.014
0.008
0.051
0.045
0.025
0.019
0.042
–
0.029
0.024
0.055
0.057
0.032
0.025
0.089
0.085
0.040
–
–
0.091
0.009
–
0.036
0.034
0.627
0.513
0
0
0
0
0
0
0
0
0
0
––
0
0
0
0
0
0
0
281,640
0
––
––
0
0
––
0
74,599
0
356,239
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
0.000
0.000
0.016
0.000
–
–
0.000
0.000
–
0.000
0.004
0.000
0.021
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 “Compensation philosophy and framework” section of this report for more information on the plans. 3 Refer to
“Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
(cid:3)
Audited |
Total of all vested and unvested shares of GEB members1,2
Shares on 31 December 2018
11,400,914
3,964,425
1,889,712
1,826,864
1,858,391
1,266,430
595,092
Total of which: vested
of which: vesting
2019
2020
2021
2022
2023
2018
2019
2020
2021
2022
Shares on 31 December 20173
1 Includes shares held by related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number of shares vesting in the future will be calculated under the
terms of the plans. Refer to the “Compensation philosophy and framework” section of this report for more information. 3 Includes all vested and unvested shares of Jürg Zeltner who stepped down from the GEB
on 31 December 2017.
1,465,516
1,825,372
1,992,458
1,796,694
1,941,018
9,840,946
819,888
(cid:3)
294
Audited |
Number of shares of BoD members1
Name, function
Axel A. Weber, Chairman
Michel Demaré, Vice Chairman
David Sidwell, Senior Independent Director
Jeremy Anderson, member2
Reto Francioni, member
Ann F. Godbehere, member
Fred Hu, member2
William G. Parrett, former member2
Julie G. Richardson, member
Isabelle Romy, member
Robert W. Scully, member
Beatrice Weder di Mauro, member
Dieter Wemmer, member
TTotal
oon 31 December
22018
NNumber of shares held
764,329
Voting rights in %
0.042
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
22018
22017
642,100
322,558
290,694
189,805
154,672
0
––
98,832
76,772
259,225
232,263
0
––
––
106,916
17,157
0
114,802
94,376
47,074
29,917
145,601
126,809
31,159
14,002
1,990,542
1,768,521
0.037
0.018
0.017
0.010
0.009
0.000
–
0.005
0.004
0.014
0.013
0.000
–
–
0.006
0.001
0.000
0.006
0.005
0.003
0.002
0.008
0.007
0.002
0.001
0.109
0.102
11 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2018 and 2017. 2 At the 2018 AGM, Jeremy Anderson and Fred Hu were newly
elected and William G. Parrett did not stand for re-election.
(cid:3)
Audited |
Total of all blocked and unblocked shares of BoD members1
Total
of which:
unblocked
of which: blocked until
2019
2020
2021
2022
Shares on 31 December 2018
1,990,542
636,397
323,051
335,587
366,570
328,937
Shares on 31 December 2017
1 Includes shares held by related parties.
1,768,521
294,924
366,821
347,106
364,161
395,509
2018
2019
2020
2021
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295
Advisory vote
Corporate governance and compensation
Compensation
Audited |
Vested and unvested options of GEB members1
oon 31 December
TTotal
number of
options2
Number of
options3
TTom Naratil, Co-President Global Wealth Management and President UBS Americas4
22018
22017
KKathryn Shih, President UBS Asia Pacific
22018
22017
0
281,640
0
74,599
181,640
100,000
Year of
grant
2008
2009
Vesting
date
Expiry
date
Strike
price
1.3.2011
1.3.2012
28.2.2018
27.2.2019
CHF 35.66
CHF 11.35
74,599
2008
1.3.2011
28.2.2018
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 30 Employee benefits: variable compensation” in the “Consolidated
financial statements” section of this report for more information. 4 Tom Naratil exercised his remaining 100,000 options on 28 November 2018.
(cid:3)
296
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 2018)
Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2017)
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.
USD
(for reference)
Loans3
8,380,492
on 31 December
Loans3
2018
22017
2018
2017
8,240,000
8,240,000
33,204,000
33,770,128
37,442,914
1 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 2 Swiss franc and US dollar amounts disclosed represent local currency amounts translated at the
relevant year-end closing exchange rate. 3 All loans granted are secured loans. 4 Excludes unused uncommitted credit facilities of CHF 2,949,690 in 2018 that had been granted to one GEB member, and of CHF
4,952,596 in 2017 that had been granted to two GEB members.
(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
Loans3,4,5
2018
2017
600,000
3,524,370
USD
(for reference)
Loans3,4,5
610,230
1 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 2 Swiss franc and US dollar amounts disclosed represent local currency amounts translated at the
relevant year-end closing exchange rate. 3 All loans granted are secured loans. 4 CHF 600,000 for Reto Francioni in 2018 and CHF 600,000 for Reto Francioni and CHF 2,924,370 for William G. Parrett in 2017.
5 Excludes an unused uncommitted credit facility of CHF 243,698 that had been granted to one BoD member in 2017.
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
2018
2017
2018
2017
2018
2017
0
0
0
336,789
0
336,789
0
0
45,556
44,636
45,556
44,636
Total
0
0
45,556
381,425
45,556
381,425
(cid:3)
USD
(for reference)
Total
0
46,333
46,333
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 Swiss franc and US dollar amounts disclosed represent local currency
amounts translated at the relevant year-end closing exchange rate. 3 Includes a payment in 2018 to one former GEB member and payments in 2017 to two former GEB members.
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297
Advisory vote
Corporate governance and compensation
Compensation
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 General Meeting shall approve the
proposals of the Board of Directors in
relation to:
a) the maximum aggregate amount of
compensation of the Board of Directors
for the period until the next Annual
General Meeting;
b) the maximum aggregate amount of
fixed compensation of the Group
Executive Board for the following financial
year; and
c) the aggregate amount of variable
compensation of the Group Executive
Board for the preceding financial year.
The Board of Directors may submit for
approval by the General Meeting
deviating or additional proposals relating
to the same or different periods. In the
event the General Meeting does not
approve a proposal of the Board of
Directors, the Board of Directors shall
determine, taking into account all
relevant factors, the respective (maximum)
aggregate amount or (maximum) partial
amounts and submit the amount(s) so
determined for approval by the General
Meeting. The Corporation or companies
controlled by it may pay or grant
compensation prior to approval by the
General Meeting, subject to subsequent
approval.
Principles of compensation: In line with
articles 45 and 46 of the Articles of
Association of UBS Group AG,
compensation of the members of the
Board of Directors shall comprise a base
remuneration and may comprise other
compensation elements and benefits.
Compensation of the members of the
Board of Directors is intended to
recognize the responsibility and
governance nature of their role, to attract
and retain qualified individuals and to
ensure alignment with shareholders’
interest.
Compensation of the members of the
Group Executive Board shall comprise
fixed and variable compensation
elements. Fixed compensation shall
comprise the base salary and may
comprise other compensation elements
and benefits. Variable compensation
elements shall be governed by financial
and non-financial performance measures
that take into account the performance of
the Corporation and / or parts thereof,
targets in relation to the market, other
companies or comparable benchmarks,
short- and long-term strategic objectives
and / or individual targets. The Board of
Directors or, where delegated to it, the
Compensation Committee determines the
respective performance measures, the
overall and individual performance
targets, and their achievements. The
Board of Directors or, where delegated to
it, the Compensation Committee aims to
ensure alignment with sustainable
performance and appropriate risk-taking
through adequate deferrals, forfeiture
conditions, caps on compensation,
harmful acts provisions and similar means
with regard to parts of or all of the
compensation. Parts of variable
compensation shall be subject to a multi-
year vesting period.
Additional amount for GEB members
appointed 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,
if the maximum aggregate amount of
compensation already approved by the
General Meeting is not sufficient to also
cover the compensation of a person who
becomes a member of or is being
promoted within the Group Executive
Board after the General Meeting has
approved the compensation, the
Corporation or companies controlled by it
shall be authorized to pay or grant each
such Group Executive Board member a
supplementary amount during the
compensation period(s) already approved.
The aggregate pool for such
supplementary amounts per
compensation period shall not exceed
40% of the average of total annual
compensation paid or granted to the
Group Executive Board during the
previous three years.
→ Refer to www.ubs.com/governance for
more information
298
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
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299
Consolidated
financial
statements
Changes to functional and presentation currencies
Effective from 1 October 2018, the functional currency of UBS Group AG and UBS AG’s Head Office in Switzerland changed from Swiss francs
to US dollars and that of UBS AG’s London Branch from British pounds to US dollars, in compliance with the requirements of International
Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates. The presentation currency of UBS Group AG’s consolidated
financial statements has changed from Swiss francs to US dollars to align with the functional currency changes of significant Group entities.
Prior periods have been restated for this change in presentation currency.
→ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments, excluding the effects of adoption of IFRS 9
Financial Instruments” in the “Consolidated financial statements” section of this report for more information
Table of contents
304 Management’s report on internal control over financial
305
306
307
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
316 UBS Group AG consolidated financial statements
316
316
317
319
320
325
Primary financial statements
Income statement
Statement of comprehensive income
Balance sheet
Statement of changes in equity
Statement of cash flows
327 Notes to the UBS Group AG consolidated financial
392
392
395
400
400
400
401
402
405
406
406
407
409
417
statements
1
Summary of significant accounting policies
Segment reporting
327
377
382
382
385
385
386
386
387
391
2
4
5
6
7
8
9
Income statement notes
3
Net interest income and other net income from fair
value changes on financial instruments
Net fee and commission income
Other income
Personnel expenses
General and administrative expenses
Income taxes
Earnings per share (EPS) and shares outstanding
Balance sheet notes
10
Financial assets at amortized cost and other
positions in scope of expected credit loss
measurement
Derivative instruments
Financial assets and liabilities at fair value held for
trading
Financial assets at fair value not held for trading
Financial assets measured at fair value through
other comprehensive income
Property, equipment and software
Goodwill and intangible assets
Other assets
Amounts due to banks and customer deposits
Debt issued designated at fair value
Debt issued measured at amortized cost
Provisions and contingent liabilities
Other liabilities
418 Additional information
418
23
Expected credit loss measurement
Fair value measurement
Offsetting financial assets and financial liabilities
Restricted and transferred financial assets
26
27 Maturity analysis of financial liabilities
28
Hedge accounting
Pension and other post-employment benefit plans
Employee benefits: variable compensation
Interests in subsidiaries and other entities
Changes in organization and acquisitions and
disposals of subsidiaries and businesses
Operating leases and finance leases
Guarantees, commitments and forward starting
transactions
Related parties
Invested assets and net new money
Currency translation rates
Events after the reporting period
38
39 Main differences between IFRS and Swiss GAAP
429
450
452
455
456
462
477
485
493
494
495
496
499
500
500
501
11
12
13
14
15
16
17
18
19
20
21
22
24
25
29
30
31
32
33
34
35
36
37
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303
Management’s assessment of internal control over financial
reporting as of 31 December 2018
UBS management has assessed the effectiveness of UBS’s
internal control over financial reporting as of 31 December 2018
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
2018, UBS’s internal control over financial reporting was
effective.
The effectiveness of UBS’s internal control over financial
reporting as of 31 December 2018 has been audited by Ernst &
Young Ltd, UBS’s independent registered public accounting firm,
as stated in their report appearing on page 305, which expresses
an unqualified opinion on the effectiveness of UBS’s internal
control over financial reporting as of 31 December 2018.
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 306) and internal control over financial reporting (refer
to page 305) of UBS Group AG are included in our filing on
15 March 2019 with the Securities and Exchange Commission
on Form 20-F pursuant to US reporting obligations.
The accompanying statutory auditor’s report on the audit of
the consolidated financial statements (refer to pages 307 to 315)
of UBS Group AG, in addition to the aforementioned reports, is
included in our Annual Report 2018 available on our website
and filed on 15 March 2019 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.
304
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(cid:1)
(cid:1)
(cid:1)
(cid:25)(cid:58)(cid:54)(cid:59)(cid:60)(cid:1)(cid:2)(cid:1)(cid:40)(cid:55)(cid:61)(cid:54)(cid:47)(cid:1)(cid:31)(cid:60)(cid:44)(cid:1)
(cid:21)(cid:45)(cid:59)(cid:43)(cid:48)(cid:45)(cid:54)(cid:47)(cid:58)(cid:41)(cid:42)(cid:45)(cid:54)(cid:1)(cid:19)(cid:1)
(cid:34)(cid:8)(cid:33)(cid:8)(cid:1)(cid:22)(cid:55)(cid:64)(cid:1)
(cid:23)(cid:28)(cid:7)(cid:14)(cid:10)(cid:10)(cid:12)(cid:1)(cid:22)(cid:41)(cid:59)(cid:45)(cid:52)(cid:1)
(cid:34)(cid:48)(cid:55)(cid:54)(cid:45)(cid:1)
(cid:26)(cid:41)(cid:64)(cid:1)
(cid:63)(cid:63)(cid:63)(cid:8)(cid:45)(cid:65)(cid:8)(cid:43)(cid:55)(cid:53)(cid:9)(cid:43)(cid:48)(cid:1)
(cid:5)(cid:14)(cid:11)(cid:1)(cid:15)(cid:18)(cid:1)(cid:12)(cid:18)(cid:16)(cid:1)(cid:18)(cid:16)(cid:1)(cid:18)(cid:16)(cid:1)
(cid:5)(cid:14)(cid:11)(cid:1)(cid:15)(cid:18)(cid:1)(cid:12)(cid:18)(cid:16)(cid:1)(cid:18)(cid:16)(cid:1)(cid:10)(cid:10)(cid:1)
(cid:1)
(cid:12)(cid:20)(cid:29)(cid:28)(cid:30)(cid:32)(cid:1)(cid:28)(cid:21)(cid:1)(cid:8)(cid:27)(cid:19)(cid:20)(cid:29)(cid:20)(cid:27)(cid:19)(cid:20)(cid:27)(cid:32)(cid:1)(cid:12)(cid:20)(cid:22)(cid:24)(cid:31)(cid:32)(cid:20)(cid:30)(cid:20)(cid:19)(cid:1)(cid:11)(cid:33)(cid:17)(cid:25)(cid:24)(cid:18)(cid:1)(cid:2)(cid:18)(cid:18)(cid:28)(cid:33)(cid:27)(cid:32)(cid:24)(cid:27)(cid:22)(cid:1)(cid:6)(cid:24)(cid:30)(cid:26)(cid:1)
(cid:1)
(cid:14)(cid:28)(cid:1)(cid:32)(cid:23)(cid:20)(cid:1)(cid:13)(cid:23)(cid:16)(cid:30)(cid:20)(cid:23)(cid:28)(cid:25)(cid:19)(cid:20)(cid:30)(cid:31)(cid:1)(cid:16)(cid:27)(cid:19)(cid:1)(cid:32)(cid:23)(cid:20)(cid:1)(cid:3)(cid:28)(cid:16)(cid:30)(cid:19)(cid:1)(cid:28)(cid:21)(cid:1)(cid:5)(cid:24)(cid:30)(cid:20)(cid:18)(cid:32)(cid:28)(cid:30)(cid:31)(cid:1)(cid:28)(cid:21)(cid:1)(cid:15)(cid:3)(cid:13)(cid:1)(cid:7)(cid:30)(cid:28)(cid:33)(cid:29)(cid:1)(cid:2)(cid:7)(cid:1)
(cid:1)
(cid:10)(cid:29)(cid:24)(cid:27)(cid:24)(cid:28)(cid:27)(cid:1)(cid:28)(cid:27)(cid:1)(cid:8)(cid:27)(cid:32)(cid:20)(cid:30)(cid:27)(cid:16)(cid:25)(cid:1)(cid:4)(cid:28)(cid:27)(cid:32)(cid:30)(cid:28)(cid:25)(cid:1)(cid:28)(cid:34)(cid:20)(cid:30)(cid:1)(cid:6)(cid:24)(cid:27)(cid:16)(cid:27)(cid:18)(cid:24)(cid:16)(cid:25)(cid:1)(cid:12)(cid:20)(cid:29)(cid:28)(cid:30)(cid:32)(cid:24)(cid:27)(cid:22)(cid:1)
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(cid:52)(cid:40)(cid:37)(cid:1) (cid:55)(cid:37)(cid:34)(cid:51)(cid:41)(cid:52)(cid:37)(cid:1) (cid:47)(cid:38)(cid:1) (cid:19)(cid:31)(cid:25)(cid:19)(cid:26)(cid:28)(cid:51)(cid:53)(cid:41)(cid:51)(cid:51)(cid:37)(cid:15)(cid:1) (cid:40)(cid:52)(cid:52)(cid:48)(cid:15)(cid:7)(cid:7)(cid:55)(cid:55)(cid:55)(cid:6)(cid:37)(cid:56)(cid:48)(cid:37)(cid:50)(cid:52)(cid:51)(cid:53)(cid:41)(cid:51)(cid:51)(cid:37)(cid:6)(cid:35)(cid:40)(cid:7)(cid:37)(cid:46)(cid:7)(cid:33)(cid:53)(cid:36)(cid:41)(cid:52)(cid:5)(cid:50)(cid:37)(cid:48)(cid:47)(cid:50)(cid:52)(cid:5)(cid:38)(cid:47)(cid:50)(cid:5)(cid:48)(cid:53)(cid:34)(cid:44)(cid:41)(cid:35)(cid:5)(cid:35)(cid:47)(cid:45)(cid:48)(cid:33)(cid:46)(cid:41)(cid:37)(cid:51)(cid:6)(cid:1) (cid:28)(cid:40)(cid:41)(cid:51)(cid:1)
(cid:36)(cid:37)(cid:51)(cid:35)(cid:50)(cid:41)(cid:48)(cid:52)(cid:41)(cid:47)(cid:46)(cid:1)(cid:38)(cid:47)(cid:50)(cid:45)(cid:51)(cid:1)(cid:48)(cid:33)(cid:50)(cid:52)(cid:1)(cid:47)(cid:38)(cid:1)(cid:47)(cid:53)(cid:50)(cid:1)(cid:33)(cid:53)(cid:36)(cid:41)(cid:52)(cid:47)(cid:50)(cid:60)(cid:51)(cid:1)(cid:50)(cid:37)(cid:48)(cid:47)(cid:50)(cid:52)(cid:6)(cid:1)
(cid:1)
314
(cid:1)
(cid:1)
(cid:25)(cid:30)(cid:36)(cid:34)(cid:1)(cid:14)(cid:1)
(cid:1)
(cid:1)
(cid:3)(cid:6)(cid:14)(cid:13)(cid:16)(cid:18)(cid:1)(cid:13)(cid:12)(cid:1)(cid:13)(cid:18)(cid:8)(cid:6)(cid:16)(cid:1)(cid:10)(cid:6)(cid:7)(cid:4)(cid:10)(cid:1)(cid:4)(cid:12)(cid:5)(cid:1)(cid:16)(cid:6)(cid:7)(cid:19)(cid:10)(cid:4)(cid:18)(cid:13)(cid:16)(cid:20)(cid:1)(cid:16)(cid:6)(cid:15)(cid:19)(cid:9)(cid:16)(cid:6)(cid:11)(cid:6)(cid:12)(cid:18)(cid:17)(cid:1)
(cid:21)(cid:41)(cid:1)(cid:30)(cid:32)(cid:32)(cid:42)(cid:44)(cid:33)(cid:30)(cid:41)(cid:32)(cid:34)(cid:1)(cid:49)(cid:38)(cid:46)(cid:37)(cid:1)(cid:30)(cid:44)(cid:46)(cid:38)(cid:32)(cid:39)(cid:34)(cid:1)(cid:12)(cid:10)(cid:13)(cid:30)(cid:1)(cid:43)(cid:30)(cid:44)(cid:30)(cid:36)(cid:44)(cid:30)(cid:43)(cid:37)(cid:1)(cid:9)(cid:1)(cid:38)(cid:46)(cid:34)(cid:40)(cid:1)(cid:11)(cid:1)(cid:17)(cid:24)(cid:1)(cid:30)(cid:41)(cid:33)(cid:1)(cid:46)(cid:37)(cid:34)(cid:1)(cid:26)(cid:49)(cid:38)(cid:45)(cid:45)(cid:1)(cid:15)(cid:47)(cid:33)(cid:38)(cid:46)(cid:38)(cid:41)(cid:36)(cid:1)(cid:26)(cid:46)(cid:30)(cid:41)(cid:33)(cid:30)(cid:44)(cid:33)(cid:1)(cid:13)(cid:14)(cid:8)(cid:5)(cid:1)(cid:49)(cid:34)(cid:1)(cid:32)(cid:42)(cid:41)(cid:35)(cid:38)(cid:44)(cid:40)(cid:1)(cid:46)(cid:37)(cid:30)(cid:46)(cid:1)
(cid:30)(cid:41)(cid:1) (cid:38)(cid:41)(cid:46)(cid:34)(cid:44)(cid:41)(cid:30)(cid:39)(cid:1) (cid:32)(cid:42)(cid:41)(cid:46)(cid:44)(cid:42)(cid:39)(cid:1) (cid:45)(cid:51)(cid:45)(cid:46)(cid:34)(cid:40)(cid:1) (cid:34)(cid:50)(cid:38)(cid:45)(cid:46)(cid:45)(cid:5)(cid:1) (cid:49)(cid:37)(cid:38)(cid:32)(cid:37)(cid:1) (cid:37)(cid:30)(cid:45)(cid:1) (cid:31)(cid:34)(cid:34)(cid:41)(cid:1) (cid:33)(cid:34)(cid:45)(cid:38)(cid:36)(cid:41)(cid:34)(cid:33)(cid:1) (cid:35)(cid:42)(cid:44)(cid:1) (cid:46)(cid:37)(cid:34)(cid:1) (cid:43)(cid:44)(cid:34)(cid:43)(cid:30)(cid:44)(cid:30)(cid:46)(cid:38)(cid:42)(cid:41)(cid:1) (cid:42)(cid:35)(cid:1) (cid:32)(cid:42)(cid:41)(cid:45)(cid:42)(cid:39)(cid:38)(cid:33)(cid:30)(cid:46)(cid:34)(cid:33)(cid:1) (cid:35)(cid:38)(cid:41)(cid:30)(cid:41)(cid:32)(cid:38)(cid:30)(cid:39)(cid:1)
(cid:45)(cid:46)(cid:30)(cid:46)(cid:34)(cid:40)(cid:34)(cid:41)(cid:46)(cid:45)(cid:1)(cid:38)(cid:41)(cid:1)(cid:30)(cid:32)(cid:32)(cid:42)(cid:44)(cid:33)(cid:30)(cid:41)(cid:32)(cid:34)(cid:1)(cid:49)(cid:38)(cid:46)(cid:37)(cid:1)(cid:46)(cid:37)(cid:34)(cid:1)(cid:38)(cid:41)(cid:45)(cid:46)(cid:44)(cid:47)(cid:32)(cid:46)(cid:38)(cid:42)(cid:41)(cid:45)(cid:1)(cid:42)(cid:35)(cid:1)(cid:46)(cid:37)(cid:34)(cid:1)(cid:16)(cid:42)(cid:30)(cid:44)(cid:33)(cid:1)(cid:42)(cid:35)(cid:1)(cid:18)(cid:38)(cid:44)(cid:34)(cid:32)(cid:46)(cid:42)(cid:44)(cid:45)(cid:7)(cid:1)
(cid:1)
(cid:28)(cid:34)(cid:1)(cid:44)(cid:34)(cid:32)(cid:42)(cid:40)(cid:40)(cid:34)(cid:41)(cid:33)(cid:1)(cid:46)(cid:37)(cid:30)(cid:46)(cid:1)(cid:46)(cid:37)(cid:34)(cid:1)(cid:32)(cid:42)(cid:41)(cid:45)(cid:42)(cid:39)(cid:38)(cid:33)(cid:30)(cid:46)(cid:34)(cid:33)(cid:1)(cid:35)(cid:38)(cid:41)(cid:30)(cid:41)(cid:32)(cid:38)(cid:30)(cid:39)(cid:1)(cid:45)(cid:46)(cid:30)(cid:46)(cid:34)(cid:40)(cid:34)(cid:41)(cid:46)(cid:45)(cid:1)(cid:45)(cid:47)(cid:31)(cid:40)(cid:38)(cid:46)(cid:46)(cid:34)(cid:33)(cid:1)(cid:46)(cid:42)(cid:1)(cid:51)(cid:42)(cid:47)(cid:1)(cid:31)(cid:34)(cid:1)(cid:30)(cid:43)(cid:43)(cid:44)(cid:42)(cid:48)(cid:34)(cid:33)(cid:7)(cid:1)
(cid:19)(cid:44)(cid:41)(cid:45)(cid:46)(cid:1)(cid:2)(cid:1)(cid:29)(cid:42)(cid:47)(cid:41)(cid:36)(cid:1)(cid:22)(cid:46)(cid:33)(cid:1)
(cid:1)
(cid:1)(cid:1)
(cid:23)(cid:30)(cid:44)(cid:38)(cid:34)(cid:6)(cid:22)(cid:30)(cid:47)(cid:44)(cid:34)(cid:1)(cid:18)(cid:34)(cid:39)(cid:30)(cid:44)(cid:47)(cid:34)(cid:1)
(cid:22)(cid:38)(cid:32)(cid:34)(cid:41)(cid:45)(cid:34)(cid:33)(cid:1)(cid:15)(cid:47)(cid:33)(cid:38)(cid:46)(cid:1)(cid:19)(cid:50)(cid:43)(cid:34)(cid:44)(cid:46)(cid:1)
(cid:3)(cid:15)(cid:47)(cid:33)(cid:38)(cid:46)(cid:42)(cid:44)(cid:1)(cid:38)(cid:41)(cid:1)(cid:17)(cid:37)(cid:30)(cid:44)(cid:36)(cid:34)(cid:4)(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)(cid:21)(cid:44)(cid:30)(cid:1)(cid:26)(cid:7)(cid:20)(cid:38)(cid:46)(cid:39)(cid:38)(cid:41)(cid:1)
(cid:1)(cid:17)(cid:34)(cid:44)(cid:46)(cid:38)(cid:35)(cid:38)(cid:34)(cid:33)(cid:1)(cid:25)(cid:47)(cid:31)(cid:39)(cid:38)(cid:32)(cid:1)(cid:15)(cid:32)(cid:32)(cid:42)(cid:47)(cid:41)(cid:46)(cid:30)(cid:41)(cid:46)(cid:1)(cid:3)(cid:27)(cid:7)(cid:26)(cid:7)(cid:4)(cid:1)
(cid:1)(cid:1)
(cid:1)(cid:1)
s
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(cid:1)
315
Consolidated financial statements
UBS Group AG consolidated financial
statements
Primary financial statements
Audited |
Income statement
USD million
Interest income from financial instruments measured at amortized cost and fair value through
other comprehensive income
Interest expense from financial instruments measured at amortized cost
Interest income from financial instruments measured at fair value through profit or loss
Interest expense from financial instruments measured at fair value through profit or loss
Net interest income
Other net income from fair value changes on financial instruments
Credit loss (expense) / recovery
Fee and commission income
Fee and commission expense
Net fee and commission 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 (USD)
Basic
Diluted
Note
331.12.18
31.12.17
31.12.16
For the year ended
3
3
3
3
3
3
23
4
4
4
5
6
7
15
16
8
9
9
10,100
(6,391)
6,968
(4,653)
6,025
5,984
(118)
19,598
(1,703)
17,895
427
30,213
16,132
6,797
1,228
65
24,222
5,991
1,468
4,522
7
4,516
10,422
(5,404)
4,056
(2,418)
6,656
5,065
(131)
19,362
(1,840)
17,522
511
29,622
16,199
6,949
1,053
71
24,272
5,351
4,305
1,046
77
969
10,379
(4,976)
3,579
(2,495)
6,487
5,023
(38)
18,374
(1,781)
16,593
663
28,729
15,913
7,517
997
93
24,519
4,209
777
3,432
84
3,348
1.21
1.18
0.26
0.25
0.90
0.88
316
Statement of comprehensive income
USD 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 related to net assets of foreign operations, before tax
Effective portion of changes in fair value of hedging instruments designated as net investment hedges, before tax
Foreign currency translation differences on foreign operations reclassified to the income statement
Effective portion of changes in fair value of hedging instruments designated as net investment hedges reclassified to
the income statement
Income tax relating to foreign currency translations, including the effect of net investment hedges
Subtotal foreign currency translation, net of tax
FFinancial assets measured at fair value through other comprehensive income
Net unrealized gains / (losses), 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)
Subtotal financial assets measured at fair value through other comprehensive income, net of tax
CCash flow hedges of interest rate risk
Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax
Net (gains) / losses reclassified to the income statement from equity
Income tax relating to cash flow hedges
Subtotal cash flow hedges, net of tax
TTotal other comprehensive income that may be reclassified to the income statement, 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.
For the year ended
331.12.18
31.12.17
31.12.16
4,516
969
3,348
(725)
181
3
2
(2)
1,595
(55)
32
(6)
(2)
(541)
1,564
(56)
0
0
0
12
(45)
(42)
(294)
67
(269)
(855)
(220)
276
56
517
(8)
509
565
96
15
(209)
14
(6)
(91)
45
(843)
163
(635)
838
286
11
296
(315)
(2)
(317)
(20)
(888)
356
77
(5)
2
(458)
261
5
(376)
26
26
(58)
234
(1,094)
176
(684)
(1,200)
(880)
51
(829)
(134)
4
(130)
(959)
(290)
4,225
818
1,787
(2,159)
1,189
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Consolidated financial statements
Statement of comprehensive income (continued)
Table continued from previous page.
USD million
Comprehensive income attributable to non-controlling interests
Net profit / (loss)
Other comprehensive income that will not be reclassified to the income statement
Foreign currency translation movements, before tax
Income tax relating to foreign currency translation movements
Subtotal foreign currency translation, net of tax
Total other comprehensive income that will not be reclassified to the income statement, net of tax
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
Net profit / (loss)
Other comprehensive income
of which: other comprehensive income that may be reclassified to the income statement
of which: other comprehensive income that will not be reclassified to the income statement
Total comprehensive income
For the year ended
31.12.18
31.12.17
31.12.16
7
(1)
0
(1)
(1)
5
4,522
(292)
(855)
563
4,231
77
84
250
0
250
250
326
1,046
1,068
838
229
2,113
(22)
0
(22)
(22)
62
3,432
(2,181)
(1,200)
(981)
1,251
318
Balance sheet
USD million
Assets
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
TTotal financial assets measured at amortized cost
Financial assets at fair value held for trading
of which: assets pledged as collateral that may be sold or repledged by counterparties
Derivative financial instruments
Brokerage receivables
Financial assets at fair value not held for trading
TTotal financial assets measured at fair value through profit or loss
FFinancial assets measured at fair value through other comprehensive income
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
TTotal assets
Liabilities
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
TTotal financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
Derivative financial instruments
Brokerage payables designated at fair value
Debt issued designated at fair value
Other financial liabilities designated at fair value
TTotal financial liabilities measured at fair value through profit or loss
Provisions
Other non-financial 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
331.12.18
31.12.17
1.1.17
10
10, 25
10, 25
10
10, 17a
12, 24
11, 24, 25
24
13, 24
14, 24
31b
15
16
8
17b
18
25
25
18
20
22a
12, 24
11, 24, 25
24
19, 24
22b, 24
21a
22c
108,370
16,868
95,349
23,602
320,352
22,563
587,104
104,370
32,121
126,210
16,840
82,690
330,110
6,667
1,099
9,348
6,647
10,105
7,410
958,489
10,962
10,296
28,906
419,838
132,271
6,885
609,158
28,943
125,723
38,420
57,031
33,594
283,711
3,494
9,022
905,386
338
20,843
(2,631)
30,448
3,930
52,928
176
53,103
958,489
90,045
14,094
91,951
24,040
326,746
37,815
584,691
129,407
36,277
121,285
60,457
311,148
8,889
1,045
9,057
6,563
10,056
7,830
939,279
7,728
17,485
31,029
419,577
143,160
37,276
656,255
31,251
119,137
50,782
16,643
217,813
3,214
9,443
886,725
338
23,598
(2,210)
25,932
4,838
52,495
59
52,554
939,279
105,883
12,926
79,936
26,198
300,010
27,115
552,068
90,416
29,731
155,642
64,210
310,269
15,402
947
8,186
6,442
13,158
12,434
918,906
10,459
9,266
34,852
416,267
101,837
37,729
610,410
22,425
151,121
49,057
14,122
236,725
4,101
14,083
865,320
338
25,958
(2,362)
25,029
3,953
52,916
670
53,586
918,906
319
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Consolidated financial statements
Statement of changes in equity
USD million
BBalance as of 1 January 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
Preferred notes
Translation effects recognized directly in retained earnings
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
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
Preferred notes
Translation effects recognized directly in retained earnings
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
capital
338
Share
premium Treasury shares
(1,806)
28,966
Retained
earnings
22,672
(1,444)3
840
493
(716)
(2)
5
872
29
(3,241)2
45
13
(45)
2,389
3,348
(829)
(130)
338
25,958
(2,362)
25,029
(908)3
994
663
(879)
1
19
735
21
(2,259)2
1
(46)
949
969
296
(317)
BBalance as of 31 December 2017
338
23,598
(2,210)
25,932
320
Other comprehensive
income recognized
directly in equity,
net of tax1
5,166
of which:
foreign currency
translation
3,360
of which:
financial assets at
fair value through
other comprehensive
income
171
of which:
cash flow
hedges
1,635
Total equity
attributable to
shareholders
55,336
0
(1,444)
Non-controlling
interests
1,992
Total equity
57,328
0
(1,444)
(13)
(1,200)
(1,200)
(17)
(58)
(58)
4
(684)
(684)
(458)
(458)
3,953
2,901
96
955
46
838
838
1,564
1,564
7
(91)
(91)
39
(635)
(635)
124
47
5
872
29
(3,241)
0
0
0
1,189
3,348
(1,200)
(829)
(130)
0
52,916
0
(908)
115
67
19
735
21
(2,259)
0
0
1
1,787
969
838
296
(317)
0
4,838
4,466
13
360
52,495
(85)
(1,299)
0
62
84
(22)
670
(77)
(878)
17
326
77
250
59
124
47
5
872
29
(3,326)
(1,299)
0
0
1,251
3,432
(1,200)
(829)
(130)
(22)
53,586
0
(908)
115
67
19
735
21
(2,337)
(878)
0
18
2,113
1,046
838
296
(317)
250
52,554
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Statement of changes in equity (continued)
USD million
BBalance as of 31 December 2017
Effect of adoption of IFRS 9
Effect of adoption of IFRS 15
BBalance as of 1 January 2018 after the adoption of IFRS 9 and IFRS 15
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Preferred notes
Translation effects recognized directly in retained earnings
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
capital
338
Share
premium Treasury shares
(2,210)
23,598
Retained
earnings
25,932
(518)
(25)
338
0
23,598
(2,210)
25,389
(1,608)3
1,137
503
(1,009)
22
676
4
(2,440)2
(7)
(21)
5,080
4,516
56
509
BBalance as of 31 December 2018
338
20,843
(2,631)
30,448
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 0.65 (2017: CHF 0.60 ordinary cash dividend; 2016:
CHF 0.60 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.
322
Other comprehensive
income recognized
directly in equity,
net of tax1
4,838
(74)
4,764
21
(855)
(855)
of which:
foreign currency
translation
4,466
of which:
financial assets at
fair value through
other comprehensive
income
13
4,466
(541)
(541)
(74)
(61)
3
(45)
(45)
of which:
cash flow
hedges
360
360
18
(269)
(269)
3,930
3,924
(103)
109
Total equity
attributable to
shareholders
52,495
Non-controlling
interests
59
59
(591)
(25)
51,879
0
(1,608)
128
50
22
676
4
Total equity
52,554
(591)
(25)
51,938
0
(1,608)
128
50
22
676
4
(2,440)
(10)
(2,450)
0
0
(7)
4,225
4,516
(855)
56
509
0
52,928
0
0
115
4,231
4,522
(855)
56
509
(1)
53,103
122
5
7
(1)
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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
22018
2017
3,853,096,603
3,850,766,389
2,538,146
2,330,214
3,855,634,749
3,853,096,603
132,301,550
103,979,927
(69,813,675)
166,467,802
138,441,772
54,828,640
(60,968,862)
132,301,550
Conditional share capital
Share repurchase program
As of 31 December 2018, 125,126,476 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 2018 for conversion rights and warrants granted
in connection with the issuance of bonds or similar financial
instruments.
As announced in January 2018, UBS has an active share
repurchase program to buy back up to CHF 2 billion of its own
shares over the three-year period starting from March 2018.
Under this program, UBS purchased 48 million shares totaling
USD 762 million in 2018.
324
Statement of cash flows1
USD 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:
Loans and advances to banks / amounts due to banks
Securities financing transactions
Cash collateral on derivative instruments
Loans and advances to customers
Customer deposits
Financial assets and liabilities at FV held for trading and derivative financial instruments
Brokerage receivables and payables
Financial assets at fair value not held for trading, other financial assets and liabilities
Provisions, other non-financial assets and 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 assets2
Purchase of property, equipment and software
Disposal of property, equipment and software
Purchase of financial assets measured at fair value through other comprehensive income
Disposal and redemption of financial assets measured at fair value through other comprehensive income
Net (purchase) / redemption of debt securities measured at amortized cost
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
331.12.18
31.12.17
31.12.16
4,522
1,046
3,432
1,228
1,053
65
118
(528)
425
(46)
(4,828)
(1,179)
3,504
(11,230)
(1,447)
(5,213)
9,138
11,107
11,432
11,115
1,682
(951)
28,913
(287)
137
(1,688)
114
(1,999)
1,361
(3,770)
(6,132)
71
131
(69)
3,414
(198)
2,109
(855)
(3,234)
(111)
(2,454)
(14,471)
(12,962)
(23,544)
(1,978)
996
(1,044)
(52,099)
(106)
339
(1,627)
47
(8,626)
15,250
(91)
5,186
997
93
38
(109)
(43)
(1,223)
9,967
(296)
(1,286)
945
(4,182)
3,662
33,493
8,525
(77,228)
5,570
(645)
(18,292)
(27)
94
(1,800)
182
(7,022)
54,433
(9,224)
36,637
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Consolidated financial statements
Statement of cash flows (continued)1
Table continued from previous page.
USD 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 debt issued designated at fair value
Repayment of long-term debt, including debt issued 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 year3
of which: cash and balances at central banks
of which: loans and advances to banks
of which: money market paper 4
Additional information
Net cash flow from / (used in) operating activities includes:
Interest received in cash
Interest paid in cash
For the year ended
331.12.18
31.12.17
31.12.16
(12,245)
(1,431)
(2,440)
60,682
(44,344)
(31)
190
104,834
22,971
(1,726)
126,079
108,268
15,678
2,133
24,500
(730)
(2,259)
51,450
(45,187)
(787)
26,988
119,014
(19,925)
5,745
104,834
89,968
12,773
2,093
5,474
(1,259)
(3,241)
33,703
(33,902)
(1,387)
(612)
102,879
17,733
(1,598)
119,014
105,832
11,749
1,433
7,705
4,553
7,735
3,917
8,002
3,565
Dividends on equity investments, investment funds and associates received in cash5
11 Upon adoption of IFRS 9 on 1 January 2018, cash flows from certain financial assets previously classified as available-for-sale assets have been reclassified from investing to operating activities as the assets are
accounted for at fair value through profit or loss effective 1 January 2018. Refer to Note 1c for more information. 2 Includes dividends received from associates. 3 USD 5,245 million, USD 2,497 million and USD
2,615 million of cash and cash equivalents (mainly reflected in Loans and advances to banks) were restricted as of 31 December 2018, 31 December 2017 and 31 December 2016, respectively. Refer to Note 26 for
more information. 4 Money market paper is included in the balance sheet under Financial assets at fair value held for trading (31 December 2018: USD 366 million; 31 December 2017: USD 135 million;
31 December 2016: USD 74 million), Financial assets measured at fair value through other comprehensive income (31 December 2018: USD 8 million; 31 December 2017: USD 17 million; 31 December 2016:
USD 416 million), Financial assets at fair value not held for trading and Other financial assets measured at amortized cost (31 December 2018: USD 1,760 million; 31 December 2017: USD 1,941 million;
31 December 2016: USD 942 million). 5 Includes dividends received from associates (2018: USD 42 million; 2017: USD 53 million; 2016: USD 50 million) reported within Cash flow from / (used in) investing
activities.
2,322
1,828
1,618
Changes in liabilities arising from financing activities
USD 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
Cash flows
Non-cash changes
of which: foreign currency translation
of which: fair value changes
of which: other
Balance as of 31 December 2018
Debt issued
measured at
amortized
cost
101,837
of which:
short-term
25,720
of which:
long-term
76,117
Debt issued
designated at fair
value
49,057
Over-the-
counter (OTC)
debt
instruments2
4,581
36,811
24,500
12,311
4,512
4,925
0
(413)
2,050
2,050
2,462
2,875
0
(413) 1
143,160
52,270
90,890
(7,402)
(3,488)
(3,155)
0
(332)
(12,245)
4,843
(1,000)
(1,000)
(2,487)
(2,155)
0
0
(332) 1
(5,625)
7,350
3,085
4,265
0
50,782
13,332
(7,083)
309
(7,392)
0
Total
155,476
30,765
12,130
8,183
4,360
(413)
(422)
268
173
95
0
4,428
198,371
(1,838)
4,092
(140)
(10,711)
(59)
(82)
0
(2,905)
(7,475)
(332)
1 Includes the effect of fair value hedges on long-term debt issued. Refer to Note 1a item j and Note 20 for more information. 2 Included in balance sheet line Other financial liabilities designated at fair value.
326
132,271
39,025
93,246
57,031
2,450
191,752
Notes to the UBS Group AG consolidated financial statements
Note 1 Summary of significant accounting policies
The following table provides an overview of information included in this Note.
328
328
328
328
329
330
330
330
331
337
337
338
338
339
345
346
346
347
348
348
348
348
349
a) Significant accounting policies
Basis of accounting
1) Consolidation
a. Consolidation principles
b. Structured entities
2) Segment reporting
3) Financial instruments
a. Recognition
b. Classification, measurement and presentation
c.
d. Derecognition
e. Securities borrowing / lending and repurchase /
Interest income and expense
reverse repurchase transactions
Fair value of financial instruments
f.
g. Allowances and provisions for expected
credit losses
h. Restructured and modified financial assets
i. Netting
j. Hedge accounting
k. Embedded derivatives
l.
Financial liabilities
m. Own credit
n. Loan commitments
o. Financial guarantee contracts
p. Other net income from fair value changes on
financial instruments
349
351
351
352
352
353
354
354
355
356
357
Income taxes
Investments in associates
4) Fee and commission income and expenses
5) Cash and cash equivalents
6) Share-based and other deferred compensation plans
7) Pension and other post-employment benefit plans
8)
9)
10) Property, equipment and software
11) Goodwill and intangible assets
12) Provisions and contingent liabilities
13) Foreign currency translation
14) Equity, treasury shares and contracts
on UBS Group AG shares
357
15) Leasing
358
b) Changes in accounting policies, comparability
and other adjustments, excluding the effects of
adoption of IFRS 9, Financial Instruments
363
c) Changes in accounting policies and
comparability and transition effects from the
adoption of IFRS 9, Financial Instruments
375
d) International Financial Reporting Standards and
Interpretations to be adopted in 2019 and later
and other changes
Accounting policies applicable prior to 1 January 2018
The accounting policies described in Note 1a have been applied consistently in all years presented unless otherwise stated in Note 1b. In addition,
effective from 1 January 2018, the Group applies IFRS 9, Financial Instruments, which substantially changes the accounting for financial assets, and
IFRS 15, Revenue from Contracts with Customers, which affects the Group’s revenue recognition, measurement and presentation.
Within Note 1a, policies for prior periods that differ from those applied to the financial year ended 31 December 2018 are identified with a Comparative
policy | signpost. A triangle symbol – (cid:3) – indicates the end of these comparative policy sections.
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Note 1 Summary of significant accounting policies (continued)
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 14 March 2019, 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 US dollars (USD), which is also the functional
currency of UBS Group AG, UBS AG’s Head Office, UBS AG’s
London Branch and UBS’s US-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. In addition, effective from 1 January 2018,
the Group applies
Instruments, which
IFRS 9, Financial
substantially changes the accounting for financial assets, and
IFRS 15, Revenue from Contracts with Customers, which affects
and
the Group’s
presentation. Within this note, policies for prior periods that
differ
financial year ended
to
31 December 2018 are identified as “Comparative policy.”
recognition, measurement
those applied
revenue
from
the
328
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, updating them as necessary. Changes in those
estimates and assumptions may have a significant effect on the Financial
Statements. Further, actual results may differ significantly from UBS’s
estimates, which could result in significant losses to the Group, beyond
what was 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 24)
allowances and provisions for expected credit losses (refer to item 3g
in this Note and to Note 23)
assessment of the business model and certain contractual features
when classifying financial instruments (refer to item 3b in this Note)
– pension and other post-employment benefit plans (refer to item 7 in
–
–
this Note and to Note 29)
income taxes (refer to item 8 in this Note and to Note 8)
–
– goodwill (refer to item 11 in this Note and to Note 16)
– provisions and contingent liabilities (refer to item 12 in this Note and
–
to Note 21)
consolidation of structured entities (refer to item 1 in this Note and to
Note 31)
– determination of the functional currency and assessing the earliest
date from which it is practical to perform a restatement following a
change in presentational currency (refer to item 13 in this Note and to
Note 1b).
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.
Note 1 Summary of significant accounting policies (continued)
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 exposes it to 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 31 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.
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. When carrying out the
consolidation assessment, judgment is exercised considering all the
relevant facts and circumstances, including the nature and activities of the
investee, as well as the substance of voting and similar rights.
→ Refer to Note 31 for more information
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Note 1 Summary of significant accounting policies (continued)
2) Segment reporting
into
Prior to the first quarter of 2018, UBS‘s businesses were
organized globally
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 qualified as reportable segments for the
purpose of segment reporting and, together with Corporate
Center, reflected the management structure of the Group.
Corporate Center – Non-core and Legacy Portfolio was managed
and reported as a separate reportable unit 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) was 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.
Effective from the first quarter of 2018, UBS combined its
Wealth Management and Wealth Management Americas
business divisions into a single Global Wealth Management
business division. Global Wealth Management is managed on an
integrated basis, with a single set of performance targets and an
structure.
integrated operating plan and management
Consistent with this, the operating results of Global Wealth
Management are presented and assessed on an integrated basis
in internal management reports to the Group Executive Board.
Consequently, from 2018, Global Wealth Management qualifies
as an operating and reportable segment for the purposes of
segment
these Financial
Statements alongside Personal & Corporate Banking, Asset
Management, the Investment Bank and Corporate Center (with
its units Services, Group ALM and Non-core and Legacy
Portfolio). Following the change in the composition of UBS’s
operating segments and corresponding reportable segments,
previously reported segment information has been restated. This
change has no material effect on the former segments, including
recognized goodwill.
reporting and
is presented
in
→ Refer to item 11 in this Note and Note 16 for more information
UBS’s
internal
accounting
policies, which
include
management accounting policies and service level agreements,
determine the revenues and expenses directly attributable to
each reportable segment. Transactions between the reportable
segments are 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. Interest income earned from managing UBS’s
consolidated equity is allocated to the reportable segments
based on average attributed equity and currency composition.
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.
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 operating 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 12
months after the reporting date, excluding financial instruments,
deferred tax assets and post-employment benefits.
→ Refer to Notes 1b 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 instrument 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.
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Note 1 Summary of significant accounting policies (continued)
b. Classification, measurement and presentation
All financial instruments are initially measured at fair value. In
the case of financial instruments subsequently measured at
amortized cost or fair value through other comprehensive
income (FVOCI), the initial fair value is adjusted for directly
attributable transaction costs.
within the latter included in a trading portfolio. In certain cases,
it may not be possible on origination to identify whether loans
or portions of loans will be sold or sub-participated and certain
loans may be managed on a fair value basis through, for
instance, using credit derivatives. These financial assets are
mandatorily measured at FVTPL.
Policy applicable from 1 January 20181
On initial recognition, financial assets are classified as measured
at amortized cost, FVOCI, or fair value through profit or loss
(FVTPL).
A debt instrument is measured at amortized cost if it meets
the following conditions:
– it is held within a business model that has an objective to
hold financial assets to collect contractual cash flows; and
– the contractual terms of the financial asset result in cash
flows that are solely payments of principal and interest (SPPI)
on the principal amount outstanding.
A debt instrument is measured at FVOCI if it meets both of
the following conditions:
– it is held within a business model whose objective is achieved
by both collecting contractual cash flows and selling financial
assets; and
– the contractual terms of the financial asset result in cash
flows that are SPPI on the principal amount outstanding.
All other financial assets are measured at FVTPL and consist of
held for trading assets, assets mandatorily measured on a fair
value basis and derivatives, except to the extent that they are
designated in a hedging relationship, in which case the IAS 39
hedge accounting requirements continue to apply.
Business model assessment
UBS determines the nature of the business model, for example if
the objective is to hold the financial asset and collect the
contractual cash flows, by considering the way in which the
financial assets are managed to achieve a particular business
objective as determined by management.
Financial assets that are held for trading or managed on a fair
value basis are measured at FVTPL insofar as the associated
business model is neither to hold the financial assets to collect
contractual cash flows nor to hold to collect contractual cash
flows and sell.
The Group originates loans to hold to maturity and to sell or
sub-participate to other parties, resulting in a transfer of
substantially all the risks and rewards, and derecognition of the
loan or portions of it. The Group considers the activities of
lending to hold and lending to sell or sub-participate as two
separate business models, with financial assets within the former
considered to be within a business model that has an objective
to hold the assets to collect contractual cash flows, and those
Critical accounting estimates and judgments
UBS exercises judgment in determining the appropriate level at which to
assess its business models. In general, the assessment is performed at the
product level, e.g., retail and commercial mortgages. In other cases, the
assessment is carried out at a more granular level, e.g., loan portfolios by
region, and, if required, further disaggregation is performed by business
strategy. A detailed assessment is carried out considering how the
financial assets are evaluated and reported to UBS’s key management, the
risks that affect the performance of the business and the way that
management is compensated. In addition, UBS exercises judgment in
determining the effect of sales of financial instruments on the business
model assessment. In particular, an assessment is made on whether and
the extent to which sales are consistent with the objective of the business
model.
Contractual cash flow characteristics
In assessing whether the contractual cash flows are SPPI, the
Group considers whether the contractual terms of the financial
asset contain a term that could change the timing or amount of
contractual cash flows arising over the life of the instrument,
which could affect whether the instrument is considered to meet
the SPPI criterion.
For example, the Group holds portfolios of private mortgage
contracts and corporate loans in Personal & Corporate Banking
that commonly contain clauses that provide for two-way
compensation
if prepayment occurs. The amount of
compensation paid by or to UBS reflects the effect of changes in
market interest rates. The Group has determined that the
inclusion of the change in market interest rates in the
compensation amount is reasonable for the early termination of
the contract, and therefore results in contractual cash flows that
are SPPI.
Critical accounting estimates and judgments
UBS applies judgment when considering whether certain contractual
features, such as interest rate reset frequency or non-recourse features,
significantly affect future cash flows and whether compensation paid or
received on early termination of lending arrangements results in cash
flows that are not SPPI. A thorough analysis of all relevant facts and
circumstances is assessed before concluding whether contractual cash
instrument are consistent with payments
flows of the financial
representing principal and interest.
After initial recognition, UBS classifies, measures and presents
its financial assets and liabilities in accordance with IFRS 9, as
described in the table on the following pages.
1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. For the details of transition effects refer to Note 1c.
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Note 1 Summary of significant accounting policies (continued)
Classification, measurement and presentation of financial instruments from 1 January 2018
Financial assets
classification
Measured at
amortized
cost
Significant items included
Measurement and presentation
A debt financial asset is measured at amortized cost if:
– it is held in a business model that has an objective to hold assets
to collect contractual cash flows; and
– the contractual terms give rise to cash flows that are SPPI.
This classification includes:
– cash and balances at central banks
– loans and advances to banks
– cash collateral receivables on securities borrowed
– receivables on reverse repurchase agreements
– cash collateral receivables on derivative instruments
– residential and commercial mortgages
– corporate loans
– secured loans, including Lombard loans, and unsecured loans
– loans to financial advisors
– debt securities held as high-quality liquid assets (HQLA)
– fee and lease receivables.
Measured at amortized cost using the effective interest rate (EIR) method
less allowances for expected credit losses (ECL) (refer to items 3c and 3g in
this Note for more information).
The following items are recognized in the income statement:
– interest income, which is accounted for in accordance with item 3c in
this Note
– ECL and reversals
– foreign exchange translation gains and losses.
Upfront fees and direct costs relating to loan origination, refinancing or
restructuring as well as to loan commitments – when it is probable that
UBS will enter into a specific lending relationship – are deferred and
amortized over the life of the loan using the EIR method.
When the financial asset at amortized cost is derecognized, the gain or
loss is recognized in the income statement.
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 in substance
net settled on a daily basis (refer to items 3d and 3i in this Note) are
presented within Cash collateral receivables on derivative instruments.
Measured at
FVOCI
Debt
instruments
measured at
FVOCI
A debt financial asset is measured at FVOCI if:
– it is held in a business model whose objective is achieved by both
holding assets to collect contractual cash flows and selling the
assets; and
– the contractual terms give rise to cash flows that are SPPI.
Measured at fair value with unrealized gains and losses reported in Other
comprehensive income, net of applicable income taxes, until such
investments are derecognized (when sold, collected or otherwise
disposed). Upon derecognition, any accumulated balances in Other
comprehensive income are reclassified to the income statement and
reported within Other income.
This classification primarily includes debt securities and certain asset-
backed securities held as HQLA for which the contractual cash flows
meet the SPPI criterion.
The following items are recognized in the income statement:
– interest income, which is accounted for in accordance with item 3c in
this Note
– ECL and reversals
– foreign exchange translation gains and losses.
The amounts recognized in the income statement are determined on the
same basis as for financial assets measured at amortized cost.
332
Note 1 Summary of significant accounting policies (continued)
Classification, measurement and presentation of financial instruments from 1 January 2018 (continued)
Financial assets
classification
Significant items included
Measurement and presentation
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 Other net income from fair
value changes on financial instruments, except interest and dividend
income on instruments other than derivatives (refer to item 3c in this Note
for more information), interest on derivatives designated as hedging
instruments in certain types of hedge accounting relationships and forward
points on certain short- and long-duration foreign exchange contracts,
which are reported in Net interest income.
Derivative assets (including derivatives that are designated and effective
hedging instruments) are generally presented as Derivative financial
instruments, except those exchange-traded and OTC-cleared derivatives
that are considered to be settled on a daily basis or in substance net
settled on a daily basis, which are presented within Cash collateral
receivables on derivative instruments.
The presentation of fair value changes on derivatives that are designated
and effective as hedging instruments depends on the type of hedge
relationship (refer to item 3j in this Note for more information).
Financial assets held for trading (other than derivatives) are presented as
Financial assets at fair value held for trading.
Other financial assets mandatorily measured at fair value through profit or
loss are presented as Financial assets at fair value not held for trading,
except for brokerage receivables, which are presented as a separate line
item on the Group’s balance sheet.
Measured at
FVTPL
Held for
trading
Financial assets held for trading include:
– all derivatives with a positive replacement value, except those that
are designated and effective hedging instruments; and
– other financial assets acquired principally for the purpose of selling
or repurchasing in the near term, or that are 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) and equity instruments.
Mandatorily
measured at
FVTPL – Other
A financial asset is mandatorily measured at FVTPL if:
– it is not held in a business model whose objective is to hold assets
to collect contractual cash flows or to hold them to collect
contractual cash flows and sell; and / or
– the contractual terms give rise to cash flows that are not SPPI; and
/ or
– it is not held for trading.
The following financial assets are mandatorily measured at FVTPL:
– certain structured loans, certain commercial loans, receivables
under reverse repurchase and cash collateral on securities
borrowing agreements that are managed on a fair value basis;
– loans managed on a fair value basis and hedged with credit
derivatives;
– certain debt securities held as HQLA and managed on a fair value
basis;
– certain investment fund holdings and assets held to hedge delivery
obligations related to cash-settled employee compensation plans.
These assets represent holdings in investment funds, whereby the
contractual cash flows do not meet the SPPI criterion because the
entry and exit price is based on the fair value of the fund’s assets;
– brokerage receivables, for which contractual cash flows do not
meet the SPPI criterion because the aggregate balance is
accounted for as a single unit of account, with interest being
calculated on the individual components;
– auction rate securities, for which contractual cash flows do not
meet the SPPI criterion because interest may be reset at rates that
contain leverage;
– equity instruments; and
– assets held under unit-linked investment contracts.
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Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
Classification, measurement and presentation of financial instruments from 1 January 2018 (continued)
Significant items included
Measurement and presentation
Financial liabilities
classification
Measured at
amortized
cost
This classification includes:
– demand and time deposits;
– retail savings / deposits;
– amounts payable under repurchase agreements;
– cash collateral on securities lent;
– non-structured fixed-rate bonds;
– subordinated debt;
– certificates of deposit and covered bonds; and
– cash collateral payables on derivative instruments.
Measured at fair
value through
profit or loss
Held for
trading
Financial liabilities held for trading include:
– all derivatives with a negative replacement value (including certain
loan commitments), except those that are designated and effective
hedging instruments; and
– obligations to deliver financial instruments, such as debt and
equity instruments, that UBS has sold to third parties, but does not
own (short positions).
Designated at
FVTPL
UBS designates at FVTPL 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
– certain payables under repurchase agreements and cash collateral
on securities lending agreements that are managed in conjunction
with associated reverse repurchase agreements and cash collateral
on securities borrowed (from 1 January 2018)
– amounts due under unit-linked investment contracts whose cash
flows are linked to financial assets measured at FVTPL and
eliminate an accounting mismatch (from 1 January 2018)
– brokerage payables, which arise in conjunction with brokerage
receivables and are measured at FVTPL to achieve measurement
consistency (from 1 January 2018).
334
Measured at amortized cost using the EIR method.
Upfront fees and direct costs relating to the issuance or origination of the
liability are deferred and amortized over the life of the liability using the
EIR method.
When the financial liability at amortized cost is derecognized, the gain or
loss is recognized in the income statement.
Amortized cost liabilities are presented on the balance sheet primarily as
Amounts due to banks, Customer deposits, Payables from securities
financing transactions and Debt issued measured at amortized cost.
Amounts arising from ETD and certain OTC derivatives cleared through
central clearing counterparties that are either considered to be daily settled
or in substance net settled on a daily basis (refer to items 3d and 3i in this
Note for more information) are presented within Cash collateral payables
on derivative instruments.
Measurement of financial liabilities classified at FVTPL follows the same
principles as for financial assets classified at FVTPL, except that the
amount of change in the fair value of the financial liability that is
attributable to changes in UBS’s own credit risk is presented in OCI.
Financial liabilities measured at FVTPL are presented as Financial liabilities
at fair value held for trading and Other financial liabilities designated at
fair value, respectively, except for brokerage payables and debt issued,
which are presented separately on the Group’s balance sheet.
Derivative liabilities (including derivatives that are designated and effective
hedging instruments) are generally presented as Derivative financial
instruments, except those exchange-traded and OTC-cleared derivatives
that are considered to be settled on a daily basis or in substance net
settled on a daily basis, which are presented within Cash collateral
payables on derivative instruments.
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 as 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 3j in this Note
for more information).
Note 1 Summary of significant accounting policies (continued)
Comparative policy | Policy applicable prior to 1 January 2018
Prior to 1 January 2018, on initial recognition, UBS classified,
measured and presented its financial assets and liabilities in
accordance with IAS 39, Financial Instruments: Recognition and
Measurement. Classification, measurement and presentation
liabilities have been
requirements
in respect of financial
substantially retained by IFRS 9 and are detailed in the table
“Classification, measurement and presentation of financial
instruments from 1 January 2018.” The following table sets out
details of classification, measurement and presentation of
financial assets prior to 1 January 2018.
Classification, measurement and presentation of financial assets prior to 1 January 2018
Significant items included
Measurement and presentation1
Financial assets
classification
Held for trading
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 Other net income from fair
value changes on financial instruments, 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 Derivative financial
instruments.
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 3j in this Note for more information).
Financial assets held for trading (other than derivatives) are presented as
Financial assets at fair value held for trading.
Financial assets designated at fair value through profit or loss are
presented as Financial assets at fair value not held for trading
Financial assets held for trading include:
– all derivatives with a positive replacement value, except those that are
designated and effective hedging instruments; and
– 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; and
– 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 as a result of the liability being measured on a fair value basis.
1 Presentation categories in this table reflect retrospective amendments to UBS Group balance sheet presentation carried out upon transition to IFRS 9 to facilitate comparability. For a detailed description of line items
presented in UBS’s financial statements on or before the year ended 31 December 2017, refer to item 4 within Note 1c.
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Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
Classification, measurement and presentation of financial assets prior to 1 January 2018 (continued)
Financial assets
classification
Loans and receivables
(amortized cost)
Significant items included
Measurement and presentation
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.
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, Loans and advances to banks, Loans and
advances to customers, Receivables from securities financing transactions
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 3i in this Note) are presented within Cash
collateral receivables on derivative instruments.
Available for sale
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, 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 3g 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.
Measured at amortized cost using the effective interest rate method less
allowances for credit losses (refer to items 3c and 3g in this Note).
This classification mainly includes debt securities held as HQLA and
managed by Corporate Center – Group ALM.
(cid:3)
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Note 1 Summary of significant accounting policies (continued)
c. Interest income and expense
Interest income and expense are recognized in the income
statement applying the effective interest rate (EIR) method.
When calculating the EIR for financial instruments (other than
credit-impaired financial instruments), UBS estimates future cash
flows considering all contractual terms of the instrument, but
not expected credit losses.
In determining interest income and expense, the EIR is applied
to the gross carrying amount of the financial asset (unless the
asset is credit-impaired) or the amortized cost of a financial
liability (prior to 1 January 2018: amortized cost of a financial
asset or financial liability). However, when a financial asset
becomes credit-impaired after initial recognition, interest income
is determined by applying the EIR to the amortized cost of the
instrument, which represents the gross carrying amount
adjusted for any credit loss allowance. Furthermore, for financial
assets that were credit-impaired on initial recognition, interest is
determined by applying a credit-adjusted EIR to the amortized
cost of the instrument.
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 FVOCI (prior to 1 January 2018: financial asset
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.
→ Please refer to item 4 in this Note for more information
Presentation of interest in the income statement
Effective from 1 January 2018, interest income or expense on
financial instruments measured at amortized cost and financial
assets measured at FVOCI (prior to 1 January 2018: financial
assets classified as available for sale) are presented separately
within Interest income from financial instruments measured at
amortized cost and fair value through other comprehensive
income and
instruments
measured at amortized cost.
Interest expense
financial
from
UBS also presents interest income and expense on financial
instruments (excluding derivatives) measured at FVTPL including
forward points on certain short- and long-duration foreign
exchange contracts and dividends separately in Interest income
(or expense) from financial instruments measured at fair value
through profit or loss. Furthermore, interest income and expense
on derivatives designated as hedging instruments in effective
hedge relationships are presented consistently with the interest
income and expense of the respective hedged item.
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.
interest expense on financial
→ Refer to item 3j 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.
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.
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Note 1 Summary of significant accounting policies (continued)
These transactions are treated as collateralized financing
transactions where the securities transferred / received are not
derecognized or recognized on the 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 line Receivables from securities financing transactions
(prior to 1 January 2018: Reverse repurchase agreements and
Cash collateral on securities borrowed), representing UBS’s right
to receive the cash. Similarly, in repurchase and securities
lending agreements, the cash received is recognized and a
corresponding obligation, including accrued interest, is recorded
in Payables from securities financing transactions (prior to
1 January 2018: Repurchase agreements and Cash collateral on
securities lent). 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.
Repurchase and reverse repurchase transactions with the
same counterparty, maturity, currency and central securities
depository are generally presented net, subject to meeting the
netting requirements described in item 3i of this Note.
→ Refer to Notes 26 and 25 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.
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
in
settlement of a derivative contract, which
derecognition of
the associated positive and negative
replacement values.
results
→ Refer to Note 25 for more information
Financial liabilities
UBS derecognizes a financial liability from its balance sheet
when it is extinguished; i.e., when the obligation specified in the
contract is discharged, canceled or expires. 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
repurchase transactions are generally entered
into on a
collateralized basis. In such transactions, UBS typically borrows
or lends equity and debt securities in exchange for securities or
cash collateral.
lending and repurchase
/
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Note 1 Summary of significant accounting policies (continued)
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,
UBS prioritizes 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 governance framework over fair value measurement
is
described in Note 24b.
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 24d. The Group provides a sensitivity
analysis of the estimated effects arising from changing significant
unobservable inputs in Level 3 financial instruments to reasonably possible
alternative assumptions within Note 24g.
→ Refer to Note 24 for more information
g. Allowances and provisions for expected credit losses
lease receivables, financial guarantees and
Policy applicable from 1 January 20181
Expected credit losses (ECL) are recognized for financial assets
measured at amortized cost, financial assets measured at FVOCI,
fee and
loan
commitments. ECL are also recognized on the undrawn portion
of revolving revocable credit lines, which include UBS’s credit
card limits and master credit facilities, which are customary in
the Swiss market for corporate and commercial clients. UBS
refers to both as “other credit lines,” with clients allowed to
draw down on-demand balances (with the Swiss master credit
facilities also allowing for term products) and which can be
terminated by UBS at any time. Though these other credit lines
are revocable, UBS is exposed to credit risk because the client
has the ability to draw down funds before UBS can take credit
risk mitigation actions.
Recognition of expected credit losses
ECL represent the difference between contractual cash flows
and those UBS expects to receive, discounted at the EIR. For loan
commitments and other credit facilities in scope of ECL,
expected cash shortfalls are determined by considering expected
future drawdowns.
ECL are recognized on the following basis:
from
– Maximum 12-month ECL are
recognized
initial
recognition, reflecting the portion of lifetime cash shortfalls
that would result if a default occurs in the 12 months after
the reporting date, weighted by the risk of a default
occurring. Instruments in this category are referred to as
instruments in stage 1. For instruments with a remaining
maturity of less than 12 months, ECL are determined for this
shorter period.
– Lifetime ECL are recognized if a significant increase in credit
risk (SICR) is detected subsequent to the instrument’s initial
recognition, reflecting lifetime cash shortfalls that would
result from all possible default events over the expected life of
a financial instrument, weighted by the risk of a default
occurring. Instruments in this category are referred to as
instruments in stage 2. Where an SICR is no longer observed,
the instrument will move back to stage 1.
– Lifetime ECL 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 is based on the occurrence of one or more loss
events, with lifetime ECL generally derived by estimating
expected cash flows based on a chosen recovery strategy.
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.
– Changes in lifetime ECL since initial recognition are also
recognized for assets that are purchased or originated credit-
impaired (POCI). POCI financial assets are initially recognized
at fair value, with interest income subsequently being
recognized based on a credit-adjusted EIR. POCI financial
instruments
recognized
following a substantial restructuring and remain a separate
category until derecognition.
that are newly
include
those
UBS does not apply the low-credit-risk practical expedient
that allows a lifetime ECL for lease or fee receivables to be
recognized irrespective of whether a significant increase in credit
risk has occurred. Instead, UBS has incorporated lease and fee
receivables into the standard ECL calculation.
1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. For the details of transition effects refer to Note 1c.
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Note 1 Summary of significant accounting policies (continued)
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 generally credited to
Credit loss (expense) / recovery. Write-offs and partial write-offs
represent derecognition / partial derecognition events.
ECL are recognized in profit or loss with a corresponding ECL
allowance reported as a decrease in the carrying value of
financial assets measured at amortized cost on the balance
sheet. For financial assets measured at fair value through OCI,
the carrying value is not reduced, but an accumulated amount is
recognized in OCI. For off-balance sheet financial instruments
and other credit lines, provisions for ECL are reported in
Provisions. ECL are recognized within the income statement in
Credit loss (expense) / recovery.
the
reflect
proceedings
inherent credit
Default and credit impairment
UBS applies a single definition of default for classifying assets
and determining the probability of default of its obligors for risk
modeling purposes. The definition of default is based on
quantitative and qualitative criteria. A counterparty is classified
as defaulted at the latest when material payments of interest,
principal or fees are overdue for more than 90 days, or more
than 180 days for certain exposures in relation to loans to
private and commercial clients in Personal & Corporate Banking,
and to private clients of Global Wealth Management Region
Switzerland. UBS does not consider the general 90-day
presumption for default recognition appropriate for these latter
portfolios based on an analysis of the cure rates, which
demonstrated that strict application of the 90-day criterion
would not accurately
risk.
Counterparties are also classified as defaulted when bankruptcy,
have
insolvency
commenced; obligations have been restructured on preferential
terms (forbearance); or there is other evidence that payment
obligations will not be fully met without recourse to collateral.
The latter may be the case even if, to date, all contractual
payments have been made when due. If a counterparty is
defaulted, generally all claims against the counterparty are
treated as defaulted.
instrument
the
counterparty is defaulted, and / or the instrument is identified as
POCI. An instrument is POCI if it has been purchased with a
material discount to its carrying amount following a risk event of
the issuer or originated with a defaulted counterparty. Once a
financial asset is classified as defaulted / credit-impaired (except
when it is POCI), it is reported as a stage 3 instrument and
remains as such unless all past due amounts have been rectified,
additional payments have been made on time, the position is
not classified as credit-restructured, and there is general
evidence of credit recovery. A three-month probation period is
applied before a transfer back to stages 1 or 2 can be triggered.
is classified as credit-impaired
liquidation
enforced
An
or
if
However, most instruments remain in stage 3 for a longer
period.
Measurement of expected credit losses
IFRS 9 ECL reflect an unbiased, probability-weighted estimate
based on either loss expectations resulting from default events
over a maximum 12-month period from the reporting date or
over the remaining life of a financial instrument. The method
used to calculate individual probability-weighted unbiased ECL is
based on a combination of the following principal factors:
probability of default (PD), loss given default (LGD) and exposure
at default (EAD). Parameters are generally determined on an
individual financial asset level. Based on the materiality of the
portfolio, for credit card exposures and personal account
overdrafts in Switzerland, and certain loans to financial advisors
of Global Wealth Management Region Americas, a portfolio
approach is applied that derives an average PD and LGD for the
entire portfolio. PDs and LGDs used in the ECL calculation are
point in time (PIT)-based for key portfolios and consider both
current conditions and expected cyclical changes. For each
instrument or group of instruments, parameter time series are
generated consisting of the instruments’ PD, LGD and EAD
profiles considering the respective period of exposure to credit
risk. For material portfolios, PD and LGD are determined for four
different scenarios, whereas EAD projections are treated as
scenario independent.
For the purpose of determining the ECL-relevant parameters,
UBS leverages its Pillar 1 internal ratings-based (IRB) models that
are also used in determining expected loss (EL) and risk-
weighted assets under the Basel III framework and Pillar 2 stress
loss models. Adjustments have been made to these models and
new IFRS 9-related models have been developed that consider
the complexity, structure and risk profile of relevant portfolios
and take account of the fact that PDs and LGDs used in the ECL
calculation are PIT-based, as opposed to the corresponding
Basel III through-the-cycle (TTC) parameters. All models that are
relevant for measuring expected credit losses have been subject
to the existing model validation and oversight processes with the
Group Model Governance Board as the highest approval
authority. The assignment of internal counterparty rating grades
and the determination of default probabilities for the purposes
of Basel III are not affected by the IFRS 9 ECL calculation.
Probability of default (PD): The PD represents the likelihood of
a default over a specified time period. A 12-month PD
represents the likelihood of default determined for the next 12
months and a lifetime PD represents the probability of default
over the remaining lifetime of the instrument. The lifetime PD
calculation is based on a series of 12-month PIT PDs that are
derived from TTC PDs and scenario forecasts. This modeling is
region-, industry- and client segment-specific and considers both
information. To
scenario-systematic and client-idiosyncratic
derive the cumulative lifetime PD per scenario, the series of 12-
month PIT PDs are transformed into marginal PIT PDs, taking any
assumed default events from previous periods into account.
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Note 1 Summary of significant accounting policies (continued)
Loss given default (LGD): The LGD represents an estimate of
the loss at the time of a potential default occurring during the
life of a financial instrument. The determination of the LGD
takes into account expected future cash flows from collateral
and other credit enhancements, or expected payouts from
bankruptcy proceedings for unsecured claims and, where
applicable, time to realization of collateral and the seniority of
claims. The LGD is commonly expressed as a percentage of the
EAD.
repayments,
Exposure at default (EAD): The EAD represents an estimate of
the exposure to credit risk at the time of a potential default
occurring during the life of a financial instrument. It represents
the cash flows outstanding at the time of default, considering
expected
interest payments and accruals,
discounted at the EIR. Future drawdowns on facilities are
considered through a credit conversion factor (CCF) that is
reflective of historical drawdown and default patterns and the
characteristics of the respective portfolios. IFRS 9-specific CCFs
have been modeled to capture client segment- and product-
specific patterns after removing Basel
III standard-specific
elements, i.e., conservatism and focus on a 12-month period
prior to default.
Estimation of expected credit losses
Number of scenarios and estimation of scenario weights
The determination of the probability-weighted ECL requires
evaluating a range of diverse and relevant future economic
conditions, especially with a view to modeling the non-linear
effect of assumptions about macroeconomic factors on the
estimate.
To accommodate this requirement, UBS uses four different
economic scenarios in the ECL calculation: an upside, a baseline,
a mild downside and a severe downside scenario. Each scenario
is represented by a specific scenario narrative, which is relevant
considering the exposure of key portfolios to economic risks,
and for which a set of consistent macroeconomic variables is
determined. Those variables range from above-trend economic
growth to severe recession. The baseline scenario is aligned to
the economic and market assumptions used for UBS business
planning purposes. An econometric model is used to provide an
input into the scenario weight assessment process giving a first
indication of the probability that the GDP forecast used for each
scenario would materialize, if historically observed deviations of
GDP growth from trend growth were representative. As such
historical analyses of GDP development do not include an
assessment of the underlying economic or political causes,
management positions the model output into the context of
current conditions and future expectations and applies material
judgment in determining the final scenario weights. The
determined weights constitute the probabilities that the
respective set of macroeconomic conditions will occur and not
that
related
macroeconomic variables will materialize.
the chosen particular narratives with
the
Macroeconomic and other factors
The range of macroeconomic, market and other factors that is
modeled as part of the scenario determination is wide, and
historical information is used to support the identification of the
key factors. As the forecast horizon increases, the availability of
information decreases and
increases. For cycle-
sensitive PD and LGD determination purposes, UBS projects the
relevant economic factors for a period of three years before
reverting, over a specified period, to a cycle-neutral PD and LGD
for longer-term projections.
judgment
Factors relevant for the ECL calculation vary by type of
exposure and are determined during the credit cycle index
model development process in close alignment with expert
judgment. Certain variables may only be relevant for specific
types of exposures, such as house price indices for mortgage
loans, while other variables have key relevance in the ECL
calculation for all exposures. Regional and client segment
characteristics are generally taken into account, with specific
focus on Switzerland and the US considering UBS’s key ECL-
relevant portfolios.
For UBS, the following forward-looking macroeconomic
variables represent the most relevant factors in the ECL
calculation:
– GDP growth rates, given their significant effect on borrowers’
performance;
– house price indices, given their significant effect on mortgage
collateral valuations;
– unemployment rates, given their significant effect on private
clients’ ability to meet contractual obligations;
– interest
rates, given
their
significant effect on
the
counterparties’ abilities to service their debt;
– consumer price indices, given their overall relevance for
companies’ performance, private clients’ purchasing power
and economic stability; and
– equity indices, given that they are an important factor in our
corporate rating tools.
The forward-looking macroeconomic assumptions used in the
ECL calculation are developed by UBS economists, risk
methodology personnel and credit risk officers. Assumptions and
scenarios are validated and approved through a Scenario
Committee and an Operating Committee, which also aim to
information
ensure a consistent use of
throughout UBS, including in the business planning process. ECL
inputs are tested and reassessed for appropriateness at least
each quarter and appropriate adjustments are made when
needed.
forward-looking
Scenario generation, review process and governance
All aspects of the scenario selection, including the specific
narratives, their weight for the ECL estimation, and the key
macroeconomic and other factors, are subject to a formal
governance and approval process.
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Note 1 Summary of significant accounting policies (continued)
A team of economists, who are part of Group Risk Control,
provide the basic analysis taking into account information
obtained through established risk identification and assessment
processes, which involve a broad range of experts, in particular,
risk specialists and other in-house economists. Material risks with
a high likelihood of materializing are then factored into the
scenario
selection process. Once narratives have been
developed, key macroeconomic factors that are consistent with
the severity of the case and interdependencies are determined.
The scenarios, their weight and the key macroeconomic and
other factors are subject to a critical assessment by members of
the Scenario Committee, where senior credit officers from the
divisions and representatives from Group Risk Control are
represented. Important aspects for the review are the extent to
which the selected scenarios reflect the vulnerabilities of the
relevant portfolios; whether their transformation into PIT PD and
LGD values is in line with credit risk officers’ expectations; and
whether there may be pockets of exposures, where particular
credit risk concerns may not be capable of being addressed
systematically and require an expert-based overlay for stage
allocation and ECL allowance. This also ensures a consistent use
of forward-looking
information throughout UBS and an
alignment with the business planning process.
The Operating Committee is jointly chaired by the Group
Controller and Chief Accounting Officer, and the Risk Chief
Operating Officer and Group Chief Risk Model Officer, and is
comprised of the divisional Chief Risk Officers and divisional
Chief Financial Officers as well as senior Corporate Center Risk
and Finance
the proposals
submitted by the Scenario Committee and approve the final
selection of scenarios and factors and any expert-based overlays
as they may be required to cover temporary issues, either related
to specific risk elements in a portfolio, or due to identified
technical deficiencies pending remediation (model updates, data
quality, etc.).
representatives. They
review
The Group Model Governance Board as the highest authority
under UBS’s model governance framework ratifies the decisions
by the Operating Committee.
ECL measurement period
The period for which lifetime ECL are determined is based on
the maximum contractual period that UBS is exposed to credit
risk, taking into account contractual extension, termination and
prepayment options. For irrevocable loan commitments and
financial guarantee contracts,
the measurement period
represents the maximum contractual period for which UBS has
an obligation to extend credit.
Additionally, some financial instruments include both an on-
demand loan and a revocable undrawn commitment, where the
contractual cancelation right does not limit UBS’s exposure to
credit risk to the contractual notice period as the client has the
ability to draw down funds before UBS can take risk-mitigating
actions. In such cases, UBS is required to estimate the period
342
over which it is exposed to credit risk. This applies to UBS’s credit
card limits, which do not have a defined contractual maturity
date, are callable on demand and where the drawn and
undrawn components are managed as one unit. The exposure
arising from UBS’s credit card limits is not significant and is
managed at a portfolio level, with credit actions triggered when
balances are past due. An ECL measurement period of seven
years is applied for credit card limits, capped at 12 months for
stage 1 balances, as a proxy for the period that UBS is exposed
to credit risk.
Customary master credit agreements in the Swiss corporate
market also include on-demand loans and revocable undrawn
commitments. For smaller commercial facilities, a risk-based
monitoring (RbM) approach is in place that highlights negative
trends as risk events, at an individual facility level, based on a
combination of continuously updated risk indicators. The risk
events trigger additional credit reviews by a risk officer, allowing
for informed credit decisions to be taken. Larger corporate
facilities are not subject to RbM, but are reviewed at least
annually through a formal credit review. UBS has assessed these
credit risk management practices and considers both the RbM
approach and formal credit review as substantive credit reviews
resulting in a re-origination of the facility. Following this, a 12-
month measurement period from the reporting date is used for
both types of facilities as an appropriate proxy of the period over
which UBS is exposed to credit risk, with 12 months also used as
a
look-back period for assessing SICR, always from the
respective reporting date.
Significant increase in credit risk
Financial instruments subject to ECL are monitored on an
ongoing basis. To determine whether the recognition of a
maximum 12-month ECL continues to be appropriate, it is
assessed whether an SICR has occurred since initial recognition
of the financial instrument. The assessment criteria include both
quantitative and qualitative factors. UBS does not make use of
the expedient that no particular SICR test is required for
instruments that have low credit risk at reporting date.
Primarily, UBS assesses changes in an instrument’s risk of
default on a quantitative basis by comparing the annualized
forward-looking and scenario-weighted
lifetime PD of an
instrument determined at two different dates:
– at the reporting date; and
– at inception of the instrument.
In both cases, the respective PDs are determined for the
residual lifetime of the instrument, i.e., the period between the
reporting date and maturity. If, based on UBS’s quantitative
modeling, an increase exceeds a set threshold, an SICR is
deemed to have occurred and the instrument is transferred to
stage 2 with lifetime ECL being recognized.
Note 1 Summary of significant accounting policies (continued)
initially
instruments with
The threshold applied varies depending on the original credit
quality of the borrower. For instruments with lower default
probabilities at inception due to good credit quality of the
counterparty, the SICR threshold is set at a higher level than for
instruments with higher default probabilities at inception. This
implies that for
lower default
probabilities, a relatively higher deterioration in credit quality is
needed to trigger an SICR than for those instruments with
originally higher PDs. The SICR assessment based on PD changes
is made at an individual financial asset level. A high-level
overview of the SICR trigger, which is a multiple of the
annualized remaining lifetime PIT PD expressed in rating
downgrades that entail the same multiple of PD values, together
with the corresponding ratings at origination of an instrument, is
provided in the “SICR thresholds” table below. This simplified
view is aligned to internal ratings as disclosed in “Internal UBS
rating scale and mapping of external ratings” presented in
“Credit risk” in the “Risk management and control” section of
this report. The actual SICR thresholds applied are defined on a
more granular level interpolating between the values shown in
the table below.
SICR thresholds
Internal rating at origination of the instrument
Rating downgrades / SICR trigger
0–3
4–8
9–13
3
2
1
→ Refer to the “Risk management and control” section of this
report for more details on the bank’s internal grading system
Irrespective of the SICR assessment based on default
probabilities, credit risk is generally deemed to have significantly
increased for an instrument if the contractual payments are
more than 30 days past due. For certain less material portfolios,
specifically the Swiss credit card portfolio and the recruitment
and retention loans to financial advisors of Global Wealth
Management Region Americas, the 30-day past due criterion is
used as the primary indicator of an SICR. Where instruments are
transferred to stage 2 due to the 30-day past due criterion, a
minimum period of six months is applied before a transfer back
to stage 1 can be triggered. For instruments in Personal &
Corporate Banking that are between 90 and 180 days past due
but have not been reclassified to stage 3, a one-year period is
applied before a transfer back to stage 1 can be triggered.
Additionally, based on
individual counterparty-specific
indicators, external market indicators of credit risk or general
economic conditions, counterparties may be moved to a watch
list, which is used as a secondary qualitative indicator for an SICR
and hence for a transfer to stage 2. Exception management is
individual and collective
further applied, allowing
for
adjustments on exposures sharing
risk
the same credit
characteristics to take account of specific situations that are not
otherwise fully reflected. Instruments for which an SICR since
initial recognition is determined based on criteria other than
changed default probabilities or watch list items remain in
stage 2 for at least six months post resolution of the stage 2
trigger event.
The overall SICR determination process does not apply to
Lombard loans, securities financing transactions and certain
other asset-based lending transactions, because of the risk
management practices adopted, including daily monitoring
processes with strict remargining requirements. If margin calls
are not satisfied, a position is closed out and classified as a
stage 3 position.
Credit risk officers are responsible for ensuring that the stage
allocation of instruments is in line with the requirements of the
standard. Identification of an SICR for accounting purposes is in
some aspects different from internal credit risk management
processes for loans with increased credit risk, mainly because
ECL accounting requirements are instrument-specific, such that
a borrower can have multiple exposures allocated to different
stages, and that maturing loans in stage 2 will migrate to
stage 1 upon renewal irrespective of the actual credit risk at that
time. Under a risk-based approach, a holistic counterparty credit
assessment and the absolute level of risk at any given date will
determine what risk mitigating actions may be warranted.
→ Refer to the “Risk management and control” section of this
report for more information
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Note 1 Summary of significant accounting policies (continued)
Comparative policy | Policy applicable prior to 1 January 2018
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 effect 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 as a result of 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.
Critical accounting estimates and judgments
Allowances and provisions for credit losses are evaluated at both a
counterparty-specific level and collectively. Judgment is used in making
assumptions about the timing and amount of impairment losses.
Counterparty-specific allowances and provisions
Loans are evaluated individually for impairment if objective
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
applying the original effective interest rate to the impaired
carrying value of the loan.
Critical accounting estimates and judgments
The calculation of ECL requires management to apply significant
judgment and make estimates and assumptions that involve significant
uncertainty at the time they are made. Changes to these estimates and
assumptions can result in significant changes to the timing and amount of
ECL to be recognized.
Determination of a significant increase in credit risk
IFRS 9 does not include a definition of what constitutes an SICR. UBS’s
assessment of whether an SICR has occurred since initial recognition is
based on reasonable and supportable forward-looking information, both
qualitative and quantitative, and
includes significant management
judgment. More stringent criteria could significantly increase the number
of instruments migrating to stage 2. An IFRS 9 Operating Committee has
been established to review and challenge the SICR approach and any
potential changes and determinations made in the quarter.
Scenarios, scenario weights and macroeconomic factors
ECL reflect an unbiased and probability-weighted amount, which UBS
determines by evaluating a range of possible outcomes. Management
selects forward-looking scenarios and judges the suitability of respective
weights to be applied. Each of the scenarios is based on management’s
in the form of
assumptions around future economic conditions
macroeconomic, market and other factors. Changes in the scenarios and
weights, the corresponding set of macroeconomic variables and the
assumptions made around those variables for the forecast horizon would
have a significant effect on the ECL. An IFRS 9 Scenario Committee, in
addition to the Operating Committee, has been established to derive,
review and challenge the selection and weights.
ECL measurement period
Lifetime ECL are generally determined based upon the contractual
maturity of the transaction, which significantly affects ECL. The ECL
calculation is therefore sensitive to any extension of contractual maturities
triggered by business decisions, consumer behaviors and an increased
number of stage 2 positions. In addition, for credit card limits and Swiss
callable master credit facilities, judgment is required as UBS must
determine the period over which it is exposed to credit risk. A seven-year
period has been applied for credit card limits, capped at 12 months for
stage 1 positions, and a 12-month period has been applied for master
credit facilities.
Modeling and management adjustments
A number of complex models have been developed or modified to
calculate ECL, with additional management adjustments required. Internal
counterparty rating changes, new or revised models and changes to data
may significantly affect ECL. The models are governed by UBS’s model
validation controls, which aim to ensure independent verification, and are
approved by the Group Model Governance Board
(GMGB). The
management adjustments are approved by the IFRS 9 Operating
Committee and endorsed by the GMGB.
The Group provides a sensitivity analysis of the effect of scenario
selection, scenario weights and SICR trigger points on ECL measurement
within Note 23g.
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Note 1 Summary of significant accounting policies (continued)
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.
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 on the previous page, 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
impaired, the related cumulative net
determined to be
unrealized loss previously recognized in Other comprehensive
income is reclassified to the income statement within Other
income. For equity instruments, any further loss is recognized
directly in the income statement, whereas for debt instruments,
any further loss is recognized in the income statement only if
there is additional objective evidence of impairment. After the
recognition of an impairment on a financial asset classified as
available for sale, increases in the fair value of equity instruments
are reported
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. (cid:3)
in Other comprehensive
h. Restructured and modified financial assets
When payment default is expected or where default has already
occurred, UBS may grant concessions to borrowers in financial
difficulties that it would otherwise not consider in the normal
course of its business, such as preferential interest rates,
extension of maturity, modifying the schedule of repayments,
debt / equity swap, subordination, etc. When a concession or
forbearance measure is granted, each case is considered
individually and the exposure is generally classified as being in
default. Forbearance classification will remain until the loan is
collected or written off, non-preferential conditions are granted
that supersede
the
counterparty has recovered and the preferential conditions no
longer exceed our risk appetite.
the preferential conditions or until
Contractual adjustments when there is no evidence of
imminent payment default, or where changes to terms and
conditions are within UBS’s usual risk appetite, are not
in forbearance. Modifications represent
considered to be
contractual amendments that result in an alteration of future
contractual cash flows and that can occur within UBS’s normal
risk appetite or as part of a credit restructuring where a
counterparty is in financial difficulties.
A restructuring or modification of a financial asset could lead
to a substantial change in the terms and conditions, resulting in
the original financial asset being derecognized and a new
financial asset being recognized. Where the modification does
not result in a derecognition, any difference between the
modified contractual cash flows discounted at the original EIR
and the existing gross carrying value of a financial asset is
recognized in profit or loss as a modification gain or loss.
Further, the subsequent SICR assessment is made by comparing
the risk of default at the reporting date based on the modified
contractual terms of the financial asset with the risk of default at
initial recognition based on the original, unmodified contractual
terms of the financial asset.
345
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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 Other net
income from fair value changes on financial instruments (prior to
1 January 2018: 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
i. Netting
UBS nets financial assets and liabilities on its balance sheet if (i) it
has the unconditional and legally enforceable right to set off the
recognized amounts, both in the normal course of business and
in the event of default, bankruptcy or insolvency of UBS and all
of the counterparties, and (ii) intends either to settle on a net
basis or to realize the asset and settle the liability simultaneously.
Netted positions include, for example, certain derivatives and
repurchase and reverse repurchase transactions with various
counterparties, exchanges and clearing houses.
to
the
realize
they may be
the asset and settle
In assessing whether UBS intends to either settle on a net
liability
basis, or
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
transactions, balance sheet offsetting may be
financing
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 25 for more information
j. 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. The
Group continues to apply hedge accounting requirements as set
out in IAS 39. 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).
346
Note 1 Summary of significant accounting policies (continued)
item.
If the hedge accounting relationship
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
is
the hedged
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 financial assets measured at
amortized cost or Other financial liabilities measured at amortized
cost. If the portfolio hedge relationship is terminated for reasons
other than the derecognition of the hedged item, the amount
included in Other financial assets measured at amortized cost or
Other financial liabilities measured at amortized cost 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.
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
Other income.
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 Other net income
from fair value changes on financial instruments (prior to
1 January 2018: Net trading income), except for the forward
points on certain short- and long-duration foreign exchange
contracts, which are reported in Net interest income.
→ Refer to Note 11 for more information
instruments. An embedded derivative
k. 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 (from
1 January 2018: unless the host contract is a financial asset in
scope of IFRS 9) 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
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.
statement;
income
the
(ii)
in
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
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.
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Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
l. Financial liabilities
Debt issued measured at amortized cost includes 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, 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 3j 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.
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).
m. Own credit
Changes in the fair value of financial liabilities designated at fair
value through profit or loss related to own credit are recognized
income directly within Retained
in Other comprehensive
earnings and will not be reclassified to the income statement in
future periods.
n. Loan commitments
Policy applicable from 1 January 20181
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 that are
revocable only because of 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
loan
commitments designated at fair value through profit or loss; or
(iii) other loan commitments.
loss;
(ii)
The Group recognizes ECL on non-cancelable other loan
commitments. In addition, UBS also recognizes ECL on loan
commitments that can be canceled at any time if UBS is exposed
to credit risk (refer to item g in this Note). Corresponding ECL
are presented within Provisions on the Group’s balance sheet.
ECL relating to these other loan commitments are recorded in
the income statement in Credit loss (expense) / recovery.
When a client draws on a commitment, the resulting loan is
presented within Financial assets at fair value held for trading, or
within Financial assets at fair value not held for trading when the
associated loan commitments are measured at fair value through
profit or loss, and within Loans and advances to customers when
the associated loan commitment is not measured at fair value
through profit or loss.
Comparative policy | Policy applicable prior to 1 January 2018
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
value
loan
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. (cid:3)
loss, consistent with
through profit or
the
o. Financial guarantee contracts
Policy applicable from 1 January 20181
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.
1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. For the details of transition effects refer to Note 1c.
348
Note 1 Summary of significant accounting policies (continued)
Certain issued financial guarantees that are managed on a
fair value basis are designated at fair value through profit or loss.
Financial guarantees that are not managed on a fair value basis
are initially recognized in the financial statements at fair value
and are subsequently measured at the higher of:
– the amount of ECL (refer to item g in this Note); and
– the amount initially recognized less the cumulative amount of
income recognized as of the reporting date.
ECL resulting from guarantees is recorded in the income
statement in Credit loss (expense) / recovery.
Comparative policy | Policy applicable prior to 1 January 2018
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. (cid:3)
p. Other net income from fair value changes on financial
instruments
The line item Other net income from fair value changes on
financial instruments includes fair value gains and losses on
financial instruments at fair value through profit or loss but
excluding interest income and expense on non-derivatives (refer
to item 3c in this Note), as well as the effects at derecognition,
trading gains and losses and intermediation income arising from
certain client-driven Global Wealth Management and Personal &
Corporate Banking financial transactions. In addition, foreign
currency translation effects and income and expenses from
precious metals are presented within this income statement line
item.
4) Fee and commission income and expenses
Policy applicable from 1 January 20181
UBS earns fee income from a diverse range of services it provides
to its clients. Fee income can be divided into two broad
categories: fees earned from services that are provided over a
certain period of time, such as asset or portfolio management,
custody services and certain advisory services; and fees earned
from point-in-time services such as underwriting fees and
brokerage fees (e.g., securities and derivative execution and
clearing).
→ Refer to Note 4 for more information, including the
disaggregation of revenues
Performance obligations satisfied over time
Fees earned from services that are provided over a certain period
of time are recognized on a pro rata basis over the service
period, provided the fees are not contingent on successfully
meeting specified performance criteria that are beyond the
control of UBS (see measurement below).
Costs to fulfill services over time are recorded in the income
statement immediately, because such services are considered to
be a series of services that are substantially the same from day to
day and have the same pattern of transfer. The costs to fulfill
neither generate nor enhance the resources of UBS that will be
used to satisfy future performance obligations and cannot be
distinguished between those that relate to satisfied and
unsatisfied performance obligations. Therefore, these costs do
not qualify to be recognized as an asset. Where costs incurred
relate to contracts that include variable consideration that is
constrained by factors beyond UBS’s control (e.g., successful
mergers and acquisitions (M&A) activity) or where UBS has a
history of not recovering such costs on similar transactions), such
costs are expensed immediately as incurred.
Performance obligations satisfied at a point in time
Fees earned from providing transaction-type services are
recognized when the service has been completed, provided such
fees are not subject to refund or another contingency beyond
the control of UBS.
Incremental costs to fulfill services provided at a point in time
are typically incurred and recorded at the same time as the
performance obligation is satisfied and revenue is earned, and
are therefore not recognized as an asset, e.g., brokerage. Where
recovery of costs to fulfill relates to an uncompleted point-in-
time service for which the satisfaction of the performance
obligation in the contract is dependent upon factors beyond the
control of UBS, such as underwriting a successful securities
issuance, or where UBS has a history of not recovering such
costs through reimbursement on similar transactions, such costs
are expensed immediately as incurred.
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1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 15. For the details of transition effects refer to Note 1b.
349
Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
recognizes
revenue when
Measurement
Fee and commission income is measured based on consideration
specified in a legally enforceable contract with a customer,
excluding amounts such as taxes collected on behalf of third
parties. Consideration can include both fixed and variable
amounts. Variable consideration includes refunds, discounts,
performance bonuses and other amounts that are contingent on
the occurrence or non-occurrence of a future event. Variable
consideration that is contingent on an uncertain event can only
be recognized to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue for a
contract will not occur. This is referred to as the variable
consideration constraint. UBS does not consider the highly
probable criterion to be met where the contingency on which
income is dependent is beyond the control of UBS. In such
the
circumstances, UBS only
contingency has been resolved or an uncertain event has
occurred. Examples include asset management performance-
linked fees, which are only payable if the returns of a fund
exceed a benchmark and are only recognized after the
performance period has elapsed. Similarly, M&A advisory fees
that are dependent on a successful client transaction are not
recognized until the transaction on which the fees are
dependent has been executed. Asset management
fees
(excluding performance-based fees) received on a periodic basis,
typically quarterly, that are determined based on a fixed
percentage of net asset value that has not been established at
the reporting date, are estimated and accrued ratably over the
period to the next invoice date, except during periods in which
market volatility indicates there is a risk of significant reversal.
Research revenues earned by the Investment Bank under
commission-sharing or research payment account agreements
are not recognized until the client has provided a definitive
allocation of amounts between research providers, as prior to
this UBS generally does not have an enforceable right to a
specified amount of consideration.
to
received
is allocated
Consideration
the separately
identifiable performance obligations in a contract. Owing to the
nature of UBS’s business, contracts that include multiple
performance obligations are typically those that are considered
to include a series of similar performance obligations fulfilled
over time with the same pattern of transfer to the client, e.g.,
asset management. As a consequence, UBS is not required to
apply significant judgment in allocating the consideration
received across the various performance obligations. UBS has
taken the practical expedient to not disclose information on the
allocation of the transaction price to remaining performance
obligations in contracts. This is because contracts are typically
less than one year in duration. Where contracts have a longer
duration, they are either subject to the variable consideration
constraint, with fees calculated on future net asset value, which
cannot be included within the transaction price for the contract,
or result in revenue being recognized ratably using the output
method corresponding directly to the value of the services
completed to date and to which UBS would be entitled to
loan
invoice upon
commitments.
the contract, e.g.,
termination of
Presentation of fee and commission income and expense
Fee and commission income and expense are presented gross on
the face of the income statement when UBS is considered to be
principal in the contractual relationship with its customer and any
suppliers used to fulfill such contracts. This occurs where UBS has
control over such services and its relationship with suppliers prior
to provision of the service to the client. UBS only considers itself to
be an agent in relation to services provided by third parties, e.g.,
third-party execution costs for exchange-traded derivatives and
fees payable to third-party research providers, where the client
controls both the choice of supplier and the scope of the services
to be provided. Furthermore, in order to be considered an agent
UBS must not take responsibility for the quality of the service,
transform or integrate the services into a UBS product. In such
circumstances UBS is essentially acting as a payment agent for its
client. When UBS is acting as an agent, any costs incurred are
directly offset against the associated income.
Presentation of expenses in the income statement
UBS presents expenses primarily in line with their nature in the
income statement, differentiating between expenses that are
incremental and incidental to revenues, which are presented
within Total operating income, and those that are related to
personnel, general and administrative expenses, which are
presented within Total operating expenses.
Contract assets, contract liabilities and capitalized expenses
UBS has applied the practical expedient of allowing for costs
incurred to obtain a contract to be expensed as incurred where
the amortization period for any asset recognized would be less
than 12 months.
Where UBS provides services to clients, consideration is due
immediately upon satisfaction of a point-in-time service or at the
end of a prespecified period for a service performed over time;
e.g., certain asset management fees are collected monthly or
quarterly, through deduction from a client account, deduction
from fund assets or through separate
invoicing. Where
receivables are recorded, they are presented within Other
financial assets measured at amortized cost.
Contract liabilities relate to prepayments received from
customers where UBS is yet to satisfy its performance obligation.
Contract assets are recorded when an entity’s right to
consideration in exchange for services transferred is conditional
on something other than the passage of time, e.g., the entity’s
future performance.
UBS has not recognized any material contract assets, contract
liabilities or capitalized expenses during the period and has
therefore not provided a contract balances reconciliation.
350
Note 1 Summary of significant accounting policies (continued)
Comparative policy | Policy applicable prior to 1 January 2018
Fees earned from services that are provided over a certain period
of time are recognized ratably over the service period, with the
exception of performance-linked fees or fee components with
specific performance criteria. Such fees are recognized when, as
of the reporting date, the performance benchmark has been
met and when collectibility is reasonably assured.
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. (cid:3)
→ Refer to Note 4 for more information
5) Cash and cash equivalents
For the purpose 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 at 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
and is adjusted to reflect actual outcomes. Where the service
period is shortened, for example in the case of employees
affected by
restructuring programs or mutually agreed
termination provisions, recognition of expense is accelerated to
the termination date.
Where no future service is required, such as for employees
who are eligible for retirement 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
their 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 30 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 eligible
for retirement 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 30 for more information
351
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Note 1 Summary of significant accounting policies (continued)
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.
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.
in future years; and
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
(ii) temporary
differences that will result in deductions against profits in future
years. 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.
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 29 for more information
Defined benefit plans
UBS offers defined benefit pension and medical insurance
benefits. Defined benefit 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
form of refunds from the plan or reductions
in future
contributions to the plan. UBS applies the projected unit credit
method to determine the present value of its defined benefit
obligations, the related current service cost and, where
applicable, past service cost. The projected unit credit method
sees each period of service as giving rise to an additional unit of
benefit entitlement and measures each unit separately to build
up the final obligation. These amounts, which take into account
the specific features of each plan, including risk sharing between
employee and employer, are calculated periodically by
independent qualified actuaries.
Critical accounting estimates and judgments
The net defined benefit liability or asset at the balance sheet date and the
related personnel expense depend on the expected future benefits to be
provided, determined using a number of economic and demographic
assumptions. A range of assumptions could be applied, and different
assumptions could significantly alter the defined benefit liability or asset
and pension expense recognized. The most significant assumptions
include life expectancy, the 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 on high-quality fixed-income investments of appropriate
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 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 29.
352
Note 1 Summary of significant accounting policies (continued)
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 (for which such amounts would affect the amount of
goodwill arising from the acquisition); (ii) for gains and losses on
the sale of treasury shares (for which the tax effects are
recognized directly in Equity); (iii) for unrealized gains or losses
on financial instruments that are classified as FVOCI (prior to
1 January 2018: financial assets classified as available for sale);
(iv) for changes in fair value of derivative instruments designated
as cash flow hedges; (v) for remeasurements of defined benefit
plans; or (vi) for certain foreign currency translations of foreign
operations. Amounts relating to points (iii) through (vi) are
recognized in Other comprehensive income within Equity.
UBS reflects the potential effect of uncertain tax positions
using expected value (i.e., a probability-weighted approach),
except where the likelihood of loss is remote (less than 5%).
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.
is
The
level of deferred tax asset recognition
influenced by
management’s assessment of UBS’s future profitability based on relevant
business plan forecasts. Existing assessments are reviewed and, if
necessary, revised to reflect changed circumstances. This review is
conducted annually, in the fourth quarter of each year, but adjustments
may be made at other times, if required. In a situation where recent losses
have been incurred, convincing other evidence that there will be sufficient
future profitability is required.
If profit forecast assumptions in future periods deviate from the
current outlook, the value of UBS’s deferred tax assets may be affected.
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.
In addition, judgment is required to assess the expected value of
uncertain tax positions that are incorporated into the estimate of income
and deferred tax and the assessment of the related probabilities, including
in relation to the interpretation of tax laws, the resolution of any income
tax-related appeals or litigation and the assessment of the related
probabilities.
→ Refer to Note 8 for more information
9) Investments in associates
Interests in 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 exceeds its recoverable amount.
→ Refer to Note 31 for more information
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Note 1 Summary of significant accounting policies (continued)
10) Property, equipment and software
for
for
indication
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 (i.e., 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 15 for more information
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.
For the 2017 annual test, UBS considered the segments, as
they are reported in Note 2a, as separate cash-generating units,
since that was the level at which the performance of investments
(and the related goodwill) was reviewed and assessed by
management.
Following the integration in 2018 of the Wealth Management
and Wealth Management Americas business divisions into the
single reportable segment Global Wealth Management, UBS
continued to separately monitor the goodwill previously allocated
to the two former business divisions. As a consequence, for the
purpose of goodwill impairment testing, the former Wealth
Management and Wealth Management Americas business
divisions are considered to be two separate cash-generating units
referred to in Note 16 as Global Wealth Management Americas1
and Global Wealth Management ex Americas. The remaining
goodwill balances continued to be tested at the level of Asset
Management and the Investment Bank, respectively, consistent
with the 2017 annual test.
The impairment test is performed for each cash-generating unit
to which goodwill is allocated by comparing the recoverable
amount, based on its value-in-use, to the carrying amount of the
respective cash-generating unit. An
is
recognized in the income statement if the carrying amount
exceeds the recoverable amount.
impairment charge
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
intangible assets are reviewed for
each reporting date,
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.
The key assumptions are linked to external market information, where
applicable. 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, the view of management
and regional differences in risk-free rates, at the level of individual cash-
generating units. Long-term growth rates are determined in a consistent
manner based on nominal or real GDP growth rate forecasts, considering
different regions worldwide as incorporated in the business plan
approved by the BoD.
The key assumptions used to determine the recoverable amounts of
each cash-generating unit are tested for sensitivity by applying reasonably
possible changes to those assumptions. Refer to Note 16 for details on
how the reasonably possible changes may affect the results of UBS‘s
model for goodwill impairment testing.
→ Refer to Notes 2 and 16 for more information
1 Now including the Global Wealth Management business in Latin America, previously part of the Wealth Management business division.
354
Note 1 Summary of significant accounting policies (continued)
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, the requirements for recognition have been
met. 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.
Management may undertake restructuring activities, i.e., a
planned and controlled program that materially changes either
the scope of the business or the manner in which it is
conducted. 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 through commencement of the plan or
announcements to affected employees.
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 measurement point that
represents our 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 disclosed 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.
When all conditions required to recognize a provision are not
met, a contingent liability is disclosed, unless the likelihood of an
outflow of resources is remote. Contingent liabilities are also
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.
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 21 for more information
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Note 1 Summary of significant accounting policies (continued)
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 including those at FVOCI (prior to
1 January 2018: monetary financial assets classified as available
for sale) and monetary liabilities denominated in foreign
currency are translated into the functional currency using the
closing exchange rate. Translation differences
(which for
monetary financial assets at FVOCI are determined as if they
were financial assets measured at amortized cost) are reported
in Other net income from fair value changes on financial
instruments (prior to 1 January 2018: Net trading income).
Non-monetary items measured at historical cost are translated
at the exchange rate on the date of the transaction. Prior to
1 January 2018, foreign currency translation differences on non-
monetary financial assets classified as available for sale were
recorded directly in Equity until the asset was derecognized.
Upon consolidation, assets and liabilities of foreign operations
(which from 1 October 2018 also include UBS’s Swiss-based
operations with Swiss franc functional currency) are translated into
US dollars, UBS’s presentation currency, at the closing exchange
rate on the balance sheet date, and income and expense items
and other comprehensive income are translated at the average
rate for the period. The resulting foreign currency translation
differences attributable to shareholders are recognized 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
included within Equity attributable to non-controlling interests.
Share capital issued, share premium and treasury shares held are
translated at the historic average rate, whereby the difference
between the historic average rate and the spot rate realized upon
repayment of share capital or disposal of treasury shares is
reported as Share premium. Cumulative amounts recognized in
OCI in respect of cash flow hedges and financial assets measured
at FVOCI (prior to 1 January 2018: financial assets classified as
available for sale) are translated at the closing exchange rate as of
balance sheet dates, with any translation effects adjusted through
Retained earnings.
When a foreign operation is disposed or partially disposed of
and UBS no longer controls 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.
Similarly, if an investment in an associate becomes an investment
in a subsidiary, the cumulative amount of foreign currency
translation differences is reclassified to profit or loss. 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 37 for more information
Critical accounting estimates and judgments
The determination of an entity’s functional currency and the trigger for a
change requires management to apply significant
judgment and
assumptions. IAS 21, The Effects of Changes in Foreign Exchange Rates,
requires management to consider the underlying transactions, events and
conditions that are relevant to the entity when determining the
appropriate functional currency and any changes. UBS’s conclusion, in the
fourth quarter of 2018, that the functional currency of UBS Group AG,
UBS AG’s Head Office in Switzerland and UBS AG’s London Branch has
changed was based on a detailed assessment of the primary currencies
affecting and influencing the economics of each entity, considering
revenue generating
income streams, expenses, funding and risk
management activities.
In addition, determining the earliest date from which it is practicable
to perform a restatement following a voluntary change in presentational
currency also requires management to apply significant judgment and
make estimates and assumptions. UBS’s decision in 2018 to change the
presentation currency of UBS Group AG’s consolidated financial
statements from Swiss francs to US dollars was made in line with IAS 8,
Accounting Policies, Changes in Accounting Estimates and Errors, by
assessing the earliest date from which it was practicable to perform a
restatement, taking into consideration whether sufficiently reliable data
was available for earlier periods and whether any assumptions on
management intent or significant estimates of amounts were required.
UBS carried out a detailed and extensive data analysis before concluding
that 1 January 2004 represented the earliest date available, with the
consequence that foreign currency translation gains and losses prior to
2004 have been disregarded and foreign currency translation effects first
calculated from 1 January 2004 onward.
→ Refer to Note 1b for more information
356
Note 1 Summary of significant accounting policies (continued)
14) Equity, treasury shares and contracts on UBS Group AG
shares
15) Leasing
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
Non-controlling interests subject to option arrangements, e.g.,
written puts, are generally deemed to be acquired by UBS. As a
result, the amounts allocated to non-controlling interests are
reduced accordingly and a liability for the options’ exercise price is
recognized, with any difference between these two amounts
recorded in Share premium.
UBS Group AG shares held (treasury shares)
UBS Group AG shares held by the Group, including those
purchased as part of market-making activities, 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 Other net income from fair
value changes on financial instruments.
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 Other financial assets measured at amortized cost
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
residual value
the estimated unguaranteed
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.
reviews
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 Note 33 for more information
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Note 1 Summary of significant accounting policies (continued)
b) Changes in accounting policies, comparability and other adjustments, excluding the effects of adoption of IFRS 9,
Financial Instruments
Income and expenses as well as Other comprehensive income
(OCI) were translated to US dollars at the respective average
exchange rates prevailing for the relevant periods. Additionally,
Other income was restated to reflect releases of FCT gains or
losses from OCI to the income statement when calculated under
the new US dollar presentation currency. The effect of such
restatements for 2018, 2017 and 2016 was not material to the
income statements of these periods.
to
relating
tax effects
reflection of deferred
Assets, liabilities and total equity were translated at closing
exchange rates prevailing on the respective balance sheet dates,
after
the
restatement. Share capital issued, share premium and treasury
shares held were translated at historic average rates, whereby
differences between historic average rate and closing exchange
rate realized upon repayment of share capital or disposal of
treasury shares were reported as Share premium. Cumulative
amounts recognized in OCI in respect of cash flow hedges and
financial assets measured at FVOCI (prior to 1 January 2018:
financial assets classified as available for sale) were translated at
closing exchange rate as of respective balance sheet dates, with
any translation effects adjusted through Retained earnings.
The restated FCT balance as of 1 October 2018 included a
cumulative gain of USD 767 million related to previously applied
net investment hedges entered into by UBS Group AG or UBS
AG’s Head Office to hedge investments in foreign operations
against their former Swiss franc functional currency.
The restated basic and diluted earnings per share (EPS) were
USD 0.26 and USD 0.25 for the year ended 31 December 2017,
which compares to CHF 0.28 and CHF 0.27 basic and diluted
EPS under the previous Swiss franc presentation currency. For
the year ended 31 December 2016, restated basic and diluted
EPS were USD 0.90 and USD 0.88, which compares to CHF 0.86
and CHF 0.84 basic and diluted EPS under the previous Swiss
franc presentation currency.
1) Changes in functional and presentation currency
Change in functional currencies
As a consequence of legal entity structural changes over recent
years – notably the transfer of the Personal & Corporate Banking
and Global Wealth Management businesses booked
in
Switzerland from UBS AG to UBS Switzerland AG, and the
creation of UBS Business Solutions AG, which houses a
significant portion of the employees and associated costs that
were previously held in UBS AG’s Head Office in Switzerland and
UBS AG’s London Branch – a concentration of US dollar-
influenced and -managed business activities now exist in UBS
AG’s Head Office in Switzerland and UBS AG’s London Branch.
In addition, from the fourth quarter of 2018, for risk
management purposes UBS adopted the US dollar as the risk-
neutral currency and has adjusted its structural risk positions
accordingly. As a result of these changes, effective from
1 October 2018, the functional currency of UBS Group AG and
UBS AG’s Head Office in Switzerland changed prospectively
from Swiss francs to US dollars and that of UBS AG’s London
Branch changed from British pounds to US dollars, in compliance
with the requirements of IAS 21, The Effects of Changes in
Foreign Exchange Rates.
Change in presentation currency
In 2018, the presentation currency of UBS Group AG’s
consolidated financial statements has changed from Swiss francs
to US dollars to align with the functional currency changes of
significant Group entities. UBS has restated prior periods for this
voluntary presentational change in line with IAS 8, Accounting
Policies, Changes in Accounting Estimates and Errors, from
1 January 2004. This point in time represented the earliest date
from which it was practicable to perform a restatement, given
the lack of sufficiently reliable data for earlier periods. As a
consequence, foreign currency translation (FCT) gains or losses
prior to 2004 have been disregarded, with FCT effects first
calculated from 1 January 2004 onward. In addition, UBS has
included a second comparative balance sheet as of 1 January
2017 in line with IAS 1, Presentation of Financial Statements.
358
Note 1 Summary of significant accounting policies (continued)
Effect of the change in the Group’s presentation currency from Swiss francs to US dollars
In million
Balance sheet
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Income statement
Other income
Total operating income
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
In million
Balance sheet
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Income statement
Other income
Total operating income
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
As of or for the year ended
31.12.17
USD based on a
simple translation of
CHF presentation
currency1
Under a USD
presentation
currency (restated)
(USD)
Under a CHF
presentation
currency
(CHF)
338
23,598
(2,210)
25,932
4,838
52,495
59
52,554
511
29,622
5,351
4,305
1,046
77
969
395
26,613
(2,189)
33,599
(5,880)
52,538
59
52,597
515
29,627
5,355
4,234
1,121
77
1,044
385
25,942
(2,133)
32,752
(5,732)
51,214
57
51,271
509
29,067
5,268
4,139
1,128
76
1,053
As of or for the year ended
31.12.16
USD based on a
simple translation of
CHF presentation
currency1
Under a USD
presentation
currency (restated)
(USD)
Under a CHF
presentation
currency
(CHF)
338
25,958
(2,362)
25,029
3,953
52,916
670
53,586
663
28,729
4,209
777
3,432
84
3,348
378
27,761
(2,210)
31,170
(4,416)
52,683
670
53,353
603
28,669
4,149
816
3,333
84
3,250
385
28,254
(2,249)
31,725
(4,494)
53,621
682
54,302
599
28,320
4,090
805
3,286
82
3,204
359
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Note 1 Summary of significant accounting policies (continued)
Effect of the change in the Group’s presentation currency from Swiss francs to US dollars (continued)
In million
As of or for the year ended
31.12.15
USD based on a
simple translation of
CHF presentation
currency1
Under a USD
presentation
currency (restated)
(USD)
Under a CHF
presentation
currency
(CHF)
Balance sheet
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
1 Amounts presented in this column represent a translation of the previously published information under a Swiss franc presentation currency, translated to US dollars using a simplified approach. Assets, liabilities
and equity were translated to US dollars at closing exchange rates prevailing on the respective balance sheet dates, and income and expenses were translated at the respective average rates prevailing for the
relevant periods.
385
31,164
(1,693)
29,504
(4,047)
55,313
1,995
57,308
384
31,113
(1,690)
29,455
(4,040)
55,221
1,992
57,213
338
28,966
(1,806)
22,672
5,166
55,336
1,992
57,328
360
Note 1 Summary of significant accounting policies (continued)
2) IFRS 15, Revenue from Contracts with Customers
Effective from 1 January 2018, UBS adopted IFRS 15, Revenue
from Contracts with Customers, which replaced
IAS 18,
Revenue, and establishes principles for revenue recognition that
apply to all contracts with customers except those relating to
financial instruments, leases and insurance contracts. The
standard requires an entity to recognize revenue as performance
obligations are satisfied.
IFRS 15 specifies that variable consideration is only recognized
when the related performance obligation has been satisfied and
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.
As permitted by the transitional provisions of IFRS 15, UBS
elected not to restate comparative figures. Instead, the cumulative
effect of initially applying the standard was recognized as an
adjustment to the opening balance of retained earnings. A
transition adjustment of USD 28 million on a pre-tax basis and
USD 25 million net of tax was posted to retained earnings to
reverse income recognized prior to 1 January 2018 under IAS 18
that must be deferred under IFRS 15, either owing to the variable
consideration constraint (asset management performance fees of
USD 16 million) or because UBS does not have an enforceable
right to a specified amount of consideration (commission-sharing
agreements for research services of USD 11 million).
The adoption of IFRS 15 resulted in changes to UBS’s
accounting policies applicable from 1 January 2018 as set out in
Note 1a.
Following the adoption of IFRS 15, fee and commission
income is presented in the income statement separately from fee
and commission expense.
Where UBS is acting as principal as defined by IFRS 15, costs
of fulfilling contracts are required by IFRS 15 to be presented
separately in the income statement within Fee and commission
expense. Where UBS is acting as agent as defined by IFRS 15,
costs of fulfilling contracts are required to be presented as a
reduction in Fee and commission income. This resulted in a
reclassification of certain brokerage fees paid in an agency
capacity from Fee and commission expense to Fee and
commission income from 1 January 2018, primarily relating to
third-party execution costs for exchange-traded derivative
transactions and fees payable to third-party research providers
on behalf of clients.
Other presentation changes
In addition to the IFRS 15 changes, certain revenues presented
within Fee and commission income, primarily distribution fees and
fund management fees, have been reclassified between reporting
lines in Note 4 to better reflect the nature of the revenues, with
comparative-period information restated accordingly. Also, certain
expenses that are incremental and incidental to revenues have
been reclassified prospectively from General and administrative
expenses to Fee and commission expense to improve the
alignment of transaction-based costs with the associated revenue
stream, primarily affecting clearing costs, client loyalty costs, and
fund and custody expenses. As the effect of this reclassification
was not material, prior-period information was not restated.
→ Refer to Note 4 for more information on the nature, amount,
timing and uncertainty of revenues and cash flows from
contracts with customers
3) Changes in segment reporting
Effective from the first quarter of 2018, UBS combined its
Wealth Management and Wealth Management Americas
business divisions into a single Global Wealth Management
business division. Global Wealth Management is managed on an
integrated basis, with a single set of performance targets and a
unified operating plan and management structure. Consistent
with this, the operating results of Global Wealth Management
are 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
2018, Global Wealth Management qualifies as an operating and
reportable segment for the purposes of segment reporting and
is presented alongside Personal & Corporate Banking, Asset
Management, the Investment Bank, and Corporate Center (with
its units Services, Group Asset and Liability Management and
Non-core and Legacy Portfolio).
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Note 1 Summary of significant accounting policies (continued)
4) IFRS 7, Financial Instruments: Disclosures
5) Amendments to IAS 1, Presentation of Financial
Statements
IFRS 7, Financial Instruments: Disclosures, was updated in line
with IFRS 9, Financial Instruments. UBS adopted the revised
requirements on 1 January 2018, which is the date of initial
application of IFRS 9. IFRS 9 transition disclosures as set out by
IFRS 7 are presented in Note 1c.
In line with amendments to IFRS 7, from 1 January 2018, UBS
separately presents hedging gains and losses recognized during
the period in the statement of comprehensive income and the
amounts reclassified to the income statement. More specifically,
the effective portion of changes in fair value of hedging
instruments designated as net investment hedges (before tax)
recognized in other comprehensive income and the amounts
reclassified to the income statement, previously included within
Foreign currency translation movements, before tax and Foreign
exchange amounts reclassified to the income statement from
equity, are now presented in Effective portion of changes in fair
value of hedging instruments designated as net investment
hedges, before tax and Effective portion of changes in fair value
of hedging instruments designated as net investment hedges
reclassified to the income statement, respectively.
translation differences on
Furthermore, the line Foreign exchange amounts reclassified
to the income statement from equity was renamed to Foreign
foreign operations
currency
reclassified to the income statement, and the line Income tax
relating to foreign currency translation movements was renamed
to Income tax relating to foreign currency translations, including
the effect of net investment hedges.
In addition, while retaining hedge accounting under IAS 39,
from 2018 the Group presents new disclosures to reflect the
effects of hedge accounting on the Group’s financial statements
as required by consequential amendments of IFRS 7. The
enhanced disclosures are included in the “Derivatives transacted
for hedging purposes” section of Note 28. Specifically, hedging
disclosures now include a more extensive description of UBS’s
hedging strategies as risk management tools, and effects of
hedge accounting on financial position and performance are
structured in tabular format. These additional disclosures are
presented prospectively from 1 January 2018.
In line with amendments to IAS 1, Presentation of Financial
Statements, from 1 January 2018, in the income statement, UBS
presents interest income and interest expense, calculated using
the effective interest method, on financial instruments measured
at amortized cost and financial assets measured at fair value
through other comprehensive income separately from interest
income and expense on financial instruments measured at fair
value through profit or loss.
→ Refer to Note 3 for more information
6) Change in presentation of forward points on certain
long-duration foreign exchange contracts transacted as
economic hedges
Effective from 1 January 2018, UBS refined the presentation of
forward points on certain long-duration foreign exchange
contracts transacted as economic hedges, transferring the
forward points from Other net income from fair value changes
on financial instruments (prior to 1 January 2018: Net trading
income) to Interest income from financial instruments measured
at fair value through profit or loss to align with the presentation
of forward points on certain short-duration foreign exchange
contracts. The amount of forward points on certain long-
duration foreign exchange contracts recognized in Interest
income from financial instruments measured at fair value
through profit or loss did not have a material effect on the
Group’s financial statements and prior periods have not been
restated.
7) IFRS Interpretations Committee, Payments relating to
taxes other than income tax
During the second quarter of 2018, UBS refined its treatment of
prepayments or overpayments in relation to uncertain tax
positions outside of the scope of IAS 12, Income Taxes,
following the IFRS Interpretation Committee’s discussion on
Payments relating to taxes other than income tax. More
specifically, prepayments for uncertain tax positions that have
not yet given rise to a liability are recognized as assets because
UBS will either receive a cash rebate or a benefit through the
extinguishment of a future liability. Adoption of the change did
not have a material effect on UBS’s financial statements.
362
Note 1 Summary of significant accounting policies (continued)
c) Changes in accounting policies and comparability and transition effects from the adoption of IFRS 9 Financial
Instruments
1) Introduction
IAS 39, Financial
IFRS 9, Financial
Effective 1 January 2018, UBS adopted
Instruments, which replaced
Instruments:
Recognition and Measurement, and substantially changed
accounting and financial reporting in three key areas: classification
and measurement of financial assets, impairment and hedge
accounting. In addition, UBS early adopted 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. The Group has retained hedge accounting
under IAS 39 as permitted and early adopted the own credit
requirements of IFRS 9 during the first quarter of 2016.
As permitted by the transitional provisions of IFRS 9, UBS
elected not to restate comparative figures. Any effect on the
carrying amounts of financial assets and liabilities at the date of
transition to IFRS 9 was recognized as an adjustment to opening
retained earnings. The detailed effects of the adoption of IFRS 9
on 1 January 2018 are presented in this Note and the updated
accounting policies for classification and measurement of
financial instruments and impairment of financial assets as
applied from 1 January 2018 are presented in Note 1a.
2) Transition effect
The adoption of IFRS 9 effective 1 January 2018 has resulted in a
reduction to IFRS consolidated equity as of 1 January 2018 of
USD 591 million. This effect is comprised of classification and
measurement changes of USD 360 million on a pre-tax basis and
USD 300 million net of tax, as well as effects from the
implementation of impairment requirements based on an
expected credit loss (ECL) methodology of USD 357 million on a
pre-tax basis and USD 291 million net of tax.
→ Refer to the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
on the effect of the IFRS 9 transition on UBS’s capital adequacy
3) Governance
The implementation of IFRS 9 has been a key strategic initiative for
UBS implemented under the joint sponsorship of the Group Chief
Financial Officer and the Group Chief Risk Officer. The
incorporation of forward-looking
into the ECL
calculation and the definition and assessment of what constitutes
a significant increase in credit risk (SICR) are inherently subjective
and involve the use of significant expert judgment. Therefore, UBS
has developed a front-to-back governance framework over the
information
ECL calculation process jointly owned by the Group Chief Financial
Officer and the Group Chief Risk Officer and has designed
controls to meet the requirements of the Sarbanes-Oxley Act. UBS
has efficient credit risk management processes in place that
continue to be applicable and aim to ensure that the effects of
economic developments are appropriately considered, mitigation
actions are taken where required and risk appetite is reassessed
and adjusted as needed.
→ Refer to the “Risk management and control” section of this
report for more information
4) Retrospective amendments to UBS Group balance sheet
presentation
Although the effect of IFRS 9 classification and measurement
changes has been applied prospectively, UBS has made a series of
changes to the presentation of its balance sheet to facilitate
information for periods ending before
comparability, with
1 January 2018 being presented in this revised structure. The
primary changes include:
– IAS 39-specific asset categories, such as Financial assets held to
maturity and Financial assets available for sale, have been
superseded by the new categories Financial assets measured at
amortized cost and Financial assets measured at fair value
through other comprehensive income.
– A new line, Financial assets at fair value not held for trading,
has been created to accommodate in particular financial assets
previously designated at fair value, all of which are mandatorily
classified at fair value through profit or loss under IFRS 9.
– Other assets and Other liabilities have been split into those
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 have been combined into a single line, Receivables
transactions. Similarly, Cash
from
collateral on securities lent and Repurchase agreements have
been combined into a single line, Payables from securities
financing transactions.
financing
securities
– Finance lease receivables, previously presented within Loans,
are now presented within Other financial assets measured at
amortized cost.
– Precious metal positions previously presented in Trading
portfolio assets are now presented within the new line Other
non-financial assets.
– Financial liabilities designated at fair value have been split into
two lines: Debt issued designated at fair value and Other
financial liabilities designated at fair value.
363
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Note 1 Summary of significant accounting policies (continued)
The table below
illustrates the revised balance sheet
presentation of assets and liabilities as of 31 December 2017 in
comparison with the presentation in the Annual Report 2017.
The presentation of the components of equity has not changed,
and therefore, for illustration purposes, total liabilities and equity
are presented in a single line in the table. The table does not
reflect any of the effects of adopting the classification and
measurement requirements of IFRS 9, which are presented in the
“Reclassification and remeasurement of carrying amounts and
recognition of ECL upon adoption of IFRS 9” table in this Note.
Retrospective amendments to UBS Group balance sheet presentation as of 31 December 2017
USD 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)
2
3
2, 3, 7
1
1
1
4
References
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)
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets (new line)
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)
Other liabilities (superseded)
Total liabilities
Total liabilities and equity
5
5
6
6
4, 7
7
8
8
8
10
9
9
9, 10
10
10
364
31.12.17
Former presentation
90,045
14,094
331.12.17
RRevised presentation
90,045
14,094
91,951
12,714
79,238
24,040
327,833
9,403
134,087
36,277
121,285
n/a
60,457
8,889
1,045
9,057
6,563
10,056
30,474
939,279
7,728
1,835
15,650
31,029
419,577
143,160
31,251
119,137
n/a
55,604
3,214
58,540
886,725
939,279
24,040
326,746
37,815
584,691
129,407
36,277
121,285
nn/a
60,457
311,148
8,889
1,045
9,057
6,563
10,056
7,830
939,279
7,728
17,485
31,029
419,577
143,160
37,276
656,255
31,251
119,137
nn/a
50,782
16,643
217,813
3,214
9,443
886,725
939,279
Note 1 Summary of significant accounting policies (continued)
Explanatory footnotes to the table “Retrospective amendments to UBS Group balance sheet presentation”
Table ref.
Description of presentation changes applied retrospectively to the balance sheet as of 31 December 2017
Balance sheet assets
1
2
3
4
5
6
7
Cash collateral on securities borrowed of USD 12,714 million and reverse repurchase agreements of USD 79,238 million as of 31 December 2017 are now presented as a
total of USD 91,951 million within a single line, Receivables from securities financing transactions.
Finance lease receivables of USD 1,086 million as of 31 December 2017, previously presented within Loans, are now presented within Other financial assets measured at
amortized cost.
Financial assets held to maturity measured at amortized cost of USD 9,403 million as of 31 December 2017 are now presented within Other financial assets measured at
amortized cost.
Precious metal positions of USD 4,681 million as of 31 December 2017, previously presented in Trading portfolio assets, are now presented within Other non-financial
assets.
Financial assets designated at fair value through profit or loss of USD 60,457 million as of 31 December 2017, previously presented in a separate line, are now presented
within Financial assets at fair value not held for trading.
Debt and equity instruments of USD 8,889 million as of 31 December 2017, previously presented in Financial assets available for sale, are now presented within Financial
assets measured at fair value through other comprehensive income.
The reporting line Other assets has been split into two new reporting lines, Other financial assets measured at amortized cost and Other non-financial assets.
– Assets of USD 30,474 million as of 31 December 2017, previously presented within Other assets, are now presented within Other financial assets measured at
amortized cost (USD 27,325 million) and Other non-financial assets (USD 3,149 million).
– Financial assets now presented within Other financial assets measured at amortized cost include brokerage receivables of USD 19,573 million, debt securities of
USD 9,403 million, loans to financial advisors of USD 3,199 million and other assets amounting to USD 5,639 million. Refer to Note 17a for more information.
– Refer to Note 17b for more information on assets now presented within Other non-financial assets.
Balance sheet liabilities
8
9
10
Cash collateral on securities lent of USD 1,835 million and repurchase agreements of USD 15,650 million as of 31 December 2017 are now presented within a single line,
Payables from securities financing transactions.
Financial liabilities designated at fair value through profit or loss of USD 55,604 million as of 31 December 2017 are now presented within Debt issued designated at fair
value (USD 50,782 million) and Other financial liabilities designated at fair value (USD 4,822 million).
The reporting line Other liabilities has been split into three new reporting lines, Other financial liabilities measured at amortized cost, Other financial liabilities designated at
fair value and Other non-financial liabilities.
– Liabilities amounting to USD 58,540 million as of 31 December 2017, previously presented within Other liabilities, are now presented within Other financial liabilities
measured at amortized cost (USD 37,277 million, thereof USD 30,413 million brokerage payables), within Other financial liabilities designated at fair value (amounts
due under unit-linked investment contracts of USD 11,821 million) and within Other non-financial liabilities (USD 9,443 million).
– Refer to Note 22a for more information on financial liabilities now presented within Other financial liabilities measured at amortized cost.
– Refer to Note 22b for more information on financial liabilities now presented within Other financial liabilities designated at fair value.
– Refer to Note 22c for more information on liabilities now presented within Other non-financial liabilities.
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Note 1 Summary of significant accounting policies (continued)
the contractual cash flows or to collect contractual cash flows
and sell (e.g., certain Investment Bank lending arrangements);
– equity instruments classified as available for sale under IAS 39
are classified at FVTPL under IFRS 9; and
– financial liabilities are newly designated under IFRS 9 at
FVTPL, from amortized cost accounting, to align with
conclusions reached for associated financial assets that will be
measured at FVTPL (e.g., brokerage payables).
loans
Effect on UBS Group income statement presentation
Upon adoption of IFRS 9, the reclassification of auction rate
Investment Bank, certain
in the
securities, certain
repurchase agreements and brokerage balances from amortized
cost to FVTPL has resulted in the interest income from these
instruments moving from
(expense) from
financial instruments measured at amortized cost to Interest
income (expense) from financial instruments measured at fair
value through profit or loss. These changes have been applied
prospectively from 1 January 2018.
Interest
income
Effect on UBS Group statement of cash flows
Following the adoption of IFRS 9, changes have been made to
the statement of cash flows to reflect the changes arising from
financial instruments that have been reclassified on the balance
sheet. In particular, cash flows from certain financial assets
previously measured as available-for-sale assets at fair value
through other comprehensive income have been reclassified
from investing activities to operating activities as the assets are
measured at fair value through profit or loss effective 1 January
2018.
Transition to expected credit loss requirements
As set out in the Group’s amended accounting policies in
Note 1a, IFRS 9 introduced 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 and the loss-provisioning
approach for financial guarantees and loan commitments under
IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
The majority of ECL calculated as of the transition date relate
to the private and commercial mortgage portfolio and corporate
lending in Switzerland within Personal & Corporate Banking.
5) Transition to IFRS 9 as of 1 January 2018
Transition to classification and measurement requirements
As set out in the amended accounting policies in Note 1a, IFRS 9
requires all financial assets, except equity instruments and
derivatives, to be classified at amortized cost, at fair value
through other comprehensive income or at fair value through
profit or loss (FVTPL), based on the business model for managing
the
flow
characteristics.
their contractual cash
respective assets and
Changes resulting from the application of IFRS 9 classification
and measurement requirements as of 1 January 2018 have been
applied as follows:
– Determination of the business model was made based on
facts and circumstances as of the 1 January 2018 transition
date.
– De-designations and new designations of
financial
instruments at FVTPL, pursuant to transition requirements of
IFRS 9, have been carried out as of 1 January 2018. These
reassessments resulted in:
i.
the de-designation of certain financial assets designated
at FVTPL, as they are managed on a fair value basis, and
therefore mandatorily measured at fair value, or are no
longer managed on a fair value basis but held to collect
the contractual cash flows and therefore measured at
amortized cost; and
the new designation of financial liabilities at FVTPL (e.g.,
brokerage payables) in order to achieve measurement
consistency with associated financial assets that are
mandatorily measured at FVTPL
(e.g., brokerage
receivables).
ii.
For UBS, the most significant IFRS 9 classification and
measurement changes on transition to IFRS 9 were as follows:
– financial assets that no longer qualify for amortized cost
accounting under IFRS 9 have been classified at FVTPL
because their cash flow characteristics do not satisfy the
solely payments of principal and interest criterion (e.g.,
auction rate securities and certain brokerage receivables);
– lending arrangements that no longer qualify for amortized
cost accounting under IFRS 9 are classified at FVTPL because
the business model within which they are managed does not
have an objective to hold financial assets in order to collect
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Note 1 Summary of significant accounting policies (continued)
Models at transition
For the purpose of implementing ECL under IFRS 9, UBS has
leveraged existing Pillar 1 internal ratings-based (IRB) models
that are also used in determining expected loss and risk-
weighted assets under the Basel III framework and Pillar 2 stress
loss models.
Existing models have been adapted and 29 new models have
been developed for the ECL calculation that consider the
complexity, structure and risk profile of relevant portfolios and
take account of the fact that the probabilities of default (PD) and
the loss given default (LGD) used in the ECL calculation are
point-in-time-based as opposed to the corresponding Basel III
through-the-cycle (TTC) parameters. Management adjustments
have also been made. UBS has leveraged its existing model risk
framework, including the key model validation control executed
by Model Risk Management & Control. New and revised models
have been approved by UBS’s Group Model Governance Board.
The assignment of internal counterparty rating grades and
the determination of default probabilities for the purposes of
Basel III remain unchanged.
→ Refer to “Credit risk models” in the “Risk management and
control” section of this report for more information
Scenarios and scenario weights at transition
As outlined in Note 1a, UBS uses four different economic
scenarios in the ECL calculation: an upside, a baseline, a mild
downside and a severe downside scenario. ECL calculated on
transition have been determined for each of the scenarios and
subsequently weighted based on the probabilities in the table
“Economic scenarios and weights applied.”
Economic scenarios and weights applied
ECL scenario
Upside
Baseline
Mild downside
Severe downside
Assigned weights in % (1.1.18 )
20.0
42.5
30.0
7.5
→ Refer to Note 23b for information on weights applied to
economic scenarios as at 31 December 2018
UBS has established IFRS 9 ECL Scenario and Operating
Committees to propose and approve the selection of the
scenarios and weights to be applied and to monitor whether
appropriate governance exists.
Macroeconomic and other factors at transition
Assumptions around the most
important forward-looking
economic factors for Switzerland, the US and other regions as
applied in each of the economic scenarios to determine ECL at
the date of transition can be summarized as follows.
For the baseline scenario, which is modeled along our
business plan assumptions of a continuation of overall important
global growth, Swiss GDP growth remains between 1% and 2%
annually over the three years of the scenario. Moderate growth
results in a very mild increase of unemployment, which stabilizes
at around 3.5%. Asset price growth is also moderate, with the
Swiss equity price index rising approximately 8% annually, while
house prices grow by less than 1% annually. Policy rates, short-
term interest rates and government bond yields increase very
gradually over the three years of the scenario by approximately
50 basis points. GDP growth in the US remains relatively stable,
and faster than in Switzerland. Monetary policy tightens at a
similar pace to Switzerland and, combined with a modest
decline in the unemployment rate, helps to keep inflation in
check. US equity prices slightly underperform their Swiss
counterparts, while house prices outperform relatively stagnant
Swiss house price growth. In the rest of the world, growth
remains buoyant, with moderating growth in both Europe and
China contrasting with accelerating growth in other emerging
markets.
In the upside scenario, which assumes GDP growth rising
above trend in most countries with only a moderate rise in
inflation and ongoing accommodative monetary policies, GDP
growth in Switzerland peaks at around 5% annually. Strong
growth leads to a decline in unemployment to very low levels
(below 1%) by 2020. Asset prices grow at a robust pace, with
equity prices increasing approximately 10% annually and house
prices (single-family homes) rising approximately 4% annually.
Policy and short-term interest rates remain low over the entire
scenario, while government bond yields experience a sustained
increase. In the US and the rest of the world, the scenario shows
broadly similar features, with growth accelerating in Year 1
before steadily returning toward trend by Year 3. Specifically in
the US, GDP growth accelerates at a slightly faster pace than in
Switzerland, although the US experiences a slightly
less
substantial improvement in the unemployment rate by Year 3.
The degree of policy tightening is marginally greater over the
scenario horizon and, as in Switzerland, long-term government
bond yields rise more significantly than short-term rates, and to
a greater degree.
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Note 1 Summary of significant accounting policies (continued)
generally follow the principles described
in the relevant
accounting policy provided in Note 1a. Furthermore, the
following principles have been applied.
General: In estimating the retrospective lifetime PDs, the
economic conditions over the relevant prior periods and the
general significant uncertainty inherent in such approximation
have been considered to determine the allocation of instruments
to stage 2 at transition.
Real estate financing: The Basel III rating methodology applied
to the majority of income-producing real estate financings
within Personal & Corporate Banking, which is leveraged for IFRS
9 ECL calculations, was significantly changed in 2017. As a
consequence, there is no comparable rating on origination to
determine whether an SICR has arisen over time. As permitted
by the IFRS 9 transition requirements, a lifetime ECL allowance
has therefore been recognized for certain real estate financing
positions and will continue to be recognized until the positions
are derecognized.
Other portfolios, including private mortgages and commercial
SME clients: The Basel III rating models for other key portfolios in
Personal & Corporate Banking, in particular for private client
mortgages and commercial clients in the small and medium-
sized enterprise segment, have recently been subject to a major
redesign. While the methodology remained essentially the same
and the calibration to the portfolios’ average TTC PD value
unchanged, the effect on the stage allocation is significant. This
is due to the fact that the introduction of new models has led to
a broader and different distribution of borrowers across the
rating spectrum; while there was no material effect on those
counterparties with an uplift in their rating, some of those that
had a downward shift in their rating triggered the SICR
threshold and a reclassification into stage 2 at transition.
Overview of transition effects
The table on the following pages provides a detailed overview of
the IFRS 9 transition effects as of 1 January 2018. This includes:
– reclassification of IAS 39 carrying amounts to the new
categories applicable under IFRS 9;
– remeasurement of carrying amounts due to reclassification
(any remeasurement to fair value and / or reversal of IAS 39
allowances or IAS 37 provisions for assets moving from
amortized cost to fair value); and
– recognition of IFRS 9 ECL for in-scope assets, off-balance
sheet positions and other credit lines.
The following table also includes the effects recognized for
deferred tax assets and therefore the total effect provided in
Retained earnings in the table is net of tax effects. Explanatory
footnotes set out after the table provide additional details on
these changes.
The mild downside scenario is based on a monetary policy
tightening assumption, implemented to deflate a potential asset
price bubble, causing Swiss GDP to decline by almost 1% in the
first year of the scenario. The unemployment rate rises to
roughly 5%. Equity prices fall by more than 20% over three
years, while house prices decline by 15% over the same period.
The fall of the nominal asking rent index, which is cushioned by
higher interest rates, is more moderate than the decline in house
prices. Short-term interest rates rise significantly as a result of
monetary tightening, as well as government bond yields. In this
scenario, inflation in the US accelerates rapidly, leading to a
rates, with a similar
sharp
development in Switzerland. GDP growth and house prices
decline at a similar rate in the US and Switzerland. In the rest of
the world, growth is also weighed down, particularly in more
vulnerable emerging markets such as Russia, Turkey and Brazil,
as interest rates and credit spreads rise sharply.
in short-term
interest
rise
The severe downside scenario is modeled to mimic a severe
recession
caused by an event affecting Switzerland’s
competitiveness in key export markets, with Swiss GDP shrinking
almost 7% in the first year of the scenario. The severe recession
results in a substantial increase in unemployment, which peaks
at around 9%. Asset prices plummet, with the Swiss equity
index falling more than 55% over three years, and house prices
declining 27% over the same period. Policy and short-term
interest rates remain low over the entire scenario horizon. US
GDP and unemployment deteriorate by a lesser degree than in
Switzerland, and while house and equity prices decline sharply,
the effects are also less severe than in Switzerland. With more
scope to cut rates than the Swiss National Bank, short-term rates
fall in the US. In the rest of the world, growth also slows sharply,
particularly in the eurozone and neighboring emerging markets,
such as Turkey and Russia.
→ Refer to Note 23 for more information
ECL measurement period at transition
As set out in Note 1a, for the majority of ECL-relevant
instruments, the contractual maturity is used to calculate the
measurement period, with this capped at 12 months when
stage 1 ECL are required. In addition, for credit card limits and
Swiss callable master credit facilities, judgment is required as
UBS must determine the period over which it is exposed to credit
risk. A seven-year period has been applied for credit cards and
12 months for master credit facilities. UBS’s ECL-relevant
financial instruments have relatively short average maturities,
which significantly contribute to the level of ECL on transition.
SICR determination at transition
The identification of instruments for which a significant increase
in credit risk (SICR) has been determined since initial recognition,
and the corresponding allocation to stage 2 at transition,
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Note 1 Summary of significant accounting policies (continued)
Reclassification and remeasurement of carrying amounts and recognition of ECL upon adoption of IFRS 9
31.12.17
1.1.18
Remeasurement
due to
reclassification
incl. reversal of
IAS 39 / IAS 37
allowances /
provisions
Carrying
amount
(IAS 39)
Reclassification
(of IAS 39
carrying
amounts)
Recognition of
ECL (IFRS 9)
Carrying
amount
(IFRS 9)
USD million
Assets
Cash and balances at central banks
Loans and advances to banks
to: Brokerage receivables
Receivables from securities financing transactions
to: Financial assets at fair value not held for trading
Cash collateral receivables on derivative instruments
Loans and advances to customers
to: Financial assets at fair value not held for trading
to: Brokerage receivables
to: Financial assets at fair value held for trading
from: Financial assets at fair value not held for trading
from: Financial assets at fair value held for trading
Other financial assets measured at amortized cost
to: Brokerage receivables
from: Financial assets measured at fair value through other comprehensive
income
Total financial assets measured at amortized cost
Financial assets at fair value held for trading
to: Loans and advances to customers
to: Financial assets at fair value not held for trading
from: Loans and advances to customers
of which: assets pledged as collateral that may be sold or repledged by
counterparties
Derivative financial instruments
Brokerage receivables
from: Loans and advances to banks
from: Loans and advances to customers
from: Other financial assets measured at amortized cost
Financial assets at fair value not held for trading
to: Loans and advances to customers
from: Financial assets at fair value held for trading
from: Receivables from securities financing transactions
from: Loans and advances to customers
from: Financial assets measured at fair value through other comprehensive
income
Total financial assets measured at fair value through profit or loss
Financial assets measured at fair value through other comprehensive income
to: Other financial assets measured at amortized cost
to: Financial assets at fair value not held for trading
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
Total assets
Classification under
IAS 39
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
FVTPL (designated)
FVTPL (held for trading)
Loans and receivables,
held to maturity
Loans and receivables
Available for sale
FVTPL (held for trading)
FVTPL (held for trading)
FVTPL (held for trading)
Loans and receivables
90,045
14,094
91,951
24,040
326,746
37,815
584,691
129,407
FVTPL (held for trading) 36,277
121,285
FVTPL (derivatives)
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
FVTPL (designated)
FVTPL (designated)
FVTPL (held for trading)
Loans and receivables
Loans and receivables
60,4579
Available for sale
Available for sale
Available for sale
Available for sale
311,148
8,889
1,045
9,057
6,563
10,056
7,830
939,279
(17)
(17) 1
(5,085)
(5,085) 2
(8,024)
(2,747) 3
(4,812) 1
(480) 4
9 5
6 5
(19,004)
(19,573) 1
569 6
(32,131)
(11,135)
(6) 5
(11,609) 7
480 4
24,403
17 1
4,812 1
19,573 1
20,822
(9) 5
11,609 7
5,085 2
2,747 3
1,391 8
34,090
(1,960)
(569) 6
(1,391) 8
0
(3)12
90,045
14,074
(2)12
86,864
0
(241)12
24,040
318,480
(36)12
18,775
(282)
552,277
118,256
36,277
121,285
24,403
0
0
0
0
0
(16)
(16)4
(295)
80,985
(1)
(293) 3
(310)
5911
6611
(251)
(216)
344,928
6,93010
1,045
9,057
6,563
10,182
7,830
938,812
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Note 1 Summary of significant accounting policies (continued)
Reclassification and remeasurement of carrying amounts and recognition of ECL upon adoption of IFRS 9 (continued)
31.12.17
1.1.18
USD million
Liabilities
Amounts due to banks
Payables from securities financing transactions
to: Other financial liabilities designated at fair value
Cash collateral payables on derivative instruments
Customer deposits
to: Brokerage payables designated at fair value
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
to: Brokerage payables designated at fair value
Derecognition: deferred fees on other loan commitments
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
Derivative financial instruments
Recognition: Loan commitments
Derecognition: Loan commitments
Brokerage payables designated at fair value
from: Customer deposits
from: Other financial liabilities measured at amortized cost
Debt issued designated at fair value
Other financial liabilities designated at fair value
from: Payables from securities financing transactions
Total financial liabilities measured at fair value through profit or loss
Provisions
Other non-financial liabilities
Total liabilities
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Total liabilities and equity
Classification under
IAS 39
Carrying
amount
(IAS 39)
Reclassification
(of IAS 39
carrying
amounts)
Remeasurement
due to
reclassification
incl. reversal of
IAS 39 / IAS 37
allowances /
provisions
Recognition of
ECL (IFRS 9)
Carrying
amount
(IFRS 9)
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL (held for trading)
FVTPL (derivatives)
Amortized cost –
off-balance sheet
FVTPL (derivatives)
Amortized cost
Amortized cost
Amortized cost
FVTPL (designated)
FVTPL (designated)
Amortized cost
7,728
17,485
31,029
419,577
143,160
37,276
656,255
31,251
119,137
50,782
16,643
217,813
3,214
9,443
886,725
338
23,598
(2,210)
25,932
4,838
52,495
59
52,554
939,279
(5,212)
(5,212) 13
(5,404)
(5,404) 14
(30,413)
(30,413) 14
(41,030)
35,818
5,404 14
30,413 14
5,212
5,212 13
41,030
(4)
(4) 4
(4)
59
61 4
(2) 5
(5)
(5) 13
54
50
7612
76
748,15
(74)8,15
0
0
0
(300)
(291)
(300)15
(291)15
(300)
(251)
(291)
(216)
7,728
12,273
31,029
414,172
143,160
6,859
615,222
31,251
119,196
35,818
50,782
21,850
258,897
3,290
9,443
886,851
338
23,598
(2,210)
25,415
4,764
51,905
59
51,963
938,812
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Explanatory footnotes to the table “Reclassification and remeasurement of carrying amounts and recognition of ECL upon adoption of IFRS 9”
Table ref.
Description of classification or remeasurement changes on adoption of IFRS 9 as of 1 January 2018
1
2
3
4
5
6
7
Certain customer and prime brokerage receivable balances, in the Investment Bank and Global Wealth Management, fail the solely payments of principal and interest
(SPPI) criterion for measurement at amortized cost. These include USD 4,812 million previously included within Loans and advances to customers, USD 17 million from
Loans and advances to banks and USD 19,573 million previously included within Other financial assets measured at amortized cost. The receivables are managed under a
business model whose objective is to hold the assets to collect contractual cash flows. However, the reported receivables represent an aggregation of cash receivable and
payable balances that form a single unit of account at the client level and generate a return that does not constitute consideration for the time value of money, credit risk
and other basic lending risks. The SPPI criterion is therefore not met and under IFRS 9 the receivables are mandatorily measured at fair value through profit or loss (FVTPL)
and separately presented as Brokerage receivables. There was no difference between the amortized cost carrying amount and the fair value as of 1 January 2018 and
therefore no remeasurement gain or loss has been recognized.
Based on the business model assessment under IFRS 9, certain reverse repurchase agreements with a carrying amount of USD 5,085 million as of 31 December 2017 were
determined to be managed on a fair value basis and were therefore reclassified from amortized cost to FVTPL measurement under IFRS 9. The carrying value has been
reclassified from Receivables from securities financing transactions to Financial assets at fair value not held for trading as of 1 January 2018. A remeasurement loss of
USD 1 million has been recorded in Retained earnings.
USD 11,787 million of forward starting reverse repurchase agreements are newly accounted for as derivatives, prior to settlement, from 1 January 2018 as they are
managed on a fair value basis. The fair value of the derivatives as of 1 January 2018 was immaterial.
Certain positions previously included within Loans and advances to customers with a carrying amount of USD 2,747 million as of 31 December 2017 were reclassified to
Financial assets at fair value not held for trading upon adoption of IFRS 9. This includes:
– auction rate securities (USD 2,169 million) that are held in Corporate Center and contain an embedded leverage feature triggering the failure of the SPPI criterion; and
– certain loans in the Investment Bank (USD 566 million) and in Corporate Center (USD 12 million) that either fail the SPPI criterion or are held within a business model
with an intent to sell or substantially hedge the primary risks.
These assets are mandatorily measured at FVTPL under IFRS 9. A corresponding net remeasurement loss of USD 293 million was recognized in Retained earnings related to
these reclassifications. This remeasurement loss also included reversal of specific credit loss allowances (USD 11 million).
Due to a change in the underlying business model, loans and advances to customers with a carrying amount of USD 480 million as of 31 December 2017 have been
reclassified to Financial assets at fair value held for trading as of 1 January 2018. A corresponding net remeasurement loss of USD 16 million, which includes the reversal of
specific IAS 39 credit loss allowances, was recognized in Retained earnings related to this reclassification.
Irrevocable loan commitments that are contractually linked with these financial assets are now recognized as Derivative financial instruments (derivative liabilities) and are
measured at FVTPL as of 1 January 2018. This reclassification resulted in a USD 61 million loss with a corresponding entry to Retained earnings.
Liabilities arising from deferred fees of USD 4 million related to these loan commitments recorded as Other financial liabilities measured at amortized cost at 31 December
2017 were derecognized with a corresponding entry to Retained earnings.
Financial assets with a carrying amount of USD 15 million as of 31 December 2017 were reclassified to Loans and advances to customers from Financial assets at fair value
not held for trading (USD 9 million) and from Financial assets at fair value held for trading (USD 6 million) given management’s intent to hold these financial assets to
collect contractual cash flows.
Loan commitments related to these financial assets, which were recognized as derivative liabilities with a carrying value of USD 2 million as of 31 December 2017, were
accordingly derecognized on 1 January 2018 with a corresponding entry to Retained earnings.
Certain debt instruments with a carrying amount of USD 569 million as of 31 December 2017 were formerly classified as available for sale and measured at fair value
through other comprehensive income (FVOCI) under IAS 39 but are measured at amortized cost under IFRS 9. Those positions, which are held to collect cash flows solely
representing payment of principal and interest, are presented within Other financial assets measured at amortized cost as of 1 January 2018. The fair value of these assets
was consistent with the amortized cost value as of 1 January 2018 and no remeasurement gain or loss has been recognized.
Upon adopting IFRS 9, UBS has elected to refine the assets classified within Financial assets at fair value held for trading to carve out those that are segregated from UBS’s
trading activities, where UBS’s role is primarily to manage the assets on a fair value basis on behalf of others. Instead, such assets will be presented alongside others
managed on a fair value basis within Financial assets at fair value not held for trading. As a consequence of this refinement, UBS has reclassified assets held to hedge unit-
linked investment contracts of USD 11,609 million from Financial assets at fair value held for trading to Financial assets at fair value not held for trading as of 1 January
2018. No remeasurement gain or loss has been recognized.
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Note 1 Summary of significant accounting policies (continued)
Explanatory footnotes to the table “Reclassification and remeasurement of carrying amounts and recognition of ECL upon adoption of IFRS 9”
(continued)
Table ref.
Description of classification or remeasurement changes on adoption of IFRS 9 as of 1 January 2018 (continued)
8
9
10
11
12
13
14
15
UBS holds certain global and local liquidity buffers that were determined to be managed on a fair value basis as management utilizes fair value information for reporting
and decision-making purposes. Therefore, assets previously classified as available for sale under IAS 39 with a carrying amount of USD 636 million as of 31 December
2017 were reclassified to Financial assets at fair value not held for trading. An unrealized gain of USD 5 million related to these positions was reclassified from Other
comprehensive income to Retained earnings.
Additionally, equity instruments and investment fund units previously classified as available for sale under IAS 39 with a carrying amount of USD 755 million as of
31 December 2017 were reclassified to Financial assets at fair value not held for trading under the revised IFRS 9 measurement rules. A related unrealized gain in OCI of
USD 204 million has been reclassified to Retained earnings.
Additionally, a net tax expense of USD 134 million was transferred from OCI to Retained earnings related to the positions above that were reclassified out of the IAS 39
available-for-sale category.
Assets previously designated at FVTPL with a carrying amount of USD 60,457 million as of 31 December 2017 are no longer designated as such under IFRS 9, as it was
determined that these assets were either held in a business model that is managed on a fair value basis, did not meet the SPPI criterion, or did meet the SPPI criterion and
are held in a hold-to-collect business model.
Of the total, assets with a carrying amount of USD 60,448 million are now mandatorily measured at FVTPL and included within Financial assets at fair value not held for
trading. The remaining assets with a carrying amount of USD 9 million have been de-designated and were reclassified to Loans and advances to customers, given a change
in business model to hold-to-collect (refer to footnote 5).
Certain debt instruments with a carrying amount of USD 6,930 million as of 31 December 2017 were formerly classified as available for sale under IAS 39 and are
measured at FVOCI under IFRS 9. These instruments include US government bonds, US government-sponsored mortgage-backed securities, and other forms of debt that
are held in a business model whose objective is achieved by both collecting contractual cash flows and selling and that meet the SPPI criterion. These positions are now
presented within Financial assets measured at fair value through other comprehensive income.
Deferred tax assets of USD 126 million have been recognized in connection with the adoption of IFRS 9. Of the total effect, USD 66 million relates to the recognition of ECL
and USD 59 million relates to classification and measurement changes upon adoption of IFRS 9.
Upon adoption of the ECL requirements of IFRS 9, a transition effect of USD 357 million was recognized, consisting of USD 148 million of stage 1 allowances, USD 193
million of stage 2 allowances and an incremental increase in stage 3 allowances of USD 16 million. The effect was mainly recognized within Loans and advances to
customers (USD 241 million), with effects also recognized in Other financial assets measured at amortized cost (USD 36 million), Loans and advances to banks
(USD 3 million), Receivables from securities financing transactions (USD 2 million) and Provisions (USD 76 million).
Certain repurchase agreements with a carrying amount of USD 5,212 million as of 31 December 2017 have been designated at FVTPL as they are managed in conjunction
with reverse repurchase agreements that are mandatorily measured at FVTPL under IFRS 9. These amounts are included within Other financial liabilities designated at fair
value as of 1 January 2018. A remeasurement gain of USD 5 million has been recognized in Retained earnings as of 1 January 2018 related to this reclassification.
USD 7,930 million of forward starting repurchase agreements are newly accounted for as derivatives, prior to settlement, from 1 January 2018 as they are managed on a
fair value basis. The fair value of the derivatives as of 1 January 2018 was immaterial.
To achieve measurement consistency with reclassified customer and prime brokerage receivables that are measured at FVTPL following adoption of IFRS 9, certain customer
deposits with a carrying amount of USD 5,404 million and prime brokerage payables with a carrying amount of USD 30,413 million as of 31 December 2017 have been
designated at FVTPL and are presented within Brokerage payables designated at fair value as of 1 January 2018. There was no difference between the amortized cost
carrying amount and the fair value as of 1 January 2018 and therefore no remeasurement gain or loss has been recognized.
The adoption of IFRS 9 has resulted in a reduction to IFRS consolidated equity as of 1 January 2018 of USD 591 million.
This effect is comprised of classification and measurement changes of USD 360 million on a pre-tax basis and USD 300 million net of tax, as well as effects from the
implementation of ECL methodology of USD 357 million on a pre-tax basis and USD 291 million net of tax. In addition, USD 74 million has been reclassified from Other
comprehensive income recognized directly in equity, net of tax, to Retained earnings (refer to footnote 8 above), with no overall effect on equity attributable to
shareholders.
372
Note 1 Summary of significant accounting policies (continued)
Reconciliation of allowances and provisions on adoption of IFRS 9 as of 1 January 2018
The table below provides a reconciliation from the IAS 39 allowances / IAS 37 provisions to the IFRS 9 ECL allowances / provisions
recognized as of 1 January 2018 upon adoption of IFRS 9.
Reconciliation of allowances and provisions on adoption of IFRS 9
USD million
On-balance sheet
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
Total on-balance sheet
Off-balance sheet financial instruments and other credit lines
Guarantees
Loan commitments
Other credit lines
Total off-balance sheet financial instruments and other credit lines
Total
of which: stage 1
of which: stage 2
of which: stage 3
31.12.17
Loss allowances
and provisions
(IAS 39 / IAS 37)
1.1.18
Reversal of
allowances
(IAS 39)
Recognition of ECL
(IFRS 9)1
Allowances and
provisions for ECL
(IFRS 9)
(3)
(675)
(104)4
(781)
(30)
(4)
(34)
(815)
272
27
27
0
(3)
(2)
0
(241)3
(36)
(282)
(8)
(33)
(35)
(76)
(357)
(148)
(193)
(16) 5
0
(5)
(2)
(890)
(139)
(1,037)
(38)
(37)
(35)
(110)
(1,146)
(148)
(193)
(806)
1 Includes stage 1 and stage 2 expected credit losses and additional stage 3 expected credit losses. 2 The reversal of USD 27 million of IAS 39 loss allowances relates to instruments reclassified from amortized
cost to fair value through profit or loss on transition to IFRS 9. Refer also to footnotes 3 and 4 to the table “Reclassification and remeasurement of carrying amounts and recognition of ECL upon adoption of
IFRS 9.” 3 Includes the reversal of collective allowances of USD 13 million. 4 Includes USD 84 million related to loans to financial advisors for which an allowance was reported as a direct reduction of the
carrying amount as of 31 December 2017. 5 The incremental increase in stage 3 allowances of USD 16 million arises from additional consideration of forward-looking scenarios under IFRS 9.
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Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
IFRS 9 transition effect on other comprehensive income and retained earnings as of 1 January 2018
The table below presents the transition effects recognized in OCI and retained earnings upon adoption of IFRS 9.
IFRS 9 impact on other comprehensive income and retained earnings
USD million
Other comprehensive income recognized directly in equity, net of tax
Reclassification of financial assets (available for sale to fair value through profit or loss) – equity instruments
Reclassification of financial assets (available for sale to fair value through profit or loss) – debt instruments
Tax (expense) / benefit
Total change in other comprehensive income
Retained earnings
Remeasurement of financial assets (reclassified from amortized cost to fair value through profit or loss)
Reclassification of financial assets (reclassified from available for sale to fair value through profit or loss)
Recognition of ECL for on-balance sheet financial assets
Remeasurement of financial liabilities (reclassified from amortized cost to designated at fair value through profit or loss)
Recognition of derivative loan commitments measured at fair value through profit or loss
Derecognition of liabilities for deferred fees on other loan commitments
Derecognition of derivative loan commitments measured at fair value through profit or loss
Recognition of ECL for off-balance sheet positions
Tax (expense) / benefit
Total change in retained earnings
Total change in equity due to the adoption of IFRS 9
(204)
(5)
134
(74)
(310)
209
(282)
5
(61)
4
2
(76)
(9)
(518)
(591)
374
Note 1 Summary of significant accounting policies (continued)
d) International Financial Reporting Standards and Interpretations to be adopted in 2019 and later and other changes
IFRS 16, Leases
UBS will adopt IFRS 16, Leases, on 1 January 2019. This will
fundamentally change how UBS accounts for operating leases
when acting as a lessee, with a requirement to record a lease
obligation and a right-of-use asset on the balance sheet. Upon
adoption of IFRS 16, assets and liabilities are expected to
increase by approximately USD 3.5 billion with no material effect
to the Group’s equity.
Changes in Corporate Center cost allocations and equity
attribution to business divisions as of the first quarter of 2019
In order to further align Group and divisional performance, UBS
will adjust the methodology for the allocation of Corporate Center
– Services funding costs and expenses to the business divisions. At
the same time, UBS is updating its funds transfer pricing
framework to better reflect the sources and usage of funding. All
of these changes are effective as of 1 January 2019 and prior-
period segment information will be restated.
Together, these changes will decrease the business divisions’
operating results and thereby increase their adjusted cost / income
ratios by approximately 1-2 percentage points, with an offsetting
effect of approximately USD 0.7 billion in Corporate Center’s
operating profit / (loss) before tax.
Corporate Center will retain funding costs for deferred tax
assets, costs relating to UBS’s legal entity transformation program
and other costs not attributable to or representative of the
performance of the business divisions.
Alongside the update to allocations and UBS’s funds transfer
pricing framework, the Group is increasing the allocation of
balance sheet resources from Corporate Center to the business
divisions, resulting in approximately USD 220 billion of assets
allocated from Corporate Center to the business divisions in
restated 2018 numbers, predominantly from high-quality liquid
assets and certain other assets centrally managed on behalf of
the business divisions.
Upon adoption of IFRS 16, Leases, as of 1 January 2019, UBS
intends to additionally allocate approximately USD 3.5 billion of
newly recognized right of use assets to the business divisions.
following
the aforementioned changes
Changes to Corporate Center segment reporting effective first
quarter 2019
As announced in the third quarter 2018 report, UBS will no longer
separately assess the performance of Non-core and Legacy Portfolio,
given its substantially reduced size and resource consumption. In
addition,
to UBS’s
methodology for allocating funding costs and expenses from
Corporate Center – Services and Corporate Center – Group Asset
and Liability Management (Group ALM) to the business divisions,
the operating loss retained in Corporate Center – Services and
Corporate Center – Group ALM will be significantly reduced. As a
consequence and in compliance with IFRS 8, Operating Segments,
beginning with the first quarter 2019 report, UBS will provide results
for total Corporate Center only and will not separately report
Corporate Center – Services, Group ALM and Non-core and Legacy
Portfolio. Furthermore, UBS will operationally combine Group
Treasury with Group ALM and call this combined unit Group
Treasury. Commentary on performance of this function will be
included in the Corporate Center management discussion and
analysis in UBS’s quarterly and annual reporting. Former Group ALM
total risk management net income after allocations will continue to
be disclosed separately. Prior-period information will be restated.
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. 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 reflect that uncertainty using an expected
value (i.e., a 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 expects to recognize a net tax expense of USD 11 million
in retained earnings on 1 January 2019 in respect of the
adoption of IFRIC 23, which will be reflected in our first quarter
2019 report.
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Consolidated financial statements
Note 1 Summary of significant accounting policies (continued)
amended Framework seeks to
improve the concepts for
reporting assets, liabilities, income and expenses, explains how
to decide when assets and liabilities should be measured using
historical cost and when they should be measured at current
value, and provides up-to-date tools that will help the IASB in
setting IFRS standards. It underpins existing IFRS standards but
does not override them. Preparers use the Framework as a point
of reference to develop accounting policies in rare instances
where a particular business transaction is not covered by existing
IFRS standards.
existing,
The IASB and the IFRS Interpretations Committee will begin to
use the new Framework immediately in developing new, or
amending
and
interpretations. For UBS, the Framework becomes effective in
annual periods beginning on 1 January 2020. UBS is currently
assessing the effect of the amended Framework on its financial
accounting policies.
standards
reporting
financial
Amendments to IFRS 3, Business Combinations
In October 2018, the IASB issued Definition of a Business
(Amendments to IFRS 3). The amendments clarify the definition
of a business, with the objective of assisting in the determination
of whether a transaction should be accounted for as a business
combination or an asset acquisition. The amendments apply to
transactions for which the acquisition date is on or after
1 January 2020, with early application permitted. Adoption of
these amendments is not expected to have a material effect on
the financial statements.
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. The adoption will have no effect on the Group’s financial
statements on transition at 1 January 2019.
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. The
adoption of these amendments will have no material effect on
the Group’s financial statements on the transition date.
Conceptual Framework
In March 2018, the IASB issued a revised version of its
Conceptual Framework for Financial Reporting (the Framework).
The Framework sets out the fundamental concepts of financial
reporting that guide the IASB in developing IFRS standards. The
376
Note 2a Segment reporting
The operational structure of the Group as of 31 December 2018
was comprised of Corporate Center and four business divisions:
Global Wealth Management, Personal & Corporate Banking,
Asset Management and the Investment Bank.
as well as registered investment funds in various jurisdictions. It
covers the main asset management markets globally, with a
presence in 23 countries grouped in four regions: the Americas;
Europe, Middle East and Africa; Switzerland; and Asia Pacific.
→ Refer to “Segment reporting” in Note 1a for more information
Global Wealth Management
In the first quarter of 2018, Wealth Management and Wealth
Management Americas were combined into a single unit. Global
Wealth Management provides investment advice and solutions
to private clients, in particular in the ultra high net worth and
high net worth segments. Clients benefit from Global Wealth
Management’s comprehensive set of capabilities, including
wealth planning,
asset protection,
philanthropy, corporate and banking services as well as family
office services in collaboration with the Investment Bank and
Asset Management. Global Wealth Management has a global
footprint, with the US representing its largest market. Clients are
served through local offices and dedicated advisors. The ultra
high net worth business is managed globally across the regions.
investing,
lending,
Personal & Corporate Banking
Personal & Corporate Banking provides comprehensive financial
products and services to private, corporate and institutional
clients and operates in Switzerland in the private and corporate
loan market. Personal & Corporate Banking is central to UBS’s
universal bank model in Switzerland and it 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. While Personal & Corporate
Banking operates primarily in its home market of Switzerland, it
also provides capabilities to support the growth of the
international business activities of UBS’s corporate and
institutional clients through local hubs in Frankfurt, New York,
Hong Kong and Singapore. The business is divided into Personal
Banking and Corporate & Institutional Clients (CIC).
Asset Management
Asset Management is a large-scale and diversified global asset
manager. It offers investment capabilities and styles across all
major traditional and alternative asset classes, as well as
platform solutions and advisory support
institutions,
intermediaries and Global Wealth Management
wholesale
clients around the world. Asset Management offers clients a
wide range of investment products and services in different asset
classes in the form of segregated, pooled or advisory mandates
to
Investment Bank
The Investment Bank provides a range of services to institutional,
corporate and wealth management clients to help them raise
capital, grow their businesses, invest and manage risks. It is
focused on its traditional strengths in advisory, capital markets,
equities and foreign exchange, complemented by a targeted
rates and credit platform. The Investment Bank uses its research
and technology capabilities to support its clients as they adapt to
the evolving market structures and changes in the regulatory,
technological, economic and competitive
landscape. The
Investment Bank delivers solutions to corporate, institutional and
wealth management clients, using its intellectual capital and
electronic platforms. It also provides services to Global Wealth
Management, Personal & Corporate Banking and Asset
Management. It has a global reach, with a presence in 33
countries and principal offices in all major financial hubs.
Corporate Center
Corporate Center provides services to the Group through the
Corporate Center – Services and Group Asset and Liability
Management (Group ALM) units. Corporate Center also includes
the Non-Core and Legacy Portfolio unit.
Corporate Center – Services consists of the Group Chief
Operating Officer area (Group Technology, Group Corporate
Services, Group Human Resources, Group Operations and Group
Sourcing), Group Finance (excluding Group ALM), Group Legal,
Group Risk Control, Communications & Branding, Group
Compliance, Regulatory & Governance, and UBS in society.
Group ALM manages the structural risk of UBS’s balance
sheet, including interest rate risk, structural foreign exchange
risk and collateral risk, as well as the risks associated with the
Group’s liquidity and funding portfolios. Group ALM also seeks
to optimize financial performance by matching assets and
liabilities. Group ALM serves all business divisions and the 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. It is overseen by a
committee chaired by the Group Chief Risk Officer.
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Consolidated financial statements
Note 2a Segment reporting (continued)
Global
Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
USD million
For the year ended 31 December 20181
Net interest income
Non-interest income
Allocations from CC Group ALM
Income2
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 assets3
Total operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
Corporate Center
UBS
Services
Group ALM
Non-core
and Legacy
Portfolio
4,206
12,659
90
16,956
(15)
16,941
7,683
1,724
3,852
3,740
4
50
13,313
3,628
2,057
2,166
56
4,278
(56)
4,222
803
285
1,208
1,285
14
0
2,310
1,912
(31)
1,874
15
1,857
0
1,857
703
202
498
541
2
1
1,406
451
937
7,641
(391)
8,188
(38)
8,150
2,941
651
2,889
2,811
8
12
6,501
1,649
(398)
(158)
43
(513)
0
(513)
3,927
3,789
(8,624)
(8,697)
1,199
2
293
(806)
(780)
(123)
295
(608)
(1)
(609)
41
42
1
35
246
(108)
172
(8)
165
35
104
176
169
153
0
0
84
(693)
0
0
315
(150)
6,025
24,306
0
30,330
(118)
30,213
16,132
6,797
0
0
1,228
65
24,222
5,991
1,468
4,522
200,036
138,809
24,371
258,691
21,733
280,135
34,715
958,489
Additions to non-current assets
196
23
1
89
1,666
0
0
1,975
1 Prior-period information may not be comparable as a result of the adoption of IFRS 9 and IFRS 15, both effective 1 January 2018. Refer to Note 1b and c for more information on these changes. 2 Impairments of
financial assets classified at fair value through other comprehensive income for the year ended 31 December 2018 totaled USD 0 million. 3 Refer to Note 16 for more information.
378
Note 2a Segment reporting (continued)
Global
Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
USD million
For the year ended 31 December 20171
Net interest income
Non-interest income
Allocations from CC Group ALM
Income2
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 assets3
Total operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
Corporate Center
UBS
Services
Group ALM
Non-core
and Legacy
Portfolio
3,722
12,196
377
16,295
(8)
16,287
7,674
1,263
3,726
3,626
4
49
12,717
3,571
1,954
1,807
184
3,945
(20)
3,925
852
296
1,156
1,251
13
0
2,317
1,607
(33)
2,097
19
2,083
0
2,083
731
235
524
562
1
3
1,495
587
1,217
7,020
(351)
7,886
(92)
7,794
3,006
675
2,824
2,729
10
12
6,527
1,267
(355)
76
123
(157)
0
(157)
3,857
4,336
(8,445)
(8,510)
1,024
7
779
(935)
128
(147)
(268)
(288)
0
(288)
34
27
(13)
145
0
0
48
(336)
24
50
(84)
(11)
(11)
(22)
44
117
228
198
0
0
388
(411)
6,656
23,098
0
29,754
(131)
29,622
16,199
6,949
0
0
1,053
71
24,272
5,351
4,305
1,046
194,990
139,062
14,638
269,731
21,371
252,092
47,395
939,279
Additions to non-current assets
120
15
1
3
1,606
0
0
1,746
1 Prior-period information may not be comparable as a result of the adoption of IFRS 9 and IFRS 15, both effective 1 January 2018. Refer to Note 1b and c for more information on these changes. 2 Impairments of
financial assets classified at fair value through other comprehensive income (prior to 2018 classified as financial assets available for sale) for the year ended 31 December 2017 totaled USD 15 million, of which
USD 12 million was recorded in Asset Management. 3 Refer to Note 16 for more information.
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Consolidated financial statements
Note 2a Segment reporting (continued)
Global
Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
USD million
For the year ended 31 December 20161
Net interest income
Non-interest income
Allocations from CC Group ALM
Income2
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 assets3
Total operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
Corporate Center
UBS
Services
Group ALM
Non-core
and Legacy
Portfolio
3,318
11,427
512
15,257
(8)
15,249
7,254
1,221
3,627
3,520
4
54
12,159
3,090
1,914
1,791
336
4,042
(6)
4,035
855
287
1,093
1,201
15
0
2,250
1,785
(33)
1,980
7
1,955
0
1,955
736
244
512
537
1
5
1,498
457
1,012
7,041
(264)
7,790
(11)
7,779
3,122
812
2,798
2,707
22
12
6,765
1,014
(326)
186
37
(103)
0
(103)
3,847
4,192
(8,263)
(8,303)
955
21
753
(856)
599
(237)
(517)
(155)
0
(155)
31
17
(49)
112
0
0
(1)
3
89
(112)
(20)
(12)
(32)
67
744
283
227
0
0
6,487
22,279
0
28,766
(38)
28,729
15,913
7,517
0
0
997
93
1,094
24,519
(154)
(1,126)
4,209
777
3,432
178,250
137,467
11,817
238,066
23,488
262,530
67,288
918,906
Additions to non-current assets
31
24
1
3
1,781
0
0
1,840
1 Prior-period information may not be comparable as a result of the adoption of IFRS 9 and IFRS 15, both effective 1 January 2018. Refer to Note 1b and c for more information on these changes. 2 Impairments
of financial assets classified at fair value through other comprehensive income (prior to 2018 classified as financial assets available for sale) for the year ended 31 December 2016 totaled USD 5 million, of which
USD 3 million was recorded in Asset Management. 3 Refer to Note 16 for more information.
380
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 2018
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 20171
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 20161
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
Total operating income
Total non-current assets
USD billion
Share %
USD billion
Share %
12.8
12.2
5.0
6.3
7.3
(1.1)
30.2
42
41
16
21
24
(3)
100
7.4
7.0
0.9
2.0
6.8
0.0
17.1
43
41
5
12
40
0
100
Total operating income
Total non-current assets
USD billion
Share %
USD billion
Share %
12.1
11.6
4.8
6.2
7.0
(0.5)
29.6
41
39
16
21
24
(2)
100
7.4
6.9
0.8
2.0
6.5
0.0
16.7
44
41
5
12
40
0
100
Total operating income
Total non-current assets
USD billion
Share %
USD billion
Share %
11.6
11.1
4.3
6.2
7.0
(0.4)
28.7
40
39
15
22
24
(1)
100
7.2
6.8
0.7
1.8
5.9
0.0
15.6
47
44
4
11
38
0
100
1 2017 and 2016 figures have been restated for the change of the presentation currency from Swiss francs to US dollars. Refer to Note 1b item 1 for more information. In addition, 2017 and 2016 figures have been
restated to reflect the regional representation of Global Wealth Management after combining Wealth Management and Wealth Management Americas in 2018. Refer to Note 1b item 3 for more information.
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Consolidated financial statements
Income statement notes
Note 3 Net interest income and other net income from fair value changes on financial instruments
Change in presentation of net interest income and other net income from fair value changes on financial instruments
instruments moving from Interest income (expense) from
financial instruments measured at amortized cost to Interest
income (expense) from financial instruments measured at fair
value through profit or loss. These changes have been applied
prospectively from 1 January 2018 with certain prior-period
information being adjusted for comparability. Comparative
information for brokerage balances now separately presents
the related interest income and expense, which was formerly
included within Interest income (expense) from loans and
deposits.
for
trading, has been
– A new line, Interest income from financial instruments at fair
to
value not held
accommodate in particular interest income from financial
assets previously designated at fair value under IAS 39, which
are now mandatorily classified at fair value through profit or
loss under IFRS 9. Comparative information has been adjusted
accordingly.
included
– Net gains / losses from financial assets previously designated
at fair value under IAS 39 (2017: net gains of USD 2,614
million; 2016: net losses of USD 174 million) are no longer
separately disclosed in the table on the following pages as
assets are now mandatorily classified at fair value through
profit or loss under IFRS 9.
The table on the following pages reflects certain presentation
changes made to reflect the effects from the adoption of new
standards and interpretations in 2018. These changes are
summarized as follows:
– In line with amendments to IAS 1, Presentation of Financial
Statements, from 1 January 2018, UBS presents interest
income and interest expense calculated, using the effective
interest rate method, on financial instruments measured at
amortized cost and financial assets measured at fair value
through other comprehensive income separately from interest
income and expense on financial instruments measured at fair
value through profit or loss (FVTPL) in the income statement.
Comparative information has been adjusted accordingly. As a
result of this change, forward points on certain short-duration
foreign exchange contracts are now presented within Interest
income from financial instruments at fair value held for
trading that were previously presented within Interest income
from loans and deposits. Comparative information was
restated accordingly.
– Upon adoption of IFRS 9, certain assets and liabilities were
reclassified from amortized cost to fair value through profit or
loss (auction rate securities, certain loans in the Investment
repurchase agreements and brokerage
Bank, certain
balances). This has resulted in the interest income from these
382
Note 3 Net interest income and other net income from fair value changes on financial instruments (continued)
For the year ended
USD million
Net interest income from financial instruments measured at amortized cost and fair value through other comprehensive income
Net interest income from financial instruments measured at fair value through profit or loss
Other net income from fair value changes on financial instruments
Total1
Global Wealth Management
of which: net interest income
of which: transaction-based income from foreign exchange and other intermediary activity 2
Personal & Corporate Banking
of which: net interest income
of which: transaction-based income from foreign exchange and other intermediary activity 2
Asset Management
Investment Bank
Corporate Client Solutions
Investor Client Services
Corporate Center
CC – Services
CC – Group ALM
CC – Non-core and Legacy Portfolio
Net interest income3
Net interest income from financial instruments measured at amortized cost and fair value through other comprehensive income
Interest income from loans and deposits4,5
Interest income from brokerage balances
Interest income from securities financing transactions6
of which: interest income from securities financing transactions measured at fair value through profit or loss since 1 January 2018
Interest income from other financial instruments measured at amortized cost
Interest income from debt instruments measured at fair value through other comprehensive income
Interest income from derivative instruments designated as cash flow hedges
Total interest income from financial instruments measured at amortized cost and fair value through other comprehensive income
Interest expense on loans and deposits7
Interest expense on brokerage balances
Interest expense on securities financing transactions8
of which: interest expense on securities financing transactions measured at fair value through profit or loss since 1 January 2018
Interest expense on debt issued
Total interest expense from financial instruments measured at amortized cost
Total net interest income from financial instruments measured at amortized cost and fair value through other comprehensive income
Net interest income from financial instruments measured at fair value through profit or loss
Interest income from financial instruments at fair value held for trading4,9
Interest income from brokerage balances
Interest income from financial instruments at fair value not held for trading9
of which: interest income from securities financing transactions measured at fair value through profit or loss since 1 January 2018 10
Other interest income
Total interest income from financial instruments measured at fair value through profit or loss
Interest expense on financial instruments at fair value held for trading11
Interest expense on brokerage balances
Interest expense on financial instruments designated at fair value
of which: interest expense on securities financing transactions measured at fair value through profit or loss since 1 January 2018 12
Total interest expense from financial instruments measured at fair value through profit or loss
Total net interest income from financial instruments measured at fair value through profit or loss
31.12.18
3,710
2,315
5,984
12,008
5,254
4,310
944
2,514
2,106
408
(30)
4,812
1,056
3,756
(541)
(159)
(554)
173
7,801
1,567
266
142
324
10,100
1,980
1,130
3,281
6,391
3,710
3,724
1,243
1,951
970
50
6,968
1,671
668
2,314
765
4,653
2,315
31.12.17
5,018
1,638
5,065
11,721
5,149
4,103
1,046
2,510
2,127
383
(24)
4,363
1,087
3,276
(278)
(43)
(162)
(72)
6,722
1,030
1,573
581
99
152
846
10,422
1,050
354
1,473
568
2,528
5,404
5,018
31.12.16
5,403
1,084
5,023
11,510
4,893
3,843
1,050
2,563
2,225
337
(29)
4,330
830
3,500
(246)
(90)
(96)
(60)
8,079
906
1,152
260
54
189
10,379
689
147
1,251
241
2,889
4,976
5,403
3,483
3,201
512
330
61
4,056
1,537
48
3,579
1,644
881
851
2,418
1,638
2,495
1,084
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Consolidated financial statements
Note 3 Net interest income and other net income from fair value changes on financial instruments (continued)
USD million
For the year ended
31.12.18
31.12.17
31.12.16
of which: net gains / (losses) from financial liabilities designated at fair value 13
Other net income from fair value changes on financial instruments
Investment Bank Corporate Client Solutions
Investment Bank Investor Client Services
Other business divisions and Corporate Center
Other net income from fair value changes on financial instruments
188
3,382
1,453
5,023
(1,516)
1 Net interest income and other net income from fair value changes on financial instruments presented for business divisions and Corporate Center units includes allocations from Corporate Center – Group ALM.
2 Mainly includes spread-related income in connection with client-driven transactions, foreign currency translation effects and income and expenses from precious metals, which are included in the income statement
line Other net income from fair value changes on financial instruments. 3 Prior-period information may not be comparable as a result of the adoption of IFRS 9, effective 1 January 2018. Refer to Note 1c for more
information on these changes. Negative interest income and negative interest expense are each individually approximately 9% of net interest income (2017: approximately 8% of net interest income; 2016:
approximately 5% of net interest income). 4 As a consequence of amendments to IAS 1, Presentation of Financial Statements, effective 1 January 2018, forward points on certain short-duration foreign exchange
contracts previously presented within Interest income from loans and deposits are now presented within Interest income from financial instruments at fair value held for trading. Comparative information was
restated accordingly. 5 Consists of interest income from cash and balances at central banks, loans and advances to banks, and negative interest on amounts due to banks and customer deposits. 6 Includes
interest income on receivables from securities financing transactions and negative interest, including fees, on payables from securities financing transactions. 7 Consists of interest expense on amounts due to
banks and customer deposits, and negative interest on cash and balances at central banks, loans and advances to banks. 8 Includes interest expense on payables from securities financing transactions and
negative interest, including fees, on receivables from securities financing transactions. 9 Includes dividend income. 10 Includes interest income on certain reverse repurchase agreements that are measured at fair
value through profit or loss since 1 January 2018 and negative interest, including fees, on the corresponding repurchase agreements. 11 Includes expense related to dividend payment obligations on financial
instruments held for trading. 12 Includes interest expense on certain repurchase agreements that are measured at fair value through profit or loss since 1 January 2018 and negative interest, including fees, on the
corresponding reverse repurchase agreements. 13 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 Other net income from fair value changes on financial instruments. 2018 includes a net gain of USD 2,152 million
related to amounts due under unit-linked investment contracts, which are designated at fair value under IFRS 9. Refer to Note 1c for more information.
611
2,863
1,591
5,065
(3,979)
709
3,537
1,738
5,984
9,382
384
Note 4 Net fee and commission income1
USD 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 related services
Other
Total fee and commission income2
of which: recurring
of which: transaction-based
of which: performance-based
Brokerage fees paid
Other
Total fee and commission expense
Net fee and commission income
of which: net brokerage fees
For the year ended
31.12.18
811
431
380
768
3,521
4,954
7,756
1,786
19,598
12,911
6,594
93
316
1,387
1,703
17,895
3,205
31.12.17
1,003
573
429
698
3,820
4,322
7,666
1,854
31.12.16
739
356
383
742
3,802
4,265
7,069
1,757
19,362
18,374
673
1,167
1,840
17,522
3,147
769
1,013
1,781
16,593
3,033
1 Upon adoption of IFRS 15, certain brokerage fees paid in an agency capacity have been reclassified from Fee and commission expense to Fee and commission income on a prospective basis from 1 January 2018,
primarily relating to third-party execution costs for exchange-traded derivative transactions and fees payable to third-party research providers on behalf of clients. In addition to the IFRS 15 changes, certain
revenues, primarily distribution fees and fund management fees, have been reclassified between reporting lines to better reflect the nature of the revenues, with prior-period information restated accordingly. This
resulted in the following effects: For the year ended 31 December 2017, USD 316 million was reclassified from Underwriting fees to Brokerage fees and USD 1,040 million was reclassified from Portfolio
management and related services to Investment fund fees. For the year ended 31 December 2016, USD 220 million was reclassified from Underwriting fees to Brokerage fees and USD 1,061 million was reclassified
from Portfolio management and related services to Investment fund fees. Also, certain expenses that are incremental and incidental to revenues have been reclassified prospectively from General and administrative
expenses to Fee and commission expense to improve the alignment of transaction-based costs with the associated revenue stream, primarily affecting clearing costs, client loyalty costs, fund and custody expenses.
As the effect of this reclassification was not material, prior-period information was not restated. 2 Reflects third-party fee and commission income of USD 12,059 million for Global Wealth Management,
USD 3,525 million for the Investment Bank, USD 2,579 million for Asset Management, USD 1,338 million for Personal & Corporate Banking and USD 97 million for Corporate Center.
Note 5 Other income
USD million
Associates, joint ventures and subsidiaries
Net gains / (losses) from acquisitions and disposals of subsidiaries1
Net gains / (losses) from disposals of investments in associates
Share of net profits of associates and joint ventures
Impairments related to associates
Total
Financial assets measured at fair value through other comprehensive income
Net gains / (losses) from disposals
Impairments
Total
Net gains / (losses) from disposals of financial assets measured at amortized cost
Net income from properties (excluding net gains / (losses) from disposals)6
Net gains / (losses) from disposals of properties held for sale
Other
Total other income
For the year ended
31.12.18
31.12.17
31.12.16
(290)2,3
464
5295
284
0
0
1
0
24
403
79
427
32
0
76
(7)
101
195
(15)
180
14
24
0
191
511
(96)
0
109
12
350
(5)
345
(3)
26
128
156
663
1 Includes foreign exchange gains / losses reclassified from other comprehensive income related to disposed foreign subsidiaries and branches. As a result of the change in presentation currency, foreign exchange
gains / losses were restated. Refer to Note 1b for more information. 2 Includes a remeasurement loss of USD 270 million related to UBS Securities China. Refer to Note 32 for more information. 3 Includes a
USD 25 million gain on sale of subsidiaries and a USD 31 million pre-tax gain on sale of real estate related to the sale of Widder Hotel. Refer to Note 32 for more information. 4 Reflects a net foreign currency
translation gain related to UBS Securities China. Refer to Note 32 for more information. 5 Includes a USD 460 million valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to
Worldline. Refer to Note 31b for more information. 6 Includes net rent received from third parties and net operating expenses.
385
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Consolidated financial statements
Note 6 Personnel expenses
USD 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
Financial advisor variable compensation2,6
Contractors
Social security
Pension and other post-employment benefit plans7
Other personnel expenses
Total personnel expenses
For the year ended
31.12.18
31.12.17
31.12.16
6,448
2,995
43
243
72
(136)
123
185
6,154
3,151
36
252
72
(107)
113
174
6,305
3,013
30
425
87
(74)
220
191
4,054
4,064
3,740
489
791
457
654
460
814
723
581
426
755
678
570
16,132
16,199
15,913
1 Includes role-based allowances. 2 Refer to Note 30 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 variable compensation consists of formulaic
compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, new assets and other
variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to vesting requirements. 7 Changes to the pension fund of
UBS in Switzerland in 2018 resulted in a reduction in the pension obligation recognized by UBS. As a consequence, a pre-tax gain of USD 241 million was recognized in the income statement in 2018, with no
overall effect on total equity. Refer to Note 29 for more information.
Note 7 General and administrative expenses
USD million
Occupancy
Rent and maintenance of IT and other equipment
Communication and market data services
Administration
of which: UK and German bank levy 1
Marketing and public relations
Travel and entertainment
Professional fees
Outsourcing of IT and other services
Litigation, regulatory and similar matters2
Other
Total general and administrative expenses
For the year ended
31.12.18
31.12.17
31.12.16
914
654
638
590
58
366
425
1,015
1,427
657
110
6,797
908
570
622
612
20
419
425
1,227
1,597
434
135
6,949
946
517
634
716
124
473
428
1,247
1,656
805
94
7,517
1 The UK bank levy expenses of USD 40 million for 2018 and USD 17 million for 2017 included a credit of USD 45 million and USD 85 million, respectively, 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 21 for more information. Also includes recoveries from third parties of USD 29 million, USD 55 million and
USD 13 million for the years ended 31 December 2018, 31 December 2017 and 31 December 2016, respectively.
386
Note 8 Income taxes
USD 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 USD 1,468 million was recognized for
the Group in 2018, which included a net Swiss tax expense of
USD 2,846 million and a net non-Swiss tax benefit of USD 1,378
million.
The Swiss tax expense included a deferred tax expense of
USD 2,377 million, which reflected a net decrease in deferred
tax assets (DTA) previously recognized in relation to tax losses
carried forward and deductible temporary differences of
USD 760 million following their offset against profits for the year
and the write-off of a Swiss temporary difference DTA of
USD 1,617 million relating to UBS AG’s investment in our US
intermediate holding company (US IHC), UBS Americas Holding
LLC. The write-off occurred because the deductible temporary
difference between the tax and accounting values in respect of
UBS AG’s investment in the US IHC is no longer expected to
reverse in the foreseeable future, reflecting the expected
repatriation of a significant portion of future US earnings. In
addition, it included a current tax expense of USD 469 million
related to taxable profits earned by Swiss subsidiaries against
which no losses were available to offset.
USD 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 recognition
Adjustments to deferred tax balances arising from changes in tax rates
Other items
Income tax expense / (benefit)
For the year ended
31.12.17
31.12.18
31.12.16
469
2,377
575
(1,953)
1,468
455
107
435
3,308
4,305
465
614
356
(658)
777
The non-Swiss tax expense included a deferred tax benefit of
USD 1,953 million. This primarily reflected a net increase in US
DTAs of USD 2,052 million following the review of the approach
to the remeasurement of those DTAs. It also included other net
deferred tax expenses of USD 99 million and a current tax
expense of USD 575 million related to taxable profits earned by
non-Swiss subsidiaries and branches against which no losses
were available to offset.
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 length of time
remaining until expiration for tax loss carry-forwards and its
assessment of expected future taxable profits. 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
5,351
2,093
3,258
1,124
31.12.18
5,991
1,843
4,148
1,258
55
223
(25)
(430)
905
114
26
(795)
0
137
1,468
217
173
(368)
(309)
606
(13)
4
(165)
2,897
139
4,305
31.12.16
4,209
2,674
1,535
884
73
182
(38)
(347)
933
22
2
(969)
19
17
777
387
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Consolidated financial statements
Note 8 Income taxes (continued)
The tax expense of USD 1,468 million for 2018 was lower
than the tax expense of USD 4,305 million in 2017. This was
mainly because 2017 included a large net deferred tax expense
of USD 3,415 million, which was primarily the result of a net
write-down of DTAs related to the US federal corporate tax rate
reduction included in the Tax Cuts and Jobs Act enacted in the
fourth quarter of 2017.
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 that
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 that 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 tax deductions for the year in respect of
permanent differences. These include deductions in respect of
profits that are either not taxable or are taxable at a lower rate
of tax than the local tax rate. They also include deductions made
for tax purposes, which are not reflected in the accounts.
388
Non-deductible expenses and additional taxable income
This item relates to additional taxable income for the year in
respect of permanent differences. These include income that is
recognized for tax purposes by an entity, but is not included in
its profit that is reported in the financial statements. In addition,
they include expenses for the year that are non-deductible. For
example, the costs of entertaining clients are not deductible in
certain locations.
Adjustments related to prior years – current tax
This item relates to adjustments to current tax expense for prior
years, e.g., if the tax payable for a year is agreed with the tax
authorities in an amount that differs 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, e.g., 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.
Change in deferred tax recognition
This item relates to changes in DTAs, including those 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 net
benefit in the year mainly relates to the upward revaluation of
US DTAs, partly offset by the write-off of the Swiss temporary
difference DTA relating to UBS AG’s investment in the US
intermediate holding company.
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
taxable
therefore the deferred tax liability.
income
from
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.
Note 8 Income taxes (continued)
Income tax recognized directly in equity
Deferred tax assets and liabilities
Certain tax expenses and benefits were recognized directly in
equity during the year. These included the following items:
– a net tax benefit of USD 345 million recognized in other
comprehensive income (OCI) (2017: net benefit of USD 164
million), which included a tax benefit of USD 67 million
related to cash flow hedges (2017: benefit of USD 163
million), a tax benefit of USD 12 million related to financial
assets recognized at fair value through OCI (2017: expense of
USD 6 million), a tax expense of USD 2 million related to
foreign currency translation gains and losses (2017: expense
of USD 2 million), a tax benefit of USD 276 million related to
defined benefit pension plans (2017: benefit of USD 11
million) and a tax expense of USD 8 million related to own
credit (2017: expense of USD 2 million);
– a tax benefit of USD 4 million recognized in share premium
(2017: benefit of USD 21 million).
The Group has gross DTAs, valuation allowances and recognized
DTAs related to tax
loss carry-forwards and deductible
temporary differences and also deferred tax liabilities in respect
of taxable temporary differences as shown in the table below.
The valuation allowances reflect 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.
Of the recognized DTAs as of 31 December 2018, USD 9.5
billion related to the US, USD 0.3 billion related to Switzerland
and USD 0.3 billion
(as of
31 December 2017, USD 7.2 billion related to the US, USD 2.5
billion related to Switzerland and USD 0.4 billion related to other
locations).
to other
locations
related
As of 31 December 2018, the Group has recognized DTAs of
USD 53 million (31 December 2017: USD 1,263 million) in
respect of entities that incurred losses in either the current or
preceding year. The recognition of these DTAs is supported by
projections of future taxable profits for these entities.
31.12.18
31.12.17
USD million
Deferred tax assets1
Tax loss carry-forwards
Temporary differences
of which: related to real estate costs capitalized for US tax
purposes
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.
Gross
15,088
4,571
2,159
1,150
390
202
670
19,659
Valuation
allowance
(8,989)
(565)
(25)
(192)
(50)
0
(298)
(9,554)
Recognized
6,099
4,006
2,134
959
339
202
372
10,105
26
62
88
Gross
17,372
5,165
0
1,165
485
2,392
1,123
22,537
Valuation
allowance
(11,480)
(1,001)
0
(228)
(60)
0
(713)
(12,481)
Recognized
5,892
4,164
0
937
425
2,392
410
10,056
19
35
54
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e
t
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Consolidated financial statements
Note 8 Income taxes (continued)
As of 31 December 2018, tax loss carry-forwards totaling USD 38,428 million (31 December 2017: USD 47,427 million) that are not
recognized as DTAs were available to be offset against future taxable profits. These tax losses expire as outlined in the table below.
31.12.18
0
464
16,297
4,457
17,210
38,428
31.12.17
171
106
3,267
26,688
17,195
47,427
in
recognized
liabilities are
tax
respect of
Deferred
investments
in subsidiaries, branches and associates and
interests in joint arrangements, except to the extent that the
Group can control the timing of the reversal of the associated
taxable temporary difference and it is probable that it will not
reverse
future. However, as of
31 December 2018, this exception was not considered to apply
to any taxable temporary differences.
foreseeable
the
in
Unrecognized tax loss carry-forwards
USD million
Within 1 year
From 2 to 5 years
From 6 to 10 years
From 11 to 20 years
No expiry
Total
As of 31 December 2018, USD 20.0 billion of the unrecognized
tax losses carried forward related to the US, USD 14.2 billion
related to the UK and USD 4.2 billion related to other locations
(at 31 December 2017, USD 28.6 billion related to the US,
USD 14.3 billion related to the UK and USD 4.5 billion related to
other locations).
In general, Swiss tax losses can be carried forward for seven
years, US federal tax losses incurred prior to 31 December 2017
for 20 years and US federal tax
incurred after
31 December 2017 and also UK tax losses for an unlimited
period. The amounts of US tax loss carry-forwards that are
included in the above table are based on their amount for
federal tax purposes rather than for state and local tax purposes.
losses
390
Note 9 Earnings per share (EPS) and shares outstanding
Basic earnings (USD million)
Net profit / (loss) attributable to shareholders
Diluted earnings (USD 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 EPS1
As of or for the year ended
31.12.18
31.12.17
31.12.16
4,516
969
3,348
4,516
(2)
4,514
969
0
969
3,348
0
3,348
3,730,297,877
3,716,174,261
3,719,764,322
Effect of dilutive potential shares resulting from notional shares, in-the-money options and warrants outstanding
111,271,269
120,540,272
104,244,665
Weighted average shares outstanding for diluted EPS
3,841,569,146
3,836,714,533
3,824,008,987
Earnings per share (USD)
Basic
Diluted
Shares outstanding
Shares issued
Treasury shares
Shares outstanding
1.21
1.18
0.26
0.25
0.90
0.88
3,855,634,749
3,853,096,603
3,850,766,389
166,467,802
132,301,550
138,441,772
3,689,166,947
3,720,795,053
3,712,324,617
1 The weighted average shares outstanding for basic EPS are calculated by taking the number of shares at the beginning of the period, adjusted by the number of shares acquired or issued during the period,
multiplied by a time-weighted factor for the period outstanding. As a result, balances are affected by the timing of acquisitions and issuances during the period.
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
31.12.18
31.12.17
31.12.16
Potentially dilutive instruments
Employee share-based compensation awards
Other equity derivative contracts
Total
3,605,198
11,912,450
15,517,648
24,124,341
9,122,496
33,246,837
46,981,698
8,419,122
55,400,820
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Consolidated financial statements
Balance sheet notes
Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement
The tables on the following pages provide information on
financial instruments and certain non-financial instruments (e.g.,
committed unconditionally revocable credit lines) that are
subject to ECL. UBS has established ECL disclosure segments or
“ECL segments” to disaggregate portfolios based on shared risk
characteristics and on the same or similar rating methods
applied. The key segments are presented in the table below.
Tables provided for 31 December 2018 include additional detail
on certain segments that have not been provided for balances as
of 1 January 2018.
→ Refer to Note 1c for the comparative information as of
31 December 2017 under IAS 39
→ Refer to Note 23 for more information on expected credit loss
measurement
Segment
Segment description
Description of credit risk sensitivity
Business division /
Corporate Center
Private clients with
mortgages
Lending to private clients secured by
owner-occupied real estate and personal
account overdrafts of those clients
Sensitive to the interest rate environment,
employment status and influence from
regional effects (e.g., property values)
– Personal & Corporate Banking
– Global Wealth Management
Real estate financing
Rental or income-producing real estate
financing to private and corporate clients
secured by real estate
Sensitive to GDP development, the
interest rate environment and regional
effects (e.g., property values)
– Personal & Corporate Banking
– Global Wealth Management
Large corporate clients
Lending to large corporate and
multinational clients
SME clients
Lending to small and medium-sized
corporate clients
– Personal & Corporate Banking
– Investment Bank
– Personal & Corporate Banking
Sensitive to GDP development,
seasonality and business cycles and
collateral values (diverse collateral
including real estate and other collateral
types)
Sensitive to GDP development, the
interest rate environment and, to some
extent, seasonality and business cycles
and collateral values (diverse collateral
including real estate and other collateral
types)
Lombard
Credit cards
Loans secured by pledges of marketable
securities, guarantees and other forms of
collateral
Sensitive to the market (e.g., changes in
collateral as well as in invested assets)
– Personal & Corporate Banking
– Global Wealth Management
Credit card solutions in Switzerland and the
US
Sensitive to the interest rate
environment and employment status
– Personal & Corporate Banking
– Global Wealth Management
Commodity trade finance Working capital financing of commodity
traders, generally extended on a self-
liquidating transactional basis
– Personal & Corporate Banking
Sensitive primarily to the strength of
individual transaction structures and
collateral values (price volatility of
commodities) as the primary source for
debt service is directly linked to the
shipments financed
→ Refer to Note 23g for more details on sensitivity
392
Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement (continued)
For amortized cost instruments, the net carrying value represents
the maximum exposure to credit risk, taking into account the
allowance for credit losses. Financial assets measured at fair
value through other comprehensive income (FVOCI) are also
subject to ECL; however, unlike for amortized cost instruments,
the allowance does not reduce the carrying value of these
financial assets. The carrying value of financial assets measured
at FVOCI represents the maximum exposure to credit risk.
No purchased credit-impaired financial assets are recognized
in the period. Originated credit-impaired financial assets were
not material and are not presented in the table below and on
the following page.
In addition to on-balance sheet financial assets, certain off-
balance sheet financial instruments and other credit lines are
also subject to ECL. The maximum exposure to credit risk for off-
balance sheet financial instruments is calculated based on
notional amounts.
USD million
31.12.18
Financial instruments measured at amortized cost
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
of which: Lombard
of which: Credit cards
of which: Commodity trade finance
Other financial assets measured at amortized cost
of which: Loans to financial advisors
Total financial assets measured at amortized cost
Financial assets measured at fair value through other comprehensive income
Total on-balance sheet financial assets in scope of ECL requirements
Off-balance sheet (in scope of ECL)
Guarantees
of which: Large corporate clients
of which: SME clients
of which: Financial intermediaries and hedge funds
of which: Lombard
of which: Commodity trade finance
Irrevocable loan commitments
of which: Large corporate clients
Forward starting reverse repurchase and securities borrowing agreements
Committed unconditionally revocable credit lines
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
of which: Lombard
of which: Credit cards
of which: Commodity trade finance
Carrying amount1
Stage 1
Total
108,370
108,370
16,666
16,868
95,349
95,349
23,602
23,602
320,352
298,248
126,335 115,679
36,474 28,578
11,390 10,845
8,029
9,924
111,722 111,707
1,216
2,798
21,862
3,104
564,096
6,667
570,763
Stage 2
0
202
0
0
20,357
9,859
7,858
457
1,263
0
297
445
223
62
20,782
0
20,782
1,529
3,260
22,563
3,291
587,104
6,667
593,770
Total exposure
Stage 1
Total
17,321
18,146
3,599
3,862
1,057
1,298
7,125
7,193
834
834
1,851
2,097
31,212
30,590
22,019 21,492
937
35,121
2,150
4,152
4,163
7,402
7,035
3,209
2,861
86,830
937
36,634
2,562
4,260
4,505
7,402
7,343
3,467
3,339
90,268
Stage 2
611
136
164
67
0
236
568
519
0
1,420
401
91
285
0
309
254
456
3,055
Stage 3
0
0
0
0
1,748
796
38
88
632
14
16
16
478
125
2,226
0
2,226
Stage 3
215
127
77
0
0
11
53
7
0
93
11
17
57
0
0
4
22
383
Total
0
(7)
(2)
0
(772)
(138)
(59)
(95)
(281)
(21)
(30)
(86)
(155)
(113)
(937)
0
(937)
Total
(43)
(8)
(26)
(4)
0
(1)
(37)
(31)
0
(36)
(17)
(2)
(7)
0
(6)
(2)
(1)
(116)
(1,054)
ECL allowances
Stage 1
0
(4)
(2)
0
(69)
(16)
(3)
(9)
(13)
(4)
(6)
(5)
(43)
(34)
(117)
0
(117)
Stage 2
0
(1)
0
0
(155)
(83)
(40)
(4)
(12)
0
(13)
(3)
(4)
(2)
(159)
0
(159)
ECL provisions
Stage 1
(7)
(1)
0
(3)
0
(1)
(32)
(26)
0
(19)
(4)
(1)
(6)
(1)
(4)
(2)
(1)
(59)
(176)
Stage 2
(2)
(1)
0
0
0
0
(5)
(4)
0
(16)
(12)
0
(1)
0
(2)
0
0
(23)
(183)
Stage 3
0
(3)
0
0
(549)
(39)
(16)
(82)
(256)
(17)
(11)
(78)
(109)
(77)
(660)
0
(660)
Stage 3
(34)
(6)
(25)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(34)
(695)
393
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Irrevocable committed prolongation of existing loans
Total off-balance sheet financial instruments and other credit lines
Total allowances and provisions
1 The carrying value of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL allowances.
Consolidated financial statements
Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement (continued)
USD million
1.1.18
Financial instruments measured at amortized cost
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
of which: Lombard
Other financial assets measured at amortized cost
of which: Loans to financial advisors
Total financial assets measured at amortized cost
Financial assets measured at fair value through other comprehensive income
Total on-balance sheet financial assets in scope of ECL requirements
Carrying amount1
Stage 2
Stage 1
Total
0
90,045
90,045
19
14,055
14,074
0
86,864
86,864
0
24,040
24,040
318,480
28,531
288,420
122,652 106,554 15,394
9,907
36,824 26,888
572
11,289 10,626
1,557
10,589
8,431
0
114,638 114,621
33
18,265
33
2,949
28,582
521,689
0
6,930
28,582
528,619
18,775
3,165
552,277
6,930
559,208
Stage 32
0
0
0
0
1,529
704
29
90
601
17
477
184
2,006
0
2,006
Total
0
(5)
(2)
0
(890)
(128)
(64)
(71)
(295)
(86)
(139)
(118)
(1,037)
0
(1,037)
ECL allowances
Stage 1
0
(3)
(2)
0
(62)
(12)
(4)
(6)
(8)
(5)
(30)
(29)
(97)
0
(97)
Stage 2
0
0
0
0
(167)
(71)
(54)
0
(24)
0
(1)
(1)
(168)
0
(168)
Stage 3
0
(3)
0
0
(661)
(45)
(6)
(65)
(262)
(81)
(108)
(89)
(772)
0
(772)
of which: Large corporate clients
Off-balance sheet (in scope of ECL)
Guarantees
Irrevocable loan commitments
Forward starting reverse repurchase and securities borrowing agreements
Committed unconditionally revocable credit lines
Stage 3
(30)
(4)
(4)
0
0
0
0
0
Irrevocable committed prolongation of existing loans
(34)
Total off-balance sheet financial instruments and other credit lines
Total allowances and provisions
(806)
1 The carrying value of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL allowances. 2 Upon adoption of IFRS 9 as of 1 January 2018, an instrument is
classified as credit-impaired if the counterparty is defaulted, and / or the instrument is purchased or originated credit-impaired and includes credit-impaired exposures for which no loss has occurred or no allowance
has been recognized (e.g., because they are expected to be fully recoverable through the collateral held). Refer to Note 1c for more information on the adoption of IFRS 9.
Total exposure
Stage 1
Total
16,753
17,596
31,650
30,933
22,568 21,896
1,247
35,362
2,151
4,423
1,676
85,972
ECL provisions
Stage 1
(6)
(25)
(19)
0
(19)
(2)
(5)
0
(50)
(148)
Total
(38)
(37)
(28)
0
(35)
(10)
(7)
0
(110)
(1,146)
Stage 2
(2)
(8)
(4)
0
(15)
(7)
(2)
0
(25)
(193)
Stage 32
194
38
26
0
64
0
54
1
295
Stage 2
649
679
645
0
2,213
1,033
416
0
3,541
of which: Real estate financing
of which: SME clients
1,247
37,639
3,184
4,893
1,677
89,809
394
Note 11 Derivative instruments
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.
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 the contracts have industry standard settlement mechanisms
prescribed by ISDA. Beginning in 2016, regulators in various
jurisdictions began a phased introduction of rules requiring 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.
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 on the balance
sheet as Derivative financial instruments within Assets when
having positive replacement values and Derivative financial
instruments within Liabilities when having negative replacement
values. 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 Other net income from fair
value changes on financial instruments, except for interest on
derivatives designated as hedging instruments in effective hedge
accounting relationships and forward points on certain short-
long-duration foreign exchange contracts, which are
and
recorded in Net interest income.
→ Refer to Note 1a items 3j and 3k for more information
→ Refer to Note 25 for more information on derivative financial
assets and liabilities after consideration of netting potential
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 24. 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
this component
in the “Derivative
instruments” table.
is also not
included
→ Refer to Notes 19 and 24 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 derivative financial assets 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 25 for more information on derivative financial
assets and liabilities after consideration of netting potential
allowed under enforceable netting arrangements
allowed under enforceable netting arrangements
395
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Consolidated financial statements
Note 11 Derivative instruments (continued)
Derivative instruments¹,²
Other notional
values4,6
PRV3
31.12.17
Notional
values
related to
PRV4
NRV5
Notional
values
related to
NRV4
Notional
values
related to
PRV4
1.4
459.8
562.2
27.7
31.12.18
NRV5
0.1
23.5
9.0
0.0
0.1
Notional
values
related to
NRV4
3.1
441.8
550.0
26.3
2,873.9
7,189.1
516.1
199.7
1,051.1
32.7
1,021.3
10,778.8
68.8
3.0
2.7
74.5
708.7
1,299.7
613.8
3.6
2.1
0.6
0.0
2.7
20.9
24.6
7.8
0.0
0.1
73.2
3.7
1.4
78.3
731.2
1,203.5
577.4
5.3
0.4
2,625.7
53.4
2,517.3
0.4
0.0
78.5
97.6
232.8
408.9
0.0
5.6
7.2
9.0
13.3
35.0
0.0
86.3
139.6
262.8
71.7
34.1
488.8
105.9
Other
notional
values4,6
2,381.2
7,724.9
467.3
159.4
22.6
553.2
572.6
0.3
29.0
10.1
23.2
0.0
0.0
8.5
465.5
561.4
35.2
1,171.6
39.4
1,070.5
10,732.8
87.4
2.3
4.4
94.1
3.0
0.9
0.0
3.9
96.8
4.0
0.1
100.8
699.0
1,308.5
438.1
18.3
22.3
6.0
709.5
1,126.9
407.9
1.2
1.2
0.4
4.8
0.1
0.0
5.7
2,450.3
46.7
2,250.0
0.4
0.0
73.0
78.6
238.6
0.0
5.7
8.4
7.1
6.3
0.0
103.0
128.2
268.0
53.3
31.8
390.2
27.4
499.2
85.0
0.1
36.3
8.7
0.0
0.0
45.2
2.7
0.2
0.0
2.9
17.6
24.4
6.3
0.0
0.0
48.4
0.0
3.4
6.0
7.1
6.3
22.8
PRV3
0.0
29.5
7.6
0.0
0.0
37.1
1.7
0.2
0.0
1.9
20.3
24.8
8.3
0.0
0.0
53.5
0.0
4.7
5.5
10.1
11.2
31.4
USD billion
Interest rate contracts
Over-the-counter (OTC) contracts
Forward contracts
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.
396
Note 11 Derivative instruments (continued)
Derivative instruments (continued)¹,²
Table continued from the previous page.
31.12.18
31.12.17
USD 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
PRV4
3.2
15.2
18.6
6.6
2.9
NRV5
0.1
0.4
0.3
0.0
0.0
0.7
1.5
PRV3
0.1
0.7
0.4
0.0
0.1
0.4
1.8
Notional
values
related to
NRV4
Other notional
values4,6
PRV3
Notional
values
related to
PRV4
3.4
9.9
16.1
5.4
3.7
8.5
0.1
0.1
0.2
0.3
0.2
0.0
0.9
1.8
Notional
values
related to
NRV4
Other
notional
values4,6
3.9
13.1
8.1
8.1
4.6
8.4
0.3
NRV5
0.1
0.4
0.1
0.0
0.1
0.9
1.6
3.0
8.7
11.6
9.6
1.0
0.2
0.4
0.1
6.0
8.6
33.9
17.0
15.1
46.4
38.5
Total
Unsettled purchases of non-derivative
financial instruments8
Unsettled sales of non-derivative financial
instruments8
Total derivative instruments, based on IFRS
netting9
10,828.0
1 Derivative financial liabilities as of 31 December 2018 include USD 0.0 billion related to derivative loan commitments (31 December 2017: USD 0.0 billion). No notional amounts related to these commitments are
included in this table, but they are disclosed within Note 34 under Loan commitments. 2 Upon adoption of IFRS 9 on 1 January 2018, certain forward starting repurchase and reverse repurchase agreements have
been classified as measured at fair value through profit or loss and are recognized within derivative instruments. The fair value of these derivative instruments was not material as of 31 December 2018. No notional
amounts related to these instruments are included in this table, but they are disclosed within Note 34 under Forward starting transactions. 3 PRV: positive replacement value. 4 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. 5 NRV: negative replacement value. 6 Other notional
values relate to derivatives that are cleared through either a central 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 all periods presented. 7 Notional values of exchange-traded agency
transactions and OTC-cleared transactions entered into on behalf of clients are not disclosed as they have a 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 Financial assets and liabilities are presented net on the balance sheet if UBS has the unconditional and legally
enforceable right to offset the recognized amounts, both in the normal course of business and in the event of default, bankruptcy or insolvency of the entity and all of the counterparties, and intends either to settle
on a net basis or to realize the asset and settle the liability simultaneously. Refer to Note 25 for more information on netting arrangements.
10,893.6
4,163.4
4,238.6
4,167.7
3,978.6
125.7
126.2
121.3
119.1
13.2
15.2
11.2
12.4
37.8
0.2
0.1
0.1
0.1
8.6
0.1
9.0
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 56% of OTC interest
rate contracts held as of 31 December 2018 (31 December
2017: 54%) mature within one year, 28% (31 December 2017:
28%) within one to five years and 16% (31 December 2017:
18%) after five years. Notional values of interest rate contracts
cleared with a clearing house that qualify for IFRS balance sheet
netting or are legally settled on a daily basis are presented under
Other notional values and are categorized into maturity buckets
on the basis of contractual maturities of the cleared underlying
derivative contracts.
Derivatives transacted for sales and 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 ongoing hedging of trading book exposures
and market-making, primarily on behalf of clients.
397
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Note 11 Derivative instruments (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 14% of credit protection bought and
sold as of 31 December 2018 matures within one year (31
December 2017: 23%), approximately 74% within one to five
years (31 December 2017: 65%) and approximately 12% after
five years (31 December 2017: 12%).
Credit derivatives by type of instrument
USD 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 2018
of which: credit derivatives related to economic hedges
of which: credit derivatives related to market-making
USD 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
Protection bought
Protection sold
PRV
0.6
0.3
0.0
0.2
0.0
1.1
0.9
0.2
PRV
0.6
0.2
0.0
0.0
0.0
0.8
0.8
0.0
NRV
Notional values
0.6
0.3
0.0
0.7
0.0
1.6
1.3
0.4
43.3
29.1
0.1
4.7
4.1
81.3
59.2
22.1
Protection bought
NRV
Notional values
1.2
1.0
0.0
0.8
0.0
3.0
2.5
0.5
62.9
32.6
0.1
4.6
4.4
104.5
83.7
20.9
PRV
0.5
0.3
0.0
0.0
0.0
0.8
0.5
0.3
PRV
1.1
0.9
0.0
0.1
0.0
2.1
1.6
0.5
NRV
Notional values
1.0
0.2
0.0
0.0
0.0
1.2
1.1
0.2
44.9
24.4
0.1
2.0
0.1
71.4
48.9
22.6
Protection sold
NRV
Notional values
0.7
0.2
0.0
0.0
0.0
0.9
0.9
0.0
57.1
32.8
0.0
1.7
0.1
91.7
72.3
19.4
398
Note 11 Derivative instruments (continued)
Credit derivatives by counterparty
USD billion
Broker-dealers
Banks
Central clearing counterparties
Other
Total 31 December 2018
USD billion
Broker-dealers
Banks
Central clearing counterparties
Other
Total 31 December 2017
Protection bought
Protection sold
PRV
0.2
0.4
0.2
0.3
1.1
PRV
0.2
0.3
0.1
0.3
0.8
NRV
0.1
0.4
0.4
0.7
1.6
Notional values
13.0
29.2
31.9
7.2
81.3
Protection bought
NRV
Notional values
0.2
0.8
1.1
0.9
3.0
16.6
38.0
42.5
7.4
104.5
PRV
0.1
0.3
0.4
0.0
0.8
PRV
0.2
0.6
1.0
0.3
2.1
NRV
0.2
0.5
0.3
0.3
1.2
Notional values
11.5
25.6
30.8
3.5
71.4
Protection sold
NRV
Notional values
0.1
0.4
0.1
0.2
0.9
12.6
32.4
41.6
5.0
91.7
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
include
credit events according
bankruptcy, failure to pay, restructuring, obligation acceleration
and repudiation / moratorium.
to market conventions
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 2018,
USD 0.0 billion, USD 0.3 billion and USD 1.0 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.
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Consolidated financial statements
Note 12 Financial assets and liabilities at fair value held for trading
USD million
Financial assets at fair value held for trading1
Government bills / bonds
Corporate and municipal bonds
Loans
Investment fund units
Asset-backed securities
Equity instruments
Financial assets for unit-linked investment contracts2
Total financial assets at fair value held for trading
Financial liabilities at fair value held for trading1
Government bills / bonds
Corporate and municipal bonds
Investment fund units
Equity instruments
Other
Total financial liabilities at fair value held for trading
31.12.18
31.12.17
11,161
6,768
3,566
9,716
392
72,768
104,370
2,839
3,530
689
21,886
0
28,943
13,186
8,785
3,946
9,881
377
81,623
11,609
129,407
5,549
3,629
841
21,230
2
31,251
1 Refer to Note 24c for more information on product type and fair value hierarchy categorization. 2 Financial assets for unit-linked investment contracts were reclassified from Financial assets at fair value held for
trading to Financial assets at fair value not held for trading upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information.
Note 13 Financial assets at fair value not held for trading
USD million
Financial assets at fair value not held for trading1
Government bills / bonds
Corporate and municipal bonds
Financial assets for unit-linked investment contracts2
Loans
Securities financing transactions3
Auction rate securities4
Investment fund units
Equity instruments5
31.12.18
31.12.17
22,493
17,236
21,446
8,132
9,937
1,664
710
702
26,633
22,022
10,405
298
597
Other
Total financial assets at fair value not held for trading
1 Refer to Note 24c for more information on product type and fair value hierarchy categorization. 2 Financial assets for unit-linked investment contracts were reclassified from Financial assets at fair value held for
trading to Financial assets at fair value not held for trading upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 3 Certain reverse repurchase agreements were reclassified from
amortized cost to fair value through profit or loss upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 4 Auction rate securities have been reclassified from amortized cost to fair
value through profit or loss upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 5 Upon adoption of IFRS 9 on 1 January 2018, equity instruments that were formerly classified as
available for sale under IAS 39 were reclassified to Financial assets at fair value not held for trading. Refer to Note 1c for more information.
369
82,690
501
60,457
Note 14 Financial assets measured at fair value through other comprehensive income
USD million
31.12.18
31.12.17
Financial assets measured at fair value through other comprehensive income1
Debt instruments
Government and government agencies
of which: USA
7,181
6,739
Banks
307
Corporates and other
842
Total debt instruments
8,330
Equity instruments2
560
Total financial assets measured at fair value through other comprehensive income
8,889
Unrealized gains – before tax
221
Unrealized (losses) – before tax
(108)
Net unrealized gains / (losses) – before tax
114
6
Net unrealized gains / (losses) – after tax
1 Refer to Note 24c for more information on product type and fair value hierarchy categorization. Refer also to Note 10 and Note 23 for more information on expected credit loss measurement. 2 Comparative-
period information includes equity instruments that were formerly classified as available for sale under IAS 39 and have been reclassified to Financial assets at fair value not held for trading upon adoption of IFRS 9
on 1 January 2018. Refer to Note 1c for more information.
6,463
6,101
149
54
6,667
6,667
4
(146)
(143)
(104)
400
Note 15 Property, equipment and software
At historical cost less accumulated depreciation
USD million
Historical cost
Balance at the beginning of the year
Additions1
Disposals / write-offs2
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Impairment3
Disposals / write-offs2
Reclassifications
Foreign currency translation
Balance at the end of the year
Own-used
properties
Leasehold
improvements
IT hardware and
communications
equipment
Internally
generated
software
Purchased
software
Other
machines
and
equipment
Projects
in progress
2018
2017
7,923
21
(17)
(174)
(74)
7,679
4,528
159
0
(16)
(129)
(42)
4,500
3,375
20
(386)
152
(40)
3,122
2,069
198
2
(380)
4
(21)
1,873
1,615
182
(213)
8
(25)
1,568
1,131
172
3
(213)
0
(18)
1,077
4,266
1
(108)
1,054
(41)
5,173
1,854
498
66
(108)
0
(18)
2,291
432
50
(15)
12
(9)
469
272
61
4
(15)
0
(7)
316
861
21
(111)
36
(8)
799
610
65
0
(108)
0
(6)
561
1,050
1,406
0
(1,283)
(16)
1,157
0
0
0
0
0
0
0
19,522
1,702
(849)
(195)7
(213)
19,966
10,465
1,153
75
(840)
(124)7
(111)
10,619
17,842
1,638
(634)
(47)
724
19,522
9,656
1,035
18
(626)
(5)
387
10,465
Net book value
Net book value at the beginning of the year
Net book value at the end of the year4,5
1 Includes USD 7 million additional assets related to acquisition of businesses in 2018. 2 Includes write-offs of fully depreciated assets. 3 Impairment charges recorded in 2018 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 2018. 4 As of 31 December 2018, contractual commitments to
purchase property in the future amounted to approximately USD 0.3 billion (31 December 2017: approximately USD 0.3 billion). 5 Includes USD 26 million related to leased assets, mainly Own-used properties.
6 Consists of USD 803 million related to Internally generated software, USD 295 million related to Own-used properties and USD 59 million related to Leasehold improvements. 7 Reflects reclassifications to
Properties held for sale (USD 70 million on a net basis) of properties sold in 2018.
1,050
1,1576
2,412
2,882
1,306
1,249
3,394
3,179
9,057
9,348
8,186
9,057
159
153
251
238
483
491
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Consolidated financial statements
Note 16 Goodwill and intangible assets
Introduction
UBS performs an impairment test on its goodwill assets on an
annual basis or when indicators of impairment exist.
For annual tests prior to 2018, UBS considered the
segments, as they were reported in Note 2a, as separate cash-
generating units, as that was the
level at which the
performance of investments (and the related goodwill) was
reviewed and assessed by management. Following
the
integration in 2018 of the Wealth Management and Wealth
Management Americas business divisions into the single
segment Global Wealth Management, UBS
reportable
continued to separately monitor the goodwill previously
allocated
former business divisions. As a
consequence, for the purposes of goodwill impairment testing,
the former Wealth Management and Wealth Management
Americas business divisions are considered to be two separate
cash-generating units, referred to in this Note as Global
Wealth Management Americas1
and Global Wealth
Management ex Americas. The remaining goodwill balances
continued to be tested at the level of Asset Management and
the Investment Bank, respectively, consistent with the 2017
annual test.
two
the
to
The impairment test is performed for each cash-generating
unit to which goodwill is allocated by comparing the recoverable
amount, based on its value-in-use, with the carrying amount of
the respective cash-generating unit. An impairment charge is
recognized if the carrying amount exceeds the recoverable
amount. As of 31 December 2018, total goodwill recognized on
the balance sheet was USD 6.4 billion, of which USD 3.7 billion
was carried by the Global Wealth Management Americas cash-
generating unit, USD 1.2 billion was carried by the Global
Wealth Management ex Americas cash-generating unit, USD 1.4
billion was carried by Asset Management and USD 0.1 billion
was carried by the Investment Bank. Based on the impairment
testing methodology described below, UBS concluded that the
goodwill balances as of 31 December 2018 allocated to these
cash-generating units are 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 cash-generating unit
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 growth beyond
this period. 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.
is
The carrying amount for each cash-generating unit
determined by reference to the Group’s equity attribution
framework. Within this framework, which is described in 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 Corporate Center – Group Asset and Liability Management
manages centrally on behalf of the business divisions. The
framework is primarily used for purposes of measuring the
performance of
certain
the businesses and
management assumptions. Attributed equity equals the capital
that a cash-generating unit requires to conduct its business and
is currently considered a reasonable approximation of the
carrying value of the cash-generating units. 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 cash-generating unit.
includes
→ 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
model are
information, where
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 Board of
Directors.
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.
1 Now including the Global Wealth Management business in Latin America, previously part of the Wealth Management business division.
402
Note 16 Goodwill and intangible assets (continued)
Following the change of the Group’s presentation currency to
US dollars, UBS has refined its assumptions on long-term growth
rates and discount rates. The discount rates now take into
account regional differences in risk-free rates, at the level of
individual cash-generating units. Consistently, long-term growth
rates are determined based on nominal or real GDP growth rate
forecasts, depending on region. The change to nominal GDP
forecasts for some regions results in higher long-term growth
rates and thus higher recoverable amounts for all cash-
generating units. The change did not affect the outcome of the
impairment test.
Key assumptions used to determine the recoverable amounts
of each cash-generating unit 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. As of 31
December 2018, the Investment Bank’s recoverable amount
exceeded its carrying amount by USD 2.5 billion. A reasonably
possible change in the forecast earnings or the discount rate
used in the calculation of the Investment Bank’s recoverable
amount would cause its carrying amount to exceed the
recoverable amount. More specifically, if forecast earnings used
in the calculation of the Investment Bank’s recoverable amount
were reduced by approximately 12% or the discount rate
increased by 1.4 percentage points, then the Investment Bank’s
recoverable amount would be equal to its carrying amount.
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’s capital ratios.
Discount and growth rates
In %
Global Wealth Management Americas
Global Wealth Management ex Americas
Asset Management
Investment Bank
Discount rates
Growth rates
31.12.18
9.5
8.5
9.0
11.0
31.12.17
9.0
9.0
9.0
11.0
31.12.18
3.2
3.0
2.7
3.5
31.12.17
2.4
1.7
2.4
2.4
Goodwill
Intangible assets
Customer
relationships,
contractual
rights and other
760
Total
Total
Infrastructure1
2017
2018
6,342
161
(40)
USD 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
Impairment2
Disposals
Write-offs
Foreign currency translation
Balance at the end of the year
Net book value at the end of the year
1 Consists of the branch network intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. 2 Impairment charges recorded in 2018 and 2017 relate to assets for which the
recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: USD 18 million for 2018 and USD 0 million for 2017).
1,325
62
4
(1)
(7)
(12)
1,371
6,647
1,245
71
0
(16)
0
26
1,325
6,563
1,325
62
4
(1)
(7)
(12)
1,371
254
1,546
109
(5)
(7)
(17)
1,625
7,888
270
(45)
(7)
(88)
8,018
7,687
105
(63)
0
160
7,888
672
24
4
(1)
(7)
(12)
679
186
786
109
(5)
(7)
(17)
865
(71)
6,392
691
68
653
38
6,392
760
1
403
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 16 Goodwill and intangible assets (continued)
The table below presents goodwill and intangible assets by cash-generating unit for the year ended 31 December 2018.
USD 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
Global Wealth
Management
Americas
Global Wealth
Management
ex Americas
Investment
Bank
Asset
Management
Corporate Center
– Services
3,742
(13)
(8)
3,721
164
22
0
(44)
0
(4)
138
1,148
79
(21)
1,206
25
86
(6)
0
0
104
35
82
0
(5)
112
29
(4)
(10)
(3)
(1)
11
1,418
0
(27)
(37)
1,354
1
0
(1)
0
0
0
2
1
(2)
0
1
The table below presents estimated aggregated amortization expenses for intangible assets.
USD million
Estimated, aggregated amortization expenses for:
2019
2020
2021
2022
2023
Thereafter
Not amortized due to indefinite useful life
Total
404
Total
6,342
161
(40)
(71)
6,392
221
109
(4)
(62)
(4)
(5)
254
Intangible assets
65
52
21
21
18
76
2
254
Note 17 Other assets
a) Other financial assets measured at amortized cost
USD million
Prime brokerage receivables1
Debt securities
of which: government bills / bonds
Loans to financial advisors2
Fee- and commission-related receivables
Finance lease receivables
Settlement and clearing accounts
Accrued interest income
Other
Total other financial assets measured at amortized cost
31.12.18
13,562
8,778
3,291
1,643
1,091
1,050
694
1,233
22,563
31.12.17
19,573
9,403
6,632
3,199
1,826
1,086
735
592
1,401
37,815
1 Upon adoption of IFRS 9 on 1 January 2018, prime brokerage receivables and payables were reclassified from amortized cost to fair value through profit or loss. Brokerage receivables and payables are now
presented separately on the balance sheet. Refer to Note 1c for more information. 2 Related to financial advisors in the US and Canada.
b) Other non-financial assets
USD million
Precious metals and other physical commodities
Bail deposit1
Prepaid expenses
VAT and other tax receivables
Properties and other non-current assets held for sale
Other
Total other non-financial assets
1 Refer to item 1 in Note 21b for more information.
31.12.18
31.12.17
4,298
1,312
990
334
82
395
4,681
1,371
1,039
368
98
273
7,410
7,830
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
405
Consolidated financial statements
Note 18 Amounts due to banks and customer deposits
USD million
Amounts due to banks
Customer deposits
of which: demand deposits
of which: retail savings / deposits
of which: time deposits
of which: fiduciary deposits
Total amounts due to banks and customer deposits
Note 19 Debt issued designated at fair value
USD million
Issued debt instruments
Equity-linked1
Rates-linked
Credit-linked
Fixed-rate
Other
Total debt issued designated at fair value
of which: issued by UBS AG with original maturity greater than one year 2
31.12.18
10,962
419,838
181,869
165,790
53,624
18,556
31.12.17
7,728
419,577
193,457
166,013
48,617
11,490
430,801
427,305
31.12.18
31.12.17
34,392
12,073
3,282
5,099
2,185
57,031
40,289
35,046
5,961
3,013
4,022
2,740
50,782
38,230
of which: life-to-date own credit (gain) / loss
163
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. More than 99% of the
balance as of 31 December 2018 was unsecured (31 December 2017: more than 99% of the balance was unsecured).
(270)
As of 31 December 2018 and 31 December 2017, the
contractual redemption amount at maturity of debt issued
designated at fair value through profit or loss was not materially
different from the carrying value.
The table below shows the residual contractual maturity of
the carrying value of debt issued 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 debt issued designated at fair value have not been included in
the table below as a majority of the debt instruments issued are
structured products, and therefore the future interest payments
are highly dependent upon the embedded derivative and
prevailing market conditions at the point in time that each
interest payment is made.
→ Refer to Note 27 for maturity information on an undiscounted
cash flow basis
Contractual maturity of carrying value
USD million
UBS AG1
Non-subordinated debt
Fixed-rate
Floating-rate
Subtotal
Other subsidiaries2
Non-subordinated debt
Fixed-rate
Floating-rate
Subtotal
Total
2019
2020
2021
2022
2023
2024–2028
Thereafter
Total
31.12.18
Total
31.12.17
3,904
19,921
23,825
1,509
4,669
6,178
805
13
818
25
119
145
24,643
6,322
1,178
3,947
5,126
66
83
149
5,275
447
1,610
2,057
274
2,758
3,031
7
6
13
0
26
26
802
5,544
6,346
321
0
321
3,694
5,113
8,807
11,807
43,562
55,370
9,664
39,063
48,728
6
183
189
1,230
431
1,662
1,437
617
2,054
2,070
3,058
6,668
8,996
57,031
50,782
1 Comprises instruments issued by the legal entity UBS AG. 2 Comprises instruments issued by subsidiaries of UBS AG.
406
Note 20 Debt issued measured at amortized cost
USD million
Certificates of deposit
Commercial paper
Other short-term debt
Short-term debt1
Senior unsecured debt that contributes to total loss-absorbing capacity (TLAC)
Senior unsecured debt other than TLAC
of which: issued by UBS AG with original maturity greater than one year2
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 Swiss central mortgage institutions
Other long-term debt
of which: issued by UBS AG with original maturity greater than one year2
Long-term debt3
31.12.18
31.12.17
7,980
27,514
3,531
39,025
29,988
33,018
32,133
3,947
17,665
7,785
2,369
6,808
703
8,569
58
52
24,447
24,140
3,683
52,270
27,937
33,102
33,090
4,218
16,983
5,321
2,445
8,500
718
8,561
89
68
93,246
90,890
Total debt issued measured 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. As of 31 December 2018,
100% of the balance was unsecured (31 December 2017: 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.
132,271
143,160
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 3j
and Note 28. As a result of applying hedge accounting, the life-
to-date adjustment to the carrying value of debt issued was a
decrease of USD 298 million as of 31 December 2018 and an
increase of USD 35 million as of 31 December 2017, reflecting
changes in fair value due to interest rate movements.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
407
Consolidated financial statements
Note 20 Debt issued measured 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 2018 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 27 for maturity information on an undiscounted
cash flow basis
Contractual maturity of carrying value
2019
2020
2021
2022
2023
2024–2028
Thereafter
Total
31.12.18
Total
31.12.17
USD million
UBS Group AG1
Subordinated debt
Fixed-rate
Subtotal
UBS AG2
Non-subordinated debt
Fixed-rate
Floating-rate
Subordinated debt
Fixed-rate
Subtotal
Other subsidiaries3
Non-subordinated debt
Fixed-rate
Floating-rate
Subordinated debt
Fixed-rate
Subtotal
Total
0
0
0
0
0
21,287
25,450
9,397
6,482
4,078
1,964
0
0
0
46,737
15,879
6,042
765
0
0
765
47,502
2,200
300
0
2,500
18,379
2,955
998
0
3,953
9,994
2,726
0
1,945
4,671
4,512
2,506
0
7,017
11,688
1,635
369
0
2,005
4,882
2,128
0
7,011
9,015
0
0
0
5,566
5,566
17,569
0
0
17,569
23,135
0
0
7,7664
7,766
985
770
0
1,755
40,108
35,035
7,511
82,654
646
0
33,529
5,933
57,566
31,930
9,217
98,714
30,561
6,120
0
36,681
10,154
10,801
12,556
10,1544
49,616
132,271
143,160
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. 4 Originally issued by UBS Group AG, which was replaced by UBS Group Funding (Switzerland) AG as issuer on 25 May 2018.
408
Note 21 Provisions and contingent liabilities
a) Provisions
The table below presents an overview of total provisions recognized under both IAS 37 and IFRS 9.
USD million
Provisions recognized under IAS 37
Provisions for off-balance sheet financial instruments1
Provisions for other credit lines1
Total provisions
1 Provisions recognized in 2018 relate to exposures in the scope of the expected credit loss requirements of IFRS 9. Refer to Notes 1c, 10 and 23 for more information. 2017 provisions for off-balance sheet financial
instruments relate to loss provisions recognized under IAS 37.
31.12.18
3,377
79
37
3,494
31.12.17
3,180
34
0
3,214
The following table presents additional information for provisions recognized under IAS 37.
USD 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
Foreign currency translation / unwind of discount
Balance at the end of the year
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 USD 50 million as of 31 December 2018 (31 December 2017: USD 85 million) and provisions for onerous lease contracts of USD 170 million as of 31 December 2018
(31 December 2017: USD 241 million). 4 Consists of reinstatement costs for leasehold improvements of USD 89 million as of 31 December 2018 (31 December 2017: USD 95 million) and provisions for onerous
lease contracts of USD 42 million as of 31 December 2018 (31 December 2017: USD 42 million). 5 Includes provisions for sabbatical and anniversary awards.
Total 2017
4,048
7
1,004
(347)
(1,632)
8
94
3,180
Total 2018
3,180
2
1,155
(311)
(628)
1
(21)
3,377
Other
91
0
35
(14)
(33)
0
(1)
78
Real
estate
137
2
4
(1)
(10)
1
(1)
1314
Employee
benefits5
70
0
10
(7)
0
0
(2)
70
Operational
risks1
44
0
27
(5)
(20)
0
0
46
Restruc-
turing
331
0
174
(65)
(214)
0
(1)
2243
Litigation,
regulatory
and similar
matters2
2,508
0
905
(220)
(350)
0
(16)
2,827
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 21b. 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,
implications of
management distraction or
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. Developments relating to a matter that occur after
the relevant reporting period, but prior to the issuance of
financial statements, which affect management’s assessment of
the provision for such matter (because, for example, the
developments provide evidence of conditions that existed at the
end of the reporting period), are adjusting events after the
reporting period under IAS 10 and must be recognized in the
financial statements for the reporting period.
409
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 21 Provisions and contingent liabilities (continued)
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.
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.
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 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
Interbank
others, the British Bankers’ Association London
Offered Rate (LIBOR), was terminated by the DOJ based on its
determination that we had committed a US crime in relation to
foreign exchange matters. As a consequence, UBS AG pleaded
guilty to one count of wire fraud for conduct in the LIBOR
matter, paid a fine and is subject to probation through January
2020.
limit, suspend or
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
regulatory
terminate
authorizations, and may permit financial market utilities to limit,
suspend or terminate our participation in such utilities. Failure to
obtain such waivers, or any limitation, suspension or termination
of licenses, authorizations or participations, could have material
consequences for UBS.
licenses and
The aggregate amount provisioned for litigation, regulatory
and similar matters as a class is disclosed in the “Provisions”
table in Note 21a 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
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
USD 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
Global
Wealth
Manage-
ment
569
659
(33)
(184)
(9)
Personal &
Corporate
Banking
81
Asset
Manage-
ment
1
Investment
Bank
354
CC –
Services
246
CC –
Group ALM
0
41
(1)
(3)
(1)
0
(1)
0
0
0
83
(146)
(18)
(3)
269
32
(38)
(1)
(2)
236
0
0
0
0
0
CC –
Non-core
and Legacy
Portfolio
1,256
90
0
(143)
(1)
Total 2018
2,508
905
(220)
(350)
(16)
Total
2017
3,204
703
(214)
(1,251)
66
1,202
2,827
2,508
Balance at the end of the year
1,003
117
1 Provisions, if any, for the matters described in this Note are recorded in Global Wealth Management (items 3 and 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 Global 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.
410
Note 21 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. On 30 July 2018, the Swiss Federal
Administrative Court granted UBS’s appeal by holding the
French administrative assistance request inadmissible. The FTA
filed a final appeal with the Swiss Federal Supreme Court.
Since 2013, UBS (France) S.A., UBS AG and certain former
employees have been under investigation in France for alleged
complicity in having illicitly solicited clients on French territory,
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 the court of first
In March 2017, the investigating judges issued a 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. The trial on these
charges
instance took place from
8 October 2018 until 15 November 2018. During the trial, the
prosecutors and the French State requested penalties and civil
monetary damages in connection with the money laundering
charges aggregating EUR 5.3 billion. On 20 February 2019, the
court announced a verdict finding UBS AG guilty of illicitly
soliciting clients on French territory and laundering the proceeds
of tax fraud, and UBS France S.A. guilty of aiding and abetting
unlawful solicitation and laundering the proceeds of tax fraud.
The court imposed fines aggregating EUR 3.7 billion on UBS AG
and UBS France S.A. and awarded EUR 800 million of civil
damages to the French state. UBS has appealed the decision.
Under French law, the judgment is suspended while the appeal
is pending. The Court of Appeal will retry the case de novo as to
both the law and the facts and the fines and penalties can be
greater than or less than those imposed by the court of first
instance. A subsequent appeal to the Cour de Cassation,
France’s highest court, is possible with respect to questions of
law.
UBS believes that based on both the law and the facts the
judgment of the court of first instance should be reversed. UBS
believes it followed its obligations under Swiss and French law as
well as the European Savings Tax Directive. Even assuming
liability, which it contests, UBS believes the penalties and
damage amounts awarded greatly exceeded the amounts that
could be supported by the law and the facts. In particular, UBS
believes the court incorrectly based the penalty on the total
regularized assets rather than on any unpaid taxes on those
assets for which a fraud has been characterized, and further
incorrectly awarded damages based on costs that were not
proven by the civil party. Notwithstanding that UBS believes it
should be acquitted, our balance sheet at 31 December 2018
reflected provisions with respect to this matter in an amount of
USD 516 million. The wide range of possible outcomes in this
case contributes to a high degree of estimation uncertainty. The
provision reflected on our balance sheet at 31 December 2018
reflects our best estimate of possible financial implications,
although it is reasonably possible that actual penalties and civil
damages could exceed the provision amount.
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, of banking and financial
solicitation by unauthorized persons, and of serious tax fraud. In
2018, tax authorities and a prosecutor’s office in Italy asserted
that UBS is potentially liable for taxes and penalties as a result of
its activities in Italy from 2012 to 2017.
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 2018 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.
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Consolidated financial statements
Note 21 Provisions and contingent liabilities (continued)
2. Claims related to sales of residential mortgage-backed
securities and mortgages
From 2002 through 2007, prior to the crisis in the US residential
loan market, UBS was a substantial issuer and underwriter of US
residential mortgage-backed securities
(RMBS) and was a
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.
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 in the US District Court for
the Southern District of New York seeking to enforce UBS RESI’s
obligation to repurchase loans in the collateral pools for three
RMBS securitizations issued and underwritten by UBS with an
original principal balance of approximately USD 2 billion. In July
2018, UBS and the trustee entered into an agreement under
which UBS will pay USD 850 million to resolve this matter. A
significant portion of this amount will be borne by other parties
that indemnified UBS. The settlement remains subject to court
approval and proceedings to determine how the settlement
funds will be distributed to RMBS holders. After giving effect to
this settlement, 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: Since 2014, the US
Attorney’s Office for the Eastern District of New York has sought
information from UBS pursuant to the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA),
related to UBS’s RMBS business from 2005 through 2007. On
8 November 2018, the DOJ filed a civil complaint in the District
Court for the Eastern District of New York. The complaint seeks
unspecified civil monetary penalties under FIRREA related to
40
UBS’s
underwriting
issuance,
and
sale
of
412
RMBS transactions in 2006 and 2007. UBS moved to dismiss the
civil complaint on 6 February 2019.
Our balance sheet at 31 December 2018 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
Authority
(FINMA) and the Luxembourg Commission de
Surveillance du Secteur Financier. Those inquiries concerned two
law,
established under
third-party
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.
Luxembourg
funds
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 totaling 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).
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.
Note 21 Provisions and contingent liabilities (continued)
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 2.9 billion, of which claims with
aggregate claimed damages of USD 1.9 billion have been
resolved through settlements, arbitration or withdrawal of the
claim. The claims have been 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
and a request for permission to appeal that ruling was denied by
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.
Following denial of the plaintiffs’ motion for class certification,
the case was dismissed in October 2018.
(SEC) and the Financial
In 2014 and 2015, UBS entered into settlements with the
Office of the Commissioner of Financial Institutions for the
Commonwealth of Puerto Rico, the US Securities and Exchange
Commission
Industry Regulatory
Authority in relation to their examinations of UBS’s operations.
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.
Beginning in 2015, and continuing through 2017, certain
agencies and public corporations of the Commonwealth of
Puerto Rico (Commonwealth) defaulted on certain interest
payments on Puerto Rico bonds. 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 has
imposed a stay on the exercise of creditors’ rights. In 2017, the
oversight board placed certain of the bonds into a bankruptcy-
like proceeding under the supervision of a Federal District Judge.
These events, further defaults, any further legislative action to
restructuring Commonwealth
create a
the
obligations or
the
Commonwealth’s
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
legal means of
to
Our balance sheet at 31 December 2018 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.
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In 2015, a putative class action was filed in federal court
against UBS and numerous other banks on behalf of persons
and businesses in the US who directly purchased foreign
currency from the defendants and alleged co-conspirators for
their own end use. 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 March 2018, the
court denied the defendants’ motions to dismiss the amended
complaint.
In 2016, a putative class action was filed in federal court in
New York against UBS and numerous other banks on behalf 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 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 March 2018, the court dismissed the consolidated complaint.
In October 2018, the court granted plaintiffs’ motion seeking
leave to file an amended complaint.
Putative class actions were also filed against UBS and 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 asserted claims
under the antitrust laws and the Commodity Exchange Act
(CEA), and other claims. In July 2018, the court in New York
granted UBS’s motions to dismiss amended complaints in the
putative class actions relating to gold and silver. In 2017, the
court granted UBS’s motion to dismiss the platinum and
palladium action. Plaintiffs in the platinum and palladium action
subsequently filed an amended complaint that did not allege
claims against UBS.
Consolidated financial statements
Note 21 Provisions and contingent liabilities (continued)
5. Foreign exchange, LIBOR and benchmark rates, and other
trading practices
Foreign exchange-related regulatory matters: Beginning in 2013
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 investigations, FINMA issued an
order 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 2015, the DOJ’s Criminal Division terminated the 2012 non-
to UBS’s
prosecution agreement with UBS AG
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. UBS has ongoing obligations
to cooperate with these authorities and to undertake certain
remediation measures. UBS has also been granted conditional
immunity by the Antitrust Division of the DOJ and by authorities
in other jurisdictions in connection with potential competition
law violations relating to foreign exchange and precious metals
businesses. Investigations relating to foreign exchange and
precious metals matters by certain authorities remain ongoing
notwithstanding these resolutions.
related
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. UBS has entered into a
settlement agreement that would resolve US federal court class
actions relating to foreign currency transactions with the
defendant banks and persons who transacted in foreign
exchange futures contracts and options on such futures. The
settlement agreement, which has been approved by the court,
requires, among other things, that UBS pay an aggregate of
USD 141 million and provide cooperation to the settlement
classes. Certain class members have excluded themselves from
that settlement and have filed individual actions in US and
English courts against UBS and other banks alleging violations of
US and European competition laws and unjust enrichment.
414
Note 21 Provisions and contingent liabilities (continued)
to conduct
investigations
LIBOR and other benchmark-related regulatory matters:
Numerous government agencies, including the SEC, the CFTC,
the DOJ, the FCA, the UK Serious Fraud Office, the Monetary
Authority of Singapore, the Hong Kong Monetary Authority,
FINMA, various state attorneys general in the US and competition
authorities in various jurisdictions, have conducted or are
continuing
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
UK Financial Services Authority, 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 and with the Swiss Competition Commission
in
(WEKO) regarding
connection with Swiss franc interest rate derivatives. UBS has
ongoing obligations to cooperate with the authorities with whom
we have
to undertake certain
remediation measures with respect to benchmark interest rate
submissions. In December 2018, UBS entered into a settlement
agreement with the New York and other state attorneys general
under which it will pay USD 68 million to resolve claims by the
attorneys general related to LIBOR. 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.
investigation of bid-ask spreads
resolutions and
reached
its
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
interest rate
behalf of parties who transacted
benchmark-based derivatives. Also pending in the US and in other
jurisdictions are a number of other 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. The
complaints allege manipulation, through various means, of certain
benchmark interest rates, including USD LIBOR, Euroyen TIBOR,
Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR, USD and SGD SIBOR
and SOR and Australian BBSW, and
seek unspecified
compensatory and other damages under varying legal theories.
USD LIBOR class and individual actions in the US: In 2013 and
2015, the district court in the USD LIBOR actions dismissed, in
whole or in part, certain plaintiffs’ antitrust claims, federal
racketeering claims, CEA claims, and state common law claims.
Although the Second Circuit vacated the district court’s judgment
dismissing antitrust claims, the district court again dismissed
antitrust claims against UBS in 2016. Certain plaintiffs have
appealed that decision to the Second Circuit. Separately, in 2018,
the Second Circuit reversed in part the district court’s 2015
decision dismissing certain individual plaintiffs’ claims. UBS
entered into an agreement in 2016 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. In 2018, the district court denied
plaintiffs’ motions for class certification in the USD class actions for
claims pending against UBS, and plaintiffs sought permission to
appeal that ruling to the Second Circuit. In July 2018, the Second
Circuit denied the petition to appeal of the class of USD lenders
and in November 2018 denied the petition of the USD exchange
class. In January 2019, a putative class action was filed in the
District Court for the Southern District of New York against UBS
and numerous other banks on behalf of US residents who, from
1 February 2014 through the present, directly transacted with a
defendant bank in USD LIBOR instruments. The complaint asserts
antitrust and unjust enrichment claims.
Other benchmark class actions in the US: In 2014, the court in
one of the Euroyen TIBOR lawsuits dismissed certain of the
plaintiff’s claims, including a federal antitrust claim, for lack of
standing. In 2015, this court dismissed the plaintiff’s federal
racketeering claims on the same basis and affirmed its previous
dismissal of the plaintiff’s antitrust claims against UBS. In 2017,
this 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 lawsuit
dismissed the cases as to UBS and certain other foreign
defendants for lack of personal jurisdiction. In October 2018, the
court in the SIBOR / SOR action dismissed all but one of plaintiffs’
claims against UBS. Plaintiffs in the CHF LIBOR and SIBOR / SOR
actions have filed amended complaints following the dismissals,
which UBS and other defendants have moved to dismiss. In
November 2018, the court in the BBSW lawsuit dismissed the case
as to UBS and certain other foreign defendants for lack of
personal jurisdiction. Following that dismissal, plaintiffs in the
BBSW action moved in January 2019 to file an amended
complaint seeking to re-name UBS and certain other banks as
defendants. UBS and other defendants also moved to dismiss the
GBP LIBOR action in December 2016, but that motion was denied
as to UBS in December 2018. UBS moved for reconsideration of
that decision in January 2019.
Government bonds: Putative class actions have been filed since
2015 in US federal courts against UBS and other banks on behalf
of persons who participated in markets for US Treasury securities
since 2007. A consolidated complaint was filed in 2017 in the US
District Court for the Southern District of New York alleging that
the banks colluded with respect to, and manipulated prices of, US
Treasury securities sold at auction and in the secondary market
and asserting claims under the antitrust laws and for unjust
enrichment. Defendants’ motions to dismiss the consolidated
complaint are pending.
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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 2018 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. On 13 March 2019, UBS Securities Hong Kong
Limited and UBS AG entered into a settlement agreement with
the SFC resolving all of the SFC’s pending investigations related
to sponsorship of initial public offerings (IPOs) by UBS. The
agreement provides for a fine of HKD 375 million (USD 48
million) and the suspension of UBS Securities Hong Kong
Limited’s ability to act as a sponsor for Hong Kong-listed IPOs for
one year.
Consolidated financial statements
Note 21 Provisions and contingent liabilities (continued)
UBS and
reportedly other banks are
to
information from various
investigations and requests for
securities and other
authorities
government bond trading practices. As a result of its review to
date, UBS has taken appropriate action.
regarding US Treasury
responding
With respect to additional matters and jurisdictions not
encompassed by the settlements and orders referred to above,
our balance sheet at 31 December 2018 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.
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Note 22 Other liabilities
a) Other financial liabilities measured at amortized cost
USD million
Prime brokerage payables1
Other accrued expenses
Accrued interest expenses
Settlement and clearing accounts
Other
Total other financial liabilities measured at amortized cost
31.12.18
2,192
1,544
1,486
1,663
6,885
31.12.17
30,413
2,507
1,552
1,432
1,373
37,276
1 Upon adoption of IFRS 9 on 1 January 2018, prime brokerage receivables and payables were reclassified from amortized cost to fair value through profit or loss. Brokerage receivables and payables are now
presented separately on the balance sheet. Refer to Note 1c for more information.
b) Other financial liabilities designated at fair value
USD million
Amounts due under unit-linked investment contracts
Securities financing transactions1
Over-the-counter debt instruments
of which: life-to-date own credit (gain) / loss
Other
31.12.18
21,679
9,461
2,450
(51)
5
31.12.17
11,821
384
4,428
37
9
Total other financial liabilities designated at fair value2
1 Certain repurchase agreements were reclassified from amortized cost to fair value through profit or loss upon adoption of IFRS 9 as of 1 January 2018. Refer to Note 1c for more information. 2 As of
31 December 2018 and 31 December 2017, the contractual redemption amount at maturity of other financial liabilities designated at fair value through profit or loss was not materially different from the carrying
value.
33,594
16,643
c) Other non-financial liabilities
USD million
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 1
Current and deferred tax liabilities2
VAT and other tax payables
Deferred income
Other
Total other non-financial liabilities
1 Refer to Note 29 for more information. 2 Refer to Note 8 for more information.
31.12.18
31.12.17
7,278
2,696
1,983
1,823
775
1,002
431
215
98
7,873
2,740
2,044
2,140
949
935
426
153
55
9,022
9,443
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Consolidated financial statements
Additional information
Note 23 Expected credit loss measurement
a) Expected credit losses in the period
Total net credit loss expenses amounted to USD 118 million in
2018, reflecting expected credit losses (ECL) of USD 23 million
related to stage 1 and 2 positions and net losses of USD 95
million related to credit-impaired (stage 3) positions.
unchanged over the year primarily because increased ECL from
new transactions and minor changes in applied credit risk
models were offset by ECL net recoveries as a lower proportion
of transactions was subject to stage 2 classification.
In the Investment Bank and Global Wealth Management,
increased stage 1 and 2 ECL provisions recognized over the year
primarily relate to loans and credit facilities originated during
2018 and to a lesser extent to changes in credit quality of
existing assets. In Personal & Corporate Banking, ECL remained
Stage 3 net losses of USD 95 million were recognized across a
number of defaulted positions, mainly in Personal & Corporate
Banking (USD 56 million) and to a lesser extent in the Investment
Bank (USD 29 million).
b) Changes to ECL models, scenarios, scenario weights and key inputs
Refer to Note 1a and 1c for information on ECL models,
scenarios, scenario weights and key inputs applied at transition
to IFRS 9 as of 1 January 2018. No changes were applied to the
determination of a significant increase in credit risk (SICR) and
the ECL measurement period during the year 2018. Apart from
updating market data, such as house prices, equity indices and
foreign exchange rates, and macroeconomic factors, such as
gross domestic product (GDP) and unemployment rates, no
significant changes were applied to the models used to calculate
ECL during the year 2018.
January 2018
is still appropriate and
The four scenarios and the related macroeconomic factors
were reviewed in light of the economic and political conditions
prevailing at year-end 2018. UBS has determined that the
fundamental risk assessment made upon transition to IFRS 9 on
1
that potential
developments remain suitably covered by the baseline scenario,
which is aligned with the business plan, and the three additional
scenarios introduced to capture potential non-linearity of credit
losses required under IFRS 9. The key parameters (e.g., the real
GDP growth, consumer price inflation, unemployment rate) of
each scenario have been updated over the course of the year,
but remained materially unchanged from what was applied at
transition (refer to Note 1c). The key parameters applied as of
31 December 2018 are summarized in the table on the
following page.
The determination of the scenario weights is subject to the
process and governance outlined in Note 1a Section 3g. An
econometric model is used to provide an input into the scenario
weight assessment process giving a first indication of the
probability that the GDP forecast used for each scenario would
materialize, if historically observed deviations of GDP growth
from trend growth were representative. As such historical
analyses of GDP development do not include an assessment of
the underlying economic or political causes, management
positions the model output
into the context of current
conditions and future expectations and applies judgment in
418
determining the final scenario weights. The reviews during 2018
reflected the increasing probability of a weakening economy in
key markets, after a long spell of substantial expansion, and the
several political
uncertainties about
developments with unforeseeable outcomes may have on future
growth. At year-end 2018, management reflected these
developments by giving more weight to the mild and severe
downside scenarios compared to transition date.
influence
that
the
Non-linearity of credit losses in relation to macroeconomic
factors is usually most pronounced in portfolios that are most
sensitive to interest rates, especially in the areas of mortgage
loans to private clients and real estate financing. The mild
downside scenario reflects a significant rise of interest rates as a
key component and is also particularly relevant for credit risk
management purposes.
As noted above, scenario weights are a reflection of risks
identified during management’s assessment of economic and
geopolitical risks and not a specific expectation that a particular
narrative with its defined macroeconomic factors (e.g., interest
rates) will materialize. Other scenarios for a mild downside with
less focus on interest rates would, however, not have been
representative of the potential asymmetry of loan losses in a
downturn. A more severe recession can be triggered by political
factors that cannot be modeled based on observed history; given
this consideration, the weight assigned to the severe downside
case was based on management’s assessment of the geopolitical
risks that might affect all of our key markets and portfolios.
ECL scenario
Assigned weights in %
Upside
Baseline
Mild downside
Severe downside
31.12.18
10.0
45.0
35.0
10.0
1.1.18
20.0
42.5
30.0
7.5
Note 23 Expected credit loss measurement (continued)
Key parameters
Real GDP growth (% change)
United States
Eurozone
Switzerland
Consumer price inflation (% change)
United States
Eurozone
Switzerland
Unemployment rate (%, average)
United States
Eurozone
Switzerland
Fixed income: 10-year government bonds (bps)
USD
EUR
CHF
Equity indices (% change)
S&P 500
EuroStoxx 50
SPI
Swiss real estate (% change)
Single-Family Homes
Other real estate (% change)
United States (S&P/Case-Shiller)
Eurozone (Housing Price Index)
1-year shock
Upside
Baseline
Mild
downside
Severe
downside
3-year cumulative shock
Mild
downside
Baseline
Severe
downside
Upside
5.5
4.3
5.0
3.5
2.4
1.4
(1.7)
(1.0)
(1.5)
61.0
40.0
48.0
14.8
17.0
13.9
2.8
1.8
2.0
2.1
1.6
0.9
(0.6)
(0.5)
(0.3)
3.9
22.0
19.7
5.8
6.0
4.2
(0.5)
(0.3)
(0.8)
(5.2)
(10.4)
(7.0)
4.9
2.8
1.8
0.6
0.0
0.6
187.5
75.0
187.5
(20.3)
(15.5)
(19.0)
(1.0)
(1.1)
(1.8)
3.4
3.2
4.3
(160.0)
(20.0)
(75.0)
(50.1)
(63.7)
(56.2)
9.9
8.5
9.4
10.4
8.1
7.1
(1.5)
(1.9)
(1.4)
249.1
146.7
208.0
38.7
38.4
37.1
7.0
4.7
5.5
5.5
5.3
2.8
(0.5)
(0.9)
0.1
5.7
60.7
53.2
15.1
15.6
10.4
0.0
0.7
(0.1)
(3.6)
(13.4)
(6.9)
11.1
6.2
4.2
1.8
0.1
1.6
262.5
225.0
262.5
(23.5)
(14.7)
(24.0)
0.6
(1.4)
(1.2)
2.9
3.7
5.3
(135.0)
(10.0)
(40.0)
(48.2)
(65.9)
(56.7)
4.5
(0.3)
(7.3)
(15.2)
14.1
1.4
(15.8)
(27.0)
10.3
4.9
6.9
1.9
(2.7)
(0.2)
(16.0)
(9.5)
30.9
15.4
17.7
8.2
(17.0)
3.0
(22.1)
(18.3)
c) Development of ECL allowances and provisions
The ECL allowances and provisions recognized in the period are
impacted by a variety of factors, such as:
– origination of new instruments during the period;
– effect of passage of time as the ECL on an instrument for the
remaining lifetime reduces (all other factors remaining the
same);
– credit impairment: increased ECL as default is certain and PD
increases to 100%;
– change in individual asset quality of instruments;
– portfolio effect of updating forward-looking scenarios and
the respective weights;
– movements from a “maximum 12-month ECL” to the
recognition of “lifetime ECL” (and vice versa) following
transfers between the stages 1, 2 and 3 (SICR or credit-
impairment status);
– changes in credit risk and / or economic forecasting models or
– discount unwind within ECL as it is measured on a present
updates to model parameters;
value basis;
– foreign exchange translations for assets denominated in
– derecognition of instruments in the period;
foreign currencies and other movements.
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Note 23 Expected credit loss measurement (continued)
The following table explains the changes in the ECL allowances and provisions for Loans and advances to customers, Loans to
financial advisors and off-balance sheet financial instruments and other credit lines between the beginning and the end of the period
due to the factors listed on the previous page.
Remeasurements without stage transfers5
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
Book quality movements
Remeasurements due to stage transfers4
USD million
Balance as of 1 January 2018
ECL movements due to stage transfer (profit or loss neutral)1
ECL movements with profit or loss impact2
Net movement from new and derecognized transactions3
Stage 3
(783)
2
(88)
19
0
0
8
0
(114)
(7)
(1)
0
1
0
(106)
(7)
(8)
(48)
(70)
Model and methodology changes6
0
216
Other allowance and provision movements
Write-offs / recoveries7
199
Reclassifications8
15
Foreign exchange movements9
8
(6)
Other
Balance as of 31 December 2018
(661)
1 Represents ECL allowances and provisions prior to ECL remeasurement due to stage transfer. 2 Includes ECL movements from new and derecognized transactions, book quality changes, model and methodology
changes and foreign exchange rates. 3 Represents the increase and decrease in allowances and provisions resulting from financial instruments (including guarantees and facilities) that were newly originated,
purchased or renewed and from the final derecognition of loans or facilities on their maturity date or earlier. 4 Represents the remeasurement between 12-month and lifetime ECL due to stage transfers.
5 Represents the change in allowances and provisions related to changes in model inputs or assumptions, including changes in forward-looking macroeconomic conditions, changes in the exposure profile, PD and
LGD changes, and unwinding of the time value. 6 Represents the change in the allowances and provisions related to changes in models and methodologies. 7 Represents the decrease in allowances and
provisions resulting from write-offs of the ECL allowance against the gross carrying amount when all or part of a financial asset is deemed uncollectible or forgiven. 8 Represents reclassifications to Other assets
measured at amortized cost. 9 Represents the change in allowances and provisions related to movements in foreign exchange rates.
Development of ECL allowances and provisions
Stage 2
(193)
95
(83)
15
4
5
1
4
(87)
(103)
(63)
(19)
(3)
(7)
16
(3)
12
(6)
6
(11)
1
0
3
0
(1)
(180)
Total
(1,117)
0
(104)
(10)
(3)
(3)
2
(10)
(89)
(16)
(11)
5
(1)
1
(73)
(9)
8
(56)
(55)
(13)
227
200
25
8
(6)
(1,002)
Stage 1
(141)
(97)
66
(44)
(6)
(8)
(6)
(14)
112
95
54
24
0
7
17
2
4
(2)
9
(2)
10
1
7
0
2
(162)
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
420
Note 23 Expected credit loss measurement (continued)
d) Maximum exposure to credit risk
The tables on the following pages provide the Group’s
maximum exposure to credit risk for financial instruments
subject to ECL 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 “Risk management and control” section of
this report 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
USD billion
Financial assets measured at amortized cost on the
balance sheet
Cash and balances at central banks
Loans and advances to banks2
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments3,4
Loans and advances to customers5
Other financial assets measured at amortized cost
Total financial assets measured at amortized cost
Financial assets measured at fair value through other
comprehensive income – debt
Total maximum exposure to credit risk reflected on the
balance sheet in scope of ECL
Guarantees6
Loan commitments6
Forward starting transactions, reverse repurchase and
securities borrowing agreements
Committed unconditionally revocable credit lines
Total maximum exposure to credit risk not reflected on
the balance sheet, in scope of ECL
31.12.18
Collateral
Credit enhancements
Maximum
exposure to
credit risk
Cash
collateral
received
Collateralized
by securities
Secured by
real estate
Other
collateral1
Netting
Credit
derivative
contracts Guarantees
Exposure to
credit risk
after collateral
and credit
enhancements
108.4
16.9
95.3
23.6
320.4
22.6
587.1
6.7
593.8
18.1
31.2
0.9
36.6
86.8
0.1
92.5
104.4
0.4
197.4
167.1
0.0
167.2
197.4
167.2
2.5
2.8
0.9
6.5
12.7
0.1
1.5
4.2
5.8
17.0
0.1
17.2
17.2
1.3
0.4
1.1
2.8
14.5
14.5
14.5
2.5
16.2
1.1
19.9
19.9
1.2
5.7
3.9
0.0
0.0
0.0
0.2
1.2
1.2
1.2
2.7
0.7
10.8
0.0
0.2
3.4
108.4
16.8
0.3
9.1
14.3
20.9
169.8
6.7
176.5
10.2
19.8
0.0
21.0
51.0
421
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Note 23 Expected credit loss measurement (continued)
Maximum exposure to credit risk (continued)
USD billion
Financial assets measured at amortized cost on the
balance sheet
Cash and balances at central banks
Loans and advances to banks2
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments3,4
Loans and advances to customers5
Other financial assets measured at amortized cost
Total financial assets measured at amortized cost
Financial assets measured at fair value through other
comprehensive income – debt
Total maximum exposure to credit risk reflected on the
balance sheet in scope of ECL
Guarantees6
31.12.17
Collateral
Credit enhancements
Maximum
exposure to
credit risk
Cash
collateral
received
Collateralized
by securities
Secured by
real estate
Other
collateral1
Netting
Credit
derivative
contracts Guarantees
Exposure to
credit risk
after collateral
and credit
enhancements
90.0
14.1
92.0
24.0
326.7
37.8
584.7
8.1
592.8
17.7
0.1
87.2
114.3
20.0
221.6
4.3
15.2
1.1
20.7
164.3
164.3
221.6
2.1
164.3
0.2
20.7
1.3
12.8
12.8
12.8
16.5
0.1
16.6
16.6
1.0
0.0
0.0
0.0
0.0
0.0
1.4
1.4
1.4
3.1
90.0
14.0
0.4
11.3
15.1
16.7
147.4
8.1
155.6
9.9
0.0
32.1
Loan commitments6
Forward starting transactions, reverse repurchase and
securities borrowing agreements
Total maximum exposure to credit risk not reflected on
the balance sheet, in scope of ECL
31.2
1 Includes but is not limited to life insurance contracts, inventory, accounts receivable, mortgage loans, patents and copyrights. 2 Loans and advances to banks include 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 25 for more information. 5 Collateral arrangements generally incorporate a range of collateral, including cash, securities, property and other collateral. 6 The
amount shown in the “Guarantees” column largely relates to sub-participations. Refer to Note 34 for more information.
17.8
62.8
13.0
12.8
21.0
4.3
7.1
0.0
0.1
1.1
1.2
2.9
1.2
0.3
0.1
1.1
5.8
Prior-period information is presented under IAS 39 requirements.
422
Note 23 Expected credit loss measurement (continued)
e) Financial assets subject to credit risk by rating category
The table below shows the credit quality and the maximum
exposure to credit risk based on the Group’s internal credit
rating system and year-end stage classification. With the
transition to IFRS 9, the credit risk rating reflects the Group’s
individual
assessment of
the probability of default of
counterparties, prior to substitutions. The amounts presented
are gross of impairment allowances.
→ Refer to the “Risk management and control” section of this
report for more details on the Group’s internal grading system
Financial assets subject to credit risk by rating category
USD million
31.12.18
Credit-
impaired
(defaulted)
Total gross
carrying
amount
ECL
allowances
Rating category1
Financial assets measured at amortized cost
Cash and balances at central banks
of which: stage 1
Loans and advances to banks
of which: stage 1
of which: stage 2
of which: stage 3
0–1
2–3
4–5
6–8
9–13
103,635
4,735
103,635 4,735
0
0
829
13,462
1,347
829 13,462 1,347
0
0
0
0
0
0
0
0
927
763
164
0
0
0
307
268
39
0
Receivables from securities financing transactions
29,065
24,653
13,602
26,865
1,165
of which: stage 1
29,065 24,653 13,602 26,865 1,165
Cash collateral receivables on derivative instruments
5,136
10,042
5,282
3,040
of which: stage 1
5,136 10,042 5,282 3,040
101
101
0
108,370
0 108,370
3
16,875
0 16,669
0
3
0
203
3
95,350
0 95,350
0
23,601
0 23,601
Loans and advances to customers
3,642
172,742
52,566
73,863
16,014
2,297
321,124
of which: stage 1
of which: stage 2
of which: stage 3
Other financial assets measured at amortized cost
of which: stage 1
of which: stage 2
of which: stage 3
3,621 172,002 49,277 62,305 11,111
20
0
13,409
13,409
0
0
740 3,289 11,558 4,903
0
676
676
0
0
0
0
313
7,460
313 7,235
0
0
225
0
0
274
272
2
0
0 298,316
0 20,510
2,297
2,297
586
22,718
0 21,905
0
586
227
586
Total financial assets measured at amortized cost
155,716
226,310
73,110
112,155
17,861
2,886
588,039
On-balance sheet financial instruments
Financial assets measured at FVOCI – debt instruments
3,889
2,702
0
76
0
0
6,667
Total on-balance sheet financial instruments
159,605
229,012
73,110
112,231
17,861
2,886
594,706
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.
0
0
(7)
(4)
(1)
(3)
(2)
(2)
0
0
(772)
(69)
(155)
(549)
(155)
(43)
(4)
(109)
(937)
0
(937)
Net carrying
amount
(maximum
exposure to
credit risk)
108,370
108,370
16,868
16,666
202
95,349
95,349
23,602
23,602
320,352
298,248
20,357
1,748
22,563
21,862
223
478
587,104
6,667
593,771
423
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Note 23 Expected credit loss measurement (continued)
Off-balance sheet positions subject to expected credit loss by rating category
USD million
31.12.18
0–1
2–3
4–5
6–8
9–13
Total carrying
amount
(maximum
exposure to
credit risk)
Credit-
impaired
(defaulted)
ECL provision
(43)
(7)
(2)
(34)
(37)
(32)
(5)
0
0
(80)
(35)
(19)
(16)
(1)
(1)
0
0
(36)
Rating category1
Off-balance sheet financial instruments
Guarantees
of which: stage 1
of which: stage 2
of which: stage 3
Irrevocable loan commitments
of which: stage 1
of which: stage 2
of which: stage 3
Forward starting reverse repurchase and securities borrowing agreements
979
6,673
3,859
5,415
1,006
215
978 6,670 3,849 5,012
3
0
10
0
402
0
0
811
195
2,088
11,667
6,519
6,479
4,404
2,088 11,667 6,519 6,296 4,019
0
0
25
0
0
0
0
510
150
183
0
251
385
0
0
215
55
1
0
53
0
18,147
17,320
610
215
31,212
30,590
568
53
936
Total off-balance sheet financial instruments
3,092
18,850
10,528
12,145
5,410
270
50,295
Other credit lines
Committed unconditionally revocable credit lines
of which: stage 1
of which: stage 2
of which: stage 3
Irrevocable committed prolongation of existing loans
of which: stage 1
of which: stage 2
of which: stage 3
Total other credit lines
776
10,899
5,282
11,499
8,084
768 10,871 5,152 10,727 7,603
28
130
772
8
0
27
1,346
27 1,315
0
0
31
0
889
680
209
0
902
701
200
481
0
154
137
17
803
12,245
6,171
12,401
8,238
93
0
93
21
0
0
21
114
36,633
35,121
1,419
93
3,339
2,860
457
21
39,972
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.
424
Note 23 Expected credit loss measurement (continued)
Financial assets subject to credit risk by rating category
USD billion
Rating category1
Financial assets measured at amortized cost
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
Total financial assets measured at amortized cost
On-balance sheet financial instruments
Financial assets measured at FVOCI – debt instruments
Total on-balance sheet financial instruments
Credit-
impaired
(defaulted)
Total gross
carrying
amount
31.12.17
Gross carrying amount per rating category
0–1
2–3
4–5
6–8
9–13
89.6
0.6
24.9
6.6
3.2
9.4
0.5
10.8
37.3
10.0
165.9
1.1
0.0
1.4
17.2
5.7
66.9
8.9
0.9
10.7
1.6
71.3
17.1
134.4
225.6
100.1
101.5
0.3
1.8
0.1
17.9
1.0
21.1
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.
7.0
1.0
0.1
141.4
226.6
100.1
101.6
21.1
1.9
Off-balance sheet positions subject to expected credit loss by rating category
USD billion
Rating category1
Off-balance sheet financial instruments
Guarantees
Irrevocable loan commitments
Forward starting reverse repurchase and securities borrowing agreements
Total off-balance sheet financial instruments
31.12.17
Gross carrying amount per rating category
0–1
2–3
4–5
6–8
9–13
4.2
7.8
2.8
5.2
0.8
3.6
1.2
2.0
3.2
8.5
13.5
13.0
34.9
12.0
8.1
4.4
0.2
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.
Prior-period information is presented under IAS 39 requirements.
1.5
0.3
1.9
Credit-
impaired
(defaulted)
0.2
90.0
14.1
92.0
24.0
326.7
37.8
584.7
8.1
592.8
Total
carrying
amount
(maximum
exposure to
credit risk)
17.7
32.1
13.0
62.8
425
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Note 23 Expected credit loss measurement (continued)
f) Credit-impaired financial instruments at amortized cost
The credit risk in the Group’s portfolio is actively managed by
taking collateral against exposures and by utilizing credit
hedging. Collateral held against the credit-impaired
loan
exposure (stage 3) mainly consisted of real estate and securities.
It is the Group’s 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 2018 and 2017
amounted to USD 60 million and USD 61 million, respectively.
The Bank seeks 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. Financial assets
that are credit-impaired and related collateral held in order to
mitigate potential losses are shown in the table below.
USD million
Loans and advances to banks
Loans and advances to customers
of which: Private clients with mortgages
of which: Real estate financing
of which: Large corporate clients
of which: SME clients
of which: Lombard
Other financial assets measured at amortized cost
Total credit-impaired financial assets measured at amortized cost
Guarantees
of which: Large corporate clients
of which: SME clients
Loan commitments
Committed unconditionally revocable credit lines
Irrevocable committed prolongation of existing loans
Total off-balance sheet financial instruments and other credit lines
31.12.18
Gross carrying
amount
3
2,297
836
54
170
888
31
586
2,8861
Allowance for
expected credit losses
(3)
(549)
(39)
(16)
(82)
(256)
(17)
(109)
(660)1
Net carrying amount
0
1,748
796
38
88
632
14
478
2,226
Collateral / credit
enhancements
0
1,654
796
30
79
561
14
12
1,666
215
127
77
53
93
22
3831
(34)
(6)
(25)
0
0
0
(34)1
31.12.17
84
79
5
8
9
0
102
Collateral / credit
enhancements
USD million
210
Loans and advances to customers
5
Guarantees and loan commitments
Total credit-impaired financial assets
215
1 Upon adoption of IFRS 9 as of 1 January 2018, an instrument is classified as credit-impaired if the counterparty is defaulted, and / or the instrument is purchased or originated credit-impaired and includes credit-
impaired exposures for which no loss has occurred or no allowance has been recognized (e.g., because they are expected to be fully recoverable through the collateral held). Refer to Note 1c for more information on
the adoption of IFRS 9. 2 December 2017 numbers do not include exposure of USD 0.3 billion presented on the balance sheet as other assets.
Allowance for
expected credit losses
(672)
(34)
(706)2
Gross carrying
amount
1,104
204
1,3082
Net carrying amount
432
432
426
Note 23 Expected credit loss measurement (continued)
g) Sensitivity analysis
As outlined in Note 1a, ECL estimates involve significant
uncertainties at the time they are made.
ECL model
The models applied to determine point-in-time PD and LGD rely
on market and statistical data, which have been found to
correlate well with historically observed defaults in sufficiently
homogeneous segments. The risk sensitivity of each of our IFRS
9 reporting segments to such factors has been summarized in
Note 10.
Emerging new systematic risk factors may not be sufficiently
taken into account by existing models and affect their
responsiveness to a changing environment. This risk is deemed
to be immaterial and monitored through regular model review
processes; in particular, it is deemed to be of less importance
for the large books of mortgage loans, where risk drivers tend
to be stable.
Statistically derived models, which perform well on a
reasonably sized and homogeneous portfolio, may show
weakness in smaller-sized sub-portfolios, for which other or
differently weighted factors may be more relevant criteria.
Where risk experts conclude that the output of a general model
is not in line with what they would have expected for a specific
portfolio segment, and that this would be material for ECL,
overlays would be recommended based on management
judgment.
ECL estimations for segments where the PD is homogeneous,
but the credit exposure is not, may prove to be inaccurate –
even though all parameters were accurately predicted – as the
actual amount of loss depends on the exposure of the position
that defaulted. This observation is less relevant in retail-type
portfolios with smaller individual exposures from mortgage loans
or financings of SME, but may become important in the large
corporate client portfolios in the Investment Bank and Personal
& Corporate Banking.
Potential effect of changing economic conditions
Forward-looking scenarios
Depending on the scenario selection and related macro-
economic assumptions for the risk factors, the components of
the relevant weighted average ECL change. This is particularly
relevant for interest rates, which can take both directions under
a given growth assumption (for example, low growth with high
interest rates in a stagflation scenario, versus low growth and
falling interest rates in a recession). Management will look for
scenario narratives that are expected to address the risks of a
the
credit portfolio, while at
requirements of IFRS 9 to avoid bias.
time meeting
the same
As forecasting models are complex due to the combination of
multiple factors, simple what-if analyses by changing individual
parameters do not provide reasonable information on the
exposure of segments to changes in the macroeconomy.
Portfolio-specific analyses based on their key risk factors would
also not be additive as potential compensatory effects in other
segments would be ignored. Sensitivities at Group level can only
be meaningfully assessed in the context of coherent scenarios
with consistently developed macroeconomic factors.
The table below indicates the potential effect of changing
economic conditions on ECL for stage 1 and stage 2 positions by
disclosing for each scenario (see Note 23b) and material
portfolio the corresponding ECL output. The effect of applying
scenarios is not linear across the portfolio, with a significant
impact observed in the mortgage loan books as the potential
effect of rising interest rates manifests itself in the mild
downside scenario, with high unemployment rates combined
with a marked correction of house prices contributing to high
expected losses in the severe downside scenario.
USD million, unless otherwise indicated
Segmentation
Private clients with mortgages
Real estate financing
Large corporate clients
SME clients
Other segments
Total
Weighted average
Baseline
ECL
102
61
47
34
115
359
in % of
baseline
275
150
133
118
122
152
ECL
37
41
35
29
95
237
in % of
baseline
100
100
100
100
100
100
Scenarios
Upside
ECL
29
32
31
28
83
204
in % of
baseline
78
79
89
97
88
86
Mild downside
Severe downside
ECL
173
80
46
39
135
473
in % of
baseline
468
198
130
135
142
200
ECL
365
119
108
63
171
826
in % of
baseline
988
293
308
216
180
349
427
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Note 23 Expected credit loss measurement (continued)
The forecasting horizon is limited to three years, with a
model-based mean reversion of PD and LGD assumed
thereafter. Changes to these timelines may have an effect on
ECL; depending on the cycle, a longer or shorter forecasting
horizon will lead to different annualized lifetime PD and
average LGD estimations. This is currently not deemed to be
material for UBS as a large share of positions, including
mortgages in Switzerland, have a maturity that is within the
forecasting horizon.
Scenario weights
ECL is sensitive to changing scenario weights, in particular, if
narratives and parameters are selected that are not close to the
baseline scenario, highlighting the non-linearity of credit losses.
As shown in the table on the previous page, the ECL for
stage 1 and stage 2 positions would have been USD 237 million
instead of USD 359 million if ECL had been determined solely on
the baseline scenario. The weighted average ECL amounts
therefore to 152% of the baseline value.
Stage allocation and SICR
The determination of what constitutes an SICR is based on
management judgment as explained in Note 1a. Changing the
SICR trigger will have a direct effect on ECL as more or fewer
positions would be subject to lifetime ECL under any scenario.
Maturity profile
The maturity profile of the assets is an important driver for
changes in ECL due to transfers to stage 2. The current maturity
profile of most lending books is relatively short; hence a
movement to stage 2 may have a limited effect on ECL.
A significant portion of our lending to SME is documented under
frame credit agreements, which allow for various forms of
utilization but are unconditionally cancelable by UBS at any time.
The relevant maturity for drawings under such agreements with
a fixed maturity is the respective term, or maximum 12 months
in stage 1. For unused credit lines and all drawings that have no
fixed maturity (e.g., current accounts), UBS generally applies a
12-month maturity from the reporting date, given the credit
review policies, which require either continuous monitoring of
key indicators and behavioral patterns for smaller positions or an
annual formal review for any other limit. The ECL for these
products is sensitive to shortening or extending the maturity
assumption.
428
Note 24 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
i) Maximum exposure to credit risk for financial instruments
measured at fair value
Financial instruments not measured at fair value
j)
Adoption of IFRS 9
Adoption of IFRS 9 on 1 January 2018 resulted in the
reclassification of certain financial assets and liabilities from
amortized cost to fair value through profit or loss. This included:
– brokerage receivables and payables held in the Investment
Bank and Global Wealth Management;
– auction rate securities held in Corporate Center; and
– certain loans held in the Investment Bank.
Some of those financial assets and liabilities are designated as
Level 3 in the fair value hierarchy. Refer to the tables and text
within this Note for more information.
An immaterial amount of financial assets were reclassified
from Financial assets at fair value held for trading and Financial
assets at fair value not held for trading to Loans and advances to
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
customers upon adoption of IFRS 9. An immaterial amount of
associated
loan commitments, which were recognized as
derivative liabilities as of 31 December 2017, were also
derecognized from the balance sheet. No material fair value
gains or losses would have been recognized in the income
statement in 2018 had these instruments not been reclassified.
Similarly, no material fair value gains or losses would have been
recognized in Other comprehensive income related to debt
instruments that were reclassified from Financial assets available
for sale to Other financial assets measured at amortized cost
upon adoption of IFRS 9.
→ Refer to Note 1c for more information
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.
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Note 24 Fair value measurement (continued)
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.
technique,
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
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
technique, but which would nevertheless be
valuation
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 24d for more information
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 24d for more information
430
Note 24 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
USD million
Financial assets measured at fair value on a recurring basis
31.12.18
31.12.17
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial assets at fair value held for trading
88,452
13,956
1,962
104,370
111,780
15,604
2,023 129,407
of which:
Government bills / bonds
Corporate and municipal bonds
Loans
Investment fund units
Asset-backed securities
Equity instruments
Financial assets for unit-linked investment contracts2
Derivative financial instruments
of which:
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Commodity contracts
Brokerage receivables3
9,554
558
0
6,074
0
72,266
1,607
5,559
2,886
3,200
248
455
0 11,161 12,244
6,768
651
3,566
680
9,716
442
144
0
392
46 72,768 81,324
10,764
941
38 8,180
0 3,433
7,409 1,886
199
190
774
0 13,186
566 8,785
513 3,946
586 9,881
178
377
108 81,623
71 11,609
753
124,033
1,424
126,210
470 119,227
1,589 121,285
0 36,658
1,444
0
311 53,148
3 30,905
1,768
0
418 37,076
476
1,920
30 53,489
496 31,404
1,769
2
1 45,049
0 2,325
212 47,957
16 22,099
0 1,772
138 45,188
564 2,889
194 48,363
693 22,807
0 1,772
0
16,840
0
16,840
Financial assets at fair value not held for trading4
35,458
42,819
4,413
82,690
23,628
35,373
1,456
60,457
of which:
Government bills / bonds
Corporate and municipal bonds
Financial assets for unit-linked investment contracts2
Loans
Securities financing transactions5
Auction rate securities3
Investment fund units
Equity instruments6
Other
17,687
4,806
781 16,455
4,751
6,380
9,899
0
428
62
38
16,694
0
0
0
173
123
0
0 22,493 22,632 4,000
0 17,236
785 21,237
0 21,446
8,132
9,937
1,664
710
702
369
0 9,627
121
0
210
387
1,752
39
1,664
109
517
331
0
0
0 26,633
0 22,022
778 10,405
298
177
0
597
501
501
Financial assets measured at fair value through other comprehensive income on a recurring basis
Financial assets measured at fair value through other comprehensive income4
2,319
4,347
of which:
Government bills / bonds
Corporate and municipal bonds
Asset-backed securities
Other6
Non-financial assets measured at fair value on a recurring basis
2,171
149
0
0
69
348
3,931
0
0
0
0
0
0
6,667
3,078
5,291
521
8,889
2,239
497
3,931
0
2,804
136
124 1,087
0 3,980
88
150
0 2,940
9 1,220
0 3,980
749
512
Precious metals and other physical commodities
4,298
0
0
4,298
4,681
0
0
4,681
Non-financial assets measured at fair value on a non-recurring basis
Other non-financial assets7
Total assets measured at fair value
0
131,280
82
202,077
0
7,800
82
341,156
0
55
143,636 175,550
43
98
5,631 324,818
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Note 24 Fair value measurement (continued)
Determination of fair values from quoted market prices or valuation techniques (continued)1
USD million
Financial liabilities measured at fair value on a recurring basis
31.12.18
31.12.17
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial liabilities at fair value held for trading
24,406
4,468
69
28,943
26,710
4,421
120
31,251
of which:
Government bills / bonds
Corporate and municipal bonds
Investment fund units
Equity instruments
Derivative financial instruments
of which:
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Commodity contracts
Financial liabilities designated at fair value on a recurring basis
Brokerage payables designated at fair value3
Debt issued designated at fair value
Other financial liabilities designated at fair value
of which:
Amounts due under unit-linked investment contracts
Securities financing transactions5
Over-the-counter debt instruments
2,423
126
551
21,306
416
3,377
137
537
2,839
0
3,530
27
0
689
42 21,886
5,286
263
51 3,542
269
555
345
20,817
0 5,549
36 3,629
16
841
68 21,230
580
122,933
2,210
125,723
409 115,849
2,879 119,137
7 32,511
2,203
0
322 52,964
1 33,669
1,487
0
226 32,743
519
2,722
86 53,372
1,371 35,041
1,487
0
191 39,380
5 39,184
617 3,895
0 3,278
218 46,318
125 46,662
43 25,445 1,945 27,433
1 1,602
0 1,601
0
0
0
38,420
0
38,420
46,074
10,957
57,031
32,569
1,025
33,594
0
0
39,616
11,166
50,782
14,651
1,991
16,643
0 21,679
9,461
0
1,427
0
0 21,679
9,461
0
2,450
1,023
0 11,821
0 11,821
385
382
0
4
0 2,447 1,980 4,427
Non-financial liabilities measured at fair value on a non-recurring basis
1
Other non-financial liabilities
16,157 217,813
Total liabilities measured at fair value
1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are not included in this table. The fair value of these derivatives was not material for the periods
presented. 2 Financial assets for unit-linked investment contracts were reclassified from Financial assets at fair value held for trading to Financial assets at fair value not held for trading upon adoption of IFRS 9 on
1 January 2018. Refer to Note 1c for more information. 3 Comparative-period information is not disclosed for financial assets and liabilities that were measured at amortized cost prior to the adoption of IFRS 9 on
1 January 2018. Refer to Note 1c for more information. 4 As of 31 December 2018, USD 23 billion of Financial assets at fair value not held for trading and USD 6 billion of Financial assets measured at fair value
through other comprehensive income are expected to be recovered or settled after 12 months. As of 31 December 2017, USD 24 billion of Financial assets at fair value not held for trading and USD 7 billion of
Financial assets measured at fair value through other comprehensive income were expected to be recovered or settled after 12 months. 5 The increases in Securities financing transactions primarily relate to the
reclassification of certain balances from amortized cost to fair value through profit or loss upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 6 Upon adoption of IFRS 9 on
1 January 2018, equity instruments that were formerly classified as available for sale under IAS 39 were reclassified to Financial assets at fair value not held for trading. Refer to Note 1c for more information.
7 Other non-financial assets primarily consist of properties and other non-current assets held for sale, which are measured at the lower of their net carrying amount or fair value less costs to sell.
1
27,119 174,538
0
244,465
0
283,711
0
24,986
0
14,260
0
0
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Note 24 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 (e.g., indicative or firm) and the relationship of
recently evidenced market activity to the prices provided by
consensus pricing services. UBS also uses internally developed
models, which are typically based on valuation methods and
techniques recognized as 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 24f 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.
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.
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Note 24 Fair value measurement (continued)
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 by 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 are not available or that are not
redeemable at the measurement date or shortly thereafter are
classified as Level 3.
Asset-backed securities
include
Product description: asset-backed securities
(RMBS), commercial
residential mortgage-backed securities
mortgage-backed
collateralized debt
(CMBS),
obligations (CDO) and other ABS and are instruments generally
issued through the process of securitization of underlying
interest-bearing assets.
securities
(ABS)
Valuation: for liquid securities, the valuation process will use
trade and price data, updated for movements in market levels
between the time of trading and the time of valuation. Less
liquid instruments are measured using discounted expected cash
flows 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 and asset default and recovery rates.
434
Fair value hierarchy: CDO, RMBS, CMBS and other ABS are
generally classified as Level 2. However, if significant inputs are
unobservable, or if market or fundamental data is not available,
they are classified as Level 3.
Auction rate securities
Product description: there are two types of auction rate securities
(APS) and auction rate
(ARS): auction preferred securities
certificates (ARC). ARC are issued by municipalities and are used
by
investors as tax-exempt alternatives to money market
instruments. Interest rates for these instruments are reset through
a periodic Dutch auction. APS are similar to ARC with the primary
difference being that they are issued from closed-end funds.
Valuation: ARS are valued using market prices that reflect
recent transactions after applying an adjustment for trade size or
quoted dealer prices, where available.
Fair value hierarchy: suitably deep and
liquid pricing
information is generally not available for ARS securities. As a
result, these securities are classified as Level 3.
Equity instruments
Product description: equity instruments include stocks and
shares, private equity positions and units held in hedge funds.
Valuation: listed equity instruments are generally valued using
prices obtained directly from the market. Unlisted equity
holdings, including private equity positions, are initially marked
at their transaction price and are revalued when reliable
evidence of price movement becomes available or when the
position is deemed to be impaired. Fair value for units held in
hedge funds is measured based on their published NAV, taking
into account any restrictions imposed upon redemption.
Fair value hierarchy: the majority of equity securities are
actively traded on public stock exchanges where quoted prices
in Level 1
are readily and regularly available, resulting
classification. Units held in hedge funds are classified as Level 2,
except for positions for which published NAV are 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.
Note 24 Fair value measurement (continued)
Securities financing transactions
Product description: securities financing transactions include
(reverse) repurchase agreements (securities purchased under
resale agreements and securities sold under
repurchase
agreements) that are managed on a fair value basis.
Valuation: These instruments are valued using discounted
expected cash flow techniques. The discount rate applied is
based on funding curves that are relevant to the collateral
eligibility terms for the contract in question.
Fair value hierarchy: Collateral funding curves for these
instruments are generally observable and, as a result, these
positions are classified as Level 2. Where the collateral terms are
non-standard
considered
the
unobservable and classified Level 3.
curve may be
funding
Brokerage receivables and payables
Product description: brokerage receivables and payables include
callable, on-demand balances, including long cash credits, short
cash debits, margin debit balances and short sale proceeds.
Valuation: fair value is determined based on the value of the
underlying balances.
Fair value hierarchy: due to their on-demand nature, these
receivables and payables are designated as Level 2.
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.
Valuation: the risk management and the valuation approaches
for these instruments are closely aligned with the equivalent
derivatives business and the underlying risk, and the valuation
techniques used for this component are the same as the relevant
valuation techniques described below. For example, equity-linked
notes should be referenced to equity / index contracts and credit-
linked notes should be referenced to credit derivative contacts.
Fair value hierarchy: observability is closely aligned with the
equivalent derivatives business and the underlying risk.
→ Refer to Notes 19 and 22 for information on debt issued
designated at fair value and other financial liabilities
designated at fair value
→ Refer to Note 24d 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 24d, 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
interest rates
market standard yield curve models using
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.
435
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Note 24 Fair value measurement (continued)
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
and 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.
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 and securitized
products, plus first to default swaps and certain total return
swaps.
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. 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 and recovery rates are determined from actively traded
observable market data. Where the underlying reference
name(s) are not actively traded and the correlation cannot be
directly mapped to actively traded tranche instruments, these
contracts are classified as Level 3. Asset-backed credit derivatives
follow the characteristics of the underlying security and are
therefore distributed across Level 2 and Level 3.
Foreign exchange contracts
Product description: this includes open spot and forward foreign
exchange (FX) contracts and OTC FX option contracts. OTC FX
option contracts include standard call and put options, options
with multiple exercise dates, path-dependent options, options
with averaging features, options with discontinuous payoff
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
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
include multi-
FX option contracts classified as Level 3
dimensional FX options and long-dated FX exotic option
contracts where there is no active market from which to derive
volatility or correlation inputs.
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.
436
Note 24 Fair value measurement (continued)
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 applying 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.
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
d) Valuation adjustments
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 11 for more information on derivative
instruments
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
measurement process, to adjust for an
identified model
simplification or to incorporate an aspect of fair value that
requires an overall portfolio assessment rather than an
evaluation based on an individual instrument level characteristic.
Deferred day-1 profit or loss 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
Deferred day-1 profit or loss related to financial instruments
other than financial assets measured at fair value through other
comprehensive income is released into Other net income from
fair value changes on financial instruments 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
measured at fair value through other comprehensive income is
released into Other comprehensive income when pricing of
equivalent products or the underlying parameters become
observable and is released into Other income when the assets
are sold.
In the second quarter of 2018, a day-1 profit or loss reserve
release of USD 196 million was recognized in the income
statement related to long-dated UBS-issued structured notes,
which are reported within Debt issued designated at fair value
on the balance sheet. The day-1 profit or loss reserve release
was driven by increased observability of the own credit
adjustment (OCA) curve used to value these positions following
the issuance of a 30-year senior unsecured bond in the second
quarter of 2018.
The table on the next page summarizes the changes in
deferred day-1 profit or loss reserves during the respective
period.
437
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Note 24 Fair value measurement (continued)
Deferred day-1 profit or loss reserves
USD million
Reserve 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
Reserve balance at the end of the year
2018
338
341
(417)
(6)
255
2017
365
247
(279)
6
338
2016
420
257
(293)
(23)
4
365
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.
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. As the Group does not hedge changes in
own credit arising on financial liabilities designated at fair value,
presenting own credit within Other comprehensive income does
not create or increase an accounting mismatch in the income
statement. The unrealized and any realized own credit
recognized
income will not be
in Other comprehensive
reclassified to the income statement in future periods.
Own credit
is estimated using an 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 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.
In June 2018, UBS AG issued a 30-year senior unsecured
bond as part of its ongoing funding requirements. The market-
observable secondary prices
this bond have been
incorporated into the OCA curve construction, resulting in a
widening of the curve at the long end. An own credit gain of
USD 253 million was recognized in Other comprehensive income
in the second quarter of 2018, mainly reflecting this OCA curve
change.
for
→ Refer to Note 19 for more information on debt issued
designated at fair value
Own credit adjustments on financial liabilities designated at fair value
USD million
Recognized during the year:
Realized gain / (loss)
Unrealized gain / (loss)
Total gain / (loss), before tax
USD million
Recognized on the balance sheet as of the end of the year:
Unrealized life-to-date gain / (loss)
438
For the year ended
Included in
Other comprehensive income
31.12.18
31.12.17
31.12.16
(3)
519
517
22
(337)
(315)
As of
18
(152)
(134)
31.12.18
31.12.17
31.12.16
320
(200)
139
Note 24 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 at fair value not held for trading, 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
with the CVA framework. A DVA is determined for each
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.
Valuation adjustments on financial instruments
Life-to-date gain / (loss), USD 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.
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
In the second quarter of 2018, a USD 65 million expense was
recognized in the income statement reflecting the model
valuation adjustment recorded to capture the spread between
OCA and LIBOR volatility affecting the valuation of certain
structured note issuances.
As of
31.12.18
31.12.17
(90)
(85)
1
(716)
(388)
(327)
(116)
(51)
2
(733)
(477)
(256)
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Note 24 Fair value measurement (continued)
e) Transfers between Level 1 and Level 2
The amounts provided below reflect transfers between Level 1
and Level 2 for instruments that were held for the entire
reporting period.
financial assets held
Assets totaling approximately USD 0.6 billion, which were
trading,
mainly comprised of
predominantly investment fund units as well as corporate and
municipal bonds, were transferred from Level 2 to Level 1 during
2018, generally resulting from increased levels of trading activity
observed within the market. Transfers of financial liabilities from
Level 2 to Level 1 during 2018 were not significant.
for
financial assets held
Assets totaling approximately USD 0.7 billion, which were
mainly comprised of
trading,
predominantly investment fund units and equity instruments,
were transferred from Level 1 to Level 2 during 2018, generally
resulting from diminished levels of trading activity observed
within the market. Transfers of financial liabilities from Level 1 to
Level 2 during 2018 were not significant.
for
440
Note 24 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 a given 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 to the respective valuation technique
as of 31 December 2018.
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, reflecting 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
Valuation
technique(s)
Significant
unobservable
input(s)1
31.12.18 31.12.17
31.12.18 31.12.17
USD billion
Financial assets and liabilities at fair value held for trading and Financial assets at fair value not held for trading3
Corporate and municipal
bonds
Traded loans, loans
designated at fair value,
loan commitments and
guarantees
Relative value to
market comparable
0.7
0.0
0.0
0.6
2.7
0.0
1.7
0.0
Bond price equivalent
Range of inputs
31.12.18
31.12.17
low
high
weighted
average2
low high
weighted
average2
unit1
0
134
89
0
133
92
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
Relative value to
market comparable
Auction rate securities 4
1.7
0.0
Investment fund units 5
0.6
0.7
0.0
0.0
Equity instruments 5
Debt issued designated at
fair value6
Other financial liabilities
designated at fair value6
Derivative financial instruments
0.6
0.5
0.0
0.1
11.0
11.2
1.0
2.0
Interest rate contracts
0.4
0.1
0.2
0.2 Option model
Credit derivative contracts
0.5
0.6
0.5
0.6
Discounted expected
cash flows
Equity / index contracts
0.5
0.7
1.4
1.9 Option model
Loan price equivalent
0
100
99
50
102
98
Credit spread
301
513
23
124
points
basis
points
Discount margin
1
Bond price equivalent
79
14
99
2
89
0
14
2
%
points
Net asset value
Price
Volatility of interest
rates7
50
81
28
70
Credit spreads
Bond price equivalent
Equity dividend yields
Volatility of equity
stocks, equity and
other indices
Equity-to-FX
correlation
Equity-to-equity
correlation
4
3
0
4
545
99
12
93
(39)
67
(50)
97
6
2
0
550
102
13
0
172
(39)
70
(50)
97
basis
points
basis
points
points
%
%
%
%
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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 Comparative-period information includes equity instruments that were formerly classified as available for sale under IAS 39 and have been reclassified to Financial assets at fair
value not held for trading upon adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 4 Comparative-period information is not disclosed for financial assets and liabilities that were
measured at amortized cost prior to the adoption of IFRS 9. Refer to Note 1c for more information. 5 The range of inputs is not disclosed as there is a dispersion of values given the diverse nature of the
investments. 6 Valuation techniques, significant unobservable inputs and the respective input ranges for Debt issued designated at fair value and Other financial liabilities designated at fair value, which are
primarily comprised of over-the-counter debt instruments, are the same as the equivalent derivative or structured financing instruments presented elsewhere in this table. 7 Effective in 2018, the range of inputs
reported for this significant unobservable input is based on normal volatility and the unit has been updated to basis points. Log-normal volatility with the unit as points was reported previously. Prior-period
information has been restated to reflect this change in presentation.
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Note 24 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.
442
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.
Note 24 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
movements of two variables. It is expressed as a percentage
between –100% and +100%, where +100% represents
interrelationship between
the
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, reflecting 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.
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.
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Consolidated financial statements
Note 24 Fair value measurement (continued)
g) Level 3 instruments: sensitivity to changes in unobservable input assumptions
The table below summarizes those financial assets and liabilities
classified as Level 3 for which a change in one or more of the
unobservable inputs to reflect reasonably possible alternative
assumptions would change fair value significantly, and the
estimated effect thereof.
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.
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 interrelationships
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
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 assumptions
USD million
Traded loans, loans designated at fair value, loan commitments and guarantees
Securities financing transactions
Auction rate securities1
Asset-backed securities
Equity instruments
Interest rate derivative contracts, net
Credit derivative contracts, net
Foreign exchange derivative contracts, net
Equity / index derivative contracts, net
Other
Total
31.12.18
31.12.17
Favorable
changes
Unfavorable
changes
Favorable
changes
Unfavorable
changes
99
17
81
27
155
8
33
10
213
19
661
(44)
(11)
(81)
(23)
(94)
(39)
(37)
(5)
(225)
(19)
(578)
81
35
19
81
13
66
12
195
13
515
(12)
(35)
(15)
(54)
(27)
(102)
(6)
(198)
(13)
(462)
1 Comparative-period information as of 31 December 2017 is not disclosed for financial assets that were measured at amortized cost prior to the adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more
information.
444
Note 24 Fair value measurement (continued)
h) Level 3 instruments: movements during the period
Significant changes in Level 3 instruments
The table on the following pages presents additional information
about Level 3 assets and liabilities measured at fair value on a
recurring basis. Level 3 assets and liabilities may be hedged with
instruments classified as Level 1 or Level 2 in the fair value
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.
Upon adoption of IFRS 9 on 1 January 2018, certain financial
assets and liabilities were newly classified at fair value through
profit or loss and were designated as Level 3 in the fair value
hierarchy. These financial instruments are presented in the table
on the following pages, including the associated effect upon
adoption. This includes auction rate securities held in Corporate
Center and certain loans held in the Investment Bank.
In addition to various financial assets and liabilities being
newly classified at fair value through profit or loss, certain equity
investments and investment fund units measured at fair value
through other comprehensive income were reclassified to
Financial assets at fair value not held for trading under the
revised IFRS 9 classification and measurement rules, which
resulted
reclassification between
reporting lines in the table on the following pages.
in an opening balance
Assets transferred into and out of Level 3 totaled USD 1.4
billion and USD 0.4 billion, respectively. Transfers into Level 3
were primarily comprised of corporate and municipal bonds,
reflecting decreased observability of the respective bond price
equivalent. Transfers out of Level 3 were primarily comprised of
equity / index contracts resulting from increased observability of
the respective equity volatility inputs.
Liabilities transferred into and out of Level 3 totaled USD 2.5
billion and USD 4.8 billion, respectively. Transfers into Level 3
were primarily comprised of rates-linked and equity-linked issued
debt instruments, reflecting decreased observability of the
respective rates volatility and equity volatility inputs. Transfers
out of Level 3 were primarily comprised of rates-linked fixed-rate
and equity-linked
instruments resulting from
changes in the observability of the OCA curve and equity
volatility inputs used to determine the fair value of these
instruments. In the second quarter of 2018, USD 2.9 billion of
UBS-issued structured notes, which are reported within Debt
issued designated at fair value on the balance sheet, were
transferred from Level 3 to Level 2 in the fair value hierarchy,
reflecting increased observability of the OCA curve used to value
these notes.
issued debt
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Consolidated financial statements
Note 24 Fair value measurement (continued)
Movements of Level 3 instruments
Total gains / (losses) included in
comprehensive income
Balance
as of
31 December
2016
Net gains /
(losses)
included in
income1
1.7
0.6
0.7
0.1
0.3
2.0
1.2
(0.1)
0.1
(0.1)
(0.1)
0.0
0.2
0.2
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
0.0
0.7
(3.9)
2.7
0.0
1.0
(0.2)
0.1
0.1
(0.1)
0.0
0.0
0.5
0.1
0.0
0.2
(0.7)
(2.8)
0.0
(0.3)
0.0
2.7
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.6
0.2
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.0
0.0
0.4
(1.3)
0.1
(0.1)
0.1
0.2
0.0
0.0
0.1
(0.7)
0.0
(0.1)
0.0
0.9
(0.1)
(0.1)
0.0
0.0
0.3
(0.6)
0.1
0.0
0.0
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
2.5
0.3
1.3
0.7
0.2
3.9
1.5
1.8
0.6
(0.3)
(0.4)
0.0
0.0
1.0
(1.2)
0.4
(0.9)
0.1
0.0
(0.2)
(0.1)
0.0
0.3
0.0
0.3
0.0
(0.1)
(0.2)
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.9
0.0
(0.1)
(0.3)
(0.7)
(0.1)
0.1
0.0
0.3
0.0
(0.1)
(0.4)
(0.4)
0.0
0.0
0.1
0.0
0.0
0.1
0.0
0.0
0.7
(1.4)
0.5
(1.4)
0.2
(0.2)
0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.6
0.0
(0.4)
(0.6)
(0.4)
0.2
0.2
0.1
(0.8)
(0.5)
(0.1)
0.1
0.1
0.1
USD billion
Financial assets at fair value held for
trading
of which:
Corporate and municipal bonds
Loans
Investment fund units
Other
Financial assets at fair value not held for
trading
of which:
Loans
Auction rate securities 3
Equity instruments 4
Other
Financial assets measured at fair value
through other comprehensive income
Derivative financial instruments – assets
of which:
Interest rate contracts
Credit derivative contracts
Equity / index contracts
Other
Derivative financial instruments –
liabilities
of which:
Credit derivative contracts
Equity / index contracts
Other
Debt issued designated at fair value
9.5
1.4
0.9
0.0
0.0
5.3
(5.0)
1.2
(1.7)
0.4
Other financial liabilities designated at
fair value
1 Net gains / (losses) included in comprehensive income are comprised of Net interest income, Other net income from fair value changes on financial instruments and Other income. 2 Total Level 3 assets as of 31
December 2018 were USD 7.8 billion (31 December 2017: USD 5.6 billion). Total Level 3 liabilities as of 31 December 2018 were USD 14.3 billion (31 December 2017: USD 16.2 billion). 3 Comparative-period
information is not disclosed for items that were measured at amortized cost prior to the adoption of IFRS 9 on 1 January 2018. Refer to Note 1c for more information. 4 Upon adoption of IFRS 9 on 1 January
2018, equity instruments that were formerly classified as available for sale under IAS 39 were reclassified to Financial assets at fair value not held for trading. Refer to Note 1c for more information.
(0.2)
(0.8)
0.0
1.5
0.0
0.0
0.1
0.0
1.3
0.1
446
Note 24 Fair value measurement (continued)
Total gains / (losses) included in
comprehensive income
Reclassifi-
cations and
remeasure-
ments upon
adoption of
IFRS 9
Balance
as of
31 December
2017
Balance
as of
1 January
2018
Net gains /
(losses)
included in
income1
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
Balance
as of
31 December
20182
2.0
0.4
2.4
(0.2)
(0.2)
2.1
(7.1)
4.2
0.0
0.7
(0.2)
0.6
0.5
0.6
0.4
0.4
0.6
0.9
0.6
0.4
0.0
0.1
(0.1)
(0.1)
0.0
0.0
(0.1)
(0.1)
0.6
0.9
0.2
0.4
(0.9)
(5.6)
(0.3)
(0.4)
0.0
4.2
0.0
0.0
0.0
0.0
0.0
0.0
0.5
0.1
0.1
0.0
0.0
0.0
(0.1)
0.0
1.5
3.0
4.4
0.0
0.0
1.7
(1.9)
0.0
0.0
0.1
(0.1)
0.8
0.7
0.6
1.9
0.4
0.1
0.5
(0.5)
1.6
0.1
0.6
0.7
0.2
1.4
1.9
0.4
0.8
1.6
0.1
0.6
0.7
0.2
(0.2)
0.1
0.1
0.0
(0.2)
0.1
0.1
0.0
1.5
0.0
0.2
0.0
(1.0)
(0.4)
(0.2)
(0.4)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
1.0
(1.5)
0.5
(0.1)
0.1
0.0
0.0
(0.1)
0.1
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.8
0.0
(0.1)
(0.4)
(1.0)
0.0
0.3
0.0
0.1
0.0
0.0
0.0
(0.1)
0.0
2.9
0.0
2.9
(0.3)
(0.2)
0.0
0.0
1.3
(1.5)
0.3
(0.5)
0.0
(0.2)
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.1
1.2
0.0
(0.2)
(1.2)
(0.1)
0.1
0.3
0.0
0.0
(0.5)
0.0
0.6
2.0
0.3
11.2
2.0
0.0
0.6
2.0
0.3
11.2
2.0
0.0
(0.3)
0.0
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.1
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
2.0
0.7
0.7
0.4
0.2
4.4
1.8
1.7
0.5
0.5
1.4
0.4
0.5
0.5
0.0
2.2
0.5
1.4
0.3
0.0
0.0
0.0
5.8
(4.3)
2.2
(4.3)
(0.2)
11.0
0.0
0.0
0.0
1.1
(2.0)
0.0
0.0
0.0
1.0
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Consolidated financial statements
Note 24 Fair value measurement (continued)
i) Maximum exposure to credit risk for financial instruments measured at fair value
The tables below provide the Group’s maximum exposure to
credit risk for financial instruments measured at fair value 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 “Risk management and control” section of
this report 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
USD billion
Financial assets measured at fair value on the balance
sheet
Financial assets at fair value held for trading – debt
instruments2,3
Derivative financial instruments4
Brokerage receivables
Financial assets at fair value not held for trading –
debt instruments6
Total financial assets measured at fair value
Guarantees7
Loan commitments7
Forward starting transactions, reverse repurchase and
securities borrowing agreements
Total maximum exposure to credit risk not reflected on
the balance sheet
31.12.18
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
21.9
126.2
16.8
59.8
224.8
1.6
3.5
8.1
13.3
0.0
0.0
0.0
4.1
16.5
16.7
37.3
8.1
8.1
110.8
110.8
0.0
0.1
0.1
2.4
0.0
0.2
0.0
0.2
0.1
0.0
2.4
0.0
0.2
0.4
31.12.17
Collateral
Credit enhancements
Maximum
exposure to
credit risk
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
collateral1
Credit
derivative
contracts Guarantees
Netting
26.3
121.3
USD billion
Financial assets measured at fair value on the balance
sheet
Financial assets at fair value held for trading – debt
instruments2,5
Derivative financial instruments4
Financial assets at fair value not held for trading –
debt instruments3,6
Total financial assets measured at fair value
Guarantees7
Loan commitments7
Total maximum exposure to credit risk not reflected on
the balance sheet
4.5
1 Includes but is not limited to life insurance contracts, inventory, accounts receivable, mortgage loans, patents and copyrights. 2 These positions are generally managed under the market risk framework. For the
purpose of this disclosure, collateral and credit enhancements were not considered. 3 Does not include investment fund units. 4 The amount shown in the “Netting” column represents the netting potential not
recognized on the balance sheet. Refer to Note 25 for more information. 5 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 6 Financial assets at fair value
not held for trading collateralized by securities consisted of structured loans and reverse repurchase and securities borrowing agreements. 7 The amount shown in the “Guarantees” column largely relates to sub-
participations. Refer to Note 34 for more information.
59.9
207.4
1.7
8.0
49.8
90.5
1.7
2.8
26.3
14.4
10.1
14.1
102.8
102.8
3.9
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.0
0.0
9.6
3.9
0.2
4.1
1.0
Exposure to
credit risk
after collateral
and credit
enhancements
21.9
11.4
0.3
43.1
76.6
1.4
0.7
0.0
2.1
Exposure to
credit risk
after collateral
and credit
enhancements
448
Note 24 Fair value measurement (continued)
j) 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
USD billion
Assets1
Cash and balances at central banks
Loans and advances to banks
Receivables from securities financing transactions
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost2
Liabilities
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Debt issued measured at amortized cost
Carrying
value
31.12.18
Fair value
Carrying
value
31.12.17
Fair value
Total
Total
Level 1
Level 2
Level 3
Total
Total
Level 1
Level 2
Level 3
108.4
108.4
16.9
95.3
23.6
320.4
22.6
11.0
10.3
28.9
419.8
132.3
16.9
95.4
23.6
320.9
22.4
11.0
10.3
28.9
419.9
135.0
108.4
16.3
0.0
0.0
0.0
8.4
8.9
0.0
0.0
0.0
0.0
0.0
0.6
91.9
23.6
171.2
10.7
1.9
10.3
28.9
419.8
133.6
0.0
0.0
3.4
0.0
149.7
3.3
0.2
0.0
0.0
0.1
1.4
90.0
14.1
92.0
24.0
326.7
37.8
7.7
17.5
31.0
419.6
143.2
90.0
14.1
92.0
24.0
328.2
37.7
7.7
17.5
31.0
419.6
147.2
90.0
13.4
0.0
0.0
0.0
6.5
6.6
0.0
0.0
0.0
0.0
0.0
0.7
89.4
24.0
0.0
0.0
2.5
0.0
181.2
147.0
30.2
1.0
1.1
17.5
31.0
419.6
142.7
0.0
0.0
0.0
0.0
4.5
Other financial liabilities measured at amortized cost2
1 As of 31 December 2018, USD 0 billion of Loans and advances to banks, USD 1 billion of Receivables from securities financing transactions, USD 139 billion of Loans and advances to customers and USD 15 billion
of Other financial assets measured at amortized cost are expected to be recovered or settled after 12 months. As of 31 December 2017, USD 0 billion of Loans and advances to banks, USD 2 billion of Receivables
from securities financing transactions, USD 137 billion of Loans and advances to customers and USD 7 billion of Other financial assets measured at amortized cost were expected to be recovered or settled after 12
months. 2 Upon adoption of IFRS 9 on 1 January 2018, prime brokerage receivables and payables were reclassified from amortized cost to fair value through profit or loss. Refer to Note 1c for more information.
37.2
37.2
37.2
0.1
0.0
6.8
6.9
6.9
0.0
0.0
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
receivables
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 2018: 100% of cash and
balances at central banks, 96% of loans and advances to
banks, 89% of
financing
transactions, 100% of cash collateral receivables on derivative
instruments, 48% of loans and advances to customers, 26%
of other financial assets measured at amortized cost, 81% of
amounts due to banks, 97% of payables from securities
financing transactions, 100% of cash collateral payables on
derivative instruments, 97% of customer deposits, 7% of
debt issued measured at amortized cost and 100% of other
financial liabilities measured at amortized cost.
from securities
– 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 given
the short-term nature of these instruments.
449
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Note 25 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 derivatives and exchange-traded
derivatives. 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
their actual credit exposure.
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements
Assets subject to netting arrangements
Netting recognized on the balance sheet
Netting potential not recognized on
the balance sheet4
Gross assets
before netting
Netting with
gross liabilities3
Net assets
recognized
on the
balance
sheet
75.5
120.0
22.3
7.8
Assets after
consideration
of
netting
potential
0.0
5.2
7.8
0.0
Financial
liabilities
Collateral
received
(4.4)
(90.8)
(13.5)
(1.4)
(71.2)
(24.0)
(1.0)
(6.4)
(13.0)
(4.3)
(2.3)
(77.5)
Assets not
subject to netting
arrangements5
Assets
recognized
on the
balance
sheet
Total assets
Total assets
after
consideration
of netting
potential
Total assets
recognized
on the
balance
sheet
19.8
6.2
1.3
74.9
19.8
11.4
9.1
74.9
(77.5)
(97.2)
7.8
225.7
(1.4)
(110.0)
(6.4)
(102.6)
0.0
13.0
2.1
102.2
2.1
115.2
(78.8)
(2.1)
69.1
115.1
(7.7)
(85.6)
(61.4)
(21.3)
(1.1)
21.1
(12.0)
(0.8)
0.0
(82.0)
0.4
205.8
0.0
(105.4)
(0.2)
(83.7)
0.0
8.2
8.3
0.2
16.8
22.8
6.2
2.9
60.0
91.9
22.8
14.4
11.2
60.3
108.7
95.3
126.2
23.6
82.7
9.9
327.9
92.0
121.3
24.0
60.5
297.7
As of 31.12.18, USD billion
Receivables from securities financing
transactions1
Derivative financial instruments
Cash collateral receivables on
derivative instruments2
Financial assets at fair value not held for
trading1
of which: reverse repurchase
agreements
Total assets
As of 31.12.17, USD billion
Receivables from securities financing
transactions1
Derivative financial instruments
Cash collateral receivables on
derivative instruments2
Financial assets at fair value not held for
trading1
Total assets
88.5
124.3
24.6
85.4
85.3
322.9
147.9
117.2
22.2
0.4
287.8
1 Certain reverse repurchase agreements were reclassified from amortized cost to fair value through profit or loss upon adoption of IFRS 9 as of 1 January 2018. This has resulted in an increase in amounts presented
on the line “Financial assets at fair value not held for trading” and a decrease in amounts presented on the line “Receivables from securities financing transactions.” Refer to Note 1c for more information. 2 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 exchange-traded derivatives that are economically settled on a daily basis. 3 The logic of the table results in amounts presented in the “Netting with gross liabilities” column corresponding directly
to the amounts presented in the “Netting with gross assets” column in the liabilities table presented on the following page. Netting in this column for reverse repurchase agreements presented within the lines
“Receivables from securities financing transactions” and “Financial assets at fair value not held for trading” taken together corresponds to the amounts presented for repurchase agreements in the “Payables from
securities financing transactions” and “Other financial liabilities designated at fair value” lines in the liabilities table presented on the following page. 4 For the purpose of this disclosure, the amounts of financial
instruments and cash collateral presented have been capped by the relevant netting agreement so as not to exceed the net amount of financial assets presented on the balance sheet; i.e., over-collateralization,
where it exists, is not reflected in the table. 5 Includes assets not subject to enforceable netting arrangements and other out-of-scope items.
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Note 25 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
Gross
liabilities
before
netting
20.6
124.1
Netting recognized on the balance sheet
Netting potential not recognized
on the balance sheet4
Net
liabilities
recognized
on the
balance
sheet
Liabilities
after
consideration of
netting
potential
Financial
assets
Collateral
pledged
Netting with
gross assets3
(12.4)
(4.3)
8.3
119.8
(3.6)
(90.8)
(4.7)
(20.9)
29.0
(2.3)
26.7
(14.2)
(1.2)
86.6
86.1
260.4
(78.2)
(78.2)
(97.2)
8.4
7.9
163.2
(2.1)
(2.1)
(110.7)
(5.9)
(5.9)
(32.6)
92.5
114.3
(78.8)
(2.1)
13.7
112.2
(7.7)
(85.6)
(6.0)
(15.4)
30.2
(1.1)
29.2
(16.7)
(1.2)
1.9
239.0
0.0
(82.0)
1.9
157.0
0.0
(110.0)
(0.1)
(22.7)
0.0
8.1
11.3
0.4
0.0
19.8
0.0
11.2
11.3
1.8
24.3
Liabilities not
subject
to netting
arrangements5
Liabilities
recognized
on the
balance
sheet
Total liabilities
Total
liabilities
after
consideration
of netting
potential
Total
liabilities
recognized
on the
balance
sheet
2.0
5.9
2.2
25.2
1.6
35.4
3.8
6.9
1.9
14.7
27.3
2.0
14.0
13.5
25.6
1.6
55.2
3.8
18.1
13.1
16.5
51.6
10.3
125.7
28.9
33.6
9.5
198.5
17.5
119.1
31.0
16.6
184.3
As of 31.12.18, USD billion
Payables from securities financing
transactions1
Derivative financial instruments
Cash collateral payables on
derivative instruments2
Other financial liabilities designated at
fair value1
of which: repurchase agreements
Total liabilities
As of 31.12.17, USD billion
Payables from securities financing
transactions1
Derivative financial instruments
Cash collateral payables on
derivative instruments2
Other financial liabilities designated at
fair value1
Total liabilities
1 Certain repurchase agreements were reclassified from amortized cost to fair value through profit or loss upon adoption of IFRS 9 as of 1 January 2018. This has resulted in an increase in amounts presented on the
line “Other financial liabilities designated at fair value” and a decrease in amounts presented on the line “Payables from securities financing transactions.” Refer to Note 1c for more information. 2 The net
amount of Cash collateral payables on derivative instruments recognized on the balance sheet includes certain exchange-traded derivatives that are net settled on a daily basis either legally or in substance under
IAS 32 principles and exchange-traded derivatives that are economically settled on a daily basis. 3 The logic of the table results in amounts presented in the “Netting with gross assets” column corresponding to
the amounts presented in the “Netting with gross liabilities” column in the assets table presented on the previous page. Netting in this column for repurchase agreements presented within the lines “Payables from
securities financing transactions” and “Other financial liabilities designated at fair value” taken together corresponds to the amounts presented for reverse repurchase agreements in the “Receivables from securities
financing transactions” and “Financial assets at fair value not held for trading” lines in the assets table presented on the previous page. 4 For the purpose of this disclosure, the amounts of financial instruments
and cash collateral presented have been capped by the relevant netting agreement so as not to exceed the net amount of financial liabilities presented on the balance sheet; i.e., over-collateralization, where it
exists, is not reflected in the table. 5 Includes liabilities not subject to enforceable netting arrangements and other out-of-scope items.
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Note 26 Restricted and transferred financial assets
This Note provides information on restricted financial assets (Note 26a), transfers of financial assets (Note 26b and 26c) and financial
assets that are received as collateral with the right to resell or repledge these assets (Note 26d).
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 USD 12,516 million as of
31 December 2018 (31 December 2017: USD 12,779 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.
Restricted financial assets
USD million
Financial assets pledged as collateral
Financial assets at fair value held for trading
of which: assets pledged as collateral that may be sold or repledged by counterparties
Loans and advances to customers1
Financial assets at fair value not held for trading
Total financial assets pledged as collateral2
31.12.18
31.12.17
43,292
32,121
18,804
0
62,096
47,414
36,277
18,087
174
65,676
Other restricted financial assets
3,364
Loans and advances to banks
Financial assets at fair value held for trading3
12,591
Cash collateral receivables on derivative instruments
3,921
Loans and advances to customers
1,289
Financial assets at fair value not held for trading3
2,669
Financial assets measured at fair value through other comprehensive income
253
Other
97
24,183
Total other restricted financial assets
Total financial assets pledged and other restricted financial assets
89,859
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
USD 3.2 billion for 31 December 2018 (31 December 2017: approximately USD 2.2 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 2018: USD 0.3 billion; 31 December 2017:
USD 2.6 billion). 3 Financial assets for unit-linked investment contracts were reclassified from Financial assets at fair value held for trading to Financial assets at fair value not held for trading upon adoption of
IFRS 9 as of 1 January 2018. Refer to Note 1c for more information.
5,140
3,589
3,205
935
23,514
171
203
36,758
98,854
In addition to restrictions on financial assets, 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. Supervisory 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, which affects UBS
limit the ability of the
Americas Holding LLC, and may
intermediate holding company sub-group to make distributions of
capital based on the results of those tests. In June 2018, the
Federal Reserve Board released the 2018 CCAR results and did not
object to UBS Americas Holding LLC’s capital plan.
452
Note 26 Restricted and transferred financial assets (continued)
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 otherwise limit the activities of
subsidiaries.
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
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
USD million
Financial assets at fair value held for trading 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 at fair value not held for trading 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
and securities lending agreements
As of 31 December 2018, approximately 14% of the
transferred financial assets were assets held for trading
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
31.12.18
31.12.17
Carrying value of
transferred assets
32,121
Carrying value of
associated liabilities
recognized
on balance sheet
4,674
Carrying value of
transferred assets
36,277
Carrying value of
associated liabilities
recognized
on balance sheet
13,277
4,726
26,234
1,161
0
32,121
4,674
0
0
0
4,674
13,485
21,684
1,109
174
36,451
13,277
0
0
173
13,450
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 2018 and as of 31 December 2017.
that are not subject
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Note 26 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.
for
fair value held
As of 31 December 2018, the majority of the retained
continuing involvement related to securitization positions held as
financial assets at
trading, primarily
collateralized debt obligations, US commercial mortgage-backed
securities and residential mortgage-backed securities. The fair
value and carrying amount of UBS’s continuing involvement
related to these purchased and retained interests was USD 6
million as of 31 December 2018, and UBS recognized gains of
in 2018 related to these positions. As of
USD 3 million
31 December 2018, life-to-date losses of USD 1,198 million were
recorded related to the positions held as of 31 December 2018.
As of 31 December 2017, the fair value and carrying amount
of UBS’s continuing involvement related to purchased and
retained interests in securitization vehicles was USD 8 million,
and UBS recognized gains of USD 4 million in 2017 related to
these positions. As of 31 December 2017, life-to-date losses of
USD 1,200 million were recorded related to the positions held as
of 31 December 2017.
The maximum exposure to loss related to purchased and
retained interests in securitization structures was USD 10 million
as of 31 December 2018, compared with USD 15 million as of
31 December 2017.
Undiscounted cash outflows of USD 4 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
USD million
Fair value of assets received that can be sold or repledged
received as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative and other transactions1
received in unsecured borrowings
Thereof sold or repledged2
in connection with financing activities
to satisfy commitments under short sale transactions
in connection with derivative and other transactions1
31.12.18
483,688
31.12.17
481,265
473,302
474,420
10,385
356,745
6,845
346,243
315,402
300,880
28,943
12,400
31,251
14,112
1 Includes securities received as initial margin from its clients that UBS is required to remit to central counterparties, brokers and deposit banks through its exchange-traded derivative clearing and execution services.
2 Does not include off-balance sheet securities (31 December 2018: USD 24.5 billion; 31 December 2017: USD 28.8 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.
454
Note 27 Maturity analysis of financial liabilities
The contractual maturities for non-derivative and non-trading
financial liabilities as of 31 December 2018 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 2017. 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 liabilities
USD billion
Financial liabilities recognized on balance sheet1
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Debt issued measured at amortized cost2
Other financial liabilities measured at amortized cost
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading3,4
Derivative financial instruments3
Brokerage payables designated at fair value
Debt issued designated at fair value5
Other financial liabilities designated at fair value
Total financial liabilities measured at fair value through profit or loss
Total
Guarantees, commitments and forward starting transactions6
Loan commitments7
Guarantees7
Forward starting transactions
Reverse repurchase agreements7
Securities borrowing agreements
Total
Financial liabilities recognized on balance sheet1
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Debt issued measured at amortized cost2
Other financial liabilities measured at amortized cost
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading3,4
Derivative financial instruments3
Debt issued designated at fair value5
Other financial liabilities designated at fair value
Total financial liabilities measured at fair value through profit or loss
Total
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
31.12.18
7.9
9.5
28.9
395.8
4.6
5.6
452.4
28.9
125.7
38.4
15.7
30.0
238.8
691.2
34.1
19.8
9.0
0.0
62.9
6.3
13.9
31.0
403.2
4.2
36.0
494.6
31.3
119.1
18.3
12.4
181.1
675.7
1.0
0.6
13.1
6.3
21.0
18.1
0.4
18.5
39.5
0.3
0.3
0.4
3.1
10.5
15.4
29.4
10.0
0.6
10.6
40.0
1.6
0.3
7.0
39.9
48.8
10.2
1.1
11.3
60.1
0.3
0.0
0.4
31.12.17
1.0
0.6
5.3
46.4
53.3
10.3
1.5
11.9
65.1
0.0
0.0
0.0
37.8
37.8
8.0
1.0
9.0
46.8
0.5
4.4
57.6
62.6
7.4
1.2
8.6
71.2
0.0
0.0
0.0
0.1
0.0
0.7
52.1
52.9
7.7
1.4
9.1
61.9
0.0
0.0
0.1
39.1
39.2
6.2
1.0
7.3
46.4
Total
11.0
10.4
28.9
420.4
146.2
5.6
622.6
28.9
125.7
38.4
59.4
33.7
286.2
908.8
34.7
19.8
9.0
0.0
63.6
7.7
17.7
31.0
419.7
157.1
36.0
669.3
31.3
119.1
52.6
17.0
219.9
889.2
39.2
19.3
Guarantees, commitments and forward starting transactions6
Loan commitments7
Guarantees7
Forward starting transactions
Reverse repurchase agreements7
13.0
13.0
0.0
0.0
Securities borrowing agreements
Total
72.0
71.5
1 Except for financial liabilities at fair value held for trading and derivative financial instruments (see footnote 3), the amounts presented generally represent undiscounted cash flows of future interest and principal
payments. 2 The time bucket Due after 5 years includes perpetual loss-absorbing additional tier 1 capital instruments. 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 28 for undiscounted cash flows of derivatives designated in hedge accounting relationships. 4 Contractual maturities of
financial liabilities at fair value held for trading are: USD 28.3 billion due within one month (2017: USD 30.3 billion), USD 0.6 billion due between one month and one year (2017: USD 0.8 billion) and USD 0 billion
due between 1 and 5 years (2017: USD 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 Comprises the maximum irrevocable amount of guarantees, commitments and forward starting
transactions. 7 Loan commitments measured at fair value of USD 3.5 billion, guarantees measured at fair value of USD 1.6 billion and forward starting reverse repurchase agreements measured at fair value of
USD 8.1 billion are under the time bucket Due within 1 month.
39.7
19.3
0.2
0.0
0.2
0.0
0.1
0.2
0.2
0.1
455
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
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 credit default swaps that provide economic
hedges for credit risk exposures (refer to “Credit derivatives” in
Note 11). 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 3j, where terms used in the following
sections are explained.
Consolidated financial statements
Note 28 Hedge accounting
Derivatives transacted for hedging purposes
risks
inherent
The Group enters into derivative transactions for the purpose of
hedging
forecast
in assets,
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.
liabilities and
Derivative transactions that qualify and are designated as
hedges for accounting purposes are described under the
corresponding risk category headings in this Note (interest rate
risk hedge accounting and structural foreign exchange risk
hedge accounting). In addition, UBS designates certain non-
derivative financial assets and liabilities as hedging instruments
in structural foreign exchange risk hedge accounting, as
described under the corresponding risk category headings of this
Note.
456
Note 28 Hedge accounting (continued)
Interest rate risk hedge accounting
Fair value hedges: interest rate risk related to debt instruments
The Group issues various long-term, fixed-rate debt instruments
measured at amortized cost, such as senior unsecured debt,
covered bonds and subordinated debt, that are exposed to
changes in fair value due to movements in market interest rates.
Interest rate swaps are used as fair value hedges to protect
against changes in the fair value of the issued debt.
Fair value hedges of interest rate risk related to debt
instruments involve swapping fixed cash flows associated with
the debt issued to floating cash flows by entering into interest
rate swaps that receive fixed and pay floating cash flows. The
variable future cash flows are based on the following benchmark
rates: USD LIBOR, CHF LIBOR, EURIBOR, GBP LIBOR, AUD LIBOR,
JPY LIBOR and SGD LIBOR.
The issued debt and interest rate swaps are designated in a
fair value hedge relationship. The notional of the designated
hedging instrument matches the notional of the hedged item.
The hedged risk is determined as the change in the fair value
of the debt issued arising solely from changes in the designated
benchmark interest rate (e.g., one-month or three-month
LIBOR). Such change is usually the largest component of the
overall change in the fair value of the hedged position in
transaction currency.
Hedge effectiveness is assessed by comparing changes in the
fair value of the debt issued attributable to changes in the
designated benchmark interest rate with the changes in the fair
value of the interest rate swaps.
Hedge ineffectiveness can arise from different curves used for
the discounting of the hedging instruments and the hedged
items, or from mismatches of critical terms between fixed-term
lending products and hedging interest rate swaps.
Hedging instruments and hedged items
USD million
Hedging instruments: interest rate swaps
Nominal amount1
Carrying amount
Derivative financial assets
Derivative financial liabilities
Hedged items: debt issued measured at amortized cost
Carrying amount1
of which: accumulated amount of fair value hedge adjustment
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
Hedge ineffectiveness
USD million
Changes in fair value of hedging instruments1
Changes in fair value of hedged items1
31.12.18
31.12.17
63,816
27
1
63,785
(298)
49
2
For the year ended
31.12.18
31.12.17
31.12.16
(341)
329
(11)
(16)
(4)
(20)
166
(170)
(4)
Net gains / (losses) related to hedge ineffectiveness recognized in Other net income from fair value changes on
financial instruments
1 For prior periods, the amounts included offsetting accrued interest, which did not have any effect on net gains / (losses) related to hedge ineffectiveness.
Profile of the timing of the nominal amount of the hedging instrument
USD billion
Interest rate swaps
Due within
1 month
Due
between
1 and 3
months
Due between
3 and 12 months
4
Due between
1 and 5 years
43
Due after
5 years
17
Total
64
457
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 28 Hedge accounting (continued)
Fair value hedges: portfolio interest rate risk related to loans
The Group has a portfolio of long-term fixed-rate mortgage
loans in CHF that are measured at amortized cost and exposed
to changes in the fair value attributable to movements in market
interest rates. Interest rate swaps that pay a fixed rate of interest
and receive a floating rate of interest are used as fair value
hedges to protect against changes in the fair value of the
originated loans.
is designated. Changes in the portfolio are driven by new loans
originated or existing loans repaid.
The hedged risk is determined as the change in the fair value
of the loans arising solely from changes in the designated
benchmark interest rate (e.g., one-month or three-month
LIBOR). Such change is usually the largest component of the
overall change in the fair value of the hedged position in
transaction currency.
The portfolio of mortgage loans and interest rate swaps are
designated in a fair value hedge relationship. The notional of the
designated hedging instrument matches the notional of the
hedged item.
Hedge effectiveness is assessed by comparing changes in the
fair value of the hedged portfolio of loans attributable to
changes in the designated benchmark interest rate with the
changes in the fair value of the interest rate swaps.
The hedging strategy involves an open portfolio of hedged
items, i.e., mortgage loans. Both the hedged items and the
hedging instruments are adjusted on a monthly basis to reflect
changes in size and the maturity profile of the hedged portfolio.
The existing hedging relationship is discontinued and a new one
Hedge ineffectiveness can arise from different curves used for
the discounting of the hedging instruments and the hedged
items, or from mismatches of critical terms between fixed-term
lending products and hedging interest rate swaps.
Hedging instruments and hedged items
USD million
Hedging instruments: interest rate swaps
Nominal amount1
Carrying amount
Derivative financial assets
Derivative financial liabilities
Hedged items: loans and advances to customers
Carrying amount1
of which: accumulated amount of fair value hedge adjustment on the portfolio that was subject to hedge accounting 2
of which: accumulated amount of fair value hedge adjustment, subject to amortization attributable to the portion of the portfolio that
ceased to be part of hedge accounting 2
31.12.18
31.12.17
0
33
10,318
0
31
10,299
200
89
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively. 2 Amounts presented within Other financial assets measured at amortized cost and Other
financial liabilities measured at amortized cost.
Hedge ineffectiveness
USD million
Changes in fair value of hedging instruments1
Changes in fair value of hedged items1
Net gains / (losses) related to hedge ineffectiveness recognized in Other net income from fair value changes on
financial instruments
1 For prior periods, the amounts included offsetting accrued interest, which had no effect on net gains / (losses) related to hedge ineffectiveness.
For the year ended
31.12.18
31.12.17
31.12.16
(22)
16
(6)
(10)
3
(7)
(132)
119
(13)
458
Note 28 Hedge accounting (continued)
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, due to movements in future market rates. 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 10 years.
The group of forecast cash flows and interest rate swaps are
designated in cash flow hedge relationships. The notional of the
designated hedging instrument matches the notional of the
hedged item for newly transacted swaps. For swaps that are re-
designated, the ratio of the designation is determined based on
the swap sensitivity.
The hedging strategy involves designation of each interest
rate swap in a separate hedge relationship against a group of
hedged items that share the same risk. The hedged items giving
rise to the hedged cash flows are fungible and could be
substituted for each other over the lifetime of the hedge. Cash
flow forecasts and risk exposures are monitored and adjusted on
an ongoing basis, and consequently hedging instruments are
added or taken out of the program accordingly.
The hedged risk is determined as the variability of future cash
flows arising solely from changes in the designated benchmark
interest rate, i.e., overnight index swap rate / one-month or
is assessed by
three-month LIBOR. Hedge effectiveness
comparing changes in the fair value of the hedged cash flows
attributable to changes in the designated benchmark interest
rate with the changes in the fair value of the interest rate swaps.
Hedge ineffectiveness can arise from differences in the
reference index of the hedging instruments and hedged items,
or from inception of the hedge relationship after the trade date
of the hedging derivative.
Hedging instruments
USD million
Hedging instruments: interest rate swaps
Nominal amount1
Carrying amount
Derivative financial assets
Derivative financial liabilities
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
Hedge ineffectiveness
USD million
Changes in fair value of hedging instruments1
Changes in fair value of hedged items
Effective portion of changes in fair value of hedging instruments recognized as Other comprehensive income
Ineffectiveness recognized as Other net income from fair value changes on financial instruments
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
Other comprehensive income recognized directly in equity related to cash flow hedges
USD million
Balance at the beginning of the year
Effective portion of changes in fair value of hedging instruments recognized in OCI
Amount reclassified to Net interest income when the hedged item affected net profit / (loss)
of which: reclassified to interest income on amortized-cost instruments 1
of which: reclassified to interest income on FVTPL instruments 1
Translation effects recognized directly in retained earnings
Income tax related to cash flow hedges
Balance at the end of the year
of which: related to hedging relationships for which hedge accounting continues to be applied 1,2
of which: related to hedging relationships for which hedge accounting is no longer applied 1,2
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively. 2 Amounts are disclosed on a pre-tax basis.
31.12.18
31.12.17
70,149
24
1
31
2
For the year ended
31.12.18
31.12.17
31.12.16
97
(73)
(42)
25
2018
360
(42)
(294)
(293)
(1)
18
67
109
74
73
45
8
2017
955
45
(843)
39
163
360
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
234
11
2016
1,635
234
(1,094)
4
176
955
459
Consolidated financial statements
Note 28 Hedge accounting (continued)
Structural foreign exchange risk hedge accounting
Hedges of net investments in foreign operations
The Group applies hedge accounting for certain net investments
in foreign operations. For this purpose, foreign exchange (FX)
derivatives, mainly FX forwards and FX swaps, as well as non-
derivative financial assets or liabilities are used and designated as
hedging instruments. The notional of the designated hedging
instrument matches the notional of the hedged item.
Based on UBS’s risk management strategy, the hedges are
adjusted on at least a monthly basis to reflect the changes in the
hedged position.
The hedged risk is determined as the change in the carrying
amount of net assets of foreign operations arising solely from
changes in spot foreign exchange rates. Consequently, the Group
only designates the spot element of the FX forwards as hedging
instruments. Changes in the fair value of the hedging instruments
attributable to changes in forward points and the effect of
discounting are not part of a hedge accounting designation. These
amounts, therefore, do not form part of the effectiveness
assessment and are recognized directly in profit or loss.
The effective portion of gains and losses of these FX swaps,
i.e., the spot element, 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
Hedging instruments
USD million
Hedging instruments: derivative financial instruments
Nominal amount
Carrying amount
Derivative financial assets
Derivative financial liabilities
Hedging instruments: non-derivative foreign currency assets and liabilities
Nominal amount
Carrying amount1
Receivables from securities financing transactions
Payables from securities financing transactions
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
Hedge ineffectiveness
USD million
Changes in fair value of hedging instruments1
Changes in fair value of hedged items1
Effective portion of changes in fair value of hedging instruments recognized in Foreign currency translation OCI1
Ineffectiveness recognized as Other net income from fair value changes on financial instruments1
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
460
accumulation of FCT at the level of individual foreign branches
and subsidiaries, which make up the total FCT OCI of the Group.
When UBS designates as hedging instruments certain non-
derivative foreign currency financial assets and liabilities of
foreign branches or subsidiaries, 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.
is
in
designated
Due to the fact that only the spot element of hedging
instruments
relationships,
ineffectiveness is unlikely unless the hedged net assets fall below
the designated hedged amount. The exceptions are hedges
where the hedging currency is not the same as the currency of
the foreign operation, where the currency basis may cause
ineffectiveness.
hedging
As of 31 December 2017, the notional amount of hedging
instruments exceeded the underlying hedged structural FX
exposures, due to the fact that non-US dollar structural FX
exposures were hedged against the US dollar first and then
against Swiss francs, the former functional currency of the
parent entity. As of 31 December 2018 all structural FX
exposures are hedged directly against the US dollar.
31.12.18
31.12.17
11,537
13,374
80
133
2,969
56
48
229
115
115
For the year ended
31.12.18
205
(205)
181
24
Note 28 Hedge accounting (continued)
Foreign currency translation reserve
USD million
Foreign currency translation reserve
31.12.18
3,924
31.12.17
4,466
31.12.16
2,901
of which: effective portion of changes in fair value of hedging instruments related to investment in subsidiaries
of which: for which hedge accounting continues to be applied1
of which: for which hedge accounting is no longer applied1
Effective portion of changes in fair value of hedging instruments reclassified to Other income upon disposal of
investment for the year ended1
1 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively.
777
521
255
2
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)
USD 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
9
9
0
2
2
0
0
0
0
0
0
0
0
0
0
Total
11
11
0
1 Undiscounted cash inflows and cash outflows of interest rate swaps as of 31 December 2018 were not material as the majority of interest rate swaps designated in hedge accounting relationships are legally
settled on a daily basis.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
461
Consolidated financial statements
Note 29 Pension and other post-employment benefit plans
The table below provides a breakdown of expenses related to pension and other post-employment benefit plans recognized in the
income statement within Personnel expenses.
Income statement – expenses related to pension and other post-employment benefit plans
USD 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
31.12.18
31.12.17
31.12.16
188
186
153
11
22
(11)
1
(12)
13
268
80
127
61
481
460
414
15
31
3
1
2
17
243
72
110
61
440
417
386
(2)
34
4
1
3
19
238
78
107
53
Total pension and other post-employment benefit plan expenses6
1 Refer to Note 29a for more information. 2 Changes to the Swiss pension plan in 2018 resulted in a pre-tax gain of USD 241 million related to past service. Refer to Note 29a for more information on these
changes. 3 Refer to Note 29b for more information. 4 Other expenses include differences between actual and estimated performance award accruals. 5 Refer to Note 29c for more information. 6 Refer to
Note 6.
457
678
723
The table below provides a breakdown of amounts recognized in Other comprehensive income for defined benefit plans.
Other comprehensive income – gains / (losses) on defined benefit plans
USD 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
1 Refer to Note 29a for more information. 2 Refer to Note 29b for more information. 3 Refer to the “Statement of comprehensive income.”
31.12.18
31.12.17
31.12.16
(230)
(352)
130
(8)
7
3
4
3
(220)
276
56
253
(79)
304
28
1
1
0
31
286
11
296
(842)
(94)
(623)
(126)
(13)
(5)
(7)
(26)
(880)
51
(829)
462
Note 29 Pension and other post-employment benefit plans (continued)
UBS recognizes assets and liabilities with respect to defined
benefit plans within Other non-financial assets and Other non-
financial liabilities.
As of 31 December 2018 and 31 December 2017, 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
2018 and 31 December 2017, no net defined benefit pension
asset was recognized on the balance sheet.
The table below provides a breakdown of liabilities recognized on the balance sheet within Other non-financial liabilities related to defined
benefit plans.
Balance sheet – net defined benefit pension and post-employment liability
USD million
Major pension plans1
of which: Swiss plan
of which: UK plan
of which: US and German plans2
Post-employment medical insurance plans3
of which: UK plan
of which: US plans
Remaining plans
31.12.18
31.12.17
671
0
160
511
62
22
40
42
825
0
275
550
88
27
61
36
Total net defined benefit pension and post-employment liability4
1 Refer to Note 29a for more information. 2 Of the total liability recognized as of 31 December 2018, USD 137 million related to US plans and USD 374 million related to German plans (31 December 2017:
USD 153 million and USD 398 million, respectively). 3 Refer to Note 29b for more information. 4 Refer to Note 22.
775
949
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
463
Consolidated financial statements
Note 29 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 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 IFRS, volatility arises in each pension plan’s net asset /
liability position because the fair value of the plan’s financial
assets is not fully correlated to movements in the value of the
plan’s DBO. Specific asset-liability matching strategies for each
pension plan are independently determined by the responsible
governance body. The net asset / liability volatility for each plan
is dependent on the specific financial assets chosen by each
plan’s governance body. For certain pension plans, a liability-
driven investment approach is applied to a portion of the plan
assets to reduce potential volatility.
Swiss pension plan
The Swiss pension plan covers employees of UBS AG and
employees of companies having close economic or financial ties
with UBS AG, 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 opportunity 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 IFRS, primarily because of the
obligation to accrue interest on the pension accounts and the
payment of lifetime pension benefits.
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 2018, the Swiss pension plan had a technical
funding ratio under Swiss pension law of 124.2% (31 December
2017: 131.9%).
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Note 29 Pension and other post-employment benefit plans (continued)
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 on 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 2018, the Swiss pension plan was in a
surplus situation on an IFRS measurement basis, as the fair value of
plan assets exceeded the DBO by USD 3,274 million (31 December
2017: surplus of USD 3,237 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. As of both
31 December 2018 and 31 December 2017, the estimated future
economic benefit was zero and hence no net defined benefit asset
was recognized on the balance sheet. As of 31 December 2018, the
difference between the pension plan surplus and the estimated
future economic benefit,
i.e., the asset ceiling effect, was
USD 3,274 million (31 December 2017: USD 3,237 million).
interest
investment
Changes to the Swiss pension plan
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 agreed to measures that have taken
effect from the start of 2019 to support the long-term financial
stability of the Swiss pension fund. As a result, the conversion
rate was lowered, the regular retirement age was increased to
65, employee contributions were increased to vary between
2.5% and 13.5% of the contributory base salary, and savings
contributions start from age 20 instead of the previous starting
age of 25. Pensions already in payment on 1 January 2019 were
not affected by these measures.
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 USD 734
million in three installments in 2020, 2021 and 2022.
In accordance with IFRS, these measures led to a reduction in
the pension obligation recognized by UBS, resulting in a pre-tax
gain of USD 241 million in 2018. In addition, 2018 service costs
were lower by USD 59 million due to the decrease in benefits.
These effects were recognized as a reduction in Personnel
expenses within the income statement across the business
divisions and Corporate Center, with a corresponding effect in
Other comprehensive income, as the Swiss pension plan was in a
surplus situation that could not be recognized due to the IFRS
asset ceiling restriction. If the Swiss pension plan remains in an
asset ceiling position, the three annual payments, adjusted for
expected forfeitures, are expected to reduce total equity by
approximately USD 210 million per year over the installment
period, with no effect on the income statement.
The employer contributions expected to be made to the Swiss
pension plan in 2019 are estimated to be USD 454 million.
Non-Swiss pension plans
UBS locations outside of Switzerland established 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. The
normal retirement age for participants in the UK plan is 60. Since
2000, the UK plan has been closed to new entrants and, since
2013, 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 2018 and 2017,
UBS did not make any deficit funding contributions.
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Note 29 Pension and other post-employment benefit plans (continued)
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 is likely to increase by more 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.
As of 31 December 2018, the UK plan was in a deficit
situation on an IFRS measurement basis as the DBO exceeded
the fair value of plan assets by USD 160 million (31 December
2017: deficit of USD 275 million).
Following the most recent triennial statutory actuarial
valuation as of 30 June 2017, UBS agreed to minimum cash
contributions of USD 26 million in 2019 and USD 13 million in
2020. Total contributions expected to be made to the UK
defined benefit pension plan in 2019 are estimated at USD 128
million, subject to regular funding reviews during the year.
In addition, UBS and the Pension Trustee Board have entered
into an arrangement whereby a collateral pool was established
to provide security for the pension fund, effective 31 January
2019, at a value of USD 574 million. The collateral pool includes
corporate bonds and government-related debt instruments. The
Pension Trustee Board and UBS may agree adjustments to the
collateral pool value in the future. The arrangement provides the
Pension Trustee Board dedicated access to a pool of assets in the
event of UBS’s insolvency or not paying a required deficit
funding contribution.
Following a UK High Court ruling requiring pension trustees
to equalize benefits for men and women in relation to
guaranteed minimum pensions (GMP), UBS recorded an increase
of USD 4 million in the DBO, resulting in a corresponding loss
recognized in the income statement in 2018.
US pension plans
There are two distinct major defined benefit pension plans in the
US, both with a normal retirement age of 65. Since 1998 and
2001, respectively, the plans have been 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, considering 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 2018, the contributions made by UBS were USD 42 million
(2017: USD 92 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
investment
assets. Both US plans apply a
approach to support the volatility management in the net asset /
liability position. Derivative instruments may also be employed to
manage volatility.
liability-driven
The employer contributions expected to be made to the US
defined benefit pension plans in 2019 are estimated at USD 9
million.
German pension plans
There are two different defined benefit pension plans in
Germany, and both are contribution-based plans. No plan assets
are set aside to fund these plans, and benefits are paid directly
by UBS. The normal retirement age for the participants in the
German plans is 65. Within the larger of the two 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 6% for amounts accrued before 2010, of 4% for
amounts accrued from 2010 to 2017 and of 0.9% for amounts
accrued after 2017. Both plans are regulated under German
pension law, under which the responsibility to pay pension
benefits when they are due rests entirely with UBS. For these
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 2019 are estimated at USD 11 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.
466
Note 29 Pension and other post-employment benefit plans (continued)
Defined benefit pension plans
USD million
Defined benefit obligation at the beginning of the year
Current service cost
Interest expense
Plan participant contributions
Remeasurements
of which: actuarial (gains) / losses due to changes in demographic assumptions
of which: actuarial (gains) / losses due to changes in financial assumptions
of which: experience (gains) / losses 1
Past service cost related to plan amendments
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 and foreign currency translation on
asset ceiling effect
Foreign currency translation
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
UK plan
2018
23,419
405
151
218
(242)
2017
22,465
456
166
208
301
0
6
0
141
(639)
154
397
0
(241)
(50)
(20)
(1,121)
(954)
(8)
0
1,001
(170)
22,566
23,419
10,452 10,741
0
12,114 12,678
24,184
26,656
1,640
(523)
181
177
485
505
208
218
(1,121)
(954)
(10)
(11)
1,090
(228)
26,656
25,839
1,718
3,237
13
23
71
(58)
3,274
0
1,417
89
3,237
0
0
(153)
(352)
505
0
0
0
0
(414)
(79)
485
8
0
0
2018
3,744
0
93
0
(266)
2017
3,639
0
102
0
(88)
(18)
(257)
8
4
0
(202)
0
(181)
3,192
146
(82)
44
(50)
0
0
(256)
0
347
3,744
180
1,434 1,930
1,612 1,634
3,120
3,469
215
(136)
88
86
0
0
0
0
(256)
(202)
0
0
302
(185)
3,469
3,032
0
0
0
0
0
0
0
(160)
(275)
(11)
130
0
0
(4)
(160)
0
0
0
(275)
(519)
(15)
304
0
0
(45)
(275)
US and German plans
2017
1,725
9
63
0
82
2018
1,816
7
55
0
(69)
(5)
(69)
5
0
0
(112)
0
(18)
1,679
226
606
847
1,265
(77)
44
51
0
(112)
(3)
0
1,168
0
0
0
0
0
(511)
(550)
(22)
(8)
51
0
18
(511)
(5)
86
2
0
0
(109)
0
47
1,816
255
645
916
1,124
110
44
100
0
(109)
(4)
0
1,265
0
0
0
0
0
(550)
(601)
(31)
28
100
0
(47)
(550)
Total
2018
28,978
413
299
218
(577)
2017
27,830
465
331
208
295
(81)
(23)
271
(964)
105
410
0
(237)
(50)
(20)
(1,487)
(1,268)
(8)
0
1,395
(369)
27,437
28,978
10,823 11,176
2,040 2,575
14,574 15,228
28,428
31,390
1,965
(736)
313
306
585
556
208
218
(1,487)
(1,268)
(15)
(14)
1,392
(412)
31,390
30,039
1,718
3,237
13
23
71
(58)
3,274
(671)
1,417
89
3,237
(825)
(825)
(186)
(230)
556
0
14
(671)
(1,120)
(460)
253
585
8
(91)
(825)
22,566
23,419
3,192
3,744
1,219
1,324
26,976
28,487
0
0
25,839
3,274
26,656
3,237
3,274
3,237
0
3,032
(160)
0
0
3,469
(275)
0
460
1,168
(511)
0
492
1,265
(550)
460
492
30,039
2,603
31,390
2,412
0
3,274
3,237
(825)
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.
(671)
(511)
(160)
(550)
(275)
0
0
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Note 29 Pension and other post-employment benefit plans (continued)
Analysis of amounts recognized in net profit
USD 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
Past service cost related to plan amendments
Curtailments
Net periodic expenses recognized in net profit
Swiss plan
31.12.18 31.12.17
456
405
UK plan
31.12.18 31.12.17
0
0
US and German plans
31.12.18 31.12.17
9
7
Total
31.12.18 31.12.17
465
413
151
(177)
23
11
(241)
(20)
153
166
(181)
13
10
0
(50)
414
93
(86)
0
0
4
0
11
102
(88)
0
0
0
0
15
55
(44)
0
3
0
0
22
63
(44)
0
4
0
0
31
299
(306)
23
14
(237)
(20)
186
331
(313)
13
15
0
(50)
460
Analysis of amounts recognized in other comprehensive income (OCI)
USD 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 and foreign currency translation on
asset ceiling effect
Total gains / (losses) recognized in other comprehensive income, before tax
Swiss plan
31.12.18 31.12.17
(301)
242
UK plan
31.12.18 31.12.17
88
266
US and German plans
31.12.18 31.12.17
(82)
69
Total
31.12.18 31.12.17
(295)
577
(523)
1,640
(136)
215
(77)
110
(736)
1,965
(71)
(352)
(1,417)
(79)
0
130
0
304
0
(8)
0
28
(71)
(230)
(1,417)
253
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
USD 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
31.12.18
31.12.17
31.12.18
31.12.17
31.12.18
31.12.17
14.5
15.1
19.5
20.0
9.8
10.6
1,153
2,356
3,554
5,643
5,142
1,149
2,294
3,455
5,564
5,109
82
187
345
701
770
83
182
337
717
806
16,792
17,190
3,927
4,325
108
216
336
566
494
798
108
217
330
572
514
887
468
Note 29 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 significant 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 or 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 each of
these plans, an increase in the interest credit rate increases
the plan’s DBO.
– Life expectancy: most of UBS’s defined benefit pension plans
are 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 2018, a net gain of USD 242 million was recognized in Other
comprehensive income (OCI) related to the remeasurement of the
DBO. This was primarily due to a market-driven increase in the
discount rate, which resulted in an OCI gain of USD 776 million.
This effect was partially offset by experience losses of USD 397
million, reflecting differences between the previous actuarial
assumptions and what actually occurred, and market-driven
changes to the assumed rate of interest credit on retirement
savings, which resulted in a loss of USD 124 million. Changes in
other assumptions were not significant.
In 2017, a net loss of USD 301 million was recognized in 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 USD 165 million, as well as experience
losses of USD 154 million. 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 USD 26 million.
Changes in other assumptions were not significant.
UK pension plan
In 2018, a net gain of USD 266 million was recognized in OCI
related to the remeasurement of the DBO for the UK plan. This
was primarily due to a market-driven increase in the discount
rate, which resulted in an OCI gain of USD 219 million, as well
as changes in the pension increase assumption, which resulted
in an OCI gain of USD 37 million.
In 2017, a net gain of USD 88 million was recognized in OCI
related to the remeasurement of the DBO for the UK plan. This
was primarily driven by changes in the life expectancy assumption,
which resulted in a gain of USD 82 million. In addition, market-
driven changes in the inflation rate assumption resulted in a gain
of USD 60 million and experience gains were USD 50 million.
These gains were partly offset by a market-driven decrease in the
discount rate, which resulted in a loss of USD 102 million.
US and German pension plans
In 2018, a net gain of USD 69 million was recognized in OCI
related to the remeasurement of the DBO for the US and
German plans, compared with a net loss of USD 82 million in
2017. OCI gains and losses in both years were primarily driven
by market-driven movements in discount rates.
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Note 29 Pension and other post-employment benefit plans (continued)
The tables below show the significant actuarial assumptions used in calculating the DBO at the end of the year.
Significant 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 projections
S2PA with CMI 2017 projections1
RP2014 WCHA with MP2018 projection scale2
Dr. K. Heubeck 2018 G3
Mortality table
BVG 2015 G with CMI 2016 projections
S2PA with CMI 2017 projections1
RP2014 WCHA with MP2018 projection scale2
Dr. K. Heubeck 2018 G3
Swiss plan
UK plan
US and German plans1
31.12.18
31.12.17
31.12.18
31.12.17
31.12.18
31.12.17
0.92
1.50
0.00
0.92
0.67
1.30
0.00
0.67
2.90
0.00
3.10
0.00
2.55
0.00
3.11
0.00
3.69
2.81
1.50
3.70
3.14
2.83
1.50
2.56
Life expectancy at age 65 for a male member currently
aged 65
aged 45
31.12.18
31.12.17
31.12.18
31.12.17
21.6
23.4
22.8
20.5
21.6
23.4
22.8
20.3
23.1
24.6
24.3
23.3
23.0
24.6
24.4
22.9
Life expectancy at age 65 for a female member currently
aged 65
aged 45
31.12.18
31.12.17
31.12.18
31.12.17
23.5
25.2
24.4
24.1
23.4
25.2
24.4
24.3
25.0
26.5
26.0
26.3
24.9
26.5
26.0
26.8
1 In 2017, the mortality table S2PA with CMI 2016 projections was used. 2 In 2017, the mortality table RP2014 WCHA with MP2017 projection scale was used. 3 In 2017, the mortality table Dr. K. Heubeck
2005 G 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
USD 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
31.12.18
31.12.17
31.12.18
31.12.17
US and German plans
31.12.18
31.12.17
(1,327)
1,503
68
(65)
1,090
–3
231
(219)
751
(1,470)
1,669
86
(82)
1,212
–3
267
(253)
827
(292)
333
–2
–2
260
(262)
–4
–4
(350)
401
–2
–2
380
(336)
–4
–4
(77)
84
1
(1)
6
(6)
9
(9)
(90)
98
1
(1)
7
(7)
9
(9)
122
143
42
48
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 2018 and as of 31 December 2017, 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.
470
Note 29 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
USD 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
31.12.18
31.12.17
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
Quoted
in an active
market
137
Other
0
Total
137
0
2,963
2,963
628
0
5,721
1,515
2,570
6,194
892
0
0
0
0
518
531
11
4,142
18
628
7,237
2,570
6,194
892
11
4,659
549
Quoted
in an active
market
120
Other
0
Total
120
0
2,859
2,859
667
0
7,507
1,331
2,279
6,375
577
0
0
0
667
8,838
2,279
6,375
577
0
23
23
861
4,044
4,905
0
12
12
1
11
2
28
10
24
3
0
18
2
0
11
3
33
9
24
2
0
18
0
17,190
8,649
25,839
100
18,386
8,270
26,656
100
31.12.18
25,839
132
13
25
1,567
88
34
31.12.17
26,656
120
3
34
2,030
85
23
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 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 2018 and 31 December 2017. Net of collateral,
derivative financial instruments amounted to USD 10 million as of 31 December 2018 (31 December 2017: USD 12 million).
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Note 29 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
UK plan
31.12.18
31.12.17
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
5
49
0
1
30
21
1
4
2
4
0
0
USD 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
Asset-backed securities
Other investments2
Total fair value of plan assets
Quoted
in an active
market
143
1,604
0
26
658
587
15
258
51
102
0
21
(565)
2,900
Other
0
Total
143
0
0
0
0
93
0
0
0
28
0
2
9
1,604
0
26
658
680
15
258
51
131
0
22
(556)
132
3,032
5
53
0
1
22
22
0
9
2
4
0
1
(18)
100
Quoted
in an active
market
163
Other
0
Total
163
0
0
0
0
83
0
0
0
28
5
0
1,709
1
31
1,046
724
21
147
57
131
1
0
1,709
1
31
1,046
641
21
147
57
103
(4)
0
(575)
3,341
11
127
(563)
3,469
(16)
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 Standard & Poor’s rating classification. 2 Mainly relates to repurchase arrangements on UK treasury bonds.
472
Note 29 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
US plans
31.12.18
31.12.17
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
Quoted
in an active
market
27
Other
0
Total
27
Quoted
in an active
market
76
Other
0
Total
76
USD 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
462
2
92
3
143
157
104
23
56
6
0
64
0
0
0
462
2
92
3
143
157
104
23
56
6
13
64
17
0
0
0
0
0
0
0
0
0
0
0
0
13
0
17
0
0
29
2
40
0
8
0
12
13
9
2
5
1
1
5
1
0
0
200
10
46
1
298
277
216
20
47
5
0
21
0
15
4
200
10
46
1
298
277
216
20
47
5
13
21
18
15
4
0
0
0
0
0
0
0
0
0
0
13
0
18
0
0
31
6
16
1
4
0
24
22
17
2
4
0
1
2
1
1
0
Total fair value of plan assets
1,139
1,168
100
1,235
1,265
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 Standard & Poor’s rating classification.
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Note 29 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. In the US, retiree medical premiums are subsidized for
eligible participants who retired before 2014.
These plans are not prefunded. In the US, the retirees also
contribute to the cost of the post-employment medical benefits.
In 2018, UBS announced changes to one of the US post-
employment medical insurance plans that replaced the UBS
retiree medical subsidy with a new subsidy to purchase medical
coverage through a private Medicare exchange. This change
reduced the post-employment benefit obligation by USD 14
million, resulting in a corresponding gain recognized in the
income statement in 2018.
The benefits expected to be paid by UBS to the post-
employment medical insurance plans in 2019 are estimated at
USD 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 insurance plans, as well as an
analysis of amounts recognized in net profit and in Other
comprehensive income.
Post-employment medical insurance plans
USD million
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
Past service cost related to plan amendments
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
Past service cost related to plan amendments
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
2018
27
2017
26
US plans
2018
61
2017
64
Total
2018
88
2017
90
0
1
0
(3)
0
(1)
(2)
0
(1)
(1)
22
6
0
17
0
(22)
0
1
0
1
3
3
0
1
0
(1)
0
(1)
0
0
(1)
2
27
6
0
21
0
(27)
0
1
0
1
1
1
0
2
3
(4)
0
(4)
0
(14)
(7)
0
40
0
0
40
0
(40)
0
2
(14)
(12)
4
4
0
2
3
0
0
2
(2)
0
(8)
0
61
0
0
61
0
(61)
0
2
0
2
0
0
0
3
3
(7)
0
(5)
(2)
(14)
(9)
(1)
62
6
0
56
0
(62)
0
3
(14)
(11)
7
7
0
3
3
(1)
(1)
2
(2)
0
(9)
2
88
6
0
81
0
(88)
0
3
0
3
1
1
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.
474
Note 29 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 significant
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.
– 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. Significant actuarial assumptions
used to determine post-employment benefit obligations at the
end of the year were:
Significant actuarial assumptions used1
In %
Discount rate
Average health care cost trend rate – initial
Average health care cost trend rate – ultimate
1 The assumptions for life expectancies are provided within Note 29a. 2 Represents weighted average assumptions across US plans.
UK plan
US plans2
31.12.18
31.12.17
31.12.18
31.12.17
2.90
5.10
5.10
2.55
5.10
5.10
4.20
7.79
4.50
3.54
7.99
4.50
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
USD 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
31.12.18
31.12.17
31.12.18
31.12.17
(1)
1
3
(3)
2
(2)
2
4
(3)
2
(2)
2
1
0
2
(3)
3
1
(1)
4
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 2018, 2017 and 2016, amounted to
USD 268 million, USD 243 million and USD 238 million,
respectively.
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Note 29 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 2018, the minimum
commitment toward the Swiss pension fund under the related
leases was approximately USD 17 million (31 December 2017:
USD 5 million).
→ Refer to the “Composition and fair value of plan assets” table in
Note 29a 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
USD million
Received by UBS
Fees
Paid by UBS
Rent
Dividends, capital repayments and interest
For the year ended
31.12.18
31.12.17
31.12.16
35
4
10
36
5
10
36
5
14
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, USD million)
Financial instruments sold by pension funds or matured
UBS shares (in thousands of shares)
UBS debt instruments (par values, USD million)
UBS shares held by pension and other post-employment benefit plans
Number of shares (in thousands of shares)
Fair value (USD million)
For the year ended
31.12.18
31.12.17
889
13
547
3
905
2
2,897
4
31.12.18
16,712
207
31.12.17
16,370
301
476
Note 30 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 and other employees with the interests of investors.
These compensation plans are also designed to meet regulatory
requirements. The most significant compensation plans are
described below.
→ Refer to Note 1a item 6 for a description of the accounting policy
related to share-based and other deferred compensation plans
Mandatory deferred compensation plans
variable remuneration. Where dividend payments are not permitted,
the grant price of the EOP award is adjusted for the expected
dividend yield over the vesting period to reflect the fair value of the
non-dividend-bearing award.
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.
Equity Ownership Plan (EOP)
The EOP is a mandatory deferred share-based compensation plan
for all employees with total annual compensation greater than USD
/ CHF 300,000.
Deferred Contingent Capital Plan (DCCP)
The DCCP is a mandatory deferred compensation plan for all
employees with total annual compensation greater than USD /
CHF 300,000.
EOP awards granted to GEB members and certain other
employees will only vest if both Group and business division
performance conditions are met. For all awards granted for the
performance year 2017 (awarded in early 2018) and before, the
Group performance condition is based on the average adjusted
return on tangible equity (RoTE) excluding deferred tax assets
over the performance period. Starting with the EOP awards
granted in 2019 for the performance year 2018, the Group
performance condition is based on the average reported return
on common equity tier 1 capital (RoCET1). Business division
performance is measured on the basis of their average adjusted
return on attributed equity (RoAE). For Corporate Center
employees, it is measured on the basis of the average operating
businesses’ adjusted 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 prior to 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, starting with awards granted for the performance year
2017, European Banking Authority guidelines do not permit
individuals who are deemed to be Material Risk Takers (MRTs) to
receive dividend or interest payments on instruments awarded as
deferred
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 at the discretion of UBS can be
settled in either a cash payment or a perpetual, marketable AT1
capital instrument. DCCP awards vest in full after five years, and
up to seven years for UK senior management functions, unless
there is a trigger event.
Awards are 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
UBS receives a commitment of extraordinary support from the
public sector that is necessary to prevent such an event.
Additionally, they are written down if the Group’s common equity
tier 1 capital ratio falls below 10% for GEB members and below
7% for all other employees. 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. Where
interest payments are not permitted, such as for MRTs, the
DCCP award reflects the fair value of the granted non-interest-
bearing award.
The awards are generally forfeitable upon, among other
circumstances, voluntary termination of employment with UBS.
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Note 30 Employee benefits: variable compensation (continued)
Asset Management EOP
In order to align deferred compensation of certain Asset
the
Management employees with
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.
the performance of
Financial advisor variable compensation
In line with market practice for US wealth management
businesses, the compensation for US financial advisors in Global
Wealth Management is comprised of production payout and
deferred compensation awards. Production payout is primarily
based on compensable revenue and is paid monthly.
Financial advisors may also qualify for deferred compensation
awards, which generally vest over a six-year period. 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.
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.
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 2018. The awards are cash-based and are
distributed over seven years, with the exception of 2018 awards,
which are 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 employed by
UBS, 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 fixed, non-forfeitable
compensation. Unlike salary, an RBA is paid only as long as the
employee is in such a role. RBAs consist of a cash portion and,
where applicable, a blocked UBS share award. Such shares will be
unblocked in equal installments after two and three years. The
compensation expense is recognized in the year of grant.
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 allowed to voluntarily contribute additional
amounts otherwise payable as production payout up to a certain
percentage, which vested upon contribution. Company
contributions and voluntary contributions were credited with
interest in accordance with the terms of the plan. Rather than
being credited with interest, a participant could elect to have
voluntary
company
contributions, credited with notional earnings based on the
performance of various mutual funds. Company contributions
and interest on both company and voluntary contributions
ratably vest in 20% installments six to 10 years following grant
date. Company contributions and interest on notional earnings
on both company and voluntary contributions are forfeitable
under certain circumstances.
contributions,
along with
vested
478
Note 30 Employee benefits: variable compensation (continued)
Discontinued deferred compensation plans
The following plans have been discontinued. Expenses related to
these plans were fully recognized in the income statement in
periods prior to 2018. Any remaining outstanding options and
stock appreciation rights under these awards will expire during
2019.
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 market value of a UBS share on the grant date.
These awards vested in full following a three-year vesting period
and generally expired 10 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 146 million
shares as of
31 December 2018 (31 December 2017: 166 million shares).
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 2018, UBS held 118 million treasury
shares (31 December 2017: 132 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 2018, the number of
UBS Group AG shares that could have been issued out of
conditional capital
this purpose was 125 million
(31 December 2017: 128 million).
for
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Consolidated financial statements
Note 30 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
variable compensation, that were recognized in the financial year
ended 31 December 2018, as well as expenses that were deferred
and will be recognized in the income statement for 2019 and later.
The majority of expenses deferred to 2019 and later that are related
to the performance year 2018 relates to awards granted in March
2019. The total compensation expense for unvested share-based
awards granted up to 31 December 2018 will be recognized in
future periods over a weighted average period of 2.3 years.
Variable compensation including financial advisor variable compensation
Expenses recognized in 2018
Expenses deferred to 2019 and later
USD 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 variable 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 financial advisor variable compensation
Total variable compensation including FA variable compensation
Related to the
performance
year 2018
2,089
Related to prior
performance
years
(32)
373
217
131
25
0
2,461
7
0
123
33
0
162
3,233
3,089
51
93
33
3,266
5,889
565
309
226
28
2
534
64
(136)
0
33
119
80
237
0
44
193
551
789
1,403
Related to the
performance
year 2018
0
Related to prior
performance
years
0
585
325
238
22
0
585
60
0
0
24
96
180
128
0
52
76
653
244
382
26
1
653
41
0
0
33
195
269
639
0
131
507
357
484
1,250
1,883
2,522
3,444
Total
2,057
938
526
357
53
2
2,995
72
(136)
123
66
119
243
3,470
3,089
95
286
584
4,054
7,2922
Total
0
1,238
570
620
48
1
1,238
102
0
0
57
291
450
767
0
183
584
2,240
3,006
4,694
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 USD 634 million in expenses related to share-based compensation (performance awards: USD 526 million; other variable compensation:
USD 12 million; financial advisor compensation: USD 95 million). A further USD 49 million in expenses related to share-based compensation was recognized within other Note 6 expense categories (Salaries: USD 15
million, related to role-based allowances; Social security: USD 8 million; Other personnel expenses: USD 26 million, related to the Equity Plus Plan). Total personnel expenses related to share-based equity-settled
compensation excluding social security were USD 676 million.
480
Note 30 Employee benefits: variable compensation (continued)
Variable compensation including financial advisor variable compensation (continued)
Expenses recognized in 2017
Expenses deferred to 2018 and later
USD 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 variable 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 financial advisor variable compensation
Total variable compensation including FA variable compensation
Related to the
performance
year 2017
2,088
Related to prior
performance
years
(25)
399
239
135
25
0
2,487
13
0
113
25
0
151
3,050
2,891
54
104
31
3,080
5,718
689
344
310
32
4
664
59
(107)
0
38
111
101
260
0
48
212
723
984
1,749
Related to the
performance
year 2017
0
Related to prior
performance
years
0
594
329
238
27
0
594
86
0
0
30
80
196
156
0
70
86
369
526
1,316
697
291
376
27
3
697
44
0
0
33
222
298
795
0
121
674
2,058
2,853
3,848
Total
2,062
1,088
583
444
57
4
3,151
72
(107)
113
63
111
252
3,310
2,891
102
316
754
4,064
7,4672
Total
0
1,291
620
614
54
3
1,291
130
0
0
63
301
494
951
0
191
760
2,428
3,379
5,164
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 USD 711 million in expenses related to share-based compensation (performance awards: USD 583 million; other variable compensation:
USD 26 million; financial advisor compensation: USD 102 million). A further USD 101 million in expenses related to share-based compensation was recognized within other Note 6 expense categories (Salaries: USD
25 million, related to role-based allowances; Social security: USD 51 million; Other personnel expenses: USD 25 million, related to the Equity Plus Plan). Total personnel expenses related to share-based equity-
settled compensation excluding social security were USD 735 million.
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Consolidated financial statements
Note 30 Employee benefits: variable compensation (continued)
Variable compensation including financial advisor variable compensation (continued)
Expenses recognized in 2016
Expenses deferred to 2017 and later
USD 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 variable 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 financial advisor variable compensation
Total variable compensation including FA variable compensation
Related to the
performance
year 2016
1,842
Related to prior
performance
years
(43)
379
217
136
26
0
2,221
25
0
220
26
0
272
2,682
2,534
34
114
43
2,725
5,218
835
491
299
39
6
792
62
(74)
0
50
115
153
250
0
49
201
765
1,015
1,960
Related to the
performance
year 2016
0
Related to prior
performance
years
0
677
511
132
34
0
677
40
0
0
23
96
159
194
0
57
137
596
790
1,626
841
349
460
26
5
841
30
0
0
26
239
296
877
0
117
760
2,084
2,961
4,097
Total
1,799
1,215
708
435
66
6
3,013
87
(74)
220
76
115
425
2,931
2,534
82
315
808
3,740
7,1782
Total
0
1,518
861
593
60
5
1,518
70
0
0
50
335
455
1,071
0
174
897
2,679
3,750
5,723
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 USD 831 million in expenses related to share-based compensation (performance awards: USD 708 million; other variable compensation:
USD 41 million; financial advisor compensation: USD 82 million). A further USD 90 million in expenses related to share-based compensation was recognized within other Note 6 expense categories (Salaries: USD 39
million, related to role-based allowances; Social security: USD 27 million; Other personnel expenses: USD 24 million, related to the Equity Plus Plan). Total personnel expenses related to share-based equity-settled
compensation excluding social security were USD 872 million.
482
Note 30 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 during 2018 and 2017 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
2018
162,835,713
58,329,398
(67,696,099)
(6,623,984)
146,845,027
66,850,562
Weighted average
grant date fair value
(USD)
15
Number of shares
2017
165,626,088
Weighted average
grant date fair value
(USD)
16
17
15
16
16
63,872,651
(58,756,089)
(7,906,936)
162,835,713
74,883,139
15
16
15
15
The total carrying amount of the liability related to cash-settled share-based awards as of 31 December 2018 and 31 December
2017 was USD 39 million and USD 56 million, respectively.
Option awards
No option awards have been granted since 2009. The table below provides information on movements in outstanding option
awards during 2018 and 2017. As these awards are Swiss franc-denominated, weighted average exercise prices are presented in
Swiss francs.
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
2018
32,583,168
Weighted average
exercise price (CHF)
25
Number of options
2017
55,913,291
Weighted average
exercise price (CHF)
39
(1,813,583)
(19,752)
(24,182,241)
6,567,592
6,567,592
12
23
29
14
14
(1,632,319)
(38,995)
(21,658,809)
32,583,168
32,583,168
12
27
61
25
25
1 The weighted average share price upon option exercise was CHF 16.22 in 2018 (2017: CHF 16.73), resulting in an intrinsic value of CHF 7 million of options exercised during 2018 (2017: CHF 8 million).
The table below provides additional information about options outstanding as of 31 December 2018.
Range of exercise prices
CHF
10.21–15.00
15.01–25.00
10.21–25.00
Options outstanding
Number of options
outstanding
Weighted average
exercise price (CHF)
Aggregate intrinsic
value (CHF million)
Weighted average
remaining
contractual term
(years)
3,294,894
3,272,698
6,567,592
10.27
16.95
6.5
0.0
6.5
0.2
0.6
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Note 30 Employee benefits: variable compensation (continued)
SAR awards
No SAR awards have been granted since 2009. The table below provides information on movements in outstanding SAR awards
during 2018 and 2017. As these awards are Swiss franc-denominated, weighted average exercise prices are presented in Swiss
francs.
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
2018
8,513,415
(2,490,146)
(11,000)
(46,500)
5,965,769
5,965,769
Weighted average
exercise price (CHF)
12
Number of SARs
2017
10,807,315
Weighted average
exercise price (CHF)
12
11
13
12
12
12
(2,212,700)
(23,000)
(58,200)
8,513,415
8,513,415
11
11
13
12
12
1 The weighted average share price upon exercise of SARs was CHF 16.15 in 2018 (2017: CHF 16.70), resulting in an intrinsic value of CHF 12 million of SARs exercised during 2018 (2017: CHF 12 million).
The table below provides additional information about SARs outstanding as of 31 December 2018.
Range of exercise prices
CHF
11.12–12.50
12.51–15.00
15.01–17.50
17.51–20.00
11.12–20.00
d) Valuation
SARs outstanding
Number of SARs
outstanding
Weighted average
exercise price (CHF)
Aggregate intrinsic
value (CHF million)
Weighted average
remaining
contractual term
(years)
5,633,269
2,500
42,000
288,000
5,965,769
11.34
14.85
16.80
19.25
5.1
0.0
0.0
0.0
5.1
0.2
0.4
0.4
0.7
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 2018 was approximately 18.0% (2017: 20.2%)
of the market price of the UBS share. The grant date fair value
of notional shares without dividend entitlements also includes a
deduction for the present value of future expected dividends to
be paid between the grant date and distribution.
UBS options and SARs awards
The fair values of options and SARs have been determined using
a standard closed-formula option valuation model. The expected
term of each instrument is calculated on the basis of historical
employee exercise behavior patterns, taking into account the
share price, strike price, vesting period and the contractual life of
the instrument. The term structure of volatility is derived from
the implied volatilities of traded options on UBS shares in
combination with the observed long-term historical share price
volatility. Expected future dividends are derived from traded UBS
options or from the historical dividend pattern.
484
Note 31 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 2018. Unless otherwise stated,
the subsidiaries listed below have share capital consisting solely
Subsidiaries of UBS Group AG as of 31 December 2018
Company
UBS AG
Registered office
Zurich and Basel, Switzerland
UBS Business Solutions AG1
Zurich, Switzerland
UBS Group Funding (Switzerland) AG
Zurich, Switzerland
1 UBS Business Solutions AG holds subsidiaries in Poland, China and India.
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. Share
capital is provided in the currency of the legally registered office.
Share capital in million
Equity interest accumulated in %
CHF
CHF
CHF
385.8
1.0
0.1
100.0
100.0
100.0
Individually significant subsidiaries of UBS AG as of 31 December 20181
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
Global Wealth Management
Frankfurt, Germany
Global Wealth Management
UBS Financial Services Inc.
Wilmington, Delaware, USA
Global Wealth Management
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
2,250.02
USD
CHF
USD
EUR
USD
GBP
USD
CHF
43.2
0.0
446.0
0.0
226.6
1,283.13
10.0
Equity interest accumulated in %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 Includes direct and indirect subsidiaries of UBS AG. 2 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 2,250,000,000. 3 Comprised of common share capital of
USD 100,000 and non-voting preferred share capital of USD 1,283,000,000.
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Consolidated financial statements
Note 31 Interests in subsidiaries and other entities (continued)
Other subsidiaries
The table below lists other direct and indirect 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 2018
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 (Hong Kong) Limited
Hong Kong, Hong Kong
UBS Asset Management (Japan) Ltd
Tokyo, Japan
Asset Management
Asset Management
UBS Business Solutions US LLC
Wilmington, Delaware, USA
Corporate Center
UBS Credit Corp.
UBS (France) S.A.
Wilmington, Delaware, USA
Global Wealth Management
Paris, France
Global Wealth Management
UBS Fund Advisor, L.L.C.
Wilmington, Delaware, USA
Global Wealth Management
UBS Fund Management (Luxembourg) S.A.
Luxembourg, Luxembourg
UBS Fund Management (Switzerland) AG
Basel, Switzerland
Asset Management
Asset Management
UBS (Monaco) S.A.
UBS Realty Investors LLC
UBS Securities (Thailand) Ltd
UBS Securities Australia Ltd
UBS Securities Japan Co., Ltd.
UBS Securities Pte. Ltd.
Monte Carlo, Monaco
Global Wealth Management
Boston, Massachusetts, USA
Asset Management
Bangkok, Thailand
Sydney, Australia
Tokyo, Japan
Singapore, Singapore
Investment Bank
Investment Bank
Investment Bank
Investment Bank
UBS Asset Management Life Ltd
London, United Kingdom
Asset Management
1 Includes a nominal amount relating to redeemable preference shares.
HKD
JPY
USD
USD
EUR
USD
EUR
CHF
EUR
USD
THB
AUD
JPY
SGD
GBP
254.0
2,200.0
0.0
0.0
133.0
0.0
13.0
1.0
49.2
9.0
500.0
0.31
32,100.0
420.4
15.0
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
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 2018 and 2017, the Group did not enter 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.
486
Note 31 Interests in subsidiaries and other entities (continued)
b) Interests in associates and joint ventures
As of 31 December 2018 and 2017, 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.
UBS Securities China is no longer recognized as an investment
in associate as of 31 December 2018 as this entity was
consolidated following an increase in stake from 24.99% to
51% and UBS acquiring control in December 2018.
→ Refer to Note 32 for more information
In November 2018, SIX and Worldline entered into a strategic
partnership in the cards business under which SIX transferred its
existing cards business to Worldline and received a 27% stake in
Worldline. UBS recognized a gain of USD 460 million in the
income statement, proportional to UBS’s 17.31% equity
ownership in SIX.
Investments in associates and joint ventures
USD million
Carrying amount at the beginning of the year
Additions
Disposals1
Reclassifications2
Share of comprehensive income
of which: share of net profit 3
of which: share of other comprehensive income 4
Dividends received
Impairment
Foreign currency translation
Carrying amount at the end of the year
of which: associates
of which: UBS Securities China 1
of which: SIX Group AG, Zurich 5
of which: other associates
of which: joint ventures
2018
1,045
3
(431)
(21)
529
529
1
(42)
16
1,099
1,066
952
114
33
2017
947
3
0
0
100
76
24
(53)
(7)
55
1,045
1,014
412
476
127
30
1 In December 2018, UBS increased its shareholding in UBS Securities China from 24.99% to 51%, acquiring control of the entity in accordance with IFRS 10, Consolidated Financial Statements. Upon acquisition of
control, UBS derecognized its former investment in associate. Refer to Note 32 for more information. 2 Reflects reclassifications to Properties and other non-current assets held for sale. 3 For 2018, consists of
USD 511 million from associates, of which USD 460 million reflected a valuation gain on the equity ownership in SIX related to the sale of SIX Payment Services to Worldline, and USD 18 million from joint ventures.
For 2017, consists of USD 61 million from associates and USD 15 million from joint ventures. 4 For 2018, the total of USD 1 million is from associates. For 2017, consists of USD 24 million from associates and
negative USD 1 million from joint ventures. 5 In 2018, 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
487
Consolidated financial statements
Note 31 Interests in subsidiaries and other entities (continued)
c) Interests in unconsolidated structured entities
During 2018, 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 2018 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
USD million, except where indicated
Financial assets at fair value held for trading
Derivative financial instruments
Loans and advances to customers
Financial assets at fair value not held for trading
Financial assets measured at fair value through other comprehensive income
Other financial assets measured at amortized cost
Total assets
Derivative financial instruments
Total liabilities
Assets held by the unconsolidated structured entities in which UBS had an interest
(USD billion)
USD million, except where indicated
Financial assets at fair value held for trading
Derivative financial instruments
Loans and advances to customers
Financial assets at fair value not held for trading
Financial assets measured at fair value through other comprehensive income
Other financial assets measured at amortized cost
Total assets
Derivative financial instruments
Securitization
vehicles
420
8
87
312
8264
35
3
636
Securitization
vehicles
373
22
86
299
7794
215
Client
vehicles
174
35
482
3,931
252
4,212
123
123
31.12.18
Investment
funds
7,297
1
179
1663
7,643
32
32
697
3858
Client
vehicles
316
70
682
3,965
302
4,449
54
31.12.17
Investment
funds
6,302
23
100
108
463
6,578
208
Total
7,890
44
179
302
3,931
337
12,682
158
158
Total
6,991
114
100
262
4,011
328
11,806
283
Maximum
exposure to loss1
7,890
44
179
1,878
3,931
1,423
3
Maximum
exposure to loss1
6,991
114
100
1,826
4,011
1,443
14
21
Total liabilities
Assets held by the unconsolidated structured entities in which UBS had an interest
(USD billion)9
1 For the purpose 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.
The maximum exposure to loss for these instruments is equal to the notional amount. 3 Upon adoption of IFRS 9 on 1 January 2018, investment fund units that were formerly classified as available for sale under
IAS 39 were reclassified to Financial assets at fair value not held for trading. Refer to Note 1c for more information. 4 As of 31 December 2018, USD 0.6 billion of the USD 0.8 billion (31 December 2017: USD 0.7
billion of the USD 0.8 billion) was held in Corporate Center – Non-core and Legacy Portfolio. 5 Comprised of credit default swap liabilities and other swap liabilities. The maximum exposure to loss for credit
default swap liabilities 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. 6 Represents the principal amount
outstanding. 7 Represents the market value of total assets. 8 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. 9 In 2018 UBS has refined the methodology applied to identify significant interests in the scope of disclosure under IFRS 12, Disclosure of Interests in Other Entities. This change has been
applied prospectively as the effect on interests disclosed was not material in prior periods. Had this methodology been applied in 2017, the interests in unconsolidated structured entities at 31 December 2017
would have been USD 0.3 million and USD 0.2 million lower for securitization vehicles and client vehicles, respectively. Assets held by the unconsolidated structured entities in which UBS had an interest at
31 December 2017 would have been USD 26 billion lower for securitization vehicles and USD 22 billion lower for client vehicles.
4228
807
586
208
283
54
488
Note 31 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 2018 and 2017, 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 2018 and 2017, income and expenses from interests in
unconsolidated SEs primarily resulted from mark-to-market
movements recognized in other net income from fair value
changes on financial instruments, 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 2018 and 31 December 2017, 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 may differ
in
the
securitization positions presented
from
the
31 December 2018 Pillar 3 report under “Pillar 3 disclosures”
at www.ubs.com/investors, for the following reasons: (i)
exclusion from the table on the following pages of synthetic
securitizations transacted with entities that are not SEs and
transactions in which the Group did not have an interest
because it did not absorb any risk, (ii) a different measurement
basis in certain cases (e.g., IFRS carrying value within the table
above compared with net exposure amount at default for
Pillar 3 disclosures) and (iii) different classification of vehicles
viewed as sponsored by the Group versus sponsored by third
parties.
→ Refer to Note 1a item 1 for more information on the Group’s
accounting policies regarding consolidation and sponsorship of
securitization vehicles and other structured entities
→ Refer to the 31 December 2018 Pillar 3 report under “Pillar 3
disclosures” at www.ubs.com/investors for more information
Interests in client vehicles
As of 31 December 2018 and 31 December 2017, 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.
In addition to the
Interests in investment funds
The Group holds interests in a number of investment funds,
primarily resulting from seed investments or in order to hedge
interests
structured product offerings.
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 and 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 2018 or as of 31 December 2017.
489
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 31 Interests in subsidiaries and other entities (continued)
Interests in unconsolidated securitization vehicles1
USD million, except where indicated
Sponsored by UBS
Interests in senior tranches
of which: rated investment grade
of which: rated sub-investment grade
of which: not rated
Interests in mezzanine tranches
of which: rated investment grade
of which: not rated
Interests in junior tranches
of which: not rated
Total
of which: financial assets at fair value held for trading
of which: financial assets at fair value not held for trading
Total assets held by the vehicles in which UBS had an interest (USD billion)
Not sponsored by UBS
Interests in senior tranches
of which: rated investment grade
of which: not rated
Interests in mezzanine tranches
of which: rated investment grade
of which: rated sub-investment grade
of which: defaulted
of which: not rated
Interests in junior tranches
of which: rated sub-investment grade
of which: defaulted
Total
of which: financial assets at fair value held for trading
Total assets held by the vehicles in which UBS had an interest (USD billion)
Residential
mortgage-
backed
securities
Commercial
mortgage-
backed
securities
31.12.18
Other
asset-backed
securities2
Re-securiti-
zation3
87
87
8
8
95
8
87
0
1
1
1
1
0
0
1
1
0
3
3
2
196
196
0
13
12
0
1
1
210
210
24
33
33
0
7
2
5
41
41
12
8
8
8
8
1
126
126
126
126
1
25
0
25
25
25
22
Total
291
196
95
0
13
12
0
9
9
313
226
87
25
185
160
25
8
2
1
0
5
1
1
0
194
194
37
490
Note 31 Interests in subsidiaries and other entities (continued)
Interests in unconsolidated securitization vehicles (continued)1
USD 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: financial assets at fair value held for trading
of which: financial assets at fair value not held for trading
Total assets held by the vehicles in which UBS had an interest (USD 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: financial assets at fair value held for trading
86
0
86
86
86
1
77
77
9
9
1
1
0
0
0
87
87
Residential
mortgage-
backed
securities
Commercial
mortgage-
backed
securities
31.12.17
Other
asset-backed
securities2
0
0
0
0
0
169
169
24
24
9
9
33
33
10
7
7
1
1
Re-securiti-
zation3
Total
11
121
11
11
11
1
66
66
24
86
11
9
9
130
44
86
12
319
319
9
1
9
1
1
0
0
0
7
7
169
169
66
66
330
330
Total assets held by the vehicles in which UBS had an interest (USD billion)4
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. 4 In 2018 UBS has
refined the methodology applied to identify significant interests in the scope of disclosure under IFRS 12, Disclosure of Interests in Other Entities. This change has been applied prospectively as the effect on interests
disclosed was not material in prior periods. Had this methodology been applied in 2017, the interests in unconsolidated securitization vehicles at 31 December 2017 would have been USD 0.3 million lower and the
assets held by these unconsolidated securitization vehicles would have been USD 26 billion lower.
20
44
19
5
0
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
491
Consolidated financial statements
Note 31 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.
financial
The Group also recorded other net income from fair value
changes on
from mark-to-market
instruments
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 2018, UBS and third parties transferred assets of
USD 1 billion and USD 1 billion, respectively, into sponsored
securitization vehicles created in the year (2017: USD 2 billion
and USD 8 billion, respectively). UBS and third parties also
transferred assets of USD 2 billion and USD 0 billion,
respectively, into sponsored client vehicles created in the year
(2017: USD 3 billion and USD 1 billion, respectively). 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 USD 18
billion (31 December 2017: USD 15 billion).
Sponsored unconsolidated structured entities in which UBS did not have an interest at year-end1
USD million, except where indicated
Net interest income
Net fee and commission income
Other net income from fair value changes on financial instruments
Total income
Asset information (USD billion)
USD million, except where indicated
Net interest income
Net fee and commission income
Other net income from fair value changes on financial instruments
Total income
Asset information (USD billion)
As of or for the year ended
31.12.18
Securitization
vehicles
0
Client vehicles
(6)
Investment
funds
1
0
1
22
16
8
18
23
39
20
60
184
As of or for the year ended
31.12.17
Securitization
vehicles
2
Client vehicles
(9)
Investment
funds
0
(8)
(6)
102
(50)
(59)
43
41
2
43
154
Total
(5)
54
29
78
Total
(7)
41
(56)
(22)
1 For the year ended 31 December 2018, no profit attributable to non-controlling interests was excluded from the table (31 December 2017: USD 73 million). 2 Represents the amount of assets transferred to the
respective securitization vehicles. 3 Represents the amount of assets transferred to the respective client vehicles. Information in the comparative period has been restated. Asset information as of 31 December
2017 has decreased by USD 3 billion as a result. 4 Represents the total net asset value of the respective investment funds.
492
Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses
Changes in Group structure and organization
UBS Business Solutions AG
In 2015, UBS Business Solutions AG was established as a direct
subsidiary of UBS Group AG to act as the Group service
company and 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. In 2017, 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.
UBS Group Funding (Switzerland) AG
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 total
loss-absorbing capacity (TLAC)-eligible senior unsecured debt,
which are guaranteed by UBS Group AG. In 2017, UBS
transferred the then outstanding TLAC-eligible senior unsecured
debt to UBS Group Funding (Switzerland) AG as the issuer. In
May 2018, UBS substituted UBS Group AG where it was the
issuer of outstanding AT1 capital instruments with UBS Group
Funding (Switzerland) AG. Following the substitution, the
relevant AT1 capital instruments are guaranteed by UBS Group
AG, and investors’ seniority of claim against UBS Group AG
remains unchanged.
UBS Europe SE
In 2016, 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, in order to establish
UBS’s new European legal entity, which is headquartered in
Frankfurt, Germany.
The previously announced combined UK business transfer
and cross-border merger of UBS Limited into UBS Europe SE
took place on 1 March 2019.
Transfer of assets and liabilities from UBS Limited to UBS AG,
London Branch
In the fourth quarter of 2018, clients and other counterparties of
UBS Limited who can be serviced by UBS AG, London Branch
were generally migrated
to UBS AG, London Branch.
Transactions affecting the businesses that were transferred
which occurred on or after the transfer date were recorded in
UBS AG, London Branch.
UBS Asset Management AG
In 2016, UBS transferred the majority of the operating subsidiaries
of Asset Management to UBS Asset Management AG.
Increase of stake in and consolidation of UBS Securities
China
In December 2018, UBS increased its shareholding in UBS
Securities China from 24.99% to 51%, acquiring control of the
entity in accordance with IFRS 10, Consolidated Financial
Statements. Upon acquisition of control, UBS remeasured its
former 24.99% holding at fair value, resulting in a pre-tax loss
of USD 270 million, recognized in Other income. In addition, a
net foreign currency translation gain of USD 46 million was
recognized upon derecognition of the former investment in
associate, also in Other income.
The cost of acquisition of the additional 26.01% stake was
USD 125 million. Upon consolidation, UBS recognized USD 102
million of goodwill and USD 278 million of other net assets. In
addition, a non-controlling interest of USD 136 million has been
recognized.
Acquisitions
In October 2018, UBS acquired certain assets and liabilities from
Nordea’s Luxembourg-based private banking business for a
consideration of approximately EUR 120 million. As a result of
the transaction, UBS recognized a total of EUR 1.1 billion of
loans (mortgages, Lombard loans, overdrafts), EUR 1.3 billion of
cash and EUR 2.4 billion of deposits, as well as approximately
EUR 75 million of intangible assets and approximately EUR 50
million of goodwill, recognized in Global Wealth Management.
In addition, UBS reported an increase of approximately EUR 9.5
billion in client assets, of which approximately EUR 6.1 billion
count as invested assets.
Sales and disposals of subsidiaries and businesses
In 2018, 2017 and 2016, no significant subsidiaries were
removed from the scope of consolidation as a result of sales or
disposals.
In the third quarter of 2018, UBS completed the sale of
Widder Hotel, resulting in a pre-tax gain on sale of subsidiaries
and businesses of USD 25 million and a pre-tax gain on sale of
real estate of USD 31 million.
In 2017, UBS completed the sale of Asset Management’s
in Luxembourg and
fund administration servicing units
Switzerland to Northern Trust, resulting in a pre-tax gain on sale
of USD 153 million. Also in 2017, UBS completed the sale of a
life insurance subsidiary within Global Wealth Management. A
loss on sale of USD 24 million was recognized in 2016 relating
to this transaction.
493
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Consolidated financial statements
Note 33 Operating leases and finance leases
Information on lease contracts classified as operating leases where UBS is the lessee is provided in Note 33a and information on
finance leases where UBS acts as a lessor is provided in Note 33b.
a) Operating lease commitments
As of 31 December 2018, 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
lease
adjustments based on price
indices. However, the
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.
→ Refer to Note 1d for more information on the expected effects
of adoption of IFRS 16, Leases, effective 1 January 2019
USD million
Expenses for operating leases to be recognized in:
2019
2020
2021
2022
2023
2024 and thereafter
Subtotal commitments for minimum payments under operating leases
Less: Sublease rental income commitments
Net commitments for minimum payments under operating leases
USD million
Gross operating lease expense recognized in the income statement
Sublease rental income
Net operating lease expense recognized in the income statement
b) Finance lease receivables
31.12.18
684
647
543
489
449
1,877
4,688
250
4,438
31.12.18
31.12.17
31.12.16
766
52
714
739
68
671
757
79
678
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 2018, unguaranteed residual values of
USD 156 million had been accrued, and the ECL stage 3
allowance for uncollectible minimum lease payments receivable
amounted to USD 7 million. No contingent rents were received
in 2018. Amounts in the table below are disclosed on a gross
basis. The finance lease receivable in Note 17a of USD 1,091
million is presented net of expected credit loss allowances.
Lease receivables
USD million
2019
2020–2023
Thereafter
Total
494
Total minimum lease
payments
359
703
103
1,166
31.12.18
Unearned finance
income
22
35
2
58
Present value
337
669
102
1,107
Note 34 Guarantees, commitments and forward starting transactions
The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions.
USD million
31.12.18
31.12.17
Gross
Measured
at fair value
1,639
Not
measured
at fair value
18,146
3,535
31,212
8,117
7,926
925
12
400
Sub-
partici-
pations
Net
Gross
Sub-
partici-
pations
Net
Measured
at fair value
1,662
Not
measured
at fair value
17,680
7,954
32,125
(2,803)
(647)
16,982
34,099
(2,942)
(1,102)
16,400
38,977
13,011
24
8,399
Total guarantees
Loan commitments
Forward starting transactions1
Reverse repurchase agreements
Securities borrowing agreements
Repurchase agreements
1 Cash to be paid in the future by either UBS or the counterparty. Certain reverse repurchase agreements and repurchase agreements were reclassified from amortized cost to fair value through profit or loss upon
adoption of IFRS 9 as of 1 January 2018. Refer to Note 1c for more information.
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
495
Consolidated financial statements
Note 35 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
USD million, except where indicated
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
31.12.18
31.12.17
31.12.16
27
15
22
3
2
40
109
25
15
22
3
2
40
106
25
11
22
3
2
42
105
Total (CHF million)4
1 Includes role-based allowances in line with market practice in response to regulatory requirements. 2 The cash portion may also include blocked shares in line with regulatory requirements. 3 Expenses for
shares granted are calculated at grant date of the respective award and allocated over the vesting period of generally 5 years. Refer to Note 30 for more information. In 2018, 2017 and 2016, equity-based
compensation was entirely comprised of EOP awards. 4 Swiss franc amounts disclosed represent the respective US dollar amounts translated at the applicable performance award currency exchange rates (2018:
CHF / USD 0.98; 2017: CHF / USD 1.00; 2016: CHF / USD 0.99).
107
104
106
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 USD 7.6 million (CHF 7.4 million) in 2018, USD 7.1
million (CHF 7.1 million) in 2017 and USD 7.2 million (CHF 7.2
million) in 2016.
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 30 for more information. 2 Excludes shares granted under variable compensation plans with forfeiture provisions.
31.12.18
0
31.12.17
398,867
5,954,967
3,709,539
Of the share totals above, 95,597 shares were held by close
family members of key management personnel on 31 December
2018 and 31 December 2017. 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 2018 and 31 December 2017. Refer to Note 30
for more information. As of 31 December 2018, no member of
the BoD or GEB was the beneficial owner of more than 1% of
UBS Group AG’s shares.
496
Note 35 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
USD million, except where indicated
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year2
2018
42
15
(22)
34
2017
42
2
(1)
42
Balance at the end of the year (CHF million)2, 3
1 All loans are secured loans. 2 Excludes unused uncommitted credit facilities for one GEB member of USD 3,000,000 (CHF 2,949,690) as of 31 December 2018 and for two GEB members and one BoD member of
USD 5,330,670 (CHF 5,196,294) as of 31 December 2017. 3 Swiss franc amounts disclosed represent the respective US dollar amounts translated at the relevant year-end closing exchange rate.
34
41
d) Other related-party transactions with entities controlled by key management personnel
In 2018 and 2017, 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 2018, 31 December
2017 and 31 December 2016, there were no outstanding
balances related to such transactions. Furthermore, in 2018 and
2017, 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 2018 and 2017, and therefore also received
no fees.
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Consolidated financial statements
Note 35 Related parties (continued)
e) Transactions with associates and joint ventures
Loans to and outstanding receivables from associates and joint ventures
USD million
Carrying value at the beginning of the year
Additions
Reductions
Foreign currency translation
Carrying value at the end of the year
of which: unsecured loans
Other transactions with associates and joint ventures
USD 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 31 for an overview of investments in associates and joint ventures
2018
565
276
(13)
0
829
818
2017
464
83
(3)
21
565
554
As of or for the year ended
31.12.18
31.12.17
177
4
4
180
2
4
498
Note 36 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 2018 and 2017.
Invested assets and net new money
USD billion
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets1
of which: double counts
Net new money1
1 Includes double counts.
Development of invested assets
USD billion
Total invested assets at the beginning of the year1
Net new money
Market movements2
Foreign currency translation
Other effects
of which: acquisitions / (divestments)
Total invested assets at the end of the year1
1 Includes double counts. 2 Includes interest and dividend income.
As of or for the year ended
31.12.18
31.12.17
342
999
1,760
3,101
213
59
2018
3,262
59
(180)
(35)
(5)
7
339
1,052
1,871
3,262
209
106
2017
2,761
106
322
77
(3)
4
3,101
3,262
499
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Note 37 Currency translation rates
The following table shows the rates of the main currencies used to translate the financial information of UBS’s operations with a
functional currency other than the US dollar into US dollars.
1 CHF
1 EUR
1 GBP
100 JPY
Closing exchange rate
As of
Average rate1
For the year ended
31.12.18
31.12.17
31.12.18
31.12.17
31.12.16
1.02
1.15
1.28
0.91
1.03
1.20
1.35
0.89
1.02
1.18
1.33
0.91
1.02
1.14
1.30
0.89
1.01
1.10
1.34
0.92
1 Monthly income statement items of operations with a functional currency other than the US dollar are translated with month-end rates into US dollars. Disclosed average rates for a year represent an average of 12
month-end rates, weighted according to the income and expense volumes of all 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 38 Events after the reporting period
Events subsequent to the publication of the unaudited fourth
quarter 2018 report
The 2018 results and the balance sheet as of 31 December 2018
differ from those presented in the unaudited fourth quarter
2018 report published on 22 January 2019 as a result of events
adjusted for after the balance sheet date. Provisions for
litigation, regulatory and similar matters increased, which
reduced 2018 operating profit before tax and 2018 net profit
attributable to shareholders each by USD 382 million. As a
result, basic earnings per share decreased by USD 0.10 and
diluted earnings per share decreased by USD 0.09.
→ Refer to Note 21 for more information on provisions for
litigation, regulatory and similar matters
Note 39 Main differences between IFRS and Swiss GAAP
IFRS
The consolidated financial statements of UBS Group AG are
prepared in accordance with International Financial Reporting
(IFRS). The Swiss Financial Market Supervisory
Standards
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. Classification and measurement of financial assets
Under IFRS, financial assets are classified as measured at
amortized cost, fair value through other comprehensive income
(FVOCI) or fair value through profit or loss (FVTPL). Whereas all
equity instruments are accounted for at FVTPL by UBS, the
classification and measurement of debt instruments depends on
the nature of the business model within which the asset is held
and the characteristics of the contractual cash flows of the asset.
Under Swiss GAAP, debt instruments are generally measured
at amortized cost. The classification and measurement of
financial assets in the form of securities depend on the nature of
the asset: debt instruments that are not held to maturity
(available for sale), as well as equity instruments with no
permanent holding intent, 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
in Non-consolidated
intent are classified as participations
in subsidiaries and other participations and
investments
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
/
Extraordinary expenses in the income statement.
recorded as Extraordinary
investment are
income
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Consolidated financial statements
Note 39 Main differences between IFRS and Swiss GAAP (continued)
collect all amounts due on it based on the original contractual
terms as a result of credit deterioration of the issuer or
counterparty. Impairment under the incurred loss approach is in
line with ECL for credit-impaired claims in stage 3 under IFRS. A
claim can be a loan or receivable or other debt instrument held
to maturity carried at amortized cost, a debt instrument available
for sale carried at the lower of amortized cost or market value,
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.
5. 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.
6. 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. In addition, these assets are tested
annually for impairment.
3. Fair value option applied to financial liabilities
Under IFRS, UBS applies the fair value option to certain financial
liabilities not held for trading. Instruments for which the fair
value option is applied are accounted for at FVTPL. The amount
of change in the fair value that is attributable to changes in
UBS’s own credit is presented in Other comprehensive income
directly within Retained earnings. The fair value option is applied
primarily to issued structured debt instruments; certain non-
structured debt instruments; certain payables under repurchase
agreements and
lending
investment
agreements; amounts due under unit-linked
contracts; brokerage payables; and certain loan commitments.
collateral on
securities
cash
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, unrealized changes in fair
value attributable to changes in UBS’s own credit are not
recognized, whereas realized own credit is recognized in Net
trading income.
4. Allowances and provisions for credit losses
Under IFRS, allowances and provisions for credit losses are
estimated based on an expected credit loss model. Expected
credit losses (ECL) are recognized for financial assets measured
at amortized cost, financial assets measured at FVOCI, fee and
lease receivables, financial guarantees, loan commitments and
certain other credit facilities. Maximum 12-month ECL are
recognized from initial recognition of instruments in stage 1.
Lifetime ECL are recognized for instruments in stage 2 if a
significant increase in credit risk is detected subsequent to the
instrument’s initial recognition. Lifetime ECL are also recognized
to as
for credit-impaired
instruments in stage 3. Determination of whether an instrument
is credit impaired is based on the occurrence of one or more loss
events.
instruments,
financial
referred
Under Swiss GAAP, 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 effect on future cash
flows that can be reliably estimated (incurred loss approach).
UBS considers a claim to be impaired if it will be unable to
502
Note 39 Main differences between IFRS and Swiss GAAP (continued)
7. Pension and other post-employment benefit plans
8. 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.
9. 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.
10. 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)
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 which 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).
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financial
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UBS Group AG standalone financial statements
Table of contents
507 UBS Group AG standalone financial statements
507
508
509
509
Income statement
Balance sheet
Reconciliation of equity
Statement of appropriation of total profit / (loss) carried
forward and proposed dividend distribution out of capital
contribution reserve
517
517
518
518
519
519
520
520
520
11 Other short-term receivables
12
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
13
14
15
16
17
18
19
511
512
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
521 Additional information
20 Guarantees
521
21
521
521
522
523
22
23
24
525
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
Balance sheet notes
9
10 Marketable securities
Liquid assets
526
528
Report of the statutory auditor on the financial statements
Independent auditor’s report related to the issue of new
shares from conditional capital
515
515
515
515
515
516
516
517
517
517
506
UBS Group AG standalone financial
statements
Audited |
Income statement
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)
Note
3
4
5
6
7
8
USD million
For the year ended
CHF million
For the year ended
331.12.18
3,212
157
77
3,446
23
216
4
30
273
3,174
3
3,171
31.12.17
11
132
595
738
21
99
4
561
686
52
4
48
331.12.18
3,152
155
76
3,383
23
212
4
30
268
3,114
3
3,111
31.12.17
10
129
580
719
20
97
4
547
668
51
4
47
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UBS Group AG standalone financial statements
Balance sheet
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
Other non-current 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
508
USD million
CHF million
Note
331.12.18
31.12.17
331.12.18
31.12.17
9
10
11
12
13
14
15
16
17
18
19
926
83
788
7
1,804
41,209
40,889
1,444
0
12
8
42,674
44,479
2,938
457
1,465
1,922
224
3,022
3,246
5,168
694
393
30,846
30,846
30,846
7,513
(2,612)
0
3,171
39,310
44,479
2,609
102
728
449
3,888
41,486
41,164
8,968
9
17
0
50,481
54,369
12,376
1,682
1,919
3,601
8,086
3,397
11,483
15,084
1,901
395
33,529
33,529
33,529
7,512
(2,201)
1
48
39,285
54,369
910
82
775
7
1,774
40,518
40,203
1,420
0
12
8
41,959
43,733
2,888
450
1,440
1,890
220
2,972
3,192
5,082
682
386
30,271
30,271
30,271
7,452
(2,569)
0
3,111
38,651
43,733
2,543
100
710
437
3,790
40,441
40,126
8,742
9
16
0
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
Reconciliation of equity
A reconciliation of equity for the year ended 31 December 2018 from the former Swiss franc presentation currency to the new
US dollar presentation currency is provided in the table below.
In million
Balance as of 1 January 2018, CHF
Exercise of conditional capital options
Dividend distribution
Change in reserve for own shares
Transactions in treasury shares
Net profit / (loss) appropriation
Net profit / (loss) for the period before conversion,
CHF
CHF equity at conversion date 1 October 20181
USD equity opening balance at conversion date
1 October 2018
Exercise of conditional capital options
Change in reserve for own shares
Share capital
385
0
General
reserves
Voluntary
earnings reserve
Treasury shares
Reserve for own
shares held by
subsidiaries
7,323
(2,145)
32,683
25
(2,444)
1
47
7,371
7,513
0
386
393
0
30,265
30,840
6
46
(2,100)
(2,140)
(472)
(2,612)
Net profit /
(loss)
47
(47)
3,129
3,129
3,188
(18)
3,171
Total equity
38,294
25
(2,444)
0
46
0
3,129
39,050
39,794
6
0
(472)
(18)
39,310
1
(1)
0
0
0
0
Transactions in treasury shares
Net profit / (loss) for the period after conversion,
USD
Balance as of 31 December 2018, USD
1 Conversion date rate as of 1 October 2018 represents the closing exchange rate as of 30 September 2018 (CHF / USD 1.02).
30,846
7,513
393
Statement of appropriation of total profit / (loss) carried forward and proposed dividend distribution out of capital
contribution reserve
The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 2 May 2019 approve the following
appropriation of total profit / (loss) carried forward.
Proposed appropriation of total profit / (loss) carried forward
Net profit for the period
Profit / (loss) carried forward
Total profit / (loss) carried forward available for appropriation
Appropriation of total profit / (loss) carried forward
Appropriation to voluntary earnings reserve
Profit / (loss) carried forward
USD million
CHF million
For the year ended
For the year ended
31.12.18
3,171
0
3,171
(3,171)
0
31.12.18
3,111
0
3,111
(3,111)
0
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UBS Group AG standalone financial statements
Statement of appropriation of total profit / (loss) carried forward and proposed dividend distribution out of capital
contribution reserve (continued)
Proposed dividend distribution out of capital contribution reserve
The Board of Directors proposes that the AGM on 2 May 2019
approve an ordinary dividend distribution of CHF 0.70 in cash
per share of CHF 0.10 par value payable out of the capital
contribution reserve. Dividends are declared and paid in Swiss
francs. The total amount of the dividends will be capped at
USD 3,255 million (Cap). To the extent that the USD dividend
calculated based on CHF 0.70 per share would exceed the Cap
on the day of the AGM, due to the exchange rate determined by
the Board of Directors in its reasonable opinion, the CHF per
share amount of the dividend will be reduced on a pro-rata basis
so that the total USD amount does not exceed the Cap. Provided
that the proposed dividend distribution out of the capital
contribution reserve is approved, the payment of CHF 0.70 per
share will be made on 8 May 2019 to holders of shares on the
record date 7 May 2019. The shares will be traded ex-dividend
as of 6 May 2019 and, accordingly, the last day on which the
shares may be traded with entitlement to receive the dividend
will be 3 May 2019.
Total statutory capital reserve: capital contribution reserve before proposed distribution1
Proposed ordinary distribution of capital contribution reserve within statutory capital reserve: CHF 0.70 per dividend-bearing share2
Total statutory capital reserve: capital contribution reserve after proposed distribution
USD million
CHF million
For the year ended
For the year ended
31.12.18
30,846
(3,255)
27,591
31.12.18
30,271
(2,699)
27,572
1 The Swiss Federal Tax Administration’s current position is that, of the CHF 30.3 billion capital contribution reserve available as of 31 December 2018, an amount limited to CHF 15.6 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 USD 3,255
million represents the Cap. The amount of CHF 2,699 million presented is based on the total number of shares issued as of 31 December 2018.
510
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 the guarantor of perpetual capital
notes which qualify as Basel III additional tier 1 (AT1) capital on a
consolidated UBS Group basis and senior debt which contributes
to the total loss-absorbing capacity (TLAC) of the Group, issued
by UBS Group Funding (Switzerland) AG.
Issuance of additional tier 1 capital instruments
During 2016 and 2015, UBS Group AG issued perpetual capital
notes, which qualify as Basel III AT1 capital on a consolidated
UBS Group basis. The proceeds from the issuances of those
instruments were on-lent to UBS AG.
In May 2018, these perpetual capital notes were transferred
to UBS Group Funding (Switzerland) AG at book value with a
retrospective effect as of 1 January 2018. The transfer was
carried out by means of an issuer substitution pursuant to the
voluntary substitution provisions provided in the terms and
conditions of the relevant instruments. Following the transfer,
the outstanding perpetual capital notes are guaranteed by UBS
Group AG, and investors’ seniority of claims against UBS Group
AG remains unchanged.
In December 2018, the Swiss Parliament approved changes to
the tax treatment of too big to fail (TBTF) instruments issued by
the holding companies of Swiss systemically important banks.
The new law aims to eliminate the additional tax burden
imposed on systemically important banks as a result of required
issuances of TBTF instruments at the holding company level. In
March 2019, the Swiss Federal Council determined that the rule
would enter into force retroactively as of 1 January 2019. Going
forward, new loss-absorbing additional tier 1 capital instruments
senior
and
unsecured debt will be issued directly out of UBS Group AG. It is
also expected that UBS Group AG will assume outstanding
capital and debt instruments that were previously issued by UBS
Group Funding (Switzerland) AG as a means of managing the
aforementioned tax burden.
(TLAC)-eligible
loss-absorbing
capacity
total
→ 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 grants Deferred Contingent
Capital Plan (DCCP) awards to UBS Group employees. These
DCCP awards also qualify as Basel III AT1 capital on a
consolidated UBS Group basis.
As of 31 December 2018, UBS Group AG’s distributable items
for the purpose of AT1 capital instruments were USD 38.8
billion (CHF 38.2 billion) (31 December 2017: USD 38.8 billion
(CHF 37.8 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.
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UBS Group AG standalone financial statements
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 US dollar.
The significant accounting and valuation principles applied are
described below.
Change in functional and presentation currency
As of 1 October 2018 (the conversion date) UBS Group AG
prospectively changed its functional currency from Swiss francs
to US dollars.
UBS Group AG also prospectively changed the presentation
currency of its standalone financial statements from Swiss francs
to US dollars. The interim Swiss franc financial information of
UBS Group AG as of 30 September 2018, including the balance
sheet, year-to-date income statement and all related notes, was
translated
rate on
30 September 2018 (the conversion date rate). This conversion
had no impact on the income statement or equity.
into US dollars at
closing
the
As the primary presentation currency of the standalone
financial statements of UBS Group AG is US dollars, amounts in
Swiss francs are additionally presented for each component of
the financial statements. UBS Group AG applies the modified
closing rate method for translating the US dollar amounts into
Swiss francs: assets and liabilities are translated at the closing
rate, equity positions at historic rates and income and expense
items at the weighted average rate for the period. All resulting
in
currency
Voluntary earnings reserve, amounting to a positive currency
translation effect of CHF 81 million as of 31 December 2018.
Under Swiss Code of Obligations, prior-period
financial
statements have not been restated. All comparative prior-period
information as of and for the year ended 31 December 2017 is
translated at the closing rate as of 31 December 2017.
translation effects are
recognized separately
Foreign currency translation
Transactions denominated in foreign currency are translated into
US dollars 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 US dollars 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
512
transaction. Currency translation effects from dividends paid in
Swiss francs are recognized in equity. All other currency
translation effects are recognized in the income statement.
The main currency translation rates used by UBS Group AG
are provided in Note 37 of 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 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.
Note 2 Accounting policies (continued)
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
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
is generally
compensation awards granted to employees
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.
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,
in Other
remeasurement of the
operating income and Other operating expenses, respectively.
liabilities are recognized
respectively. Gains
resulting
losses
and
513
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UBS Group AG standalone financial statements
Note 2 Accounting policies (continued)
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
514
Income statement notes
Note 3 Dividend income from investments in subsidiaries
Dividend income from investments in subsidiaries in 2018
consists of USD 3,123 million (CHF 3,065 million) received from
UBS AG related to the financial year 2017, which was approved
by the Annual General Meeting of Shareholders of UBS AG on
26 April 2018, USD 86 million (CHF 84 million) received from
UBS Business Solutions AG related to the financial year ended
31 December 2017, which was approved by the Annual General
Meeting of Shareholders of UBS Business Solutions AG on
19 April 2018, and USD 3 million (CHF 3 million) received from
UBS Group Funding (Switzerland) AG related to the financial
year ended 31 December 2017, which was approved by the
Annual General Meeting of Shareholders of UBS Group Funding
(Switzerland) AG on 8 March 2018. In 2017, dividend income
from investments in subsidiaries consisted of USD 5 million
(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 USD 5 million
(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.
Note 4 Other operating income
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 USD 90 million (CHF 88 million).
Note 5 Financial income
Fair value gains on marketable securities and financial assets
Fair value gains on derivatives
Treasury share gains
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
USD million
For the year ended
CHF million
For the year ended
31.12.18
31.12.17
31.12.18
31.12.17
8
106
5
37
157
0
107
1
25
132
9
105
5
36
155
0
104
1
24
129
USD million
For the year ended
CHF million
For the year ended
31.12.18
31.12.17
31.12.18
31.12.17
0
6
47
13
11
0
77
51
0
0
539
5
0
595
0
6
46
13
11
0
76
49
0
0
525
5
0
580
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 2018 and
2017. 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 2018, the UBS Group employed 66,888 personnel
(31 December 2017: 61,253) on a full-time equivalent basis.
515
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UBS Group AG standalone financial statements
Note 7 Other operating expenses
Fair value losses on AIV awards
Losses related to equity-settled awards
Capital tax
Other
Total other operating expenses
Note 8 Financial expenses
Fair value losses on marketable securities and financial assets
Impairment losses on financial assets
Treasury share losses
Interest expense on interest-bearing liabilities
Interest expense on derivatives
Fees paid
Foreign currency losses
Total financial expenses
USD million
For the year ended
CHF million
For the year ended
31.12.18
31.12.17
31.12.18
31.12.17
0
184
14
18
216
49
19
15
16
99
0
181
14
17
212
48
18
14
16
97
USD million
For the year ended
CHF million
For the year ended
31.12.18
31.12.17
31.12.18
31.12.17
8
0
0
13
6
1
2
30
0
2
13
546
0
1
0
561
8
0
0
13
6
1
2
30
0
2
12
532
0
1
0
547
516
Balance sheet notes
Note 9 Liquid assets
As of 31 December 2018, liquid assets comprised USD 542
million
(CHF 533 million) held on current accounts at
UBS Switzerland AG and UBS AG and USD 384 million (CHF 378
million) of time deposits placed with UBS AG. As of
31 December 2017, liquid assets comprised USD 1,706 million
(CHF 1,663 million) held on current accounts at UBS Switzerland
AG and UBS AG and USD 903 million (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
Loans to UBS Business Solutions AG
Receivables from employing entities related to compensation awards
Other
Total other short-term receivables
Note 12 Accrued income and prepaid expenses
Accrued interest income
Other accrued income and prepaid expenses
Total accrued income and prepaid expenses
USD million
CHF million
31.12.18
31.12.17
31.12.18
31.12.17
216
567
5
788
83
637
9
728
213
557
5
775
80
621
9
710
USD million
CHF million
31.12.18
31.12.17
31.12.18
31.12.17
6
1
7
378
71
449
6
1
7
368
69
437
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UBS Group AG standalone financial statements
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. Share capital is provided in
the currency of the legally registered office.
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 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 2018
Company
UBS AG
Registered office
Zurich and Basel, Switzerland
UBS Business Solutions AG1
Zurich, Switzerland
UBS Group Funding (Switzerland) AG
Zurich, Switzerland
1 UBS Business Solutions AG holds subsidiaries in Poland, China and India.
Share capital in million
Equity interest accumulated in %
CHF
CHF
CHF
385.8
1.0
0.1
100.0
100.0
100.0
Individually significant subsidiaries of UBS AG as of 31 December 20181
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
Global Wealth Management
Frankfurt, Germany
Global Wealth Management
UBS Financial Services Inc.
Wilmington, Delaware, USA
Global Wealth Management
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
2,250.02
USD
CHF
USD
EUR
USD
GBP
USD
CHF
43.2
0.0
446.0
0.0
226.63
1,283.14
10.0
Equity interest accumulated in %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 Includes direct and indirect subsidiaries of UBS AG. 2 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 2,250,000,000. 3 The combined UK business transfer and
cross-border merger of UBS Limited into UBS Europe SE, which was formally concluded on 1 March 2019, was treated as an adjusting event after the reporting period in UBS AG standalone financial statements for
the year ended 31 December 2018. 4 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 31 in the “Consolidated financial statements”
section of this report for more information
Note 14 Financial assets
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
USD million
31.12.18
993
224
224
4
31.12.17
8,460
211
293
4
CHF million
31.12.18
976
220
220
4
31.12.17
8,247
205
286
4
1,444
8,968
1,420
8,742
1 As of 31 December 2017, long-term receivables from UBS AG included the onward lending of the proceeds from the issuances of additional tier 1 perpetual capital notes. Refer to Note 1 for more information.
518
Note 15 Accrued expenses and deferred income
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
USD million
CHF million
31.12.18
31.12.17
31.12.18
31.12.17
3
1,405
550
856
4
53
1,465
6
1,499
499
1,000
365
49
1,919
3
1,382
541
841
3
52
6
1,461
486
975
356
47
1,440
1,871
Long-term interest-bearing liabilities totaled USD 224 million
(CHF 220 million) as of 31 December 2018 comprising fixed-
term loans from UBS AG. As of 31 December 2017, long-term
interest bearing liabilities totaled USD 8,086 million (CHF 7,882
million) comprising USD 7,875 million (CHF 7,677 million) of
notes issued and USD 211 million (CHF 205 million) of fixed-
term loans from UBS AG. In May 2018, outstanding perpetual
capital notes that qualify as Basel III AT1 capital issued by UBS
Group AG were transferred to UBS Group Funding (Switzerland)
AG at book value by means of an issuer substitution with a
retrospective effect as of 1 January 2018.
→ Refer to Note 1 for more information
Notes issued, overview by amount, maturity and coupon
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
Maturity1
Coupon1
19.02.22
5.750%
19.02.25
7.000%
19.02.20
7.125%
07.08.25
6.875%
22.03.21
6.875%
10.08.21
7.125%
31.12.17
Carrying value
in transaction
currency
Carrying value
in USD
Carrying value
in CHF
1,000
1,250
1,250
1,575
1,500
1,100
1,200
1,250
1,250
1,575
1,500
1,100
7,875
1,170
1,218
1,218
1,535
1,462
1,072
7,677
1 The disclosed maturity refers to the 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 first call date.
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UBS Group AG standalone financial statements
Note 17 Compensation-related long-term liabilities
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
USD million
CHF million
31.12.18
31.12.17
31.12.18
31.12.17
0
3,022
1,415
1,607
3,022
3
3,394
1,543
1,850
3,397
0
2,972
1,391
1,581
2,972
3
3,308
1,504
1,804
3,311
As of 31 December 2018, the issued share capital consisted of 3,855,634,749 (31 December 2017: 3,853,096,603) 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
Note 19 Treasury shares
Balance as of 31 December 2016
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 2017
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 2018
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 USD
Average price in CHF
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
103,979,927
(2,438,508)
(67,375,167)
166,467,802
166,203,791
264,011
16.12
16.12
15.78
16.28
16.65
16.75
16.65
16.65
17.99
15.32
16.90
16.69
15.71
15.71
12.27
16.41
16.41
16.06
15.87
16.23
16.32
16.23
16.23
17.54
15.10
16.61
16.39
15.45
15.46
12.05
1 Treasury shares held by UBS Group AG had a carrying value of USD 2,612 million (CHF 2,569 million) as of 31 December 2018 (31 December 2017: USD 2,201 million (CHF 2,145 million)).
520
Additional information
Note 20 Guarantees
As of 31 December 2018, UBS Group Funding (Switzerland) AG,
a subsidiary of UBS Group AG, had issued USD 31,448 million
(CHF 30,920 million) equivalent of senior debt which contributes
to the total loss-absorbing capacity (TLAC) of the Group
(31 December 2017: USD 28,422 million (CHF 27,706 million)).
Further, UBS Group Funding (Switzerland) AG had issued
USD 10,334 million (CHF 10,161 million) equivalent of perpetual
capital notes which qualify as Basel III AT1 capital on a
consolidated UBS Group basis. 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 2018, total pledged assets of UBS Group AG
amounted to USD 1,862 million (CHF 1,831 million). These
assets consisted of certain liquid assets, marketable securities
and financial assets and were pledged to UBS AG. As of
31 December 2017, total pledged assets of UBS Group AG
Note 22 Contingent liabilities
(CHF 4,337 million). The
amounted to USD 4,449 million
associated liabilities secured by these pledged assets were
USD 633 million (CHF 623 million) and USD 1,846 million
(CHF 1,800 million)
and
of
31 December 2017, respectively.
31 December 2018
as
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.
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UBS Group AG standalone financial statements
Note 23 Significant shareholders
Shareholders registered in the UBS Group AG share register with 3% or more of total share capital
% of share capital
Chase Nominees Ltd., London
DTC (Cede & Co.), New York1
Nortrust Nominees Ltd., London
1 DTC (Cede & Co.), New York, “The Depository Trust Company,” is a US securities clearing organization.
31.12.18
31.12.17
12.08
7.23
4.14
11.16
6.64
4.11
10 February 2016. The above disclosures have not been
subsequently superseded and no new disclosures of significant
shareholdings have been made since 31 December 2018.
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.
Information on disclosures under the FMIA is available at
www.six-exchange-regulation.com/en/home/publications/
significant-shareholders.html.
Shareholders registered in the UBS share register
The shareholders (acting in their own name or in their capacity
as nominees for other investors or beneficial owners) listed in
the table above were registered in the UBS share register with
3% or more of the total share capital of UBS Group AG as of
31 December 2018 or as of 31 December 2017.
Cross-shareholdings
UBS Group AG has no cross-shareholdings where reciprocal
ownership would be in excess of 5% of capital or voting rights
with any other company.
General rules
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. Nominee
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.
companies
that
Pursuant to the Swiss Code of Obligations, UBS discloses in
its financial statements the identity of any shareholder with a
holding of more than 5% of the total share capital of UBS
Group AG.
Shareholders not registered in the UBS share register
According to the FMIA disclosure notifications filed with UBS
Group AG and the SIX as of 31 December 2018, the following
entities held more than 3% of the total share capital of UBS
Group AG: Dodge & Cox, San Francisco, disclosed a holding of
3.03% of the total share capital of UBS Group AG on
30 November 2018; BlackRock Inc., New York, disclosed a
holding of 4.99% on 28 August 2018; and MFS Investment
Management, Boston, disclosed a holding of 3.05% on
522
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 31.12.18
For the year ended 31.12.17
Number of shares
354,265
2,996,831
55,332,567
58,683,663
Value of shares in
USD million
6
Value of shares in
CHF million
6
52
926
984
51
908
965
Number of shares
416,980
2,720,614
61,152,037
64,289,631
Value of shares in
USD million
7
Value of shares in
CHF million
7
44
896
947
43
874
923
→ Refer to the “Corporate governance and compensation” section of 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
Jeremy Anderson, member2
Reto Francioni, member
Ann F. Godbehere, member
Fred Hu, member2
William G. Parrett, former member2
Julie G. Richardson, member
Isabelle Romy, member
Robert W. Scully, member
Beatrice Weder di Mauro, member
Dieter Wemmer, member
Total
oon 31 December
2018
Number of shares held
764,329
Voting rights in %
0.042
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
642,100
322,558
290,694
189,805
154,672
0
–
98,832
76,772
259,225
232,263
0
–
–
106,916
17,157
0
114,802
94,376
47,074
29,917
145,601
126,809
31,159
14,002
1,990,542
0.037
0.018
0.017
0.010
0.009
0.000
–
0.005
0.004
0.014
0.013
0.000
–
–
0.006
0.001
0.000
0.006
0.005
0.003
0.002
0.008
0.007
0.002
0.001
0.109
0.102
1 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2018 and 2017. 2 At the 2018 AGM, Jeremy Anderson and Fred Hu were newly
elected and William G. Parrett did not stand for re-election.
1,768,521
2017
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UBS Group AG standalone financial statements
Note 24 Share and option ownership of the members of the Board of Directors, the Group Executive Board and other
employees (continued)
Share and option ownership / entitlements of GEB members1
Name, function
Sergio P. Ermotti, Group Chief Executive Officer
Martin Blessing, Co-President Global Wealth Management
Christian Bluhm, Group Chief Risk Officer
Markus U. Diethelm, Group General Counsel
Kirt Gardner, Group Chief Financial Officer
Robert Karofsky, Co-President Investment Bank
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
Piero Novelli, Co-President Investment Bank
Andrea Orcel, former President Investment Bank
Markus Ronner, Group Chief Compliance and Governance
Officer
Kathryn Shih, President UBS Asia Pacific
Total
on
31 December
2018
Number of
unvested
shares / at risk2
1,715,430
Number of
vested shares
1,757,766
Total number of
shares
3,473,196
Potentially
conferred
voting
rights in %
0.191
Potentially
conferred
voting
rights in %4
0.000
Number of
options3
0
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
1,632,464
256,356
460,377
0
2,092,841
256,356
65,761
259,745
131,520
614,222
589,659
343,120
264,718
500,902
–
259,762
244,676
910,951
881,979
307,090
156,180
1,132,938
1,047,311
471,049
–
–
1,328,113
161,152
–
503,772
581,546
0
0
0
317,516
194,000
107,472
61,652
254,119
–
263,362
176,602
95,597
95,597
277,978
277,978
484,075
422,298
256,367
–
–
251,439
173
–
150,000
0
65,761
259,745
131,520
931,738
783,659
450,592
326,370
755,021
––
523,124
421,278
1,006,548
977,576
585,068
434,158
1,617,013
1,469,609
727,416
––
–
1,579,552
161,325
––
653,772
581,546
7,436,489
3,964,425
11,400,914
0.121
0.014
0.004
0.014
0.008
0.051
0.045
0.025
0.019
0.042
–
0.029
0.024
0.055
0.057
0.032
0.025
0.089
0.085
0.040
–
–
0.091
0.009
–
0.036
0.034
0.627
0
0
0
0
0
0
0
0
0
0
––
0
0
0
0
0
0
0
281,640
0
––
–
0
0
––
0
74,599
0
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
0.000
0.000
0.016
0.000
–
–
0.000
0.000
–
0.000
0.004
0.000
0.021
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 “Compensation philosophy and framework” in the “Compensation” section of this report for more information on the
plans. 3 Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
8,863,870
1,939,943
6,923,927
356,239
0.513
2017
524
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 and the external auditors are provided in
the table below. Amounts due from and due to subsidiaries are
provided on the face of the balance sheet.
Payables due to the members of the GEB
of which: Deferred Contingent Capital Plan
of which: other deferred compensation plans
Payables due to external auditors
USD million
CHF million
31.12.18
31.12.17
31.12.18
31.12.17
156
78
78
0
170
79
91
154
77
77
0
166
77
89
(cid:3)
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(cid:1)
(cid:1)
(cid:1)(cid:1)
(cid:1)
(cid:21)(cid:53)(cid:49)(cid:54)(cid:55)(cid:1)(cid:2)(cid:1)(cid:35)(cid:50)(cid:56)(cid:49)(cid:42)(cid:1)(cid:27)(cid:55)(cid:39)(cid:1)
(cid:17)(cid:40)(cid:54)(cid:38)(cid:43)(cid:40)(cid:49)(cid:42)(cid:53)(cid:36)(cid:37)(cid:40)(cid:49)(cid:1)(cid:16)(cid:1)
(cid:30)(cid:6)(cid:29)(cid:6)(cid:1)(cid:18)(cid:50)(cid:59)(cid:1)
(cid:19)(cid:24)(cid:5)(cid:12)(cid:8)(cid:8)(cid:10)(cid:1)(cid:18)(cid:36)(cid:54)(cid:40)(cid:47)(cid:1)
(cid:30)(cid:43)(cid:50)(cid:49)(cid:40)(cid:1)
(cid:22)(cid:36)(cid:59)(cid:1)
(cid:58)(cid:58)(cid:58)(cid:6)(cid:40)(cid:60)(cid:6)(cid:38)(cid:50)(cid:48)(cid:7)(cid:38)(cid:43)(cid:1)
(cid:3)(cid:12)(cid:9)(cid:1)(cid:13)(cid:15)(cid:1)(cid:10)(cid:15)(cid:14)(cid:1)(cid:15)(cid:14)(cid:1)(cid:15)(cid:14)(cid:1)
(cid:3)(cid:12)(cid:9)(cid:1)(cid:13)(cid:15)(cid:1)(cid:10)(cid:15)(cid:14)(cid:1)(cid:15)(cid:14)(cid:1)(cid:8)(cid:8)(cid:1)
(cid:32)(cid:50)(cid:1)(cid:55)(cid:43)(cid:40)(cid:1)(cid:23)(cid:40)(cid:49)(cid:40)(cid:53)(cid:36)(cid:47)(cid:1)(cid:28)(cid:40)(cid:40)(cid:55)(cid:44)(cid:49)(cid:42)(cid:1)(cid:50)(cid:41)(cid:1)(cid:1)
(cid:16)(cid:9)(cid:15)(cid:1)(cid:12)(cid:33)(cid:31)(cid:36)(cid:32)(cid:1)(cid:8)(cid:12)(cid:2)(cid:1)(cid:17)(cid:36)(cid:33)(cid:26)(cid:20)(cid:25)(cid:1)
(cid:18)(cid:36)(cid:54)(cid:40)(cid:47)(cid:4)(cid:1)(cid:9)(cid:12)(cid:1)(cid:28)(cid:36)(cid:53)(cid:38)(cid:43)(cid:1)(cid:10)(cid:8)(cid:9)(cid:16)(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:14)(cid:22)(cid:32)(cid:31)(cid:33)(cid:35)(cid:1)(cid:31)(cid:23)(cid:1)(cid:35)(cid:25)(cid:22)(cid:1)(cid:34)(cid:35)(cid:18)(cid:35)(cid:36)(cid:35)(cid:31)(cid:33)(cid:38)(cid:1)(cid:18)(cid:36)(cid:21)(cid:26)(cid:35)(cid:31)(cid:33)(cid:1)(cid:31)(cid:30)(cid:1)(cid:35)(cid:25)(cid:22)(cid:1)(cid:23)(cid:26)(cid:30)(cid:18)(cid:30)(cid:20)(cid:26)(cid:18)(cid:28)(cid:1)(cid:34)(cid:35)(cid:18)(cid:35)(cid:22)(cid:29)(cid:22)(cid:30)(cid:35)(cid:34)(cid:1)
(cid:1)
(cid:1)(cid:17)(cid:54)(cid:1) (cid:54)(cid:55)(cid:36)(cid:55)(cid:56)(cid:55)(cid:50)(cid:53)(cid:60)(cid:1) (cid:36)(cid:56)(cid:39)(cid:44)(cid:55)(cid:50)(cid:53)(cid:4)(cid:1) (cid:58)(cid:40)(cid:1) (cid:43)(cid:36)(cid:57)(cid:40)(cid:1) (cid:36)(cid:56)(cid:39)(cid:44)(cid:55)(cid:40)(cid:39)(cid:1) (cid:55)(cid:43)(cid:40)(cid:1) (cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:1) (cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:1) (cid:50)(cid:41)(cid:1) (cid:33)(cid:18)(cid:31)(cid:1) (cid:23)(cid:53)(cid:50)(cid:56)(cid:51)(cid:1) (cid:17)(cid:23)(cid:4)(cid:1) (cid:58)(cid:43)(cid:44)(cid:38)(cid:43)(cid:1) (cid:38)(cid:50)(cid:48)(cid:51)(cid:53)(cid:44)(cid:54)(cid:40)(cid:1) (cid:55)(cid:43)(cid:40)(cid:1)
(cid:37)(cid:36)(cid:47)(cid:36)(cid:49)(cid:38)(cid:40)(cid:1)(cid:54)(cid:43)(cid:40)(cid:40)(cid:55)(cid:4)(cid:1)(cid:44)(cid:49)(cid:38)(cid:50)(cid:48)(cid:40)(cid:1)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:1)(cid:36)(cid:49)(cid:39)(cid:1)(cid:49)(cid:50)(cid:55)(cid:40)(cid:54)(cid:1)(cid:41)(cid:50)(cid:53)(cid:1)(cid:55)(cid:43)(cid:40)(cid:1)(cid:60)(cid:40)(cid:36)(cid:53)(cid:1)(cid:40)(cid:49)(cid:39)(cid:40)(cid:39)(cid:1)(cid:11)(cid:9)(cid:1)(cid:20)(cid:40)(cid:38)(cid:40)(cid:48)(cid:37)(cid:40)(cid:53)(cid:1)(cid:10)(cid:8)(cid:9)(cid:15)(cid:6)(cid:1)
(cid:1)
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(cid:32)(cid:43)(cid:40)(cid:1)(cid:18)(cid:50)(cid:36)(cid:53)(cid:39)(cid:1)(cid:50)(cid:41)(cid:1)(cid:20)(cid:44)(cid:53)(cid:40)(cid:38)(cid:55)(cid:50)(cid:53)(cid:54)(cid:1)(cid:44)(cid:54)(cid:1)(cid:53)(cid:40)(cid:54)(cid:51)(cid:50)(cid:49)(cid:54)(cid:44)(cid:37)(cid:47)(cid:40)(cid:1)(cid:41)(cid:50)(cid:53)(cid:1)(cid:55)(cid:43)(cid:40)(cid:1)(cid:51)(cid:53)(cid:40)(cid:51)(cid:36)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:1)(cid:50)(cid:41)(cid:1)(cid:55)(cid:43)(cid:40)(cid:1)(cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:1)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:1)(cid:44)(cid:49)(cid:1)(cid:36)(cid:38)(cid:38)(cid:50)(cid:53)(cid:39)(cid:36)(cid:49)(cid:38)(cid:40)(cid:1)(cid:58)(cid:44)(cid:55)(cid:43)(cid:1)(cid:55)(cid:43)(cid:40)(cid:1)
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(cid:1)
(cid:1)(cid:6)(cid:10)(cid:19)(cid:18)(cid:21)(cid:23)(cid:1)(cid:18)(cid:17)(cid:1)(cid:18)(cid:23)(cid:13)(cid:10)(cid:21)(cid:1)(cid:15)(cid:10)(cid:12)(cid:7)(cid:15)(cid:1)(cid:21)(cid:10)(cid:20)(cid:24)(cid:14)(cid:21)(cid:10)(cid:16)(cid:10)(cid:17)(cid:23)(cid:22)(cid:1)
(cid:29)(cid:35)(cid:1)(cid:33)(cid:44)(cid:43)(cid:36)(cid:39)(cid:47)(cid:42)(cid:1)(cid:49)(cid:38)(cid:31)(cid:49)(cid:1)(cid:52)(cid:35)(cid:1)(cid:42)(cid:35)(cid:35)(cid:49)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)(cid:41)(cid:35)(cid:37)(cid:31)(cid:41)(cid:1)(cid:47)(cid:35)(cid:46)(cid:50)(cid:39)(cid:47)(cid:35)(cid:42)(cid:35)(cid:43)(cid:49)(cid:48)(cid:1)(cid:44)(cid:43)(cid:1)(cid:41)(cid:39)(cid:33)(cid:35)(cid:43)(cid:48)(cid:39)(cid:43)(cid:37)(cid:1)(cid:31)(cid:33)(cid:33)(cid:44)(cid:47)(cid:34)(cid:39)(cid:43)(cid:37)(cid:1)(cid:49)(cid:44)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)(cid:15)(cid:50)(cid:34)(cid:39)(cid:49)(cid:44)(cid:47)(cid:1)(cid:24)(cid:51)(cid:35)(cid:47)(cid:48)(cid:39)(cid:37)(cid:38)(cid:49)(cid:1)(cid:15)(cid:33)(cid:49)(cid:1)(cid:3)(cid:15)(cid:24)(cid:15)(cid:4)(cid:1)
(cid:31)(cid:43)(cid:34)(cid:1)(cid:39)(cid:43)(cid:34)(cid:35)(cid:45)(cid:35)(cid:43)(cid:34)(cid:35)(cid:43)(cid:33)(cid:35)(cid:1)(cid:3)(cid:31)(cid:47)(cid:49)(cid:39)(cid:33)(cid:41)(cid:35)(cid:1)(cid:12)(cid:10)(cid:13)(cid:1)(cid:17)(cid:24)(cid:1)(cid:31)(cid:43)(cid:34)(cid:1)(cid:31)(cid:47)(cid:49)(cid:39)(cid:33)(cid:41)(cid:35)(cid:1)(cid:9)(cid:9)(cid:1)(cid:15)(cid:24)(cid:15)(cid:4)(cid:1)(cid:31)(cid:43)(cid:34)(cid:1)(cid:49)(cid:38)(cid:31)(cid:49)(cid:1)(cid:49)(cid:38)(cid:35)(cid:47)(cid:35)(cid:1)(cid:31)(cid:47)(cid:35)(cid:1)(cid:43)(cid:44)(cid:1)(cid:33)(cid:39)(cid:47)(cid:33)(cid:50)(cid:42)(cid:48)(cid:49)(cid:31)(cid:43)(cid:33)(cid:35)(cid:48)(cid:1)(cid:39)(cid:43)(cid:33)(cid:44)(cid:42)(cid:45)(cid:31)(cid:49)(cid:39)(cid:32)(cid:41)(cid:35)(cid:1)
(cid:52)(cid:39)(cid:49)(cid:38)(cid:1)(cid:44)(cid:50)(cid:47)(cid:1)(cid:39)(cid:43)(cid:34)(cid:35)(cid:45)(cid:35)(cid:43)(cid:34)(cid:35)(cid:43)(cid:33)(cid:35)(cid:7)(cid:1)
(cid:1)
(cid:21)(cid:43)(cid:1)(cid:31)(cid:33)(cid:33)(cid:44)(cid:47)(cid:34)(cid:31)(cid:43)(cid:33)(cid:35)(cid:1)(cid:52)(cid:39)(cid:49)(cid:38)(cid:1)(cid:31)(cid:47)(cid:49)(cid:39)(cid:33)(cid:41)(cid:35)(cid:1)(cid:12)(cid:10)(cid:13)(cid:31)(cid:1)(cid:45)(cid:31)(cid:47)(cid:31)(cid:7)(cid:1)(cid:9)(cid:1)(cid:39)(cid:49)(cid:35)(cid:42)(cid:1)(cid:11)(cid:1)(cid:17)(cid:24)(cid:1)(cid:31)(cid:43)(cid:34)(cid:1)(cid:26)(cid:52)(cid:39)(cid:48)(cid:48)(cid:1)(cid:15)(cid:50)(cid:34)(cid:39)(cid:49)(cid:39)(cid:43)(cid:37)(cid:1)(cid:26)(cid:49)(cid:31)(cid:43)(cid:34)(cid:31)(cid:47)(cid:34)(cid:1)(cid:13)(cid:14)(cid:8)(cid:5)(cid:1)(cid:52)(cid:35)(cid:1)(cid:33)(cid:44)(cid:43)(cid:36)(cid:39)(cid:47)(cid:42)(cid:1)(cid:49)(cid:38)(cid:31)(cid:49)(cid:1)(cid:31)(cid:43)(cid:1)
(cid:39)(cid:43)(cid:49)(cid:35)(cid:47)(cid:43)(cid:31)(cid:41)(cid:1) (cid:33)(cid:44)(cid:43)(cid:49)(cid:47)(cid:44)(cid:41)(cid:1) (cid:48)(cid:54)(cid:48)(cid:49)(cid:35)(cid:42)(cid:1) (cid:35)(cid:53)(cid:39)(cid:48)(cid:49)(cid:48)(cid:5)(cid:1) (cid:52)(cid:38)(cid:39)(cid:33)(cid:38)(cid:1) (cid:38)(cid:31)(cid:48)(cid:1) (cid:32)(cid:35)(cid:35)(cid:43)(cid:1) (cid:34)(cid:35)(cid:48)(cid:39)(cid:37)(cid:43)(cid:35)(cid:34)(cid:1) (cid:36)(cid:44)(cid:47)(cid:1) (cid:49)(cid:38)(cid:35)(cid:1) (cid:45)(cid:47)(cid:35)(cid:45)(cid:31)(cid:47)(cid:31)(cid:49)(cid:39)(cid:44)(cid:43)(cid:1) (cid:44)(cid:36)(cid:1) (cid:36)(cid:39)(cid:43)(cid:31)(cid:43)(cid:33)(cid:39)(cid:31)(cid:41)(cid:1) (cid:48)(cid:49)(cid:31)(cid:49)(cid:35)(cid:42)(cid:35)(cid:43)(cid:49)(cid:48)(cid:1)
(cid:31)(cid:33)(cid:33)(cid:44)(cid:47)(cid:34)(cid:39)(cid:43)(cid:37)(cid:1)(cid:49)(cid:44)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)(cid:39)(cid:43)(cid:48)(cid:49)(cid:47)(cid:50)(cid:33)(cid:49)(cid:39)(cid:44)(cid:43)(cid:48)(cid:1)(cid:44)(cid:36)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)(cid:16)(cid:44)(cid:31)(cid:47)(cid:34)(cid:1)(cid:44)(cid:36)(cid:1)(cid:18)(cid:39)(cid:47)(cid:35)(cid:33)(cid:49)(cid:44)(cid:47)(cid:48)(cid:7)(cid:1)
(cid:1)
(cid:29)(cid:35)(cid:1)(cid:36)(cid:50)(cid:47)(cid:49)(cid:38)(cid:35)(cid:47)(cid:1)(cid:33)(cid:44)(cid:43)(cid:36)(cid:39)(cid:47)(cid:42)(cid:1)(cid:49)(cid:38)(cid:31)(cid:49)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)(cid:45)(cid:47)(cid:44)(cid:45)(cid:44)(cid:48)(cid:35)(cid:34)(cid:1)(cid:31)(cid:45)(cid:45)(cid:47)(cid:44)(cid:45)(cid:47)(cid:39)(cid:31)(cid:49)(cid:39)(cid:44)(cid:43)(cid:1)(cid:44)(cid:36)(cid:1)(cid:31)(cid:51)(cid:31)(cid:39)(cid:41)(cid:31)(cid:32)(cid:41)(cid:35)(cid:1)(cid:35)(cid:31)(cid:47)(cid:43)(cid:39)(cid:43)(cid:37)(cid:48)(cid:1)(cid:33)(cid:44)(cid:42)(cid:45)(cid:41)(cid:39)(cid:35)(cid:48)(cid:1)(cid:52)(cid:39)(cid:49)(cid:38)(cid:1)(cid:26)(cid:52)(cid:39)(cid:48)(cid:48)(cid:1)(cid:41)(cid:31)(cid:52)(cid:1)(cid:31)(cid:43)(cid:34)(cid:1)(cid:49)(cid:38)(cid:35)(cid:1)
(cid:33)(cid:44)(cid:42)(cid:45)(cid:31)(cid:43)(cid:54)(cid:55)(cid:48)(cid:1) (cid:31)(cid:47)(cid:49)(cid:39)(cid:33)(cid:41)(cid:35)(cid:48)(cid:1) (cid:44)(cid:36)(cid:1) (cid:39)(cid:43)(cid:33)(cid:44)(cid:47)(cid:45)(cid:44)(cid:47)(cid:31)(cid:49)(cid:39)(cid:44)(cid:43)(cid:7)(cid:1) (cid:29)(cid:35)(cid:1) (cid:47)(cid:35)(cid:33)(cid:44)(cid:42)(cid:42)(cid:35)(cid:43)(cid:34)(cid:1) (cid:49)(cid:38)(cid:31)(cid:49)(cid:1) (cid:49)(cid:38)(cid:35)(cid:1) (cid:36)(cid:39)(cid:43)(cid:31)(cid:43)(cid:33)(cid:39)(cid:31)(cid:41)(cid:1) (cid:48)(cid:49)(cid:31)(cid:49)(cid:35)(cid:42)(cid:35)(cid:43)(cid:49)(cid:48)(cid:1) (cid:48)(cid:50)(cid:32)(cid:42)(cid:39)(cid:49)(cid:49)(cid:35)(cid:34)(cid:1) (cid:49)(cid:44)(cid:1) (cid:54)(cid:44)(cid:50)(cid:1) (cid:32)(cid:35)(cid:1)
(cid:31)(cid:45)(cid:45)(cid:47)(cid:44)(cid:51)(cid:35)(cid:34)(cid:7)(cid:1)
(cid:1)
(cid:1)
(cid:1)(cid:19)(cid:47)(cid:43)(cid:48)(cid:49)(cid:1)(cid:2)(cid:1)(cid:30)(cid:44)(cid:50)(cid:43)(cid:37)(cid:1)(cid:22)(cid:49)(cid:34)(cid:1)
(cid:1)
(cid:1) (cid:1)
(cid:1) (cid:16)(cid:47)(cid:50)(cid:43)(cid:44)(cid:1)(cid:25)(cid:31)(cid:49)(cid:50)(cid:48)(cid:39)(cid:1)
(cid:1) (cid:22)(cid:39)(cid:33)(cid:35)(cid:43)(cid:48)(cid:35)(cid:34)(cid:1)(cid:31)(cid:50)(cid:34)(cid:39)(cid:49)(cid:1)(cid:35)(cid:53)(cid:45)(cid:35)(cid:47)(cid:49)(cid:1)
(cid:1)
(cid:1)
(cid:23)(cid:31)(cid:47)(cid:39)(cid:35)(cid:6)(cid:22)(cid:31)(cid:50)(cid:47)(cid:35)(cid:1)(cid:18)(cid:35)(cid:41)(cid:31)(cid:47)(cid:50)(cid:35)(cid:1)
(cid:22)(cid:39)(cid:33)(cid:35)(cid:43)(cid:48)(cid:35)(cid:34)(cid:1)(cid:31)(cid:50)(cid:34)(cid:39)(cid:49)(cid:1)(cid:35)(cid:53)(cid:45)(cid:35)(cid:47)(cid:49)(cid:1)
(cid:3)(cid:15)(cid:50)(cid:34)(cid:39)(cid:49)(cid:44)(cid:47)(cid:1)(cid:39)(cid:43)(cid:1)(cid:33)(cid:38)(cid:31)(cid:47)(cid:37)(cid:35)(cid:4)(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
527
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528
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 information3,4,5
Income statement
Total operating income
Total operating expenses
Operating profit / (loss) before tax
Net profit / (loss)
Balance sheet
Total assets
Total liabilities
Total equity
Capital6,7
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)1
USD million,
except where indicated
31.12.17
331.12.18
UBS Switzerland AG
(standalone)
CHF million,
except where indicated
31.12.17
331.12.18
UBS Limited
(standalone)
GBP million,
except where indicated
331.12.18 31.12.172
UBS Americas Holding LLC
(consolidated)
USD million,
except where indicated
31.12.172
331.12.18
112,040
99,539
22,501
33,333
10,563
10,091
472
932
88,257
66,439
11,818
11,401
8,350
6,419
1,931
1,513
6638
6621
117
118
796
599
197
114
4480,238
4429,130
551,107
489,313
438,074
51,239
2293,034
2279,200
113,834
290,310
275,525
14,785
331,014
228,345
22,669
35,569
32,760
2,809
112,953
111,162
11,791
33,969
1142,701
1115,280
227,421
12,026
10,709
1,317
(1,674)
140,797
117,950
22,847
449,411
77,805
557,217
663,225
49,625
3,761
53,386
61,464
110,225
44,243
114,468
114,468
10,160
3,000
13,160
13,160
110,932
8,400
225,400
21,560
22,377
2235
22,612
2,529
235
2,764
111,746
22,141
113,887
10,851
1,196
12,047
2255
685
7714
722
22,867
3,449
114,601
12,769
Risk-weighted assets and leverage ratio denominator6,7
Risk-weighted assets
Leverage ratio denominator
2292,888
6601,013
284,707
615,238
995,646
3306,487
92,894
302,987
88,486
228,661
10,473
36,409
Capital and leverage ratios (%)6,7
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
Liquidity7,9,10
High-quality liquid assets (billion)
Net cash outflows (billion)
Liquidity coverage ratio (%)11,12
116.9
221.6
17.4
21.6
110.5
10.0
776
555
1139
88
67
132
110.7
115.1
226.6
88.3
667
553
1128
10.9
14.2
23.2
7.1
69
48
144
228.0
330.8
333.8
99.1
66
11
4429
24.2
26.4
32.9
7.6
6
1
454
0
0
552,581
1122,829
0
0
49,587
135,718
222.3
226.4
227.8
111.3
21.9
24.3
25.8
8.9
0
226
Other
Joint and several liability between UBS AG and UBS Switzerland AG (billion)13
11 As of 1 October 2018, UBS AG prospectively changed the presentation currency of its financial statements from Swiss francs to US dollars. Refer to “Note 2b Changes in accounting policies” in the “UBS AG
standalone financial statements (audited)” section of the UBS AG standalone financial statements and regulatory information for the year ended 31 December 2018 under “Holding company and significant
regulated subsidiaries and sub-groups” at www.ubs.com/investors for more information. 2 Figures as of or for the year ended 31 December 2017 have been adjusted for consistency with the full-year audited
financial statements and / or local regulatory reporting, which were finalized after the publication of the UBS Group AG Annual Report 2017 and the 31 December 2017 Pillar 3 report on 9 March 2018. 3 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. 4 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. 5 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. 6 For UBS AG and UBS
Switzerland AG, based on applicable transitional arrangements for Swiss systemically relevant banks (SRBs). For UBS Limited, based on Directive 2013/36/EU and Regulation 575/2013 (together known as CRD IV)
and their related technical standards, as implemented within the UK by the Prudential Regulation Authority (PRA). For UBS Americas Holding LLC, based on applicable US Basel III rules, with total loss-absorbing
capacity requirements effective from 1 January 2019 only. 7 Refer to the 31 December 2018 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 8 For UBS AG, on the
basis of going concern capital. On the basis of tier 1 capital for UBS Limited and UBS Americas Holding LLC. 9 There was no local disclosure requirement for UBS Americas Holding LLC as of 31 December 2018 and
31 December 2017. 10 For UBS Limited, the values represent an average of the month-end balances for the twelve months ending 31 December 2018 and 31 December 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 ratios were 179% and 187% for 31 December 2018 and
31 December 2017, respectively. 11 UBS AG is required to maintain a minimum liquidity coverage ratio of 105% as communicated by FINMA. 12 UBS Switzerland AG, as a Swiss SRB, is required to maintain a
minimum liquidity coverage ratio of 100%. 13 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.
69
530
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. 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 26 Restricted and transferred financial assets” in
the “Consolidated financial statements” section of this report
for more information.
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.
In June 2018, the Federal Reserve Board released the results
of its Comprehensive Capital Analysis and Review (CCAR) and
did not object to UBS Americas Holding LLC’s capital plan.
Standalone regulatory information for UBS AG, UBS Switzerland
AG and UBS Limited as well as consolidated regulatory information
the
for UBS Americas Holding
is provided
LLC
in
31 December 2018 Pillar 3 report, which is available under “Pillar 3
disclosures” at www.ubs.com/investors. Standalone
financial
statements for UBS Group AG as well as standalone financial
for UBS AG and
statements and
UBS Switzerland AG are available under “Holding company and
significant
at
subsidiaries
regulatory
www.ubs.com/investors.
sub-groups”
information
regulatory
and
Asset transfer from UBS Limited to UBS AG and merger of UBS
Limited into UBS Europe SE
On 1 March 2019, the previously announced combined UK
business transfer and cross-border merger of UBS Limited into
UBS Europe SE took place.
Former clients and other counterparties of UBS Limited who
can be serviced by UBS AG’s London Branch were migrated to
UBS AG’s London Branch prior to the merger. This business
included a transfer of net assets against cash
transfer
consideration of USD 0.7 billion, with no effect on the equity or
profit or loss of UBS AG. Total assets of UBS AG increased by
USD 4.4 billion, and total liabilities increased by USD 3.7 billion.
As a result of the cross-border merger, we expect that UBS
Europe SE will become subject to direct supervision by the
European Central Bank and will be considered a significant
regulated subsidiary from a Group reporting perspective. Starting
with the first quarter of 2019, we will include financial and
regulatory information of UBS Europe SE in our quarterly reports
and Pillar 3 reports.
→ Refer to the “Regulatory and legal developments“ and “Risk
factors“ sections of this report for more information
531
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Appendix
Abbreviations frequently used in our financial reports
CDR
CDS
CEA
CECL
CEM
CEO
CET1
CFO
CFTC
CHF
CIC
CIO
CLN
CLO
CLS
CMBS
COP
C&ORC
CRD IV
CRM
CSO
CST
CVA
D
DBO
DCCP
DJSI
DOJ
DOL
D-SIB
DTA
DVA
constant default rate
credit default swap
Commodity Exchange Act
current expected credit loss
current exposure method
Chief Executive Officer
common equity tier 1
Chief Financial Officer
US Commodity Futures
Trading Commission
Swiss franc
Corporate Institutional
Clients
Chief Investment Office
credit-linked note
collateralized loan
obligation
continuous linked
settlement
commercial mortgage-
backed security
close-out period
Compliance & Operational
Risk Control
EU Capital Requirements
Directive of 2013
credit risk mitigation (credit
risk) or comprehensive risk
measure (market risk)
Client Strategy Office
combined stress test
credit valuation adjustment
defined benefit obligation
Deferred Contingent
Capital Plan
Dow Jones Sustainability
Indices
US Department of Justice
US Department of Labor
domestic systemically
important bank
deferred tax asset
debit valuation adjustment
E
EAD
EBA
EC
ECAI
ECB
ECL
EEPE
EIR
EL
EMEA
EOP
EPE
EPS
ERISA
ESG
ESMA
ESR
ETD
ETF
EU
EUR
EURIBOR
F
FCA
FCT
FDIC
FINMA
FINRA
FMIA
exposure at default
European Banking
Authority
European Commission
external credit assessment
institution
European Central Bank
expected credit loss(es)
effective expected positive
exposure
effective interest rate
expected loss
Europe, Middle East and
Africa
Equity Ownership Plan
expected positive exposure
earnings per share
Employee Retirement
Income Security Act of 1974
environmental, social and
governance
European Securities and
Markets Authority
environmental and social
risk
exchange-traded derivative
exchange-traded fund
European Union
euro
Euro Interbank Offered
Rate
UK Financial Conduct
Authority
foreign currency translation
US Federal Deposit
Insurance Corporation
Swiss Financial Market
Supervisory Authority
US Financial Industry
Regulatory Authority
Swiss Federal Act on
Financial Market
Infrastructures and Market
Conduct in Securities and
Derivatives Trading
asset-backed security
automatic exchange of
information
annual general meeting of
shareholders
advanced internal
ratings-based
artificial intelligence
alternative investment
vehicle
Asset and Liability
Management Committee
advanced measurement
approach
anti-money laundering
Articles of Association of
UBS Group AG
available stable funding
advanced supervisory
formula approach
additional tier 1
assets under management
Basel Committee on
Banking Supervision
business division
base erosion and anti-
abuse tax
Bank for International
Settlements
Board of Directors
Business Solutions Center
Swiss occupational
pension plan
Capital Adequacy
Ordinance
Corporate Center
Comprehensive Capital
Analysis and Review
countercyclical buffer
credit conversion factor
central counterparty
counterparty credit risk
Corporate Culture and
Responsibility Committee
collateralized debt
obligation
A
ABS
AEI
AGM
A-IRB
AI
AIV
ALCO
AMA
AML
AoA
ASF
ASFA
AT1
AuM
B
BCBS
BD
BEAT
BIS
BoD
BSC
BVG
C
CAO
CC
CCAR
CCB
CCF
CCP
CCR
CCRC
CDO
532
Abbreviations frequently used in our financial reports (continued)
FMIO
FRA
FSA
FSB
FTA
FTD
FTP
FVA
FVOCI
FVTPL
FX
FINMA Ordinance on
Financial Market
Infrastructure
forward rate agreement
UK Financial Services
Authority
Financial Stability Board
Swiss Federal Tax
Administration
first to default
funds transfer pricing
funding valuation
adjustment
fair value through other
comprehensive income
fair value through profit or
loss
foreign exchange
G
GAAP
GBP
GEB
GFA
GHG
GIA
GIIPS
generally accepted
accounting principles
British pound
Group Executive Board
Group Franchise Awards
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
HR
I
IAA
IAS
IASB
IBOR
IFRIC
high-quality liquid assets
human resources
internal assessment
approach
International Accounting
Standards
International Accounting
Standards Board
interbank offered rates
International Financial
Reporting Interpretations
Committee
IFRS
IHC
IMA
IMM
IPS
IRB
IRC
ISDA
K
KRT
L
LAC
LAS
LCR
LGD
LIBOR
LLC
LRD
LTV
M
MiFID II
MiFIR
MRT
MTN
N
NAV
NII
NPA
NRV
NSFR
NYSE
O
OCA
OCI
OECD
OIS
OTC
P
PD
PFE
PIT
P&L
POCI
PRA
Q
QRRE
R
RBA
RBC
RLN
RMBS
RniV
RoAE
RoCET1
RoE
RoTE
RV
RW
RWA
International Financial
Reporting Standards
intermediate holding
companies
internal models approach
internal model method
Investment Platforms and
Solutions
internal ratings-based
incremental risk charge
International Swaps and
Derivatives Association
Key Risk Taker
loss-absorbing capacity
liquidity-adjusted stress
liquidity coverage ratio
loss given default
London Interbank Offered
Rate
limited liability company
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
New York Stock Exchange
own credit adjustment
other comprehensive
income
Organisation for Economic
Co-operation and
Development
overnight index swap
over-the-counter
probability of default
potential future exposure
point in time
profit or loss
purchased or originated
credit-impaired
UK Prudential Regulation
Authority PRVpositive
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 CET1
return on equity
return on tangible equity
replacement value
risk weight
risk-weighted assets
533
Appendix
Abbreviations frequently used in our financial reports (continued)
S
SA
SA-CCR
SAR
SBC
SCCL
SDGs
SE
SEC
SEEOP
SESTA
SESTO
standardized approach
standardized approach for
counterparty credit risk
stock appreciation right
Swiss Bank Corporation
single-counterparty credit
limit
Sustainable Development
Goals
structured entity
US Securities and
Exchange Commission
Senior Executive Equity
Ownership Plan
Swiss Federal Act on Stock
Exchanges and Securities
Trading
FINMA Ordinance on Stock
Exchanges and Securities
Trading
SFA
SFT
SI
SICR
SIX
SMA
SME
SMF
SNB
SPPI
SRB
SRM
SSFA
SVaR
supervisory formula
approach
securities financing
transaction
sustainable investing
significant increase in
credit risk
SIX Swiss Exchange
standardized measurement
approach
small and medium-sized
enterprises
Senior Management
Function
Swiss National Bank
solely payments of
principal and interest
systemically relevant bank
specific risk measure
simplified supervisory
formula approach
stressed value-at-risk
T
TBTF
TCJA
TLAC
TRS
TTC
U
UoM
USD
US IHC
V
VaR
too big to fail
US Tax Cuts and Jobs Act
total loss-absorbing
capacity
total return swap
through the cycle
units of measure
US dollar
US intermediate holding
company
value-at-risk
This is a general list of the abbreviations frequently used in our financial reporting. Not all of the listed abbreviations may appear in
this particular report.
534
Information sources
Reporting publications
Other information
including
framework,
in English,
this single-volume
(SAP no. 80531):
Annual publications: Annual Report
Published
report provides
descriptions of: our Group strategy and performance; the
strategy and performance of the business divisions and
Corporate Center; risk, treasury and 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): This 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
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. Refer to
www.ubs.com/investors for more information.
535
Cautionary Statement Regarding Forward-Looking Statements | This report contains statements that constitute “forward-looking statements,” including
but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic
initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the
matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s
expectations. These factors include, but are not limited to: (i) the degree to which UBS is successful in the ongoing execution of its strategic plans, including its
cost reduction and efficiency initiatives and its ability to manage its levels of risk-weighted assets (RWA) and leverage ratio denominator (LRD), including to
counteract regulatory-driven increases, liquidity coverage ratio and other financial resources, and the degree to which UBS is successful in implementing
changes to its businesses to meet changing market, regulatory and other conditions; (ii) the continuing low or negative interest rate environment in Switzerland
and other jurisdictions, developments in the macroeconomic climate and in the markets in which UBS operates or to which it is exposed, including movements
in securities prices or liquidity, credit spreads, and currency exchange rates, and the effects of economic conditions, market developments, and geopolitical
tensions 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, the European Union and other financial centers that have imposed, or resulted in, or may do so in the future, more stringent or entity-specific capital,
TLAC, leverage ratio, 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 and the potential need to make further changes to the legal structure or booking model of UBS Group
in response to legal and regulatory requirements, proposals in Switzerland and other jurisdictions for mandatory structural reform of banks or systemically
important institutions or to other external developments, and the extent to which such changes will have the intended effects; (vi) UBS’s ability to maintain and
improve its systems and controls for the detection and prevention of money laundering and compliance with sanctions to meet evolving regulatory
requirements and expectations, in particular in the US; (vii) the uncertainty arising from the timing and nature of the UK exit from the EU; (viii) changes in UBS’s
competitive position, including whether differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s
ability to compete in certain lines of business; (ix) changes in the standards of conduct applicable to our businesses that may result from new 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, potentially large fines or monetary penalties, or the loss of licenses or privileges as a result of regulatory or other governmental sanctions, as well as
the effect that litigation, regulatory and similar matters have on the operational risk component of our RWA as well as the amount of capital available for
return to shareholders; (xi) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies and
practices relating to this business; (xii) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its
businesses, which may be affected by competitive factors; (xiii) changes in accounting or tax standards or policies, and determinations or interpretations
affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xiv) UBS’s ability to implement
new technologies and business methods, including digital services and technologies and ability to successfully compete with both existing and new financial
service providers, some of which may not be regulated to the same extent; (xv) limitations on the effectiveness of UBS’s internal processes for risk
management, risk control, measurement and modeling, and of financial models generally; (xvi) the occurrence of operational failures, such as fraud,
misconduct, unauthorized trading, financial crime, cyberattacks, 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 2018.
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. Starting in 2018, percentages,
percent changes, and adjusted results are calculated on the basis of unrounded figures. Information on absolute changes between reporting periods, which is
provided in text and that can be derived from figures displayed in the tables, is calculated on a rounded basis.
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.
536
UBS Group AG
P.O. Box
CH-8098 Zurich
ubs.com