UBS AG Annual Report 2019

Plain-text annual report

UBS Group AG Annual Report 2019 Our external reporting approach The scope and content of our external reports are determined by Swiss legal and regulatory requirements, accounting standards, relevant stock and debt listing rules, including regulations promulgated by FINMA, the SIX Swiss Exchange, the US Securities and Exchange Commission and other regulatory requirements, as well as by our financial reporting policies. At the center of our external reporting approach is the annual report of UBS Group AG, which consists of disclosures for UBS Group AG and its consolidated subsidiaries. We also provide a combined annual report for UBS Group AG and UBS AG consolidated, which additionally includes the consolidated financial statements of UBS AG as well as supplemental disclosures required under SEC regulations and is the basis for our SEC Form 20-F filing. Annual reporting 9 1 0 2 9 1 0 t 2 r o t r p o e p R e R l a u l a n u n n A n A G A G A p u p o u r o G r G S B S U B U UBS Group AG Annual Report 2019 9 1 0 2 9 1 0 2 t r o p e R t r o p e R l a l u a n u n n A n A G G A A S B S U B U d n d a n a G G A A p u p o u r o G r G S B S U B U 9 1 0 2 t h c i r e b s t f ä h c s e G G A p u o r G S B U UBS Annual Reports The 2019 Annual Reports (UBS Group AG Annual Report 2019 and the combined UBS Group AG and UBS AG Annual Report 2019) include the consolidated financial statements of UBS Group AG and UBS AG, respectively, and provide comprehensive information about our firm, including our strategy and businesses, financial and operating performance and other key information. The reports are presented in US dollars, our presentation currency. The UBS Group AG Annual Report 2019 is translated into German, with the German translation available as of 13 March 2020 under “Annual reporting” at www.ubs.com/investors. The consolidated financial statements of UBS Group AG and UBS AG have been prepared in accordance with International Financial Reporting Standards (IFRS). The risk, treasury and capital management sections include certain audited financial information, which forms part of the consolidated financial statements. The Annual Reports also include the statutory financial statements of UBS Group AG, which are the basis for our Swiss tax return, our appropriation of retained earnings and a potential distribution of dividends, subject to shareholder approval at the Annual General Meeting. We provide our combined Annual Report, the Pillar 3 report, the standalone legal entity reports and the sustainability report as web disclosures at www.ubs.com/investors. G A S B U G A d n a l r e z t i w S S B U 31 December 2019 Pillar 3 report UBS Group and signiﬁcant regulated subsidiaries and sub-groups UBS AG Standalone ﬁnancial statements and regulatory information for the year ended 31 December 2019 Sustainability Report 2019 Based on GRI Standards Pillar 3 report The Pillar 3 report provides detailed quantitative and qualitative information about risk, capital, leverage and liquidity for the UBS Group and prudential key figures and regulatory information for UBS AG standalone, UBS Switzerland AG standalone, UBS Europe SE consolidated and UBS Americas Holding LLC consolidated. Standalone legal entity reports We publish separate standalone legal entity reports for UBS AG and UBS Switzerland AG. Selected financial and regulatory key figures for these entities as well as for UBS Europe SE and UBS Americas Holding LLC are also included in our annual reports. Sustainability report The sustainability report (formerly called the GRI Document), which will be available from 5 March 2020, provides disclosures on environmental, social and governance factors for the UBS Group and includes the disclosures of non- financial information required by German law implementing EU Directive 2014/95 (CSR-Richtlinie- Umsetzungsgesetz, CSR-RUG). Our Pillars are the foundation for everything we do. Capital strength Efﬁ ciency and effectiveness Risk management Our Principles are what we stand for as a ﬁ rm. Client focus Excellence Sustainable performance Our Behaviors are what we stand for individually. Integrity Collaboration Challenge Our approach to long-term value creation As of or for the year ended 31 December 2019 What we put into the equation Input What we do Business activities Financial capital • Common equity tier 1 (CET1) capital ratio: 13.7%. • CET1 leverage ratio: 3.9%. • Going concern leverage ratio: 5.7%. • Total loss-absorbing capacity: USD 89.6 billion. • CET1 capital: USD 35.6 billion. Relationships and intellectual capital • Strong brand with over 150 years of experience in banking. • Presence in all major ﬁnancial centers worldwide. • Strong culture and strategy based on our Pillars, Principles and Behaviors. • We have access to the majority of the world’s billionaires. • We spent more than 10% of our revenues (around USD 3.5 billion) on technology in 2019, including amounts spent on regulatory change programs and innovative solutions for our businesses and clients. Human capital • We foster a corporate culture that supports and engages employees. • Our 69,966 employees (by headcount) work in 50 countries, are citizens of 136 nations and speak more than 150 languages. • 39% women and 61% men, with an average of 8 years of service. • 19% under 30 years old, 60% between 30 and 50, and 21% over 50 years old. Global Wealth Management Personal & Corporate Banking Social and natural capital • Our UBS in society organization focuses our ﬁrm on being a force for driving positive change in society and the environment. • Our comprehensive environmental and social risk standards govern client and vendor relationships and are enforced ﬁrm-wide. • We invest in communities: our employees have valuable skills and knowledge, which they use to make a difference in their communities. • 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. • We regularly contribute to debates about important societal topics and, in collaboration with other ﬁrms and industry bodies, help to set standards on these topics. Catalyst: digitalization and innovation ABCDE (automation, un-bundling, cloud, data, experience) trends drive the changes in how we operate. Modernizing and modularizing technical estates leveraging new technologies, such as public cloud, microservices architecture, APIs, and front-to-back automation. The results we deliver Output Investors Our ﬁnancial results • Net proﬁt attributable to shareholders: USD 4,304 million. • Diluted earnings per share: USD 1.14. • Return on CET1 capital: 12.4% (with a target of 12–15% for 2020–2022). • Invested assets: USD 3,607 billion. • Cost / income ratio was 80.5%, compared with 79.9% in 2018. We are targeting a cost / income ratio of 75–78% in 2020–2022. Clients The products and services we offer • We build and strengthen client relationships through various platforms and offerings, such as UBS Evidence Lab Innovations, GWM platforms and WM Online portal, UBS Partner, we.trade, UBS Atrium and Mobile Banking. • A broad range of well-designed products and services for clients’ personal wealth and their businesses. • Effective procedures and processes to handle complaints. Employees How we work at UBS • We are committed to further increasing our diversity, treating our employees fairly and providing equal opportunities for all. • We strive to hire, promote and retain more women across the ﬁrm, with a stated aspiration of increasing the representation of women in management roles to one-third. • Our in-house UBS University offers customized training and skills development opportunities. • We support employees’ career growth; our new Career Navigator online platform supports the mobility of internal talent. • Modern cloud-enabled virtual workstations and mobile technologies have been deployed. Society and environment What we deliver on sustainability • USD 488.5 billion of sustainable investing assets (13.5% of our total invested assets). USD 3.9 billion of clients’ assets in SDG-related impact investments. • With a market share of 20.2% among asset and wealth managers offering sustainable investment solutions, we are a leading provider of such products in Switzerland. • USD 52.7 billion of the total deal value in equity or debt capital market services and USD 34.5 billion in ﬁnancial advisory services provided by our Investment Bank to companies that make a positive contribution to climate change mitigation and adaptation. • In 2019, we donated USD 45.2 million to local programs. 38% of our employees volunteered and invested 202,784 hours in community projects. • UBS Optimus Foundation raised USD 89.5 million in donations. Asset Management Investment Bank Co-developing digital innovation and ecosystems through partnerships, research and innovation pipeline management, facilitated by centers of excellence. Strengthening our digital culture and engineering approach through training, communications, and adopting new toolsets and agile ways of collaborating. How our stakeholders beneﬁt Outcome The impact we create Impact Driving change in the world needs leadership. As the largest truly global wealth manager, we have a responsibility to take a leading role in shaping a positive future – for all of us and the generations to come. We are an integral part of the Swiss economy and broader society – not only as a leading universal bank, but also as the third biggest private employer and one of the top taxpayers. We signiﬁcantly contribute to the prosperity of the Swiss economy by providing efﬁcient ﬁnancial services, capital allocation, stability, security and reliability. We aim to protect and increase the value of our clients’ assets. Understanding our clients’ needs and expectations allows us to serve their best interests and to create value for them. In sustainable and impact investing, we set standards across the industry and constantly challenge ourselves and our peers to raise the bar. How our investors beneﬁt • Attractive capital returns to our shareholders. A dividend of USD 0.73 per share proposed for the ﬁnancial year 2019. We aim to increase our ordinary dividend per share by USD 0.01 per year, and to return excess capital through share repurchases. • Total payout ratio for 2019 will be 80%, combining the proposed dividend with our share repurchases of USD 806 million in 2019. • We aim to balance growth opportunities with cost and capital efﬁciency in order to drive attractive risk-adjusted returns and sustainable performance. How our clients beneﬁt • Sustaining long-term relationships based on mutual respect, trust and integrity. Access to outstanding, tailored advice, ﬁnancial solutions and services from around the globe delivered by experts our clients can trust; superior investment performance. • Improved satisfaction through the offering of suitable products and services. • Services accessible through convenient digital banking portals, which enable our clients to bank at their convenience, and through our branches and presences in Switzerland and abroad. How our employees beneﬁt • UBS is widely recognized as an employer of choice and a great place to build a career. • Levels of employee satisfaction and engagement, as shown in our most recent employee survey, are above the norm for ﬁnancial services organizations. • A diverse and inclusive culture across the ﬁrm to drive sustainable growth and innovation and to build a better place to work for all employees. • Support for leadership development, as great leaders are the key to growing our people, client relationships and results. • Pay for performance, with a strong commitment to pay equity embedded into our compensation policies and practices. How society and the environment beneﬁt • Total reduction of greenhouse gas footprint by 71% from the 2004 baseline year, targeting a 75% reduction by the end of 2020. • We further reduced our carbon-related assets to less than 1% of our total banking products exposure and strengthened our standards in the energy and utilities sectors. • More than 280,000 direct beneﬁciaries and 107,388 lives substantially improved as a result of our community investments. • UBS Optimus Foundation committed USD 109.5 million to carefully selected programs. • The well-being of 3.3 million vulnerable children around the world was improved with help of the work of UBS Optimus Foundation. Contents 2 Letter to shareholders 8 Our key figures 10 Our Board of Directors 12 Our Group Executive Board 14 Our evolution 1. Our strategy, business model and environment 3. Risk, treasury and capital management 18 Our strategy 19 Performance targets and measurement 20 Our businesses 31 Our environment 35 How we create value for our stakeholders 49 Regulation and supervision 54 Regulatory and legal developments 60 Risk factors 2. Financial and operating performance 72 Critical accounting estimates and judgments 73 Significant accounting and financial reporting changes 75 Group performance 85 Global Wealth Management 88 Personal & Corporate Banking 93 Asset Management Investment Bank 97 101 Corporate Center 105 Risk management and control 156 Treasury management 175 Capital management 4. Corporate governance and compensation 196 Corporate governance 236 Compensation 5. Financial statements 283 Consolidated financial statements 475 Standalone financial statements 6. Significant regulated subsidiary and sub-group information 500 Financial and regulatory key figures for our significant regulated subsidiaries and sub-groups Appendix 502 Alternative performance measures 504 Abbreviations frequently used in our financial reports 507 508 Cautionary statement Information sources Annual Report 2019 Letter to shareholders Dear Shareholders, Building on your positive feedback from the previous years, our shareholder letter for 2019 again answers a series of questions that we are regularly asked by different stakeholders of the bank. What was the market context in 2019? Even though equity markets reached all-time highs, sharp changes in macroeconomic and market conditions affected UBS and our clients. Interest rate headwinds intensified, with rate cuts in the US and further moves into negative territory in Europe. Contrary to more optimistic expectations at the start of the year, global GDP growth of just 3% was both substantially lower than had been forecast and the lowest since the 2007– 2009 financial crisis. Faced with slowing global growth and persistent geopolitical concerns, many clients either de-risked, or simply stayed on the sidelines. Client activity was also negatively affected by historically low market volatility. Nevertheless, recession concerns abated in the US and investor sentiment improved in the final quarter. How do you assess the financial performance of the Group in 2019? In these mixed conditions we delivered a solid performance in 2019, closing the year with the best fourth quarter since 2010. Our net profit reached USD 4.3 billion and we delivered a 12.4% return on CET1 capital, competitive with American peers large European banks. Clients and well ahead of other continued to turn to us for high-quality advice and solutions to help them achieve their goals. We now manage over USD 3.6 trillion of their assets, up nearly a trillion in four years. Our capital position remains formidable, with a CET1 capital ratio of 13.7%. Our total loss-absorbing capacity increased to nearly USD 90 billion. How much of your profits did you return to shareholders last year? In 2019, we generated USD 5 billion of capital, bringing the total to USD 28 billion since 2011. Our proposed dividend of USD 0.73 per share for 2019 represents an increase of 6% compared with 2018 and is in addition to the USD 806 million of shares bought back under our repurchase program, helping increase our tangible book value per share by 6%. The sum of our 2019 proposed dividend and share repurchases is USD 3.4 billion, or 80% of our net profits, which is highly attractive compared to peers. 2 What actions are you taking in the French litigation case? Management and the Board of Directors are completely focused on and committed to a resolution of the French cross-border matter. This is in the best interest of shareholders, and it will most likely take time to resolve the case. The trial at the Court of Appeal is scheduled for 2–29 June 2020, and a verdict is expected later in the year. We are preparing diligently for this trial. UBS denies any criminal wrongdoing in this case. Our provision for this matter remains at EUR 450 million (USD 505 million), unchanged from year-end 2018. We have published responses to questions frequently asked by shareholders, clients, employees and other stakeholders on this matter, which are available at www.ubs.com/investors. What are the key growth opportunities you see going forward? We are ideally positioned to take advantage of global mega- trends. As the largest truly global wealth manager to high net worth and ultra-high net worth clients, we are well positioned to benefit from these trends. Our business is based on wealth creation and helping clients manage their wealth and fulfil their goals, as well as advising on how they want to pass it on. Our billionaires report revealed that approximately 723 billionaires will transfer USD 3.5 trillion to their heirs over the next two decades. We have a strong presence in the US and Asia – two leading growth markets – along with the right people, the right investments in technology, and the capital strength to lead the wealth management industry. We are also a leading universal bank in Switzerland and we are determined to extend our lead. All this is enhanced by an investment bank that is strong in the areas where we choose to compete, and a successful asset manager. We are delivering attractive returns in a responsible and sustainable way, while strategically investing for growth. Joint ventures, cross-selling and white-labelling are other growth opportunities. Examples in 2019 include exciting strategic partnerships with leading market players – Banco do Brasil in Brazil and Sumitomo Mitsui Trust in Japan. These are just some of the opportunities across our businesses that we are focused on. There are many others that you can read about in the pages of our annual report. Sergio P. Ermotti Group Chief Executive Officer Axel A. Weber Chairman of the Board of Directors 3 Annual Report 2019 Letter to shareholders What are your priorities for 2020–2022? We aim to drive higher and superior returns by growing each of our businesses and leveraging our unique, integrated and complementary business portfolio and geographic footprint. We have defined a number of priorities to help us achieve this in 2020–2022. In Global Wealth Management, we will execute on several initiatives designed to accelerate our growth and elevate the quality and value of the service we deliver to our clients. Our Investment Bank is well positioned to respond to changing market conditions and client needs and to better leverage our capabilities, including the technology investments we have made over the years. Our Asset Management business will continue to build on its differentiated client offering for further growth, performance and scale. In our Personal & Corporate Banking business in Switzerland, we will drive profitable growth through digital initiatives, services and efficiency gains. Our business divisions are competitive in those fields that matter most to our clients, but they would not be as successful on a stand-alone basis. Therefore, a key priority is further embedding our one-firm approach across the Group. While we have successfully delivered our integrated business model for the benefit of many clients and shareholders, we can do more. We also remain committed to improving efficiency and productivity in 2020, keeping operating costs flat, while growing revenues and funding USD 1 billion in investments to meet regulatory requirements and improve efficiency. Continued investments in technology, platforms and risk management systems are crucial for growing our franchise, generating attractive returns in the future and improving client experience. What are you doing to make sure UBS remains the most relevant global wealth manager? Client needs are constantly evolving, and the pace of change is faster than ever. What has not and will not change is clients’ need for high-quality advice. This is where UBS excels and what makes our value proposition durable. We provide customized, nuanced, and personalized advice that helps our clients meet their individual financial goals, while improving their lives and generating impact that matters. Clients are increasingly looking to partner with a firm that creates value for society as a whole and helps them invest in areas and ideas that matter most to them. Our millennial clients are a good example of this. Many are restructuring their portfolios and using our advisory and product capabilities to do well financially while also doing good for the world around us. Technology plays another key part in this endeavor, helping us to deliver even more for our clients, empower our client-facing staff, including advisors, and make our infrastructure more agile and versatile and, as a result, increase productivity and quality of service. What is UBS doing to provide sustainable finance opportunities for clients? Sustainable finance has long been a firm-wide priority. The Dow recognized Jones Sustainability the most widely Index, 44 sustainability ranking, recognized UBS as the industry leader for the fifth year running. This demonstrates our commitment to the growing demand for sustainable finance services and products across client segments. A key indicator is the development of our core sustainable investing assets, which have more than doubled in just two years, from 5.6% of total invested assets in 2017 to 13.5% in 2019. Our multi-asset sustainable investing solutions were our fastest-growing mandate offering, reaching over USD 9 billion in invested assets. We aim to create sustainable finance products and services firm wide that help clients channel capital to support the United Nations Sustainable Development Goals (the SDGs). We also offer advice from philanthropy experts to assist clients in making a meaningful and measurable difference for their chosen philanthropic causes. How are you using technology to help drive value for clients and shareholders? We invest in technology to improve our client service and client experience, as well as to improve the efficiency and scalability of our businesses. Technology affects every element of our value chain – from the way we communicate with, serve and advise our clients to how we manage risks and run our back office. This is why we invest over 10% of revenues per year in technology, which was around USD 3.5 billion in 2019. Last year we decommissioned over 400 legacy applications and deployed 1,100 robots across our organization. In our Swiss Personal & Corporate Banking business, for example, two-thirds of our clients interact with us through our digital banking facilities. In our corporate business, this number is even higher with almost 80% using our digital banking. These clients are more satisfied and, as a result, do more business with us. Data analytics allows client advisors to analyze data more efficiently and provide better, more timely advice. We are also using machine learning and artificial intelligence-powered engines to automate more complex tasks and allow for better and faster decision-making. What kind of capital returns can we expect if you successfully execute on your strategy and priorities? We continue to focus on sustainable performance. We hold ourselves accountable for delivering our targets by executing on our proven strategy in a disciplined manner, and avoiding opportunistic measures for the sake of short-term gain. We invest for the long term and aim to do the right thing for clients and the long-term health of the business. Over the next three years, our aim is to deliver at the upper end of our target range of between 12% and 15% reported return on CET1 capital, as announced in January 2020. Our goal is to balance revenue growth with both cost and capital efficiency. Going forward, we intend to grow our dividend per share by USD 1 cent per year. This will give us greater capacity to return more capital through share repurchases. We expect to repurchase around USD 450 million worth of shares in the first half of 2020, completing our current CHF 2 billion repurchase program, and will assess our future repurchase plans in the second half of 2020. What is UBS doing to develop the talent and leaders of tomorrow? Our success relies on our long-standing commitment to investing in our employees at every career stage. We are widely recognized as an employer of choice and a great place to build a career. We believe the right strategy and a culture of ethical behavior and accountability drive strong performance. The three keys to success – our Pillars, Principles and Behaviors – embody the foundation of our strategy and culture. They define what we stand for as a firm and as individuals, while also defining the way we think, work and act at UBS. Our in-house UBS University updated its curriculum to emphasize future-skills development and personal growth for all employees, with a new digital skills syllabus that builds knowledge about topics such as blockchain, intelligence. cloud Furthermore, we revamped our leadership development offering to ensure our leaders have the skills they need to develop their businesses and their people, and to lead effectively in the digital transformation age. Finally, we foster a diverse and inclusive culture across the firm to drive sustainable growth and innovation, deliver the best of UBS to clients, and build a better place to work. computing, robotics artificial and What is UBS doing to benefit stakeholders and society at large? We believe that by keeping a healthy balance between the expectations of our most important stakeholder groups – clients, employees and investors – we are also creating value for society. Delivering tailored advice, top quality solutions and disciplined execution, while also addressing strategic opportunities, further improving the working environment and facilitating economic development that is sustainable for the planet and humanity – these actions are at the heart of our strategy. In 2019, we demonstrated this commitment by becoming a founding signatory of the United Nations Principles for Responsible Banking, a comprehensive framework for the integration of sustainability into banks’ business strategies. Our annual report contains a dedicated section on how we create value for all our stakeholders. What are you doing to support the transition to a low- carbon economy? We have been executing on our comprehensive climate strategy for many years. In 2019, our total core sustainable investments increased significantly to USD 488 billion from USD 313 billion in 2018, while, as part of this, our climate-related sustainable investments increased to USD 108 billion. This includes our recently launched and award-winning Climate Aware strategy, which reached over USD 3 billion in invested assets. To protect our own and our clients’ assets from climate-related risks, our exposure to carbon-related assets on our balance sheet continues to be low, at 0.8% or USD 1.9 billion as at the end of 2019, down from 1.6% at the end of 2018 and 2.8% at the end of 2017. Our goal is to be the financial partner of choice for clients who want to mobilize capital toward climate action and the Paris Agreement. For the World Economic Forum annual meeting in 2020, our white paper focused on climate action and the ways in which investors can mobilize private and institutional capital toward the orderly transition to a low-carbon economy. How does UBS play a role and give back in the communities in which it operates? We strive to use our skills to help communities grow and thrive. We recognize that our long-term success depends on the health and prosperity of the communities in which we operate. Our firm-wide UBS in society program covers all of the activities and capabilities related to sustainable finance, including sustainable investing, philanthropy, environmental, climate and human rights policies governing client and supplier relationships, our environmental footprint, human resources, and community investment. For example, we seek to tackle societal disadvantage and through investments India entrepreneurship, Development Impact Bond. We provide strategic financial commitments and offer targeted employee volunteering to drive positive change. Directing these efforts toward skills-based volunteering, we aim to tackle local social issues in the most powerful and effective way. In 2019, 38% of our global workforce volunteered, with 48% of the hours being skills based. education the Quality Education long-term such as in You have announced that Ralph Hamers will be appointed Group Chief Executive Officer as of 1 November 2020. Can you explain your choice? The Board made the decision to appoint Ralph Hamers as successor of Group CEO Sergio P. Ermotti following a thorough and rigorous selection process, reflecting the firm’s commitment to strong corporate governance. Ralph is a proven leader in banking and a strong cultural fit for UBS. Under his leadership, ING Group has implemented a fundamental shift in its operating model and is now considered one of the best examples of digital innovation in the banking sector. Ralph is a charismatic executive with the experience and personality to write UBS’s next chapter. Thank you for your ongoing support. We look forward to your feedback and to welcoming you to this year’s Annual General Meeting on 29 April. Yours sincerely, Axel A. Weber Chairman of the Board of Directors Sergio P. Ermotti Group Chief Executive Officer 5 WEAR. SHARE. TAG. #TOGETHERBAND champions the 17 United Nations Sustainable Development Goals for a sustainable future. UBS is proud to join forces with sustainable fashion brand BOTTLETOP on the mission to raise awareness of and support for the 17 UN Sustainable Development Goals. Find out more and buy a band ubs.com/togetherband @togetherbandofficial Corporate information UBS Group AG is incorporated and domiciled in Switzerland and operates under Art. 620ff. of the Swiss Code of Obligations as an Aktiengesellschaft, a corporation limited by shares. Its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, telephone +41-44-234 11 11, and its corporate identification number is CHE-395.345.924. UBS Group AG was incorporated on 10 June 2014 and was established in 2014 as the holding company of the UBS Group. UBS Group AG shares are listed on the SIX Swiss Exchange and on the New York Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107). UBS Group AG owns 100% of the outstanding shares 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, London, New York and Krakow. UBS Group AG, Investor Relations P.O. Box, CH-8098 Zurich, Switzerland www.ubs.com/investors Zurich +41-44-234 4100 New York +1-212-882 5734 Media Relations UBS’s Media Relations team supports global media and journalists from our offices in Zurich, London, New York and Hong Kong. www.ubs.com/media Zurich +41-44-234 8500 mediarelations@ubs.com London +44-20-7567 4714 ubs-media-relations@ubs.com New York +1-212-882 5858 mediarelations@ubs.com Hong Kong +852-2971 8200 sh-mediarelations-ap@ubs.com Office of the Group Company Secretary The Group Company Secretary receives inquiries on compensation and related issues addressed to members of the Board of Directors. UBS Group AG, Office of the Group Company Secretary P.O. Box, CH-8098 Zurich, Switzerland sh-company-secretary@ubs.com +41-44-235 6652 Shareholder Services UBS’s Shareholder Services team, a unit of the Group Company Secretary office, is responsible for the registration of UBS Group AG registered shares. UBS Group AG, Shareholder Services P.O. Box, CH-8098 Zurich, Switzerland sh-shareholder-services@ubs.com +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: 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 2020 report: Tuesday, 28 April 2020 Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com Annual General Meeting 2020: Wednesday, 29 April 2020 Language: English / German | SAP-No. 80531E Publication of the second quarter 2020 report: Tuesday, 21 July 2020 Publication of the third quarter 2020 report: Tuesday, 20 October 2020 © UBS 2020. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Printed in Switzerland on chlorine-free paper with mineral oil-reduced inks. Paper production from socially responsible and ecologically sound forestry practices 7 Annual Report 2019 Our key figures As of or for the year ended 31.12.17 31.12.19 31.12.19 31.12.18 28,889 28,889 23,312 23,312 5,577 5,577 4,304 4,304 1.14 1.14 30,213 24,222 5,991 4,516 1.18 29,622 24,272 5,351 969 0.25 7.9 7.9 9.0 9.0 12.4 12.4 11.0 11.0 3.2 3.2 80.5 80.5 78.9 78.9 22.7 22.7 (4.7) (4.7) 8.6 9.8 13.1 11.8 3.3 79.9 79.5 24.5 366.0 1.8 2.0 3.0 12.6 3.3 81.6 78.2 80.5 (71.1) USD million, except where indicated Group results Group results Operating income Operating expenses Operating profit / (loss) before tax Net profit / (loss) attributable to shareholders Diluted earnings per share (USD)1 Profitability and growth2 Profitability and growth2 Return on equity (%) Return on tangible equity (%) Return on common equity tier 1 capital (%) Return on risk-weighted assets, gross (%) Return on leverage ratio denominator, gross (%) Cost / income ratio (%) Adjusted cost / income ratio (%) Effective tax rate (%) Net profit growth (%) Resources Resources Total assets Equity attributable to shareholders Common equity tier 1 capital3 Risk-weighted assets3 Common equity tier 1 capital ratio (%)3 Going concern capital ratio (%)3 Total loss-absorbing capacity ratio (%)3 Leverage ratio denominator3 Common equity tier 1 leverage ratio (%)3 Going concern leverage ratio (%)3 Total loss-absorbing capacity leverage ratio (%)3 Liquidity coverage ratio (%)4 Other Other Invested assets (USD billion)5 3,262 Personnel (full-time equivalents)6 61,253 Market capitalization7 68,477 Total book value per share (USD)7 14.11 Total book value per share (CHF)7 13.75 Tangible book value per share (USD)7 12.34 Tangible book value per share (CHF)7 12.03 1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 2 Refer to the “Performance targets and measurement” 1 3 Based on the Swiss systemically relevant bank framework as of 1 January 2020. Refer to the “Capital management” section of this section of this report for more information about our performance targets. 3 5 Includes invested assets for Global Wealth Management, Asset report for more information. 5 6 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 61. Management and Personal & Corporate Banking. 6 7 Refer to “UBS shares” in the “Capital management” section of this report for more information. 7 939,279 52,495 33,516 243,636 13.8 17.6 33.0 909,032 3.69 4.7 8.8 143 958,489 52,928 34,119 263,747 12.9 17.5 31.7 904,598 3.77 5.1 9.3 136 972,183 972,183 54,533 54,533 35,582 35,582 259,208 259,208 13.7 13.7 20.0 20.0 34.6 34.6 911,325 911,325 3.90 3.90 5.7 5.7 9.8 9.8 134 134 4 Refer to the “Balance sheet, liquidity and funding management” section of this report for more information. 4 3,101 66,888 45,907 14.35 14.11 12.55 12.33 3,607 3,607 68,601 68,601 45,661 45,661 15.08 15.08 14.60 14.60 13.29 13.29 12.87 12.87 2 Alternative performance measures An alternative performance measure (APM) is a financial measure of historical or future financial performance, financial position or cash flows other than a financial measure defined or specified in the applicable recognized accounting standards or in other applicable regulations. We report a number of APMs, including adjusted results, in the discussion of the financial and operating performance of the Group, our business divisions and our Corporate Center. We use APMs to provide a fuller picture of our operating performance and to reflect management’s view of the fundamental drivers of our business results. A definition of each APM, the method used to calculate it and the information content are presented in the appendix under “Alternative performance measures.” Our APMs may qualify as non-GAAP measures as defined by SEC regulations. 8 11 2 44 Terms used in this report, unless the context requires otherwise “UBS,” “UBS Group,” “UBS Group AG consolidated,” “Group,” “the Group,” “we,” “us” and “our” UBS Group AG and its consolidated subsidiaries “UBS AG consolidated” UBS AG and its consolidated subsidiaries “UBS Group AG” and “UBS Group AG standalone” UBS Group AG on a standalone basis “UBS AG” and “UBS AG standalone” UBS AG on a standalone basis “UBS Switzerland AG” and “UBS Switzerland AG standalone” UBS Switzerland AG on a standalone basis “UBS Europe SE consolidated” UBS Europe SE and its consolidated subsidiaries “UBS Americas Holding LLC” and “UBS Americas Holding LLC consolidated” UBS Americas Holding LLC and its consolidated subsidiaries In this report, unless the context requires otherwise, references to any gender shall apply to all genders. 9 Our Board of Directors 1. Axel A. Weber Chairman of the Board of Directors / Chairperson of the Corporate Culture and Responsibility Committee / Chairperson of the Governance and Nominating Committee 2. Robert W. Scully Member of the Risk Committee 3. Jeanette Wong Member of the Audit Committee 4. Dieter Wemmer Member of the Audit Committee / member of the Compensation Committee 5. Isabelle Romy Member of the Audit Committee / member of the Governance and Nominating Committee 6. David Sidwell Senior Independent Director / Chairperson of the Risk Committee / member of the Governance and Nominating Committee 7. Fred Hu Member of the Compensation Committee 8. Jeremy Anderson Chairperson of the Audit Committee / member of the Corporate Culture and Responsibility Committee / member of the Governance and Nominating Committee 9. Julie G. Richardson Chairperson of the Compensation Committee / member of the Governance and Nominating Committee / member of the Risk Committee 10. William C. Dudley Member of the Corporate Culture and Responsibility Committee / member of the Risk Committee 11. Beatrice Weder di Mauro Member of the Audit Committee / member of the Corporate Culture and Responsibility Committee 12. Reto Francioni Member of the Compensation Committee / member of the Risk Committee 10 2 4 6 3 5 7 8 10 1 9 11 12 The Board of Directors (BoD) of UBS Group AG, under the leadership of the Chairman, consists of between 6 to 12 members as per our Articles of Association. The BoD decides on the strategy of the Group upon recommendation by the Group Chief Executive Officer (Group CEO) and is responsible for the overall direction, supervision and control of the Group and its management, as well as for supervising compliance with applicable laws, rules and regulations. The BoD exercises oversight over UBS Group AG and its subsidiaries and is responsible for establishing a clear Group 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. 11 Our Group Executive Board UBS Group AG operates under a strict dual board structure, as mandated by Swiss banking law, and therefore the BoD delegates the management of the business to the GEB. Under the leadership of the Group CEO, the GEB is comprised of 13 members and has executive management responsibility for the steering of the Group and its business. It assumes overall responsibility for developing and implementing the strategies of the Group, business divisions and Group functions, as approved by the BoD.  Refer to “Board of Directors” and “Group Executive Board” in the “Corporate governance” section of this report or to www.ubs.com/bod and www.ubs.com/geb for the full biographies of our BoD and GEB members 12 1. Sergio P. Ermotti Group Chief Executive Officer 2. Christian Bluhm Group Chief Risk Officer 3. Markus U. Diethelm Group General Counsel 4. Iqbal Khan Co-President Global Wealth Management 5. Tom Naratil Co-President Global Wealth Management and President UBS Americas 6. Edmund Koh President UBS Asia Pacific 7. Kirt Gardner Group Chief Financial Officer 8. Suni Harford President Asset Management 9. Markus Ronner Group Chief Compliance and Governance Officer 10. Sabine Keller-Busse Group Chief Operating Officer and President UBS Europe, Middle East and Africa 11. Robert Karofsky Co-President Investment Bank 12. Axel P. Lehmann President Personal & Corporate Banking and President UBS Switzerland 13. Piero Novelli Co-President Investment Bank 3 5 4 6 1 2 7 9 8 12 11 10 13 13 Our evolution Since our origins in the mid-19th century, many financial institutions have become part of the history of our firm and have helped to shape its development. 1998 was a major turning point for the firm, when two of the then three largest banks in Switzerland, Union Bank of Switzerland and Swiss Bank Corporation (SBC), merged to form today’s UBS. At the time of the merger, both banks were already well established and successful in their own right. Union Bank of Switzerland had grown organically to become the largest Swiss bank. In contrast, SBC had grown mainly through a combination of strategic partnerships and acquisitions, including S.G. Warburg in 1995. In 2000, we acquired PaineWebber, a US brokerage and asset management firm whose roots went back to 1879, establishing us as a significant player in the US. Over the past half century, we have also built a strong presence in the Asia Pacific region, where we are the largest wealth manager (measured by invested assets), a top-tier investment bank and an established player in asset management. During the financial crisis of 2008, we incurred significant losses. In 2011, we initiated a strategic transformation of our firm toward a business model that focused on our core businesses of wealth management and personal and corporate banking in Switzerland. We sought to revert to our roots, emphasizing a client-centric model that requires less risk-taking and capital, and have successfully completed this transformation. Today, we are a global financial services firm, consisting of the largest truly global wealth manager, a leading personal and corporate banking business in Switzerland, a global asset manager and a focused investment bank. The chart on the next page provides an overview of our principal legal entities and reflects our legal entity structure.  Refer to www.ubs.com/history for more information The 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 14 2014 2015 Holding company UBS structure • UBS Group AG became the holding company of the Group. • We transferred our personal and corporate banking and wealth management businesses booked in Switzerland from UBS AG to the newly established UBS Switzerland AG. • UBS Business Solutions AG, a direct subsidiary of UBS Group AG, was established as the Group’s service company. 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(cid:81)(cid:84)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:78)(cid:91)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:53)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:43)(cid:80)(cid:69)(cid:16) 2016 2017 2019 UBS structure UBS Business Solutions UBS Europe SE UBS Group Funding (Switzerland) AG • UBS Americas Holding LLC was designated as our intermediate holding company for our US subsidiaries. • Wealth management subsidiaries in various European countries were merged into UBS Europe SE. • The majority of Asset Management’s operating subsidiaries were transferred to UBS Asset Management AG. • UBS Group Funding (Switzerland) AG was 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. • Shared services functions in Switzerland and the UK were transferred from UBS AG to UBS Business Solutions AG. • We 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. • Merger of UBS Limited, our UK- headquartered subsidiary, into UBS Europe SE, our Germany- headquartered European subsidiary. • We transferred our outstanding loss-absorbing AT1 capital instruments and TLAC-eligible senior unsecured debt from UBS Group Funding (Switzerland) AG to UBS Group AG as the issuer. 15 Our strategy, business model and environment Management report Our strategy, business model and environment Our strategy Our strategy We aim to drive higher and superior returns by growing and leveraging our unique, integrated and complementary business portfolio and geographic footprint. performance and scale. We plan to build on our strengths in fast-growing areas of the industry, such as sustainable investing, private markets and alternatives. UBS is the largest truly global wealth manager and a leading personal and corporate bank in Switzerland, with focused investment bank and asset management divisions. We concentrate on capital-efficient businesses in our targeted markets, where we have a strong competitive position and an attractive long-term growth or profitability outlook. We view capital strength as the foundation of our strategy. In delivering all of UBS as one firm to our clients, we intend to: strengthen our leading client franchises and grow share; position UBS for growth by expanding our services and capabilities; drive greater efficiencies and scale; and further intensify collaboration for the benefit of our clients. Priority IV Personal & Corporate Banking aims to deliver steady profit growth by enhancing its digital initiatives and services, while improving efficiency. By expanding our leading position in digital services in Switzerland, along with broadening our advisory solutions and product offering, we expect to increase profits despite the current negative interest rate environment. Priority V We want to deliver more as one firm to our clients. The collaboration between our business divisions is critical to the success of our strategy and is a source of competitive advantage. This collaboration also provides further revenue growth potential and enables us to better meet client needs; for example, in the ultra high net worth and Global Family Office space. Driving increasing returns We manage UBS for the long term, focusing on sustainable profit growth and responsible resource deployment. We aim to balance growth opportunities with cost and capital efficiency in order to drive attractive risk-adjusted returns and sustainable performance. For the years 2020–2022, we have seven strategic priorities, which are outlined below. Priority I We aim to increase profit before tax in our Global Wealth Management business by 10–15% and drive higher pre- tax margins by elevating our leading franchise. We are adjusting our coverage across the client spectrum to deliver more tailored services and solutions. We are reorganizing ourselves to be closer to clients, in order to increase time spent with them, empowering regions, improving our responsiveness and speed to market, as well as delivering on all of the firm’s capabilities through expanded strategic partnerships with the Investment Bank and Asset Management. Furthermore, we are expanding our product offering while becoming more efficient, leveraging scale through partnerships and optimizing processes to increase productivity. Priority II In our Investment Bank, we intend to improve returns by driving profitable growth, by further optimizing resources and through collaboration. We will maintain our capital-light business model that is focused on advice and execution and leverages our digital capabilities. Together with our other business divisions and through external partnerships, we aim to deliver market-leading digital, research and banking capabilities to our clients, while consuming up to one-third of Group resources. Priority III In Asset Management, we intend to capitalize on further growth, client offering our differentiated for Another area where collaboration between our business divisions can bring more value to clients is in sustainable finance. As the largest truly global wealth manager, we have a responsibility to take a leading role in shaping a positive future, and our goal is to be the financial provider of choice for clients who wish to mobilize capital toward the achievement of specific environmental or social outcomes. We are shaping the landscape of sustainable finance by using thought leadership, innovation and partnerships their sustainability efforts. to support clients in  Refer to “Society” and “Our focus on ESG” in the “How we create value for our stakeholders” section of this report for more information about our engagement and leadership in sustainability matters Priority VI We aim to drive improvements in firm-wide efficiency to fund growth and enhance returns. We believe continued optimization of processes, platforms, our organization and capital resources will help us to achieve this. We will continue to invest in technology with the goal of improving efficiency and effectiveness, driving growth and better serving our clients. We also intend to realize the benefits of existing external partnerships and to explore selected new opportunities. Priority VII We plan to maintain an attractive capital return profile through dividends and share repurchases. Our capital strength and capital-accretive business model allows us to grow our business while delivering attractive capital returns to our shareholders. We aim to increase our ordinary dividend per share by USD 0.01 each year, and to return excess capital through share repurchases. We consider business conditions and any idiosyncratic developments when determining excess capital available for share repurchases. 18 Performance targets and measurement Targets and capital guidance In January 2020, we updated and simplified our performance target framework. We reduced the number of targets to concentrate primarily on the Group rather than our business divisions, underlining our focus on cross-divisional collaboration. Our targets are underpinned by the latest three-year strategic plan, which reflects our strategic initiatives, management actions, as well as certain economic and market assumptions. The return and efficiency targets have been revised to reflect changes the previously communicated targets were set in October 2018. the market outlook since in The table below shows the performance targets and capital guidance for the 2020–2022 period. Our updated performance targets are based on reported results. From the first quarter of 2020, we will no longer disclose adjusted results in our financial reports. We will continue to provide disclosure of restructuring and litigation expenses as well as other material profit or loss items that management believes are not representative of underlying business performance in our management’s discussion and analysis. Performance against targets is taken into account when determining variable compensation.  Refer to “Performance and compensation at a glance” in the “Compensation” section of this report for more information about variable compensation  Refer to “Alternative performance measures” in the appendix to this report for definitions of and further information about our performance measures Targets and capital guidance 2020–2022 (on a reported basis) Group returns Cost efficiency 12–15% return on CET1 capital (RoCET1) Positive operating leverage and 75–78% cost / income ratio Growth 10–15% profit before tax growth in Global Wealth Management Capital allocation Capital guidance Up to 1⁄3 of Group RWA and LRD in the Investment Bank ~13% CET1 capital ratio ~3.7% CET1 leverage ratio 19 Our strategy, business model and environment Our strategy, business model and environment Our businesses Our businesses Working in partnership Personal & Corporate We operate through four business divisions – Global Wealth Banking, Asset Management, Management and the Investment Bank. Our global reach and the breadth of our expertise are major assets that set us apart from our competitors. We see partnership as key to our growth, both within and between business divisions. We are at our best when we combine our strengths to provide our clients with more comprehensive and better solutions through, for example, the creation of a unified capital markets group across Global Wealth Management and the Investment Bank, and a Global Family Office joint venture. Combining our strengths makes us a better firm. Initiatives such as the Group Franchise Awards encourage employees to look for ways to build bridges between areas and offer the whole firm to our clients. 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(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(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:86)(cid:81)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:72)(cid:386)(cid:69)(cid:75)(cid:71)(cid:80)(cid:69)(cid:91)(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:16) (cid:43)(cid:86)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:85)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:75)(cid:92)(cid:71)(cid:70)(cid:14)(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:15)(cid:85)(cid:86)(cid:91)(cid:78)(cid:71)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2) (cid:86)(cid:81)(cid:2)(cid:89)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:91)(cid:2)(cid:72)(cid:67)(cid:79)(cid:75)(cid:78)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:85)(cid:2)(cid:85)(cid:71)(cid:71)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2) (cid:67)(cid:69)(cid:69)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:81)(cid:14)(cid:2)(cid:81)(cid:84)(cid:2)(cid:67)(cid:70)(cid:88)(cid:75)(cid:69)(cid:71)(cid:2)(cid:81)(cid:80)(cid:14)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:88)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:16) 20 Global Wealth Management We are the largest truly global wealth manager, with USD 2.6 trillion in invested assets. Our goal is to provide tailored advice and solutions to private clients and family offices. services Since the combination of Wealth Management and Wealth Management Americas in 2018, we have continued to deliver capture operational comprehensive efficiencies, and invest in our business. More than 22,000 Global Wealth Management employees assist our clients with achieving their goals. Our presence in the ultra high net worth segment is particularly strong, and we have access to the majority of the world’s billionaires. clients, to many of whom already have a relationship with UBS. Our globally diversified footprint allows us to capture growth both in the largest (the US) and the fastest-growing (Asia Pacific) wealth markets. We are focusing on increasing mandate and lending penetration, delivering innovative solutions for our clients (e.g., structured solutions, private markets, sustainability and thematic investing), as well as enhancing our advisors’ productivity by making operational processes more efficient. Additionally, we aim to maintain low attrition and to increase our share of clients’ business. In Japan, we have entered into a comprehensive strategic wealth management partnership with Sumitomo Mitsui Trust Holdings, Inc. (SuMi Trust Holdings). The new joint venture will combine UBS’s wealth management capabilities with SuMi Trust Holdings’ stature as Japan’s largest independent trust bank. SuMi Trust Holdings offers a range of services, including banking, real estate, asset and wealth advisory services, and has strong client access and brand name awareness in Japan. Global Wealth Management organizational changes In January 2020, we announced several initiatives designed to achieve Global Wealth Management’s growth ambitions and to elevate the quality and value of the service we deliver to our clients. First, we have reframed our offering around each client’s needs to deliver more tailored services and solutions. Second, we have made it easier for advisors to spend more time with clients and to better understand their needs and preferences, and we have taken measures to improve our responsiveness and speed to market. We created three distinct business units in EMEA – Europe; Central and Eastern Europe; and the Middle East and Africa – to better capture the diverse opportunities in these markets. Finally, we intend to deliver all of the firm’s capabilities through strategic partnerships with the Investment Bank and Asset Management. Our focus We serve high net worth and ultra high net worth individuals, families and family offices around the world, as well as affluent clients in selected markets. Through our organizational changes, we are making our Global Family Office capabilities, which are provided to ultra high net worth individuals, available to more clients, targeting coverage of around 1,500 in total. While we are already a market leader in the ultra high net worth segment outside the US,1 we believe that we can also become the firm of choice for the wealthiest clients in the US, We are investing in our operating platforms and tools to support our clients and client advisors, in order to better serve our clients’ needs and improve our efficiency. As of 31 December 2019, approximately 80% of invested assets booked outside the Americas were on the Wealth Management Platform as we continue to consolidate our operating platforms there. In the US, and in collaboration with our third-party software provider Broadridge, we are building the Wealth Management Americas Platform, which we expect to become operational in 2021. The development of our platforms is happening alongside enhancements to our digital capabilities for the benefit of our clients and advisors.  Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization How we operate We have a global footprint, with a presence in the world’s largest and fastest-growing markets and are well positioned to serve clients with global interests and demands. The US is our largest market, accounting for more than 50% of our invested assets. We are the largest wealth manager in Asia Pacific and the second largest in Latin America in terms of invested assets.1 In Switzerland, we hold a leading market position1 and can deploy the full range of the Group’s products and services across Personal & Corporate Banking, Asset Management and the Investment Bank. Our broad domestic footprint in Europe enables us to provide locally adapted offerings, and our local offices across Central Europe, the Middle East and Africa keep us close to our clients. Through strategic partnerships with the Investment Bank and Asset Management, we provide clients with broad access to financing, global capital markets and portfolio solutions.  Refer to “Working in partnership” in this section for examples of collaboration between the business divisions 11 Statements of market position for Global Wealth Management are UBS’s estimates based on published invested assets and internal estimates. 21 Our strategy, business model and environment Our strategy, business model and environment Our businesses Global Family Ofﬁ ce serves clients globally across the regions 7 regional business United States and Canada Switzerland Europe Asia Paciﬁ c units Latin America Middle East and Africa Central and Eastern Europe As part of our organizational changes, ultra high net worth client relationships and advisors were integrated into regional business units to increase speed and proximity to clients. In our newly established Global Capital Markets team, we combined our Investment Product Services (IPS) unit and Investment Bank teams and their respective expertise. The Global Capital Markets team provides clients with an enhanced offering, faster execution, and more competitive conditions. Our main competitors are either large US players that have a smaller presence outside the US (including Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo) or geographically diverse firms with a smaller presence in the US (including BNP Paribas, Credit Suisse, HSBC and Julius Baer). Our size, geographic presence and diversified client portfolio are exceptional and would be difficult for other wealth managers to replicate organically. What we offer Our distinctive approach to wealth management is designed to strengthen engagement with our clients and to help them pursue what matters most to them. By operating as a unified business, we aim to offer our clients the best wealth management solutions, services and expertise globally. Our experts provide our clients with thought leadership, investment analysis and formulated investment strategies, as well as develop and source solutions for them. The Chief Investment Office (CIO) provides the concise, comprehensive UBS House View, which identifies and communicates investment opportunities designed to protect and increase our clients’ wealth over generations. Regional client strategy teams deepen our understanding of clients’ needs, behaviors and preferences, enabling us to tailor our offerings to serve them better. Our product specialists deliver investment solutions, including our flagship investment mandates, innovative long-term themes and sustainable investment offerings.  Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization 22 Clients benefit from our comprehensive set of capabilities and expertise, including wealth planning, investing, philanthropy, corporate and banking services, as well as family advisory services. We also offer considerable expertise across structured, mortgage and securities-based lending. We work to improve our offerings and respond to changing client needs. In 2019, we launched a new line of UBS Manage offerings in Switzerland. In addition, to meet growing demand, we expanded the number of exclusive private markets opportunities for clients. Our sustainable investing solutions continue to be well received. Currently, invested assets in 100% sustainable investing solutions and bespoke sustainable investing solutions have grown to over USD 9 billion. We also broadened our sustainable investing offering, teaming up with external partners such as BMO Global Asset Management, Generation Investment Management and KKR & Co. Inc. to offer clients innovative investment opportunities. development-related sustainable How we serve our clients We serve our clients through local offices, dedicated advisors and experienced specialists. We use a mix of digital and non- digital channels (including marketing campaigns, events, advertising, publications and digital-only solutions) to help drive greater awareness of UBS among prospects and reinforce trust- based relationships between advisors and clients. How we are organized Our business division is organized into regional business units: the US and Canada; Latin America; Europe; Central and Eastern Europe; the Middle East and Africa; Asia Pacific; and Switzerland. We also have a business unit for our Global Family Office clients. Central functions for global capabilities supporting these business units are the CIO, Global Banking, Global Capital Markets and the Chief Operating Office. We are governed by the executive, risk, operating, and asset and liability committees. 23 Our strategy, business model and environment Our strategy, business model and environment Our businesses Personal & Corporate Banking As a leading personal and corporate bank in Switzerland, we provide comprehensive financial products and services to private, corporate and institutional clients. We are among the country’s foremost players in the private and corporate loan market, with a substantial lending portfolio. Personal & Corporate Banking is at the core of our universal bank delivery model in Switzerland. Our focus We are a leading personal and corporate bank in Switzerland, providing a superior client experience and combining technology with a personal touch. We have established a strong pipeline of growth initiatives across our business areas. Effective 1 November 2019, we have set up a new business area, Digital Platforms & Marketplaces, to rapidly extend our platform offering for mortgages. We also aim to improve efficiency by streamlining processes and introducing new digital self-service tools. For example, we have rolled out an integrated mortgage workflow for extensions, which significantly reduces the time it takes to set up a contract. In addition, we have further optimized our contact center setup, increased automation of repetitive processes, and launched a pilot for a digital mailroom that reduces processing time by digitizing incoming physical mail and documents. Technology plays a key role in our client-centered operating model and we aim leadership. Our multi-year digitalization program enables us to further enhance the client experience. Thanks to technological solutions, we are able to offer clients new products and identify new cross-selling opportunities in a more targeted way. to expand our digital  Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization Operationally, we strive for excellence in execution, focusing on efficiency while improving our service quality and overall agility. To scale our digital transformation efforts, in 2019 we opened our second digital factory in Switzerland, which is larger than our first one. These digital factories are now home to approximately 1,100 employees across various functions. Moreover, we introduced an agile academy and quick-launch formats to drive innovation and attract key talent. In the Corporate & Institutional Clients business, our main competitors are Credit Suisse, the cantonal banks and globally active foreign banks. We compete in areas covering basic banking services, cash management, trade and export finance, asset servicing, institutional clients, lending, and cash and securities corporate finance and transactions for banks. investment advice for In the Swiss Personal Banking business, our competitors are Credit Suisse, PostFinance, Raiffeisen, the cantonal banks and other regional and local Swiss banks. In addition to those traditional players, we also face competition from international players entering the Swiss market and neobanks. We compete in areas such as basic banking, mortgages and foreign exchange, as well as investment mandates and funds. What we offer Our personal banking clients have access to a comprehensive, life cycle-based offering and convenient digital banking. We deliver a broad range of basic banking products, from payments to deposits, cards, online and mobile banking, as well as lending (predominantly mortgages), investments and retirement services. The overall service range is complemented by our UBS KeyClub reward program, which provides clients residing in Switzerland with exclusive and attractive offers, including those from third- party partners. In close collaboration with Global Wealth Management, we offer leading private banking and wealth management services. Our corporate and institutional clients benefit from our financing and investment solutions, particularly access to equity and debt capital markets, syndicated and structured credit, private placements, leasing, and traditional financing. Our transaction banking offers solutions for payment and cash management services, trade and export finance, as well as global custody solutions for institutional clients. We collaborate closely with the Investment Bank to offer capital market and foreign exchange products, hedging strategies and trading capabilities, as well as corporate finance advice. In cooperation with Asset Management, we also provide fund and portfolio management solutions.  Refer to “Working in partnership” in this section for examples of collaboration between the business divisions How we operate How we serve our clients While we operate primarily in our home market of Switzerland, we also provide capabilities to support the growth of the international business activities of our Swiss corporate and institutional clients through our local hubs in Frankfurt, New York, Hong Kong and Singapore. We are the only Swiss bank providing local banking capabilities abroad to its corporate clients. We are the recognized digital leader, with the highest online and mobile banking penetration in Switzerland, and continue to invest in a multi-channel distribution model to further enhance our leading position. 24 We are adapting existing branch formats to suit evolving client needs by converting some locations to smaller, more agile branches that serve as digital support hubs and are intended to ensure a strong local presence along with advice on basic client needs. We aim to further reshape our physical footprint in an innovative and client-centric way, particularly by defining future branch formats with different purposes. In addition, we continue to provide our expertise to our clients through our contact center and our digital channels, offering basic banking services and transactions. Dedicated client advisors serve personal banking clients who need tailored solutions. As part of our sustainability road map, we are substantially expanding our offerings. Our personal banking and institutional clients have access to a number of sustainable investment solutions, and we promote innovative approaches for corporate banking clients. For example, we issued the first green bond for a listed company in Switzerland. For marketing campaigns, we use online media (including social media and search engine advertising), out-of-home media (posters and digital billboards) and, very selectively, print, TV, radio and cinema advertising. In line with our position as a digital leader in Swiss banking, and because of the channel’s cost-effectiveness, we follow a digital-first media strategy. More than 50% of our media spending goes into online channels. How we are organized Our business division is organized into Personal Banking, Corporate & Institutional Clients, and Digital Platforms & Marketplaces. Geographically, our business, with its 267 branches, is organized into 10 regions, covering distinct Swiss economic areas. We are governed by the executive, risk and operating committees, and operate mainly through UBS Switzerland AG. 267 branches in Switzerland Personal Banking has 267 branches1 in Switzerland, of which more than 80 are shared with Global Wealth Management and 60 are shared with Corporate & Institutional Clients 11 The size of the circles on the map reflects the number of branches in each location. 25 Our strategy, business model and environment Our strategy, business model and environment Our businesses Asset Management UBS Asset Management is a large-scale and diversified global asset manager, with USD 903 billion in invested assets. We offer investment capabilities and styles across all major traditional and alternative asset classes, as well as advisory support to institutions, wholesale intermediaries and Global Wealth Management clients around the world. Our focus Our strategy is focused on capitalizing on the areas where we have a leading position to drive further profitable growth and scale. Sustainable and Impact Investing remains a key area, as clients increasingly seek solutions that combine their investment goals with sustainability objectives. We continue the expansion of our world-class capabilities in areas such as climate-aware solutions. We do this through: product and service innovation; dedicated research; integration of environmental, social and governance factors into our investment processes, leveraging our proprietary analytics; and active corporate engagement. In response to the increasing importance of private markets and alternative investments, we are building on our existing expertise in these areas, including our hedge fund and real estate businesses, as well as our capabilities across infrastructure, private equity and private debt. We continue to develop our award-winning1 Indexed and Alternative Beta business, including exchange-traded funds (ETFs) in Asia Pacific, Europe and Switzerland. We provide customization while leveraging our highly scalable platform, with a particular focus on key areas such as sustainability and fixed income products. Since 2016, the Alternative Beta business has seen growth in invested assets of approximately 85%. Geographically, we are investing in our leading presence and products in China, both onshore and offshore, one of the fastest-growing asset management markets in the world, building on our extensive and long-standing presence in the Asia Pacific region. In the rapidly evolving and attractive wholesale segment, we aim to significantly expand our market share through a combination of continued client penetration, expansion of our strategic partnerships with distributors and the build-out of our client service offerings.  Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization To drive further growth in our Investment Solutions business, which provides access to and combines the breadth and depth of our capabilities across public and private markets, we are focused on delivering superior multi-asset strategies and white- label solutions to meet the needs of clients around the world. to continue We also intensify our cross-divisional collaboration, in particular with Global Wealth Management, to enable our teams to draw on the best ideas, solutions and capabilities from across the firm to deliver superior investment performance and experiences for our clients.  Refer to “Working in partnership” in this section for examples of collaboration between the business divisions To support our growth, we are focused on disciplined execution of our operational excellence initiatives. This includes further automation, simplification, process optimization and offshoring / nearshoring of selected activities, complemented by a continued modernization of our platform and development of our analytics and data capabilities. In January 2020, we announced a number of changes to the operational setup of our Platforms businesses intended to deliver greater scale and breadth of offering for our clients and ensure the ongoing development of these world-class businesses in a highly competitive marketplace. The changes include the proposed sale of a majority stake (51.2%) in UBS Fondcenter to Clearstream, Deutsche Börse Group’s post-trade services provider. The sale is expected to close in the second half of 2020, subject to customary closing conditions. In addition, in order to fully leverage the expertise and resources within the wider Group to accelerate the growth of the business, we have decided to transfer UBS Partner, our highly innovative white- label technology solution, to the Corporate & Institutional Clients International business within the Personal & Corporate Banking business division. UBS Partner will be part of UBS’s “The Bank for Banks” client offering, and this is an exciting step in our collaboration efforts across the firm to bring the best of UBS to our clients. With these changes, we are making a step change in the proposition for our clients, who will have seamless access to expanded platform capabilities, while at the same time enabling us to sharpen our focus on the execution of our strategic priorities. How we operate We cover the main asset management markets globally, and have a local presence in four regions: the Americas; Europe, the Middle East and Africa; Switzerland; and Asia Pacific. Our main competitors are global firms with wide-ranging capabilities and distribution channels, such as Amundi, BlackRock, DWS, Goldman Sachs Asset Management, Invesco, JPMorgan Asset Management, Morgan Stanley Investment Management and Schroders, as well as firms with a specific market or asset class focus. 1 Second largest Europe-based indexed player based on peers’ public reporting (UBS calculation, 3Q19) and ranked fourth largest ETF provider in Europe as of December 2019 (source: ETFGI). 1 26 What we offer We offer clients a wide range of investment products and services in different asset classes in the form of segregated, pooled or advisory mandates, as well as registered investment funds in various jurisdictions. Our traditional and alternative capabilities include equities, fixed income, hedge funds, real estate and private markets, and indexed and alternative beta strategies (including ETFs), as well as sustainable and impact investing products and solutions. Our Investment Solutions business draws on the breadth of our capabilities to offer: asset allocation and currency investment strategies across the risk / return spectrum; customized multi- asset solutions, advisory and fiduciary services; and multi- manager hedge fund solutions and advisory services. How we serve our clients We deliver our investment products and services directly to institutional clients. High net worth and retail clients are served through Global Wealth Management, third-party banks and distributors. Our teams are based in the key financial markets, bringing our unique perspectives and global expertise to our clients around the world. This, in combination with our presence on the ground, enables our teams to develop long-term relationships with our clients and a deep understanding of their specific needs. How we are organized Our business division is organized along five areas: Client Coverage, Investments, Real Estate & Private Markets, Products and the COO Area. We are based worldwide across four regions, with nine main hubs: Chicago, Hong Kong, London, New York, Shanghai, Singapore, Sydney, Tokyo and Zurich. We are governed by executive, risk and operating committees, supplemented by business unit-specific committees. 9 main hubs covering the full breadth of our investment insights across the world to serve our clients New York United States Chicago United States Zurich Switzerland Tokyo Japan Hong Kong (SAR) China Sydney Australia London United Kingdom Singapore Singapore Shanghai China 27 Our strategy, business model and environmentOur strategy, business model and environment Our businesses Investment Bank The Investment Bank provides a range of services to institutional, corporate and wealth management clients to help them raise capital, grow their businesses, invest for growth and manage risks. We are focused on our traditional strengths in equities, foreign exchange, research, advisory services and capital markets, complemented by a targeted rates and credit platform. We use our powerful research and technology capabilities to support our clients as they adapt to the evolving market structures and changes technological, economic and competitive landscapes. regulatory, the in We aspire to deliver market-leading solutions to clients, using our intellectual capital and electronic platforms. We also provide services to Global Wealth Management, Personal & Corporate Banking and Asset Management, while managing our balance sheet, costs, risk-weighted assets and leverage ratio denominator with discipline. Our capital-light business model allows the Investment Bank to deliver digital, research and banking capabilities, consuming up to one-third of Group resources. Structural changes in the Investment Bank In January 2020, we realigned our Investment Bank to meet the evolving needs of our clients and to further focus resources on opportunities for profitable growth and digital transformation. Corporate Client Solutions and Investor Client Services were renamed Global Banking and Global Markets, respectively. Global Banking moves to two product verticals (Capital Markets and Advisory), adopting a global coverage model. Global Markets combines Equities and Foreign Exchange, Rates and Credit, and introduces three product verticals (Execution & Platform, Derivatives & Solutions, and Financing) and three horizontal functions (Risk & Trading, Distribution and Digital Transformation). The new Global Markets structure is designed to facilitate the alignment of business processes and operations and to reduce inefficiencies and duplication. It further permits a more holistic understanding of our clients’ cross-product needs and is designed to foster tighter coordination of client coverage and distribution. This will allow for improved oversight of key risks and the allocation of resources. Investment Bank Research and UBS Evidence Lab Innovations continue to be a critical part of our advisory and content offering. The changes are effective 1 January and we will provide restated prior-period information in advance of our first quarter 2020 results. Our focus Our key priority is disciplined growth in the capital-light advisory and execution businesses, while accelerating our digital transformation. Global Banking has a global coverage model 28 and will utilize its deep global industry expertise to meet the emerging needs of its clients. In Global Markets, we are focused on clients’ expectation of excellence in execution, financing and structured solutions. Our digital strategy is led by our businesses, which harness technology to deliver superior and differentiated client service and content. We established the UBS Investment Bank Innovation Lab to speed up innovation by facilitating proofs of concept. In Global Markets, the new Digital Transformation horizontal function facilitates adoption of best-in-class practices around trade idea generation, risk management. In Investment Bank Research, we continue to build UBS Evidence Lab Innovations to concentrate on data-driven outcomes. liquidity management, pricing tools and Our balanced global reach gives us attractive options for growth across various regions. In the Americas, the largest investment banking fee pool globally, we are focusing on increasing our market share in our core Global Banking and Global Markets businesses. In Asia Pacific, we see opportunities primarily from expected market internationalization and growth in China. We are planning to grow by further strengthening Global Banking, both onshore and offshore. Partnerships between the Investment Bank’s businesses and the Group, including the creation of a unified capital markets group, and, externally, joint ventures such as that with Banco do Brasil, are a key strategic focus. These initiatives should lead to growth by delivering global products to each region, leveraging our global connectivity across borders and sharing and strengthening our best client relationships.  Refer to “Working in partnership” in this section for examples of collaboration between the business divisions How we operate Our geographically balanced business has a global reach, with a presence in more than 30 countries and principal offices in the major financial hubs. Competing firms are active in many of our markets, but our strategy differentiates us, with its focus on leadership in the selected areas where we have chosen to compete, and a business model that leverages talent and technology rather than balance sheet. Our main competitors are the major global investment banks, including Morgan Stanley, Credit Suisse and Goldman Sachs, as well as corporate investment banks, including Bank of America, Barclays, Citigroup, BNP Paribas, Deutsche Bank and JPMorgan Chase. We also compete with boutique investment banks and fintech firms in certain regions and with regard to certain products. Through strategic partnerships with Global Wealth Management and Asset Management, we provide clients with broad access to financing, global capital markets and portfolio solutions.  Refer to “Working in partnership” in this section for examples of collaboration between the business divisions What we offer Through our Global Banking business, we advise our clients on strategic business opportunities and help them raise capital to fund their activities. Our Global Markets business enables our clients to buy, sell and finance securities on capital markets across the globe and to manage their risks and liquidity. Furthermore, in Investment Bank Research, we offer clients key insights on major financial markets and securities around the globe. Separately, our team of experts in UBS Evidence Lab Innovations specializes in creating insightful data sets on diverse topics for companies of all sizes, spanning more than 30 countries and 50 sectors. We seek to develop new products and solutions that are consistent with our capital-efficient business model. These are typically related to new technologies or changing market standards.  Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization Since 2005, we have addressed increasing client demand for sustainable investing by providing thematic and sector research. We also provide socially responsible and impact exchange-traded funds and index-linked notes. In addition, we offer capital-raising and strategic advisory services globally to companies that make a positive contribution to climate change mitigation and adaptation. investment solutions through How we serve our clients We interact with our clients digitally and in person. In Global Banking, we leverage our intellectual capital and relationships to deliver high-quality solutions for our clients. In Global Markets, we use our execution capabilities, differentiated research content, bespoke solutions, client franchise model, and our global platform to expand coverage across a broad set of institutional and corporate clients. In Investment Bank Research, we deliver high-quality differentiated research to our institutional clients using a wide range of methods, including UBS Neo, our multi-channel platform. How we are organized Our business division is organized into the following three units: Global Banking, Global Markets, and Investment Bank Research and UBS Evidence Lab Innovations. We are governed by the executive, operating, risk, and asset and liability committees. Each business unit is organized globally by product. 9 ﬁ nancial hubs in all major ﬁ nancial centers New York United States Chicago United States Zurich Switzerland Frankfurt Germany Shanghai China Singapore Singapore London United Kingdom Hong Kong (SAR) China Tokyo Japan 29 Our strategy, business model and environmentOur strategy, business model and environment Our businesses Corporate Center Our Corporate Center provides services to the Group, with a focus on effectiveness, risk mitigation and efficiency. Corporate Center also includes the Non-core and Legacy Portfolio unit. How we are organized Corporate Center The major areas within Corporate Center are Group Chief Operating Officer (Group Technology, Group Corporate Services, Group Human Resources and Group Operations), Group Treasury, Group Finance, Group Legal, Group Risk Control, Group Communications & Branding, Group Compliance, Regulatory & Governance, UBS in society, and Non-core and Legacy Portfolio. Over recent years, we have progressively aligned our support functions with our business divisions. We operate the Group with the vast majority of these functions either fully aligned or shared among business divisions, where full management responsibility. By keeping the activities of the businesses and support functions close together, we increase efficiency and create a working environment built on a culture of accountability and collaboration they have The Non-core and Legacy Portfolio, a small residual set of activities in Group Treasury and certain other function costs mainly related to deferred tax assets and costs relating to our legal entity transformation program are retained centrally. Since our first quarter 2019 report and in compliance with IFRS 8, Operating Segments, we provide results for total Corporate Center only and do not separately report Corporate Center – Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Furthermore, we have combined Group Treasury operationally with Group ALM and call this combined function Group Treasury.  Refer to the “Significant accounting and financial reporting changes” section and “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the changes in the structure of Corporate Center Group Treasury Group Treasury manages the structural risk of our balance sheet, including interest rate risk, structural foreign exchange risk and collateral risk, as well as the risks associated with our liquidity and funding portfolios. Group Treasury serves all business divisions and its risk management is fully integrated into the Group’s risk governance framework. Non-core and Legacy Portfolio Non-core and Legacy Portfolio manages legacy positions from businesses exited by the Investment Bank, following a largely passive wind-down strategy. It is overseen by a committee chaired by the Group Chief Risk Officer. The portfolio also includes positions relating to legal matters arising from businesses that were transferred to it at the time of its formation.  Refer to “Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information about litigation, regulatory and similar matters 30 Our environment Current market climate Global economic developments in 2019 In a year characterized by strong equity markets, ultra-low volatility and an inflection in interest rates, the pace of the global economy slowed on a broad basis in 2019. World GDP grew by 3.1%, which was substantially lower than the 3.7% growth achieved in 2018 and represents the weakest growth rate since the financial crisis. US GDP increased 2.3%, compared with 2.9% in 2018, as trade tensions between the US and China hindered business investment and the boost from tax cuts introduced in December 2017 ebbed. Trade tensions represented an even more serious drag on growth in the eurozone, which relies more than the US on global trade, manufacturing output, and business investment. Growth in the eurozone decreased to 1.2% in 2019, compared with 1.9% in 2018. Germany’s economy expanded by only 0.6%, after a 1.5% increase in the previous year. Outside the Eurozone, Swiss growth decreased as well, to 0.8%, compared with 2.8% in 2018. China’s government attempted to partially offset the effects of increasing tariffs on its exports to the US by reducing bank reserve requirements and providing extra fiscal leeway to local governments. However, this stimulus was limited by concerns over high leverage in the economy. GDP growth decreased to around 6.1%, compared with 6.7% in 2018. In other leading emerging economies, growth slowed or stabilized at low levels. The economy of India, which until recently had been one of the world’s fastest-growing major nations, expanded by 5%, compared with 6.1% in 2018. Momentum was weakened by the problems of the shadow- banking sector, which has been reducing the availability of credit to consumers. The Mexican economy, meanwhile, was roughly flat after expanding 2% in 2018, and Brazil’s growth rate decreased to 1.1% from 1.3%. Major central banks were able to keep their accommodating monetary policies in place in 2019, given that low inflation rates persisted. Eurozone inflation stayed below the European Central Bank’s (the ECB) target (of at or below 2%), at around 1.2% for the year. The ECB cut its deposit rate from negative 0.4% to negative 0.5%. US inflation was close to the target at 1.8%, permitting three quarter-point rate cuts over the course of the year to between 1.5% and 1.75%. Equity markets rallied, with all major indices advancing. The MSCI All Country World Index gave a total return of 27% in US dollars. The S&P 500 index in the US returned 31%, while the technology-heavy Nasdaq Composite gained 37%. China’s CSI 300 was up 41% in local currency terms. Less well-performing markets included the UK’s FTSE 100 and Hong Kong’s Hang Seng, which both returned 17% in local currency terms. It was also a favorable year for investors holding government bonds. The yield on 10-year US Treasury bonds fell around 80 basis points to 1.9%. The yield on the German Bund of the same tenor fell 40 basis points to negative 0.2%. Economic and market outlook for 2020 We expect continued sub-trend growth in the coming year, and the global economy to continue expanding at about the same pace as in 2019. Consumer spending has remained robust in much of the world, especially in the US, where it is supported by a vibrant job market. The year ended with news of a “Phase 1” trade deal between the US and China, along with indications that tensions between the two powers may lessen. Not only did the agreement withdraw planned tariff increases and reverse some existing tariffs, it also moved negotiations forward in other areas of contention, such as intellectual property protection and US access to China’s financial services market. While this truce could be fragile and the US–China rivalry is not about to end anytime soon, the deal appears to reduce the risks to the global economy and business investment. The UK left the European Union on 31 January 2020 and has entered a transition period in which the UK now faces a race to conclude talks on a trade deal with the EU ahead of the end of its transition period on 31 December 2020. The next major political focus for markets will be the US election in November, which could generate higher volatility and affect key US sectors, such as technology, energy, finance and health care. 31 Our strategy, business model and environment Our strategy, business model and environment Our environment Against a backdrop of sluggish growth and continued political risk, we believe central banks will be in no rush to raise rates. We do not expect the US Federal Reserve to increase rates in the coming year, barring an unexpected shift in the trajectory of the economic data. Rates are unlikely to rise again until 2021. We expect the ECB to cut rates to negative 0.6%, with the Swiss National Bank maintaining rates at a negative 0.75%. The outbreak of novel Coronavirus or Covid-19 in China and its subsequent spread to other countries is likely to increase investor uncertainty. Although our base economic forecast is that the outbreak of Covid-19 will be contained and the effect on full-year economic growth will be relatively limited, the virus and containment measures are likely to have at least a short- term adverse effect on economic activity in China and other affected countries, with a collateral impact on the global economy. A significant rise in the number of Covid-19 infections, infections in a wide range of countries and regions, or a prolongation of the outbreak, could increase the adverse economic effects. In terms of investing, stocks in most major markets are trading above historical averages on a price-to-earnings basis. As a result, we believe equity market returns are more likely to be driven by earnings growth than by a further expansion of multiples. Markets should also be supported by continuing economic growth in 2020. The risk of a recession remains relatively low. Uncertainty over the effects of the Covid-19 outbreak has substantially increased the macroeconomic risk to growth and this increased risk has at least partially been reflected in recent declines in equity markets. 32 Industry trends While our regulatory industry was heavily affected by developments over the past decade, technology has clearly emerged as the main driver of change today and is expected to further affect the competitive landscape as well as our products and operations going forward. In parallel, our industry is materially driven by market and macroeconomic conditions.  Refer to “Current market climate” in this section for information about global economic growth Digitalization Technology is changing the way banks operate and we expect this to continue, in step with exponential advances in computing capability, evolving customer needs and digital trends. Investment in technology is no longer solely considered a means of making banks more efficient. Today, such investment is the key to keeping banks flexible and competitive in a digitalized world, and it creates the opportunity to develop new business models. By connecting across the financial industry ecosystem through our innovation labs, digital factories, Future of Finance initiatives, and project collaborations, we aim to remain at the forefront of the digital movement to drive client experience as well as operational excellence. At the heart of our digital journey is the focus on our clients and their evolving needs. The speed, scale, security, transparency and precision that new technologies can offer enable us to create new services and experiences for our clients. We also aim to improve operational efficiency by increasing the range of modernized and modularized applications and infrastructure in our IT portfolio, as well as by leveraging cloud technology and a growing number of front-to-back automated systems and processes. Effective data management and protection are crucial to us. The generated and curated data from our applications is protected under our data management framework, and supports the development of responsible artificial intelligence for better tailoring our client and employee experience. Consolidation In the financial services industry, many regions and businesses are still highly fragmented. We expect further consolidation, with ongoing margin pressure, the search for cost efficiencies and increasing scale advantages resulting from the fixed costs of technology and regulation being the key drivers. Many banks also seek increasing exposure and access to regions with attractive growth profiles, such as Asia and emerging markets, through local acquisitions or partnerships. Lastly, the increased focus on core capabilities or geographical the ongoing simplification of business models to reduce operational and compliance risks will result in further disposals of non-core businesses and assets. footprints and New competitors Our competitive environment is also evolving. In addition to our traditional competitors in the asset-gathering businesses, new entrants are targeting selected components of the value chain. However, we have not yet seen a fundamental unbundling of the value chain and client relationships, which might ultimately result in the disintermediation of banks by new competitors. Over the longer term, we believe the entry into the financial services industry of large platform companies could pose a significant competitive threat, given their strong client franchises and access to client data. Fintech firms are gaining momentum; however, they have not materially disrupted our asset-gathering businesses to date. We see a trend in forging partnerships between new entrants and incumbent banks, with the latter acquiring technology from fintech firms, thus gaining an edge over competitors in terms of technology, cost efficiency, and service quality. Regulation The post-2008 regulatory reform agenda has largely been completed. While some areas, such as funding in resolution, must still be fully addressed, and the implementation of certain standards, such as the finalized Basel III capital standard, is continuing on a national level, the focus is shifting from regulation to supervision. In parallel, some regulators are reviewing the efficiency of the new frameworks. In general, regulatory-driven change continues to consume substantial resources. In 2020, we expect further consideration of adjustments to the Swiss too-big-to-fail framework, in particular focused on additional liquidity requirements for systemically important banks, and the national implementation of final Basel III rules. We expect continued work on resolution- related reforms, including stress testing, and a sustained focus on conduct and anti-money laundering. Furthermore, we are experiencing a surge in sustainability-related policy proposals targeted at various aspects of financial services across the globe. We also expect regulatory initiatives to address some of the more recent challenges that could affect financial stability, such as shadow banking and digital currencies. Many of these developments are happening in the context of increased protectionism, posing challenges to the provision of cross-border financial services. Further restrictions with regard to market access into the EU in particular would have a significant effect on Switzerland as a financial center, affecting also UBS. Variations in how different countries implement rules, and an increasing national focus, bring a risk of additional regulatory fragmentation, which in turn may lead to higher costs for us and new financial stability risks. 33 Our strategy, business model and environment Our strategy, business model and environment Our environment However, we believe the adaptations made to our business model and our proactive management of regulatory change put us in a strong position to absorb upcoming changes to the regulatory environment.  Refer to the “Regulatory and legal developments” section of this report for more information conversation with clients about what is most important to them. We help clients organize their financial life along three key strategies: Liquidity to help provide cash flow for short-term expenses; Longevity for long-term needs; and Legacy for needs that go beyond their own and help improve the lives of others, a key part of wealth transfer planning. Wealth creation Shift into passive strategies In 2018, global wealth overall grew marginally, given a steep decline in equity market performance in the fourth quarter. This trend was partially reversed in 2019, as equity markets rallied. Today, half of global wealth is concentrated in the Americas, followed by Asia Pacific (with approximately 30%) and the remainder in Europe, the Middle East and Africa.1 By segment,2 approximately half of global wealth is with high net worth individuals, ultra high net worth individuals hold approximately 30% of global wealth, and the remaining approximately 20% is within the affluent segment. Over the next four years, global wealth is expected to grow by 5–10% annually.1 Regionally, wealth creation will likely be driven by Asia Pacific and North America. The share of the Americas is expected to remain stable over the next four years at approximately 50% of global wealth, while the share of Europe, the Middle East and Africa is expected to further reduce as Asia Pacific grows. In particular, China’s share of global wealth is expected to grow to around 15% by 2023. Wealth transfer Demographic and socioeconomic developments continue to generate shifts in wealth. By 2030 for example, USD 15.4 trillion of global wealth is expected to be transferred by individuals with a net worth of USD 5 million or more, according to a 2019 report by Wealth-X.3 In addition, women now control more wealth than ever before: UBS’s 2019 report titled “The billionaire effect – Billionaires insights 2019” found that the number of female billionaires had grown by 46% in five years, outpacing the growth of male billionaires. We are responding to the evolving wealth landscape with a framework that addresses all aspects of our clients’ financial lives, called UBS Wealth Way. UBS Wealth Way begins with discovery questions and a We note a continuing trend of separation between low-cost, passive strategies and high-alpha active and alternative strategies. Passive management is beneficial in an environment with rising stock markets, such as the equity bull markets of the last decade. At the same time, central banks’ monetary policies have kept interest rates at historically low levels, which has had an effect on bond yields and other asset classes. Investors searching for longer-term higher alpha than passive strategies can provide have been diversifying their portfolios into real assets and alternatives and we expect this trend to continue. We believe the breadth of UBS Asset Management’s investment expertise allows us to meet client demands across asset classes and strategies. Retirement funding Over recent years, the pension industry has faced two key challenges: fundamental demographic shifts, such as aging populations, and lower expected returns due to all-time low interest rates. Beyond structural answers to these challenges, such as the progressive shift from defined benefit to defined contribution pensions, we believe pension funds are reassessing their asset allocation approach. Indeed, many pension funds are now allocating a higher share of their portfolios to alternative investments, such as private equity, hedge funds, real estate and infrastructure, in a search for higher-yielding exposures. We see this development as positive for UBS, as these funds will likely need further support to define their investment strategy and target portfolio allocation. In addition, our private banking and wealth management clients are expected to need further financial and retirement planning advice, which we are able to provide holistically through our wealth planning services. 1 Based on BCG Global Wealth Report 2019. 1 2 The BCG Global Wealth Report 2019 defines wealth segmentation as follows: wealth of greater than USD 20 million to be classified as ultra high net worth individuals; USD 1–20 million for high net worth 2 individuals; USD 0.25–1 million for affluent individuals. 3 A Generational Shift: Family Wealth Transfer Report, issued by Wealth-X in 2019. 3 34 How we create value for our stakeholders Key topics discussed: Key topics discussed: what was important to our what was important to our stakeholders in 2019 stakeholders in 2019 Investment performance in light of current interest rate situation Stakeholder engagement: Stakeholder engagement: how did we engage with our how did we engage with our stakeholders? stakeholders? Individualized client meetings Holistic goals-based financial planning Requests for regular client feedback, feedback monitoring and complaints handling Sustainable finance and investing possibilities Data privacy and security Specialized client events and conferences including information on key developments and opportunities Offerings for small enterprises in Personal & Corporate Banking Client satisfaction surveys Stakeholder group Stakeholder group Stakeholder needs: Stakeholder needs: what do our stakeholders expect from us? what do our stakeholders expect from us? Clients Clients Advice on a broad range of products and services from trusted experts The option of personal interaction with our advisors in combination with digital service anywhere, anytime (convenient digital banking) Value proposition: Value proposition: how we create value for our how we create value for our stakeholders stakeholders Delivering tailored advice and customized solutions, using our intellectual capital and digital capabilities Building long-term personalized relationships with our clients Investors Investors Top quality solutions and the highest standards in terms of asset safety, data and information security, confidentiality and privacy Developing new products and services in response to clients’ evolving needs in the digital age A combination of global reach and local service resulting in positive investment outcomes Competitively priced products and services Disciplined execution of our strategy leading to attractive capital returns through dividends and share repurchases Providing access to the world’s capital markets and bespoke financing Meeting increasing demand from clients for sustainable investments Executing our strategy with discipline and agility as the external environment evolves, while aiming to deliver cost- and capital-efficient growth Comprehensive and clear disclosures on quantitative and qualitative data necessary to make an informed investment decision Providing transparent, timely and reliable public disclosures Recognize and proactively address strategic opportunities and challenges Employees Employees A world-class employer providing an engaging and supportive workplace culture Attracting and developing great talent Skill and career development opportunities and rewards for performance An environment that provides a sense of belonging and of adding value to clients and to society Fostering a workplace culture that supports and engages our employees, enabling them to develop their careers and unlock their full potential Structural growth and return potential in our businesses Cost efficiency and ability to generate positive operating leverage Ability to protect or even grow revenues in a low-for-longer interest rate environment The three keys to a strong corporate culture Our approach to hiring great people and supporting their growth The importance of diversity and inclusion Society Society Facilitation of economic development that is sustainable for the planet and humanity Promoting significant and lasting improvements in the well-being of communities in which we operate Sustainable finance Our climate strategy Maximization of our positive effect and minimization of any negative effects on society and the environment Proactive management of the environmental and societal impacts of our business Taking an active role in the transition of our economy toward environmentally and socially sustainable solutions Our client and corporate philanthropy efforts Financial reports, investor and analyst conference calls, and/or webcasts, as well as media updates on our performance or other disclosures General shareholder meetings Investor and analyst meetings Regular employee surveys Group Franchise Awards program Regular “Ask the CEO” events, along with senior leadership, regional and functional employee sessions Dialogs with regulators and governments Partnerships with social institutions Community investments Interaction with NGOs Participation in forums and round tables, as well as industry-, sector- and topic-specific debates 35 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders Clients Our clients are the heart of our business. We are committed to building and sustaining long-term relationships based on mutual respect, trust and integrity. Understanding our clients’ needs and expectations enables us to best serve their interests and to create value for them. Our clients and what matters most to them There is no archetypal UBS client. Our clients have varying needs, but each of them expects outstanding advice and service, a wide range of choices, and an excellent client experience. Global Wealth Management is focused on serving the unique and sophisticated needs of high net worth and ultra high net worth individuals, families, and family offices around the world, as well as affluent clients in selected markets. We provide these clients with access to outstanding advice, service, and investment opportunities from around the globe, delivered by experts they can trust. Using a holistic, goals-based approach to financial planning, we deliver a personalized wealth management experience and work side-by-side with clients to help them realize their ambitions. Our client-facing advisors and the global teams that support them are focused on developing long-term client relationships, which often span generations. Global Wealth Management clients look to us for our expertise in helping them to plan for, protect and grow their wealth, as well as helping them make some of the most important decisions in their lives. From liquidity events to professional milestones and significant personal turning points, we aim to give our clients the confidence to move forward and achieve their goals. Through extensive research into our clients’ preferences and goals, as well as broader analysis of investor sentiment globally, we are constantly evolving our offerings to meet the shifting priorities of today’s wealthy clients. This includes investing in digital capabilities and developing products that help clients fund their lifestyles and manage their cash flow, as well as offering guidance on how clients can create a lasting and positive impact for their communities and the causes about which they care the most. We have been recognized as the leading global wealth manager for clients interested in sustainable investing,1 with a commitment to developing solutions that allow clients to align their financial goals and their personal values.  Refer to “Our focus on ESG” in this section for examples of how sustainable finance solutions are used across our business divisions and for the benefit of our clients Personal & Corporate Banking serves a total of approximately 2.6 million individuals and 128,000 firms. We provide services to companies ranging from start-ups to large multi-nationals, including specialized entities, such as pension funds and insurers, real estate companies, commodity traders, and 1 Euromoney Private Banking and Wealth Management Survey 2019: Global Results. 1 banks. Personal & Corporate Banking clients look for financial advice based on their needs at each stage of their individual or corporate journey. We aim to deliver outstanding advice to them via our client advisors and also through digital banking. Our clients demand convenience, 24/7 availability, security and value for money. We provide clients with access to a broad range of services and products offered in all relevant areas: basic banking, investing, financing (including mortgages), retirement planning, cash management, trade and export finance, global custody, and company succession, among others. In Asset Management, we deliver investment products and services directly to approximately 3,000 clients around the world – including sovereign institutions, central banks, supranational corporations, pension funds, insurers and charities – as well as to its clients, wholesale Global Wealth Management and intermediaries and financial institutions. Our clients seek global insights and a holistic approach to tailoring solutions. By building long-term, personalized relationships with our clients and partners, we aim to achieve a deep understanding of their needs and to earn their trust. We draw on the breadth and depth of our global investment capabilities – across traditional and alternative, active and passive categories – and provide seamless access to world-class platform services to deliver the solutions they need. We integrate sustainability into our financial analysis enabling us to help clients meet their sustainability objectives and their fiduciary duties. The Investment Bank provides corporate, institutional and wealth management clients with expert advice, financial solutions, execution, and access to the world’s capital markets. Our business model is specifically built around our clients and their needs. Corporate clients can access advisory services, debt and equity capital market solutions, and bespoke financing through our newly reshaped Global Banking business. Meanwhile, our Global Markets business is focused on helping institutional clients engage with local markets around the world, offering equities and equity-linked products, foreign exchange, rates and credit.  Refer to “Investment Bank” in the “Our businesses” section of this report for more information about the structural changes in the Investment Bank Our advisory and content offering is underpinned by the research we provide. The differentiated nature of this research, combined with UBS Evidence Lab Innovations, which offers access to insight-ready data sets for thousands of companies, aims to give clients an informational edge when it comes to understanding markets. As a new offering for 2019, we have established the UBS Research Academy, where our fundamental analytics team provides training for institutional investors on all aspects of fundamental investing, leveraging the best of the UBS Research and UBS Evidence Lab Innovations platforms. 36 Our clients place the highest priority on the confidentiality and security of their data. The protection of our clients’ data is of the utmost importance to us and we have comprehensive measures in place designed to ensure that data confidentiality and integrity are maintained. We are investing in our IT platform to preserve and improve our IT security standards, while enabling our clients to have secure access to their data via our digital channels. The volume, level of sophistication and impact of cyberattacks constantly increase, and we aim to maintain a robust and agile cybersecurity and information security program to manage cyber risk. Enhancing the client experience through innovation and digitalization We strive to streamline and simplify interactions with our clients through front-to-back digitalization and innovations. In Global Wealth Management, we develop and deploy digital tools that preserve and enhance the value of human relationships. Clients expect the convenience and speed that technology offers but, simultaneously, consider personal communication with our advisors to be more important than ever. Modern technology that our advisors use enables them to spend more time with clients. And our clients appreciate digital tools that improve their experience, such as easy ways to view their portfolios, access to research that is tailored to their needs, and multiple ways to communicate with their advisors. In 2019, we introduced a number of new tools to help deliver on those expectations. For example, our Asset Wizard platform provides ultra high net worth clients in the US with consolidated and sophisticated performance and risk analytics for their assets held at UBS and across multiple banks, portfolios, managers, and locations. Also, in Asia, we launched the UBS Advisor Messaging for WhatsApp, allowing for real-time conversations between clients and advisors, to create a better client experience. And we continue to make progress by executing our multi-year strategy to serve clients globally from two platforms: the Wealth Management Americas Platform in the US and the Wealth Management Platform outside the US. Our core investment solutions consist of: UBS Manage, a discretionary mandate solution where we use our expertise to invest clients’ assets according to a predefined investment strategy; UBS Advice, which investment recommendations based on an agreed investment strategy to self-directed accounts; and UBS Transact, a self-directed account providing clients access to UBS execution capabilities and the UBS House View. All our solutions draw on our broad range of instruments across stocks, bonds, currencies, investment funds and alternative structured products, investments. portfolio monitoring investment adds and Personal & Corporate Banking launched several initiatives in 2019. Effective 1 November 2019, we have established a new business area, Digital Platforms & Marketplaces, which reflects our commitment to engage in new digital business models. In addition to the mortgage platform UBS Atrium, which we launched in 2017 and is directed at corporate and institutional clients, UBS is set to introduce a mortgage platform for private clients in the first half of 2020. We launched new tools for our client advisors aimed at improving the in-branch advisory experience for clients, so that we are able to suggest the right products that match the clients‘ needs. Thanks to our new mortgage workflow, we have been able to reduce contracting time substantially, from 10–15 days for extensions to 24 hours. We also further simplified our digital banking platform (for both mobile and desktop) and added new services, in addition to expanding transaction the number of possible payment currencies to more than 120. Our clients can now pay in stores directly with their smartphones and a wide array of wearables via Mobile Pay and Swatch Pay. Furthermore, we have introduced the ability to pay parking fees via Twint, which has more than 1.5 million users in Switzerland. As of October 2019, our clients can access we.trade, a blockchain-based trade finance platform, which was the first such platform to be launched by a Swiss bank. Recognizing changing client needs and growing demand from start-up companies for a broader offering, we have launched UBS Start Business, which includes digital accounting, mentoring for business planning, and many other services in addition to the banking services UBS offers. The attractive offering aims to assist young entrepreneurs in every stage of their business’s journey. Similarly, we bundle our digital offering for small companies in UBS Digital Business, which provides the convenience and leading digital solutions that small companies look for. We have also introduced our vendor leasing solution, an online tool that allows vendors to provide leasing proposals directly to their clients (based on online credit decisions) and to generate contracts. For corporate clients, we have made available the new UBS Payment Tracking service (SWIFT global payments innovation). In Asset Management, we are investing in new tools and technologies, as well as our alternative data capabilities, to support our teams’ investment decision-making processes and enhance client service. In addition, our operational excellence programs are focused on building a scalable and globally integrated operating platform to better enable our teams to deliver the full breadth of our capabilities to clients around the world. 37 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders The Investment Bank strives to be the digital investment bank innovation-led businesses that drive of the future, with efficiencies and solutions. We set up the UBS Investment Bank Innovation Lab to help connect business teams in order to leverage best practice, build and test proofs of concept safely and quickly, and inspire a culture of innovation. We see increasing interest from clients in financial and alternative data sets that they can incorporate into their models. In response, we set up UBS Data Solutions to meet those needs through a centralized robust data processing and distribution platform. and streams client-tailored We strive to develop new products and solutions that are consistent with our capital-efficient business model. These are typically related to new technologies or changing market standards. Examples include FX spot & STIR tree E-pricing, which hedging pricing provides optimization, and Technology Enabled Sales, which enables faster delivery and distribution of tailored content matched to our clients’ interests. During 2019, we also launched the client portal of UBS Evidence Lab Innovations as part of the firm’s strategy to expand our value proposition in the alternative data space, which relates to innovative ways to capture data critical for investment decisions. We also set up UBS Neo, our multi- channel platform, and the One Client service model, which aims to drive superior client outcomes via collaboration, technology and data-driven client intelligence. Engaging with our clients Communication with our clients enables us to understand their needs and what matters most to them. We use a variety of channels to engage with clients, including regular client relationship / service meetings where we monitor feedback and satisfaction, as well as various corporate roadshows and dedicated events. We also engage with our clients while supporting cultural and sports events across Switzerland. We conduct client events on a regular basis and on a wide array of topics. For example, in Personal & Corporate Banking, we have financing and retirement planning events, and a dedicated event for the CFO community. In the Investment Bank, we host around 350 conferences and educational seminars globally throughout the year, covering a broad range of macro, sector, regional and regulatory topics. More than 50,000 clients attended such events in 2019, providing insight and access to our own opinion leaders, policy makers and leading industry experts. In Global Wealth Management, we engage with clients in a range of ways, from personalized private briefings with subject matter experts, to segment-specific events, to large-scale gatherings such as UBS Wealth Insights, our flagship Pan-Asian investment forum series, which attracts more than 3,000 clients every year. In Asset Management, a consistent program of engagement takes place throughout the year. Thematic events, such as the UBS Reserve Management Seminar and the Sovereign Investment Circle, bring together institutional investors to debate relevant topics and share best 38 practices. Our experts also produce insightful thought leadership on markets and assets that is regularly shared with clients, as well as frequently meeting investors to answer questions, clarify the investment strategy or discuss issues that can affect markets. How we measure client satisfaction We utilize different measures achievements and the satisfaction of our clients. to regularly assess our is increasingly Global Wealth Management leveraging technology and analytics software to collect client feedback. In 2019, we began introducing a digital feedback tool to supplement more traditional survey methods. The tool allows Global Wealth Management to survey clients about their satisfaction with their advisors and UBS, as well as to identify additional financial needs. Advisors are provided with real-time access to client feedback, enabling them to address concerns and to follow up on new topics of interest. The tool was piloted in selected markets in 2019 and is expected to be rolled out more broadly throughout 2020. We conduct an annual client survey in Personal & Corporate Banking. We have been conducting client surveys in Switzerland since 2011, consistently covering all private and corporate client segments annually since 2015. Clients assess their satisfaction with regard to various topics (e.g., UBS overall, branches, client advisors, products, services) and indicate further product or advisory needs. Survey responses are distributed to client advisors, who subsequently follow up with each respondent individually. In 2019, we introduced a new machine learning model which enables us to identify the importance of internal factors (e.g., advisors, products, prices) and external factors (e.g., media impact, market development) with regard to overall satisfaction scores. In Asset Management, we conduct regular surveys, inviting institutional and wholesale clients across all our markets to participate. They are asked about their satisfaction with client service, products and solutions, as well as other factors relevant to their investments. The results are analyzed to identify focus areas to improve client satisfaction. For the then collate and is closely Investment Bank, client satisfaction monitored by individual product coverage points. Relationship managers feedback holistically, conducting regular internal review sessions to address specific areas of feedback. The Investment Bank also closely monitors external surveys, such as the Global Institutional Investor Survey, which provides feedback across a range of investment banking services. review We thoroughly evaluate the feedback we receive, including complaints from clients, and take measures to address key themes identified. In 2019, clients specifically raised sustainable finance as a key priority, which provided confirmation that we are aligned with our clients’ preferences in expanding our sustainable finance offering. Our focus on ESG Our firm is in a powerful position to contribute toward achieving the 17 United Nations (UN) Sustainable Development Goals (the SDGs) by integrating sustainability in our mainstream offerings, through new and innovative financial products with a positive effect on the environment and society, and by advising our clients on their philanthropic works. Our goal is to be the financial provider of choice for clients who wish to mobilize capital toward the achievement of the SDGs and the orderly transition to a low-carbon economy. We are shaping the landscape of sustainable finance by using thought leadership, innovation and partnerships their sustainability efforts. to support clients in Our clients are increasingly interested in sustainable finance, including sustainable investing (SI), which is especially attractive if it can reduce risk or improve returns. More than 80% of wealthy individuals are interested in sustainable investing and 45% already hold sustainable investments.1 With regard to asset owners across the globe, 78% are integrating environmental, social and governance (ESG) factors into their investment process.2 Switzerland, for example, saw an 87% asset growth in institutional sustainable investments in 2018 (compared with 2017),3 and the early indicators are that this growth continued throughout 2019. Our key public commitments to sustainable finance In 2019, we became a founding signatory of the UN Principles for Responsible Banking (the Principles). The Principles constitute a comprehensive framework for the integration of sustainability across banks. They define accountabilities and require each bank to set, publish and work toward ambitious targets. Before signing up to the Principles, UBS had already been strongly committed both to maximizing positive effects through our sustainable business activities and to minimizing negative impacts. While our firm’s growing range of sustainable finance products and services supports the former, our environmental and social risk framework helps us to better understand and respond to potential risks to the environment and human rights. Our Asset Management business division is among the signatories of the PRI (the Principles for Responsible Investment). The PRI organization supports the signatories in incorporating ESG factors into their investment and ownership decisions. In 2019, UBS also became one of the inaugural members of the CEO Alliance on Global Investors for Sustainable Development, which is committed to scaling up and speeding up efforts to align business with the SDGs. The Alliance is aimed at harnessing the insights of private sector leaders on ways to remove impediments and 11 UBS Investor Watch on the Year Ahead, November 2019. 22 UBS Asset Management and Responsible Investor magazine, ESG: Do You or Don’t You?, June 2019. 33 Swiss Sustainable Investment Market Study 2019, June 2019. introduce solutions long-term sustainable development in line with the SDGs. for scaling investment for Since 2017, we have presented white papers to the World Economic Forum (the WEF) putting forward recommendations for ways in which private capital can achieve the SDGs, while also outlining our own actions and pledges in that regard. For the WEF annual meeting in 2020, our white paper focused on climate action and the ways in which investors can mobilize private and institutional capital toward the orderly transition to a low-carbon economy. In response, UBS has developed a Climate Aware framework. We actively support the development of industry standards. In 2019, we contributed to the writing of and signed the International Finance Corporation’s Operating Principles for Impact Management. These Impact Principles provide a standard for impact investing, in which investors seek to generate positive impact returns. We also contributed to a report by the Sustainable Finance Working Group of the Institute of International Finance on sustainable investment terminology. for society alongside financial  Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors, for our key documents, frameworks and external commitments, and for our climate disclosure following the recommendations of the Task Force on Climate-related Financial Disclosures What is our governance on ESG? Our governance framework on sustainability supports the creation of long-term value. Our firm’s sustainability activities, including sustainable finance, are overseen at the highest level of our firm and are founded in our Code of Conduct and Ethics.  Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors, for the sustainability governance chart We regularly review whether our governance framework continues to reflect our ambitions with regard to sustainability. In 2019, we therefore decided to further sharpen our focus on sustainable finance and we are now establishing a Sustainable Finance Steering Committee. It will be comprised of senior business leaders engaged in our firm’s sustainable finance efforts, who will work together to ensure that we continue to drive innovation and develop expertise and thought leadership regarding sustainable finance. The Chair of the Sustainable Finance Steering Committee is a member of the UBS in society Steering Committee. 39 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders How do we define sustainable finance? Sustainable finance refers to any form of financial service that integrates ESG criteria into business or investment decisions. We provide sustainable finance solutions across all our business divisions and to all our client groups (as shown in the “Key achievements in 2019” chart on the next page), with a particular focus on sustainable investing. Sustainable investing is an approach that seeks to incorporate ESG considerations into investment decisions. SI strategies seek to achieve a positive environmental or social impact and/or align investments with an investor’s values regarding ESG topics, while aiming to improve portfolio risk and return characteristics. In the main, we identify three approaches of sustainable investing: exclusion (individual companies or entire industries are Core sustainable investments1 excluded from portfolios if their areas of activity conflict with an investor’s values); ESG integration (which combines ESG factors with traditional financial considerations); and impact investing (which is designed specifically to help generate a positive social or environmental impact alongside financial returns). We were among the early movers in developing terminology to describe our sustainable investing activities and to consistently report on them. We are, however, conscious of the need to simplify and standardize the terminology for sustainable finance, which will help to develop and expand that market. We are therefore actively involved in the relevant discussions and are committed to reflecting pertinent changes to terminology in our reporting. USD billion, except where indicated Core SI products and mandates Core SI products and mandates Integration – sustainability focus3 Integration – ESG integration4 Impact investing5 Exclusions6 Third-party7 Total core sustainable investments Total core sustainable investments UBS total invested assets UBS total invested assets GRI2 FS11 FS11 FS11 FS11 FS11 FS11 For the year ended 31.12.18 31.12.19 31.12.19 31.12.17 % change from 31.12.18 46.4 46.4 372.3 372.3 9.1 9.1 52.2 52.2 8.5 8.5 488.5 488.5 3,607.0 3,607.0 20.0 224.5 4.7 50.3 13.4 312.9 3,101.0 12.8 63.2 2.8 93.0 9.8 181.7 3,262.0 132.4 65.9 92.1 3.7 (37.0) 56.1 16.3 3 Core SI proportion of total invested assets (%) 2 FS stands for the performance indicators defined in the Financial Services Sector Supplement of the Global Reporting Initiative reporting 1 All figures are based on information available in January 2020. 1 2 framework. 3 Strategies where sustainability is an explicit part of the investment guidelines, universe, selection, and/or investment process. 4 Strategies that integrate environmental, social, and governance (ESG) 4 factors into fundamental financial analysis to improve risk / return. 5 Strategies where the intention is to generate measurable environmental and social impact alongside financial return. 6 Strategies that exclude 7 SI products from third-party providers applying a strict companies from portfolios where they are not aligned to an investor’s values. Includes customized screening services (single or multiple exclusion criteria). 7 and diligent asset selection process; the selection criteria have been reviewed for the end of 2019 reporting cycle, following a stricter approach from the provider of sustainability ratings. Excludes third-party products that went through a systematic GWM onboarding process, now counted under “Integration – sustainability focus.” FS11 10.1 13.5 13.5 5.6 6 5 What do we offer? We support clients’ sustainability efforts through thought leadership, innovation and partnerships, and we strive to incorporate ESG factors into the products and services we provide. We support corporate and institutional clients who want to generate positive environmental and societal impact using our corporate advisory expertise or by directing capital through our lending or investment capacity. We assist private and institutional clients with their desire to invest in accordance with their own social and environmental objectives, and we are proactive in discussing these issues with them. Through our Philanthropy Services platform, we are partnering with clients to manage their philanthropy and maximize their impact, by offering expert advice, carefully selected programs from UBS Optimus Foundation, and innovative social financing mechanisms, such as development impact bonds. In 2019, we noted strong momentum in our sustainable finance activities. A key indicator is the development of our core SI assets, where we managed to more than double penetration, from 5.6% of total invested assets in 2017 to 13.5% (USD 488 billion) in 2019 (2018: 10.1% or USD 313 billion). Core sustainable investments are SI products that involve a strict and diligent asset selection process through either exclusions (of companies / sectors from portfolios where the companies / sectors are not aligned to an investor’s values) or positive selections (such as best-in-class, thematic or ESG integration and impact investing). Norms-based screening assets, i.e., assets that fall under the application of a UBS policy1 and do not otherwise qualify as a core sustainable investment, amounted to USD 818 billion as of 31 December 2019 (up from USD 797 billion in 2018). Total sustainable investments, including norms-based screening assets, accounted for USD 1,306 billion (2018: USD 1,110 billion), or 36.2% (2018: 35.8%), of our total invested assets. 1 The assets in discretionary mandates, in UBS’s actively managed retail and institutional funds, as well as in our firm’s proprietary trading book, are subject to our firm’s policy on the prohibition of investment in and 1 indirect financing of companies involved in the development, production or purchase of anti-personnel mines and cluster munitions. 40 Key achievements in 2019 Global Wealth Management We are a leader in sustainable investing (SI),1 with a global footprint and a network of resources to deliver a wide range of research, advisory and product capabilities that continue to grow. • USD 3.9 billion raised toward commitment to direct at least USD 5 billion of client assets in SDG-related impact investments by 2021. • Launch of the SDG Engagement High Yield Credit funds. 9.4 USD billion invested in 100% SI solutions and bespoke SI solutions. Personal & Corporate Banking We have been building sustainable ﬁ nance offerings for all client segments. • Retail clients: access to 100% sustainable investment solutions. • Corporate clients: USD 200 million raised in the ﬁ rst green bond for a Swiss-listed energy and infrastructure company. • Institutional clients: advice on SI integrated into strategic dialog with clients. 2 core SI products were launched for our retail clients. Asset Management We have established an industry-leading SI platform offering a wide range of SI strategies across various asset classes, integrating sustainability and impact into all our mainstream offerings. • Invested assets in the categories “impact investing” and “sustainability focus” increased 14-fold since beginning of 2016 to USD 38.6 billion. • ESG integration across all traditional asset classes, at USD 323.1 billion. 3.1USD billion Climate Aware strategy, a pio- neering approach to integrate the 2°C climate change scenario into an investment solution, at USD 3.1 billion invested assets. 1 Euromoney Private Banking and Wealth Management Survey 2019: Global Results. Group We are committed to maximizing positive effects and to minimizing negative impact that we have on society and the environment. • UBS Optimus Foundation: an award-winning grant-making foundation that helps our clients use their wealth to drive positive and sustainable social change for children. • Environmental and social risk management: 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. 3.3 million children In 2019, UBS Optimus Foundation raised USD 89.5 million in donations, approved USD 109.5 million in grants and helped improve the well-being of 3.3 million children worldwide. Investment Bank We are focused on meeting the needs of our clients with regard to ESG and sustainable ﬁ nance, and helping reshape business models and investment opportunities. • Dedicated thought-leading ESG research team in its 15th year. • Introduced the UBS ESG icon in our research reports in 2019, ﬂ agging ESG content in 32 reports. • UBS ESG and Sustainability Symposium in London with over 40 speakers; relevant ESG content incorporated at key client conferences. • Sustainability-driven investment solutions: launch of ESG Global Equity Premia. 25 green and sustainable bonds Support for companies driving positive impact: 25 high-proﬁ le issuances of green and sustainable bonds. 41 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders Investors We generate long-term value for our investors by executing our strategy with discipline, striving for cost- and capital-efficient growth, long-term sustainable value creation, and attractive shareholder returns. Investor base Our investor base is well diversified. A substantial proportion of our institutional shareholders are based in the US, the UK and Switzerland.  Refer to the “Corporate governance” section of this report for more information about disclosed shareholdings Cost- and capital-efficient revenue growth We aim to drive higher and superior returns by growing and leveraging our unique, integrated and complementary business portfolio and geographic footprint. Our Global Wealth Management business is well positioned to take advantage of two secular trends: wealth transfer and wealth creation, partly driven by continued economic growth, particularly in Asia, where China is opening its financial markets. Each of our businesses has initiatives to achieve revenue growth and improve operating efficiency.  Refer to “Industry trends” in the “Our environment” section of this report for more information about wealth creation and wealth transfer We aim to balance growth opportunities with cost and capital efficiency in order to drive attractive risk-adjusted returns and sustainable performance. Our primary measurement of performance for the Group is return on common equity tier 1 capital (CET1), as regulatory capital is our binding constraint and drives our ability to return capital to shareholders. Shareholder returns We aim to increase our ordinary dividend per share by USD 0.01 each year, and to return excess capital through share repurchases. We consider business conditions and any idiosyncratic developments when determining excess capital available for share repurchases. Alignment of interests We aim to align the interests of our employees with those of our equity and debt investors. This is reflected in our compensation philosophy and practices.  Refer to “Our compensation philosophy” in the “Compensation” section of this report for more information Communications Our Investor Relations function serves as the primary point of contact between UBS and all shareholders. Our senior management and the Investor Relations team regularly interact with the institutional investors community, financial analysts and other market participants, such as credit rating agencies. Clear, transparent and relevant disclosures, together with regular and direct interactions with existing and prospective shareholders, form the basis for our communications. The Investor Relations team also relays the views of and feedback from institutional investors and other market participants on UBS to our senior management. Investor Relations and Corporate Responsibility work together and interact with those investors focusing on sustainability topics relevant to UBS and society at large.  Refer to “Corporate governance” and “Information policy” in the “Corporate governance” section of this report for more information  Refer to the “Performance targets and measurement” section of  Refer to “Society” in this section for more information about this report for more information our sustainability efforts 42 Employees Our employees drive our success. Our employees work in 50 countries, are citizens of 136 nations and speak more than 150 languages. Their skills, experience and commitment enable us to deliver innovative solutions for our clients, foster sustainable business success, protect our reputation and drive the firm forward. As an employer, we attract, develop and retain a diverse range of talent and aim to ensure there is a workplace culture that supports and engages our employees, enabling them to build their careers and unlock their full potential. Our workforce at a glance1 68,601 employees (by FTE)2 69,966 employees (by headcount) 136 nationalities (by citizenship) 150+ languages spoken 8 years of service on average 19% 60% 21% 50 countries Age age < 30 age 30–50 age > 50 Region 31% 30% 20% 19% Switzerland Americas APAC EMEA 1 Calculated as of 31 December 2019 on a headcount basis of 69,966 internal employees only. 2 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 61. The keys to a strong corporate culture Our three keys to success remain the foundation of our strategy and culture. Together, they define what we stand for as a firm and as individuals, and they drive our business strategy. We set out on our cultural transformation in 2011, defining and then embedding our Pillars, Principles and Behaviors into our core people management processes. We conduct regular employee surveys to obtain feedback and ensure continuous improvement, discussing the findings and further actions with our employees. In 2019, responses indicated that employee engagement, appreciation for our talent management practices, and pride in working at UBS were all above the norm for financial services organizations.  Refer to the foldout pages of this report for more information about our Pillars, Principles and Behaviors Engaging and enabling employees, instilling a strong risk culture and promoting sustainability were culture-building priorities in 2019. In this respect, our Group Franchise Awards program provided foundational support. This Group-wide initiative rewards employees for cross-divisional collaboration and operational effectiveness improvements. leaders better adapt We are convinced that leadership drives culture, and culture drives performance. Great leaders are the key to developing our people, client relationships and results. For many years, our House View on Leadership has outlined what effective leadership is at UBS, as well as what employees can expect. To help to continuous change and digitalization, we updated our House View in 2019 and integrated its precepts into all of our core HR processes, training, recruitment, performance evaluations, including succession planning and promotions. Characteristics such as innovation, curiosity and agility complement our long-standing emphasis on inclusivity, sustainable profits, accountability, cross- firm partnership and putting clients first. It is an evolution of how we view leadership that creates an extraordinary experience for our clients and our people. 43 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders Hiring, developing and retaining talent considering We are widely recognized as an employer of choice and a great place to build a career. Key to our success is our long-standing commitment to investing in our employees at every career stage. It starts with recruitment, where our philosophy is to hire for potential, and competencies, learning capabilities and agility, as well as digital and data savviness. We hired a total of 10,080 external candidates in 2019. Our junior talent programs hired more than 1,700 graduate and other trainees, interns and apprentices. We also continued our insourcing and hiring activities in our Business Solutions Centers in China, India, Poland, Switzerland and the US as part of our integrated workforce strategy. individual’s experience the Our in-house UBS University further updated its curriculum in 2019 to emphasize future-skills development and personal growth for all employees, with a new digital skills curriculum that builds knowledge about topics such as blockchain, cloud computing, robotics and artificial intelligence. We also launched a mobile learning app to enable employees to learn whenever and wherever they want. We revamped our leadership development offering in 2019 to ensure that our leaders have the skills they need to develop their businesses and their people, and to lead effectively in the digital transformation age. In 2019, our permanent employees completed more than 1,100,000 learning activities, including mandatory training on compliance, business and other topics. This averaged to more than two training days per employee. Personnel by region Full-time equivalents Americas of which: USA Asia Pacific Europe, Middle East and Africa (excluding Switzerland) of which: UK of which: rest of Europe (excluding Switzerland) of which: Middle East and Africa Switzerland Along with line manager effectiveness, having a wide range of learning and career development opportunities, as well as tools to facilitate professional growth, are key drivers of employee engagement. In this respect, our new Career Navigator tool, which was launched in June 2019, has been a game-changer. This online platform enables employees to explore career paths and search for open roles that match their interests while allowing our recruiters to find internal talent more easily. It also identifies skill gaps with regard to new roles and interests and directly links to learning opportunities to help fill these gaps. We are committed to ensuring a workplace where employees are fairly treated, with equal opportunities for all. We do not tolerate harassment of any kind. Our global measures include employee and line manager training, specialist expertise in handling concerns raised, and a global employee hotline. A Harassment Guardian provides an independent view of the firm’s setup, procedures and behaviors to prevent harassment and sexual misconduct. We pay for performance, and a strong commitment to pay equity is embedded into our compensation policies. We conduct regular internal, as well as independent external, reviews, with the aim of ensuring that all employees are paid fairly, and we seek to address any unexplained gaps.  Refer to www.ubs.com/employerawards, www.ubs.com/careers and the “Compensation” section of this report for more information 31.12.19 31.12.19 21,036 21,036 20,232 20,232 13,956 13,956 12,918 12,918 5,704 5,704 7,048 7,048 166 166 20,691 20,691 As of % change from 31.12.18 31.12.17 31.12.18 21,309 20,495 12,119 12,620 5,782 6,670 168 20,840 66,888 20,770 19,944 8,959 11,097 5,274 5,662 161 20,427 61,253 (1) (1) 15 2 (1) 6 (1) (1) 3 Total1 Total1 1 The increase in workforce in 2019 and 2018 was mainly due to insourcing initiatives and was more than offset by a decrease in external staff. 1 68,601 68,601 44 The importance of diversity and inclusion A widely diverse workforce that reflects the experience of our global clients is important for our long-term success. We therefore strive to shape a diverse and inclusive culture across the firm to drive sustainable growth and innovation, deliver the best of UBS to our clients, and build a better place to work for all employees. Our broad view of diversity encompasses a range of aspects, including gender, ethnicity, LGBTQ, disability, mental health and inclusive leadership. We remain committed to narrowing our gender representation gap, especially at the management level, through a global gender diversity strategy and a wide range of supporting initiatives to hire, promote and retain more women at all levels of the organization. We continue to make progress toward our stated aspiration of increasing the representation of women in management roles to one-third. In 2019, 25.2% of all employees in roles at Director level and above were women, up from 24.7% in 2018. Our UBS Career Comeback program, which was launched in 2016, continues to help us increase our pipeline of female senior leaders. Professionals looking to return to corporate jobs after a career break are hired for permanent roles and supported with specialized onboarding, coaching and mentoring. In 2019, Career Comeback expanded beyond its four established hubs in the US, UK, Switzerland and India to become a global, year-round program. To date, Career Comeback has helped 142 women and 8 men relaunch their careers.  Refer to www.ubs.com/diversity for additional information about our priorities and commitments, and the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors for our management practices and detailed employee data, including gender- and region-specific data (cid:47)(cid:81)(cid:84)(cid:71)(cid:2)(cid:67)(cid:68)(cid:81)(cid:87)(cid:86)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:89)(cid:81)(cid:84)(cid:77)(cid:72)(cid:81)(cid:84)(cid:69)(cid:71)(cid:19) (cid:21)(cid:27)(cid:7) (cid:21)(cid:27)(cid:7)(cid:2) (cid:89)(cid:81)(cid:79)(cid:71)(cid:80) (cid:20)(cid:25)(cid:14)(cid:19)(cid:21)(cid:24) (cid:24)(cid:19)(cid:7) (cid:2) (cid:24)(cid:19)(cid:7) (cid:79)(cid:71)(cid:80) (cid:22)(cid:20)(cid:14)(cid:26)(cid:21)(cid:18)(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:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85) (cid:25)(cid:14)(cid:27)(cid:18)(cid:23) (cid:19)(cid:21)(cid:14)(cid:23)(cid:23)(cid:26) (cid:26)(cid:14)(cid:19)(cid:23)(cid:22) (cid:19)(cid:21)(cid:14)(cid:19)(cid:21)(cid:22) (cid:35)(cid:50)(cid:35)(cid:37) (cid:23)(cid:14)(cid:26)(cid:20)(cid:22) (cid:39)(cid:47)(cid:39)(cid:35) (cid:26)(cid:14)(cid:19)(cid:21)(cid:19) (cid:23)(cid:14)(cid:20)(cid:23)(cid:21) (cid:26)(cid:14)(cid:18)(cid:18)(cid:25) (cid:19)(cid:2)(cid:2)(cid:37)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:2)(cid:38)(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:2)(cid:81)(cid:80)(cid:2)(cid:67)(cid:2)(cid:74)(cid:71)(cid:67)(cid:70)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:68)(cid:67)(cid:85)(cid:75)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:24)(cid:27)(cid:14)(cid:27)(cid:24)(cid:24)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:85)(cid:2)(cid:81)(cid:80)(cid:78)(cid:91)(cid:16) 45 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders Society As expressed in the 17 United Nations Sustainable Development Goals (the SDGs), the world faces enormous societal and environmental challenges. We recognize that it is important to understand these challenges, as well as the opportunities arising from them, to consider their relevance to UBS and to identify potential actions our firm may need to take. client and supplier relationships, our environmental footprint, human resources, and community investment. It is through this cross-divisional organization that we leverage our expertise across all of these areas to drive sustainable performance. UBS in society is committed to making UBS a force for driving positive change in society and the environment. As the world’s largest truly global wealth manager, we have a responsibility to take a leading role in shaping a positive future, for everyone, including the generations to come. Code of Conduct and Ethics In our Code of Conduct and Ethics (the Code), the Board of Directors and the Group Executive Board set out the principles and practices that define our ethical standards and the way we do business. These principles apply to all aspects of our business. All employees must confirm annually that they have read and will adhere to the Code and other key policies, supporting a culture where ethical and responsible behavior is part of our everyday operations. In the Code, we make a commitment to integrating financial and societal performance for the mutual benefit of our clients and our firm – and that we are constantly looking for better ways to do business in an environmentally sound and socially responsible manner.  Refer to the Code of Conduct and Ethics of UBS, available at www.ubs.com/code, for more information Engaging with society We engage with representatives of wider society on a regular basis and on a wide range of topics. This engagement yields important information about society’s expectations and concerns and makes a critical contribution to our understanding and management of issues with potential (positive and negative) relevance to our firm – and to society. By actively fostering such interactions, we are in a position to address expectations and concerns in an informed and effective manner. UBS in society UBS in society is 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 all of the activities and capabilities related to sustainable finance philanthropy, environmental, climate and human rights policies governing sustainable investing), (including The activities driven by UBS in society are overseen, at the highest level of our firm, by our Board of Directors’ Corporate Culture and Responsibility Committee (the CCRC). The Group CEO supervises the execution of the UBS in society strategy and annual objectives and informs the Group Executive Board and CCRC about UBS in society updates as appropriate. Reporting to the Group CEO, the Head UBS in society is UBS’s senior-level representative for sustainability issues and, on behalf of the Group CEO, proposes the UBS in society strategy and annual objectives to the CCRC for approval.  Refer to “Board of Directors” in the “Corporate governance” section of this report for more information about the CCRC Driving change in finance As a major financial institution, we are conscious that the activities and decisions of our clients can have a substantial impact on society. It is for that reason that we strive to incorporate environmental, social and governance (ESG) impacts into the products and services we provide to clients and partner with them to help mobilize capital toward the achievement of the SDGs and the orderly transition to a low-carbon economy. We know that ESG topics are increasingly important to our clients. That is why we have dedicated a separate section in this report to highlight our commitment to serving the growing sustainable finance needs and expectations of our clients, and to the key activities associated with our commitment.  Refer to “Our focus on ESG” in this section for more information Driving change in philanthropy We believe our clients can make a meaningful, and measurable, difference for their chosen causes with advice from our philanthropy experts and the more than 200 global programs that have been carefully selected through our UBS Optimus Foundation. We increase social impact by combining our expertise with capital and networks. Through our Philanthropy Services platform, we offer clients unique access to social and financial innovation and philanthropic advice, as well as tailored program design, co-funding and co-development opportunities.  Refer to www.ubs.com/optimus for more information 46 Driving change in communities We recognize that our firm’s long-term success depends on the health and prosperity of the communities of which we are a part. We seek to redress disadvantages through long-term investments in education and entrepreneurship. We provide targeted employee strategic volunteering to drive impact across a number of the SDGs.  Refer to the “Driving change in communities” section in the financial commitments and Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors for more information Driving change in business We view the proper, firm-wide management of our firm’s own environmental footprint and our supply chain as important proof of how we do business in a sustainable manner for the benefit of society. This is equally true of our comprehensive environmental and social risk management and framework that governs client and vendor relationships and is applied firm-wide to all activities. We have set environmental and social risk standards pertaining to environmental and human rights topics in product development, investments, financing and supply chain management. We have identified certain controversial activities that we will not engage in at all, or only under stringent criteria. As part of this process, we engage with clients and vendors to better understand their processes and policies, and to explore how any environmental and social risks may be mitigated. We have set ambitious targets relating to our use of energy, water and paper, as well as to our travel and the amount of waste we produce, and we aim to increase the awareness of environmental and social matters among our employees and foster a long-term sustainable mindset in all our activities. In 2019, the year in which we celebrated 20 years since becoming the first bank to gain global environmental management system certification (ISO 14001), we ran major campaigns on key environmental themes. Our campaigns demonstrate our strong commitment to reducing UBS’s environmental footprint and further raising our employees’ awareness of key environmental challenges. The “Go drastic. Cut the plastic.” global campaign, which was launched in July 2019, aims at encouraging behavioral change to help tackle, reduce and phase out single-use plastic items across our firm. In October, we held our first Zero Waste Day at featured numerous 22 sustainability-themed activities. Additionally, at five major offices across the globe, we hosted events featuring subject matter experts talking about their life’s work and passion, including speakers from innovative companies. the globe, which sites across (cid:52)(cid:71)(cid:70)(cid:87)(cid:69)(cid:75)(cid:80)(cid:73)(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:67)(cid:78)(cid:2)(cid:72)(cid:81)(cid:81)(cid:86)(cid:82)(cid:84)(cid:75)(cid:80)(cid:86) (cid:52)(cid:71)(cid:70)(cid:87)(cid:69)(cid:71)(cid:70)(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:75)(cid:79)(cid:82)(cid:67)(cid:69)(cid:86)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:72)(cid:81)(cid:69)(cid:87)(cid:85)(cid:71)(cid:70)(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:10)(cid:85)(cid:86)(cid:67)(cid:86)(cid:87)(cid:85)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:11) (cid:39)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71) (cid:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:20)(cid:18)(cid:19)(cid:20) (cid:19)(cid:18)(cid:18) (cid:7) (cid:37)(cid:49)(cid:20)(cid:2)(cid:71)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2) (cid:67)(cid:75)(cid:84)(cid:2)(cid:86)(cid:84)(cid:67)(cid:88)(cid:71)(cid:78)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:72)(cid:85)(cid:71)(cid:86) (cid:25)(cid:20)(cid:7) (cid:21)(cid:18) (cid:7) (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:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85) (cid:67)(cid:75)(cid:84)(cid:2)(cid:86)(cid:84)(cid:67)(cid:88)(cid:71)(cid:78) (cid:20)(cid:26) (cid:7) (cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:84)(cid:75)(cid:69)(cid:75)(cid:86)(cid:91)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79) (cid:84)(cid:71)(cid:80)(cid:71)(cid:89)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85)(cid:29)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:84)(cid:67)(cid:69)(cid:77) (cid:86)(cid:81)(cid:2)(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)(cid:2)(cid:19)(cid:18)(cid:18)(cid:7)(cid:2)(cid:68)(cid:91)(cid:2)(cid:79)(cid:75)(cid:70)(cid:15)(cid:20)(cid:18)(cid:20)(cid:18) (cid:70)(cid:71)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:71)(cid:80)(cid:71)(cid:84)(cid:73)(cid:91) (cid:69)(cid:81)(cid:80)(cid:85)(cid:87)(cid:79)(cid:82)(cid:86)(cid:75)(cid:81)(cid:80) (cid:31)(cid:2)(cid:55)(cid:53)(cid:38)(cid:2)(cid:21)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:85)(cid:67)(cid:88)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)(cid:82)(cid:71)(cid:84)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84) (cid:26)(cid:21)(cid:7) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:82)(cid:67)(cid:82)(cid:71)(cid:84)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79) (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:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85) (cid:21)(cid:24) (cid:7) (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:82)(cid:67)(cid:82)(cid:71)(cid:84) (cid:69)(cid:81)(cid:80)(cid:85)(cid:87)(cid:79)(cid:82)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:82)(cid:71)(cid:84)(cid:2)(cid:40)(cid:54)(cid:39) (cid:25)(cid:19)(cid:7) (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: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:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:20)(cid:18)(cid:18)(cid:22) (cid:81)(cid:80)(cid:2)(cid:86)(cid:84)(cid:67)(cid:69)(cid:77)(cid:2)(cid:86)(cid:81) (cid:79)(cid:71)(cid:71)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:20)(cid:18)(cid:20)(cid:18)(cid:2) (cid:86)(cid:67)(cid:84)(cid:73)(cid:71)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:25)(cid:23)(cid:7) Reporting to our stakeholders on our sustainability strategy and activities Information about all our sustainability efforts and commitments is provided in the UBS Sustainability Report,1 available under “Annual reporting” at www.ubs.com/investors. The content of the Sustainability Report has been prepared in accordance with the Global Reporting Initiative (GRI) Standards (“comprehensive” option) and with the German rules implementing the EU directive on disclosure of non-financial and diversity information (2014/95/EU). Our reporting on sustainability has been reviewed on a limited assurance basis by Ernst & Young Ltd against the GRI Standards. Our Sustainability Report 2019 also includes our full climate disclosure, which we have been aligning with the recommendations provided by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures since their introduction in 2017.  Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors, for full descriptions of our environmental management, our responsible supply chain management and our environmental and social risk management and framework 11 The UBS Sustainability Report is available from 5 March 2020, and is not deemed incorporated by reference into the SEC Form 20-F filing. 47 Our strategy, business model and environment Our strategy, business model and environment How we create value for our stakeholders Aims and progress We work with a long-term focus on providing appropriate returns to all of our stakeholders in a responsible manner. To underline our commitment, we provide transparent goals and report on progress made against them wherever possible. In 2019, we made good progress in delivering against the Group’s aims. WWee aaiimm ttoo bbee // OOuurr kkeeyy ggooaallss11 OOuurr pprrooggrreessss A leader in sustainable finance across all client segments A leader in sustainable finance across all client segments 2017–2020 2017–2020 – Double the penetration of core SI assets from 5.6% (USD 182 billion) of total invested assets2 2016–2021 2016–2021 – Direct at least USD 5 billion of client assets into SDG-related impact investments A recognized innovator and thought leader in philanthropy A recognized innovator and thought leader in philanthropy 2017–2020 2017–2020 – Achieve 40% of employees volunteering with 40% of volunteer hours – being skills based Increase donations to UBS Optimus Foundation to CHF 100 million in 2020 2020–2025 2020–2025 – Support 1 million young people and adults (“beneficiaries”) to learn and develop skills for employment, decent jobs and entrepreneurship through our community investment activities Improve the lives of 5 million children globally by engaging at least 1,000 clients in UBS Optimus Foundation’s collective giving platforms – An industry leader in sustainable business practices An industry leader in sustainable business practices – Retain favorable positions in key ESG ratings 2017–2022 2017–2022 – Implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) 2019–2024 2019–2024 – Implement the requirements of the Principles for Responsible Banking (PRB) An employer of choice An employer of choice – Achieved our goal one year early, reaching USD 488.5 billion in core SI assets representing 13.5% of total invested assets2,3 – USD 3.9 billion of client assets directed into SDG-related impact investments4 – 38% of global workforce volunteered and 48% of volunteer hours were skills based5 – UBS Optimus Foundation: USD 89.5 million (CHF 86.9 million) in donations raised; USD 109.5 million (CHF 106.3 million) in grants approved – Progress against these goals will be reported for the financial year 2020 onward – Maintained leadership position (Dow Jones Sustainability Indices / DJSI) – AA rating maintained (MSCI ESG Research) – Industry leader rank maintained (Sustainalytics) – A– rating and included in Leadership band (CDP) – First TCFD reporting introduced for the financial year 2017, continuous improvements ever since – Among the founding signatories of the PRB (September 2019) – Being recognized as one of the world’s most attractive employers in key – ratings and rankings Included in Global Universum ranking of Top 50 World’s Most Attractive Employers – Peer-leading position in human resources elements of DJSI – Score above financial services norm in employee engagement and work environment (based on employee survey results) – Recognized by Bloomberg Gender-Equality Index 1 Refer to the UBS in society constitutional document (in the Sustainability Report 2019) for more information about all aims. Goals are to be achieved by the end of the target year. 2 Core SI are SI products that 1 2 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- 3 The increase in core SI assets was mainly driven by the ESG in-class, thematic or ESG integration and impact investing). Refer to the “Core sustainable investments” table in “Our focus on ESG” in this section. 3 4 Strategies where the investment has the intention of generating measurable integration strategy of Asset Management. Refer to the “Core sustainable investments” table in “Our focus on ESG” in this section. 4 environmental and social impact alongside a financial return. 5 Refer to the “Driving change in communities” section in the Sustainability Report 2019. 5 48 Regulation and supervision As a financial services provider based in Switzerland, UBS is subject to the consolidated supervision of the Swiss Financial Market Supervisory Authority (FINMA). Our entities are also regulated and supervised by the authorities in each of the countries where they conduct business. Through UBS AG and UBS Switzerland AG, which are licensed as banks in Switzerland, the Group may engage in a full range of financial services activities in Switzerland and abroad, including personal banking, commercial banking, investment banking and asset management. As a global systemically important bank (G-SIB), as designated by the Financial Stability Board, and a systemically relevant bank (SRB) in Switzerland, we are subject to stricter regulatory requirements and supervision than most other Swiss banks. The significant changes to financial regulation after the financial crisis in 2008 have had a material effect on how we conduct our business and have required significant investment.  Refer to the “Our evolution” section of this report for more information  Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information Regulation and supervision in Switzerland Supervision UBS Group AG and its subsidiaries are subject to consolidated supervision by FINMA under the Swiss Federal Law on Banks and Savings Banks (the Swiss Banking Act) and related ordinances, which impose, among other requirements, minimum standards for capital, liquidity, risk concentration and internal organization. FINMA fulfills its statutory supervisory responsibilities through is licensing, responsible for prudential supervision and mandates audit firms to perform regulatory audits and other supervisory tasks on its behalf. supervision and enforcement. regulation, It Capital adequacy and liquidity regulation As an internationally active Swiss SRB, we are subject to capital and total loss-absorbing capacity requirements that are based on both risk-weighted assets and leverage ratio denominator and are among the most stringent in the world. Furthermore, we are subject to short-term liquidity coverage ratio rules, and after the net stable funding ratio will have been brought into force in Switzerland, which the Swiss Federal Council currently intends will be by mid-2021, we will be subject to long-term minimum funding requirements.  Refer to the “Capital management” section of this report for more information about the Swiss SRB framework and the Swiss too-big-to-fail requirements  Refer to “Assets and liquidity management” in the “Treasury management” section of this report for more information about liquidity coverage ratio requirements  Refer to the “Regulatory and legal developments” section of this report for more information about the introduction of the net stable funding ratio Regulation and supervision outside Switzerland Regulation and supervision in the US In the US, UBS is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under a number of laws. UBS Group AG and UBS AG are both subject to the Bank Holding Company Act, under which the Federal Reserve Board has supervisory authority over the US operations of both UBS Group AG and UBS AG. UBS’s US operations are also subject to oversight by the Federal Reserve Board’s Large Institution Supervision Coordinating Committee. In addition to being a financial holding company under the Bank Holding Company Act, UBS AG maintains several branches and representative offices in the US, which are authorized and supervised by the Office of the Comptroller of the Currency. UBS AG is registered as a swap dealer with the Commodity Futures Trading Commission (the CFTC) and we expect that UBS AG will be required to register as a security-based swap dealer with the Securities and Exchange Commission (the SEC) by the registration date of 6 October 2021. UBS Americas Holding LLC – the intermediate holding company for our non-UBS AG branch operations in the US, as required under the Dodd–Frank Act – is subject to requirements established by the Federal Reserve Board related to risk-based capital, liquidity, the Comprehensive Capital Analysis and Review stress testing and capital planning process, and resolution planning and governance. 49 Our strategy, business model and environment primarily supervised by the Monetary Authority of Singapore and the Singapore Exchange. UBS AG, Hong Kong Branch is primarily supervised by the Hong Kong Monetary Authority. UBS Securities Hong Kong Limited, UBS Securities Asia Limited and UBS Asset Management (Hong Kong) Limited are primarily supervised by the Hong Kong Securities and Futures Commission. In addition, UBS Securities Hong Kong Limited is supervised by the Hong Kong Stock Exchange and the Hong Kong Futures Exchange. Financial crime prevention Combating money laundering and terrorist financing has been a major focus of government policies relating to financial institutions in recent years. The US Bank Secrecy Act and other laws and regulations require the maintenance of effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the identity of our clients. Failure to maintain and implement adequate programs to prevent money laundering and terrorist financing could result in significant legal and reputation risk. In addition, we are subject to laws and regulations, in jurisdictions in which we operate, prohibiting corrupt or illegal payments to government officials and others, including the US Foreign Corrupt Practices Act and the UK Bribery Act. We maintain policies, procedures and internal controls intended to comply with those regulations. Data protection We are subject to regulations concerning the use and protection of customer, employee, and other personal and confidential information. This includes provisions under Swiss law, the EU General Data Protection Regulation (the GDPR) and laws of other jurisdictions. If implemented as proposed, we will become subject to a revised Swiss data protection law, which seeks to improve data protection for individuals by enhancing the transparency and accountability rules for companies processing data, among other measures. This is intended to ensure the equivalence necessary for the continued cross-border transmission of data. We expect the Swiss parliament to pass the revised law in 2020 and expect it to take effect on 1 January 2021.  Refer to the “Risk factors” section of this report for more information about regulatory change Our strategy, business model and environment Regulation and supervision 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 (the PRA), which is part of the Bank of England, and the Financial Conduct Authority (the FCA). We are also subject to the rules of the London Stock Exchange and other securities and commodities exchanges of which UBS AG is a member. UBS AG and UBS Europe SE have UK-registered branches in London. UBS AG, London Branch serves as a global booking center for our Investment Bank. In addition, our regulated subsidiaries in the UK that provide asset management services are authorized and regulated mainly by the FCA, with one entity being also subject to the authority of the PRA. Regulation and supervision in Germany Certain parts of the businesses of UBS Limited have been transferred via cross-border merger to UBS Europe SE, a Frankfurt-based subsidiary of UBS AG. The remainder of the businesses not merged into UBS Europe SE were transferred to UBS AG, London Branch. As a result of the cross-border merger, UBS Europe SE has become a significant entity and is subject to the direct supervision of the European Central Bank, in addition to the continued conduct, consumer protection and anti-money laundering-related supervision by the German BaFin and the supervisory support by the German Bundesbank. The entity is subject to EU and German laws and regulations. UBS Europe SE in Austria, Denmark, France, maintains branches Italy, Luxembourg, the Netherlands, Poland, Spain, Sweden, Switzerland and the UK, and is subject to conduct supervision by authorities in all those countries. Regulation and supervision in Singapore and Hong Kong In Asia Pacific (APAC), we operate from 13 locations and are therefore subject to the regulation and supervision by local financial regulators. The APAC regional hubs are Singapore and Hong Kong. UBS AG, Singapore Branch and UBS Securities Pte. Ltd. are 50 Recovery and resolution Too-big-to-fail legislation in Switzerland requires each Swiss systemically relevant bank (SRB) to establish an emergency plan to avoid impending insolvency while maintaining systemic functions. In response to these requirements in Switzerland, and to similar requirements in other jurisdictions, UBS has developed recovery plans and resolution strategies, as well as plans for restructuring or winding down businesses if the firm could not be stabilized by other measures. In 2013, FINMA stated its preference for a single point of entry (SPE) strategy for globally active SRBs, such as UBS, with a bail-in at the group holding company level. UBS has since made structural, financial and operational changes to facilitate an SPE strategy and is confident that a resolution of the bank is operationally executable and legally enforceable. In February 2020, FINMA published its assessment of the recovery and resolution plans and emergency plans for Swiss SRBs. FINMA confirmed that our Swiss emergency plan is effective, subject to a further reduction of its joint and several liabilities. In addition, FINMA confirmed that UBS has completed important measures and made considerable progress with respect to its global resolvability. UBS’s crisis management framework There are three key governance bodies within the UBS Group crisis management framework (see the chart below), which take (cid:55)(cid:36)(cid:53)(cid:2)(cid:69)(cid:84)(cid:75)(cid:85)(cid:75)(cid:85)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77) responsibility and action depending on the nature of the stress incident and the scale of the response needed. – For incident, risk and crisis management, the Group Crisis Management Committee works with incident management teams who provide monitoring and early warning indicators to management at a local or regional level, without the need to activate protocols at the Group level. In the event that any local response is insufficient, global task forces and crisis management teams provide decision-making guidance and coordination, including crisis management plans, protocols and playbooks, as well as contingency funding plans. The Group Executive Board (the GEB) and the Board of Directors (the BoD) of the Group would evaluate and decide upon the need to activate the Global Recovery Plan (the GRP) were a stress event to reach a severity that required such decision making, according to the risk indicators identified in the GRP. FINMA has the authority to determine whether the point of impending insolvency as defined by Swiss law has been reached and, in such instances, as part of the resolution strategy, has the power to order the bail-in of creditors to recapitalize and stabilize the Group, limit payments of dividends and interest, alter our legal structure, take actions to reduce business risk, as well as to order a restructuring of the bank. – – (cid:43)(cid:80)(cid:69)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:84)(cid:75)(cid:85)(cid:75)(cid:85)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:52)(cid:71)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:85)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80) 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(cid:81) (cid:2) (cid:78) (cid:71) (cid:88) (cid:71) (cid:46) (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:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:86)(cid:84)(cid:75)(cid:73)(cid:73)(cid:71)(cid:84)(cid:85) (cid:52)(cid:71)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:91) (cid:86)(cid:84)(cid:75)(cid:73)(cid:73)(cid:71)(cid:84)(cid:85) (cid:46)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91) (cid:86)(cid:84)(cid:75)(cid:73)(cid:73)(cid:71)(cid:84)(cid:85) (cid:53)(cid:69)(cid:67)(cid:78)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:71)(cid:2)(cid:80)(cid:71)(cid:71)(cid:70)(cid:71)(cid:70) (cid:50)(cid:81)(cid:75)(cid:80)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:88)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91) (cid:52)(cid:71)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:91) (cid:52)(cid:71)(cid:85)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80) 51 Our strategy, business model and environment Our strategy, business model and environment Regulation and supervision Global Recovery Plan The Global Recovery Plan (the GRP) provides UBS’s senior management with a tool to respond to early warning indicators and identifies measures to restore financial strength should UBS come under severe capital and/or liquidity stress. Defined quantitative and qualitative triggers are monitored daily and are subject to predefined governance and escalation processes. Fully actionable recovery options are available and provide a firm basis for the GEB Recovery Task Force for decision making in recovery. Recovery options have defined execution owners and playbooks with the following objectives: – capital preservation, such as reduction of future dividends, incentive compensation reductions; – capital raising, such as issuance of mandatory convertible instruments; and – raising funding, disposal or wind-down of businesses. Global Resolution Strategy The Global Resolution Strategy (the GRS) sets out measures that can be taken by FINMA to resolve UBS in an orderly manner, in the event that the recovery process is not successful and the Group enters into resolution. UBS submits the GRS to FINMA, which has the ultimate authority and responsibility to execute the resolution, in cooperation with the Swiss National Bank, the Federal Department of Finance and other key authorities through a Crisis Management Group. The SPE bail-in strategy would involve the write-down of remaining equity, additional tier 1 and tier 2 instruments of the Group, as well as the bail-in of total loss-absorbing (TLAC)-eligible senior unsecured bonds at the UBS Group AG level. At the same time, an internal recapitalization of the affected subsidiaries would be executed, allowing the subsidiaries to transmit incurred losses to the parent bank, UBS AG, and ultimately to UBS Group AG. Post-resolution restructuring measures could include the potential wind-down of businesses and assets, as well as business disposals. Preparatory work is ongoing. Overall, FINMA confirmed that UBS has already taken thus made important preparatory steps and has considerable progress with respect to its global resolvability. 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As required by the US resolution planning regulations, our US plan contemplates that UBS Americas Holding LLC will commence a bankruptcy proceeding in the US. Prior the plan LLC would that UBS Americas Holding contemplates downstream financial resources to its subsidiaries to facilitate the orderly wind-down or disposal of businesses. to commencement of the proceeding, Subsequent to the cross-border merger of UBS Limited into UBS Europe SE, the enlarged European operating subsidiary is in the process of developing resolution planning according to Single Resolution Board requirements. In view of the relatively small size of UBS Europe SE compared with the overall Group, emphasis is placed on the GRP and GRS to provide the tools necessary to recapitalize and restructure the company in the event of material financial distress. The Swiss emergency plan demonstrates how UBS’s systemically important functions and critical operations can continue in the event that a successful restructuring of the Group is deemed not to be successful. This is achieved mainly by maintaining UBS Switzerland AG as a separate legal entity. FINMA has confirmed that the Swiss emergency plan is effective, subject to a further reduction of its joint and several liabilities. Other local recovery and resolution plans exist for various Group entities and jurisdictions. They illustrate how local operations benefit from the GRP and the GRS, and also support the global plans. UBS’s operational continuity planning is intended to ensure the uninterrupted provision of critical services even if certain Group entities are discontinued in a crisis. 53 Our strategy, business model and environment Our strategy, business model and environment Regulatory and legal developments Regulatory and legal developments business location. The federal changes resulting from this tax reform do not have a significant effect on the tax expenses for the Group, as increases resulting from the reform are largely offset by tax rate reductions and other changes at the cantonal level. The federal reform became effective on 1 January 2020. The reform measures also provide that for Switzerland- domiciled companies with shares listed on a stock exchange no more than 50% of dividends may be, and at least 50% of share repurchases for redemption must be, paid out of capital contribution reserves, with the remainder required to be paid from retained earnings. As a result, at least 50% of all dividends paid after 1 January 2020, including dividends in respect of the financial year 2019, will be paid from retained earnings, and will be subject to a 35% Swiss withholding tax. As of 31 December 2019, UBS held CHF 13 billion in approved capital contribution reserves for potential future distributions to shareholders, either in the form of dividends or share repurchases. Separately, following a change in Swiss tax law as of 1 January 2019 that applies to holding companies of systemically relevant banks issuing loss-absorbing additional tier 1 or total loss-absorbing capacity (TLAC)-eligible senior unsecured debt instruments, UBS will no longer issue such instruments out of UBS Group Funding (Switzerland) AG and existing instruments were migrated to UBS Group AG in October 2019. EU equivalence for Swiss trading venues In June 2019, the European Commission decided not to extend its equivalence decision for Swiss trading venues beyond the end of June 2019, citing a perceived lack of progress toward the conclusion of an institutional framework agreement between Switzerland and the EU as the reason for this decision. In reaction, the Swiss Federal Council activated a contingency measure to protect the Swiss stock exchange infrastructure, effective as of 1 July 2019. The Swiss measure introduced a recognition requirement for foreign trading venues that admit shares issued by Swiss incorporated companies to trading, with EU trading venues having their recognition revoked due to the lack of reciprocity. To comply with this measure, trading in Swiss shares on EU trading venues ceased and was redirected to Swiss trading venues as of 1 July 2019, as permitted under EU law in the absence of eligible EU trading venues. We prepared for this scenario and, as of 1 July 2019, routed relevant trade flows in Swiss shares from EU to Swiss trading venues, with limited adjustment costs for UBS. Switzerland Swiss Federal Council adopts new rules on gone concern capital for G-SIBs In November 2019, the Swiss Federal Council adopted amendments to the Capital Adequacy Ordinance, which became effective 1 January 2020. The revisions introduce gone concern capital requirements for Switzerland-based intermediate parent banks of global systemically important banks (G-SIBs) on a standalone basis. As a consequence, UBS AG will be subject to: (i) a gone concern capital requirement on its third-party exposure on a standalone basis; (ii) an additional gone concern capital buffer requirement equal to 30% of the Group’s gone requirement on UBS AG’s consolidated concern capital exposure; and (iii) a gone concern capital requirement equal to the nominal value of the gone concern instruments issued by UBS entities and held by the parent bank. A transitional period until 2024 will be granted for the buffer requirement. Based on current estimates, and once the new requirements have been fully phased in, we expect the UBS Group to be required to maintain a gone concern leverage ratio of around 75–100 basis points higher than what would be required to total meet loss-absorbing capital Group requirement at the end of the transition phase will depend on a number of components, including the subsidiaries’ loss-absorbing capacity at the time. requirements alone. The actual the Group The revisions also reduced the gone concern requirement of UBS Switzerland AG to 62% of the Group’s gone concern requirement (before rebate) and increased the minimum gone concern requirement for the Group (after rebate) from 3% to ratio denominator), effective 3.75% 1 January 2022. (based on leverage Finally, instruments available to meet gone concern requirements remain eligible until one year before maturity; however, the current haircut of 50% in the last year of eligibility is no longer applied under the revised rules.  Refer to the “Capital management” section of this report for more information about the currently applicable requirements Swiss corporate tax reform In May 2019, the Swiss electorate approved corporate tax reform measures that abolish preferential corporate tax regimes and introduce a series of tax measures aligned with Organisation for Economic Co-operation and Development (OECD) standards, while seeking to maintain Switzerland’s competitiveness as a 54 Swiss National Bank adjustment to the zero interest rate exemption threshold In September 2019, the Swiss National Bank (the SNB) announced adjustments to the calculation of the amount of sight deposits at the SNB that are exempt from negative interest rates. The exemption threshold has been increased from 20 to 25 times each bank’s minimum requirement. In addition, the threshold will be updated on a monthly basis. These changes came into effect on 1 November 2019. The SNB communicated that this decision was taken based on the assumption that the low interest rate environment around the world will persist for some time. In its December 2019 monetary policy assessment, the SNB its previously announced policy measures unchanged. UBS maintains significant sight deposits at the SNB. The adjustments to the exemption threshold calculation benefit our net interest income. left Swiss Federal Council communicated its intention to bring the NSFR into force by mid-2021 Having delayed the introduction of net stable funding ratio (NSFR) requirements in Switzerland over the previous two years to align with developments in the EU and the US, the Swiss Federal Council communicated its intention in November 2019 to adopt the associated ordinance amendments in early summer 2020, and bring them into force by mid-2021. The Federal Department of Finance was mandated to finalize the regulatory texts jointly with relevant stakeholders, including affected banks, in the coming months. If implemented as originally proposed in the 2017 consultation, the introduction of the NSFR could result in a significant increase in long-term funding requirements on a legal entity level. Automatic exchange of information In September 2019, as a consequence of the automatic exchange of information (AEI) introduced in Switzerland as of 1 January 2017, the Swiss Federal Tax Administration exchanged information on financial accounts with 75 countries. With 63 of these countries, the exchange was reciprocal. In the case of 12 countries, Switzerland received information, but did not provide any, either because those countries do not yet meet the international requirements on confidentiality and data security (Belize, Bulgaria, Costa Rica, Curaçao, Cyprus, Montserrat, Romania and Saint Vincent and the Grenadines) or because they chose not to receive data (Bermuda, the British Virgin Islands, the Cayman Islands, and the Turks and Caicos Islands). The Federal Tax Administration sent information on around 3.1 million financial accounts to the partner states and received information on around 2.4 million from them. Subject to the exchange are identification, account and financial information, including name, address, state of residence and tax identification number, as well as information concerning the reporting financial institution, account balance, income payments and gross proceeds. UBS is committed to full compliance with its AEI obligations. Tightened self-regulation for income-producing real estate the Swiss Bankers In August 2019, FINMA approved Association’s revised self-regulation on mortgage lending for income-producing real estate. The revisions increase the minimum equity required for new and increased mortgages on these properties, from 10% to 25% of the market value at origination, and require mortgages to amortize to two-thirds of the market value at origination within 10 years (previously 15 years). UBS Switzerland AG is subject to the revised self- regulation that came into effect on 1 January 2020. We expect the overall effect on UBS to be limited. Europe Update on the UK’s withdrawal from the EU Based on recent developments, the UK and EU are expected to negotiate the terms of their future relationship during a transition period intended to end 31 December 2020, including the granting of equivalence determinations for the UK under existing EU financial services legislation. UBS implemented contingency plans through the combined UK business transfer and cross-border merger of UBS Limited into UBS Europe SE (UBS ESE) in March 2019. The European Commission has confirmed an extension of the temporary equivalence for UK central counterparties (CCPs) until 31 January 2021. Should the UK exit the transition period without the necessary equivalence determination in place, UBS ESE’s exposures to UK CCPs would need to be migrated to an EU CCP ahead of the 31 January 2021 deadline. In the absence of an agreement on the future EU–UK relationship or equivalence determinations covering relevant financial services, however, the industry would face a number of market structure issues that await resolution between the UK and EU in 2020, such as the operation of the derivatives and share trading obligations under the EU’s Markets in Financial Instruments Directive II (MiFID II). UK operational resilience requirements In December 2019, the UK regulators (the Bank of England, the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority) issued a consultation on their operational resilience expectations financial market infrastructures (FMIs). To complement this, the PRA is also consulting on outsourcing and third-party risk management requirements. for banks and The proposals will require firms and FMIs to identify their key business services and set impact tolerances (i.e., the maximum level of disruption that would be tolerated) for each one. Firms will also be required to test their ability to deliver important business services within impact tolerances in severe but plausible scenarios. UBS is in the process of adapting its existing operational resilience framework to the new methodology set out in the consultations. Impact tolerances will be clearly defined and scenarios will be designed and implemented to test our controls and maintain operations within those impact tolerances. 55 Our strategy, business model and environment Our strategy, business model and environment Regulatory and legal developments International Developments on anti-money laundering There has been increasing focus on anti-money laundering (AML), including on international collaboration, supervisory information sharing, and on divergences in the criteria and methodologies of the Financial Action Task Force (FATF). Authorities also recognized the increased role played by technology in facilitating AML compliance, but also in opening new doors for malicious activities. In this context, the FATF consulted on “Draft Guidance on Digital Identity”, which aims to clarify how digital identity systems can be used for customer due diligence. The FATF also updated its standards that require crypto-exchanges to identify their customers and make that information available to law enforcement authorities. Separately, the Basel Committee on Banking Supervision (BCBS) consulted on the introduction of guidelines on interaction and cooperation between prudential and AML and counter-terrorist financing supervision. In the EU, there has been focus on strengthening the implementation of the EU AML rules, including via a strengthened role of the European Banking Authority (EBA) in rulemaking and supervision, and discussions are ongoing on a possible creation of an EU AML Agency. a using approach, risk-based In Switzerland, the Federal Council adopted a dispatch on amending the Anti-Money Laundering Act (the AMLA) on 26 June 2019. According to the proposal, advisors, such as lawyers and other professionals, will be subject to the AMLA. financial Additionally, intermediaries will be required to verify certain information regarding beneficial ownership and will also be required to periodically review client profiles to assess whether they are up- to-date. In the US, various amendments and guidance regarding US AML laws were introduced, including on issues such as beneficial ownership, information sharing, privacy protections, risk management, and examination priorities. In APAC, the FATF and the Asia/Pacific Group on Money Laundering (the APG) carried out an evaluation of Japan and adopted six mutual evaluation reports which will drive AML policy development in the region for the years to come. Developments on data protection There has been an increased focus on data protection regulation and in particular on how technology is changing the context and international coordination of data policies, in the absence of a single global data protection regulatory body. This included considerations for clarity regarding the ability of banks to use big data analytics, addressing privacy and security concerns aimed at giving individuals more control over how their data is collected and used, and smooth transfers of data across borders. In the EU, the focus was on ongoing implementation of the General 56 Data Protection Regulation (the GDPR) and addressing the inconsistencies between the GDPR and other EU legislation. Additionally, the EBA outlined key challenges in the roll out of big data and advanced analytics. EU–UK data transfers require use of EU-approved standard contractual clauses in the absence of UK and EU adequacy decisions. UBS completed a review in 2019 intended to ensure that EU-approved standard contractual clauses are included in all relevant contracts. In Switzerland, parliamentary debate on revision and the modernization of the Federal Data Protection Act took place throughout 2019 and will continue in 2020. Linked to the revision is the Swiss Federal Council’s adoption of a dispatch to approve the Council of Europe data protection convention. The European Commission is expected to publish an adequacy decision on the level of Swiss data protection compared to the EU GDPR in the first quarter of 2020. In the US, California has become the first state to adopt its own comprehensive regulatory framework, the California Consumer Privacy Act. fundamental Regulatory approaches to stablecoins Stablecoins in general and the Libra project specifically continue to receive significant regulatory attention. At the international level, a G7 report identified stablecoins as one of nine significant risks, giving rise to money laundering and tax compliance risks. The Financial Stability Board (the FSB) announced a review of the existing supervisory and regulatory approaches in addressing financial stability and systemic risks of stablecoins, and is expected to issue a consultation in April 2020. The International Organization of Securities Commissions examined how securities legislation may apply to global stablecoins and recommended a case-by-case approach. In the EU, the European Commission and the Council of the EU stated that no global stablecoin initiative should operate in the EU until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed. In the US, Congress introduced a bill to classify stablecoins as securities and to regulate stablecoins under the Securities Act of 1933. In Switzerland, FINMA outlined its treatment of stablecoins under Swiss supervisory law, stating that it would consider “substance over form” and apply a principle-based and technology-neutral approach. In addition, FINMA responded to a request from the Libra Association, providing an initial indication of the application of Swiss regulation, and highlighting the need for international regulatory coordination. In the UK, the Bank of England recommended the UK Treasury consider adjusting the UK regulatory framework for payments to take into account innovations, such as stablecoins, by applying a risk-based approach and standards equivalent to those applied to traditional payment chains. FSB efforts on new and emerging vulnerabilities in the financial system and resolvability of systemically important financial institutions (banks and CCPs) As part of its priorities for 2020, the FSB communicated that it will reinforce its forward-looking monitoring of developments to identify, assess and address new and emerging vulnerabilities in the financial system. Focus topics include developments and financial stability considerations around fintech, regulatory issues from global stablecoins, cross-border payment systems, interest rate benchmark reforms, implications of the extended low interest environment, leveraged loans and collateralized loan obligations, as well as financial stability implications of climate change. The FSB also pointed to remaining gaps in making resolution strategies and plans operational with respect to banks and central counterparties (CCPs). Regarding banks, the FSB plans to address challenges related to finding the appropriate balance between group-internal distribution of total loss-absorbing capacity (TLAC) and non-pre-positioned resources and ensuring access to temporary liquidity as needed by firms going through resolution. Concerning CCPs, the FSB seeks to further strengthen their resilience and resolvability by continuing its work on financial resources and tools to support orderly resolution, with a related consultation expected for the second quarter of 2020. Basel III implementation across jurisdictions In Switzerland, the technical work on implementation of the Basel III rules finalized in 2017 started in the second half of 2019, led by the Swiss Federal Department of Finance and FINMA. However, none of the proposals have been made public so far. The European Commission (the EC) consulted on the EU’s approach to the implementation of the remaining elements of Basel III (including the market risk framework, the standardized approach to credit risk, operational risk and the output floor). The EC is expected to publish legislative proposals by June 2020. UBS’s EU entities, principally UBS Europe SE, will be in scope of the EU requirements. US regulators have not yet proposed rules regarding the implementation of the remaining elements of Basel III. Regulators in jurisdictions relevant to UBS are committed to meeting the BCBS implementation timeline for final Basel III rules as of 1 January 2022. However, we expect the effective dates to be later due to transition periods. Regulatory developments related to sustainable finance In the EU, political agreement has been reached on key elements of the EC’s Sustainable Finance Action Plan issued in March 2018, including: (i) a sustainable finance taxonomy determining certain whether an economic activity contributes to for banks requirements environmental objectives and does no harm to others; (ii) that offer portfolio disclosure management services to provide transparency on the promotion of environmental or social characteristics and of sustainable investments types of benchmarks aiming to reduce the carbon footprint of a standard investment portfolio or specifically contribute to attaining the two degrees Celsius reduction target set out in the Paris Agreement of 2015. reports; and in periodic two (iii) The EC also published draft rules that amend delegated acts under MiFID II and the Insurance Distribution Directive aiming at obliging investment firms and insurance distributors to include environmental, social and governance (ESG) factors and preferences in the advice that investment firms offer to their clients. In Switzerland, the Federal Council created a working group headed by the State Secretariat for International Finance (the SIF) tasked with reviewing regulatory developments in the area of sustainable finance, such as the impact of the EC action plan on Switzerland. A report is expected for spring 2020 containing the results of this review and proposals for Switzerland’s regulatory approach to sustainable finance. The effect on UBS will depend on the recommendations made in this report. Separately, 2019 saw a number of developments related to management of financial risks. In April 2019, the UK Prudential Regulation Authority (the PRA) published a supervisory statement on enhancing banks’ and insurers’ approaches to managing the financial risk from climate change. The Bank of England (the BoE) has published a discussion paper setting out its proposed framework for the 2021 biennial exploratory scenario (BES) exercise. The objective of the BES is to test the resilience of the largest banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk. The BES is the part of the BoE’s stress testing framework used to explore less well-understood risks that are not neatly linked to the financial cycle. In Switzerland, parliament adopted a new draft for the revision of the CO2 Act to implement the reduction goals of the Paris Agreement until 2030. The draft contains a new provision mandating the SNB and FINMA to assess climate-related financial risks in the financial sector. In Hong Kong, the Hong Kong Monetary Authority has developed the Common Assessment Framework on Green and Sustainable Banking for authorized institutions to conduct self- assessments of their readiness and preparedness in managing climate- and environment-related risks. 57 Our strategy, business model and environment Our strategy, business model and environment Regulatory and legal developments Developments related to the transition away from IBORs Liquidity and activity in alternative reference rates (ARRs) continue to develop in markets around the world, with work issues associated with progressing transitioning away from (IBORs). Regulatory authorities continue to focus on transitioning to ARRs by the end of 2021. interbank offered rates resolve certain to In June 2019, the SNB introduced the SNB policy rate, which replaces the previously used target range for the three-month CHF LIBOR. The SNB policy rate signals the interest rate level for secured short-term money market rates, with a focus on the Swiss Average Rate Overnight (SARON). The introduction of the SNB policy rate is also intended to foster an early transition to SARON. The Financial Conduct Authority and Bank of England encourage switches from LIBOR to the Sterling Overnight Index Average (SONIA) for sterling interest rate swaps from the first quarter of 2020. In addition, banks need to target a stopping point with regard to the issuance of cash products linked to sterling LIBOR by the end of the third quarter of 2020 and a significant reduction of the number of existing contracts in circulation that reference the rate. The European Central Bank published the euro short-term rate (€STR), the ARR for EUR markets, for the first time in October 2019. Liquidity in the US Secured Overnight Financing Rate (SOFR) is still developing and is concentrated among a few issuers, primarily government-sponsored enterprises. SOFR averages are expected to be published beginning in the first half of 2020. The US Commodity Futures Trading Commission (CFTC) has issued no-action letters that provide relief and ensure that market participants are not penalized as they transition from LIBOR to ARRs. We have a substantial number of contracts linked to IBORs. ARRs do not currently provide a term structure, which will require a change in the contractual terms of products currently indexed on terms other than overnight. We have established a cross-divisional, cross-regional governance structure and change program to address the scale and complexity of the transition. USA that tailor how certain capital and Tailoring of regulation for foreign banks in the US On 10 October 2019, the Federal Reserve Board adopted two liquidity proposals requirements and enhanced prudential standards apply to foreign banking organizations (FBOs) with significant US operations. Under the final rules, FBOs and their US intermediate holding companies (IHCs) will be assigned to categories based on their size measured in total assets as well as on scores relating to four other risk-based indicators: non-bank assets, a weighted measure of short-term wholesale funding, off-balance sheet exposure and cross-jurisdictional activity. Each of UBS Americas Holdings LLC (our IHC) and our combined US operations, which include our IHC and US 58 branches of UBS AG, are “Category III” firms under the final rule. In this category, among other things, UBS Americas Holding LLC will continue to be: (i) required to submit its capital plan annually; (ii) subject to limitations on distributions through the Comprehensive Capital Analysis and Review (CCAR) process; (iii) subject to annual supervisory stress testing; and (iv) subject to the supplementary leverage ratio. It will also become subject to the newly applicable liquidity coverage ratio requirements and the proposed net stable funding ratio requirements. “Category III firms” are now required to conduct company-run stress tests once every two years, rather than annually, and to submit US resolution plans once every three years. On 9 July 2019, US regulators adopted rules intended to simplify compliance with certain capital requirements for certain categories of organizations, including Category III organizations such as UBS Americas Holding LLC. Volcker Rule revisions US regulators have adopted amendments (2019 Final Rule) to their regulations implementing the Volcker Rule prohibitions on proprietary trading and limitations on covered fund activities. The amendments became effective 1 January 2020, with compliance voluntary from that date and mandatory from 1 January 2021. Among other changes, the 2019 Final Rule tailors compliance program obligations for trading activities in tiers based on the level of US trading assets and liabilities and relaxes certain conditions for exemptions to the Volcker Rule restrictions to apply to activities engaged in by foreign banking entities outside the United States. We expect UBS will fall within the “Significant” category, which will require UBS to maintain its compliance program but should eliminate certain reporting requirements. On 30 January 2020, US regulators proposed further amendments to their Volcker Rule regulations. The proposed amendments would permit banking entities to engage in additional activities with covered funds compared with the existing regulations. Final BEAT tax regulations issued In December 2019, the US Treasury Department and the Internal Revenue Service issued final regulations regarding the base erosion and anti-abuse tax (BEAT). BEAT was introduced as part of the Tax Cuts and Jobs Act of 2017 with the intended purpose of preventing US corporations from unduly reducing their US taxable income through payments to related foreign parties. While generally retaining most features of the proposed regulations issued in December 2018, including those that were considered helpful to foreign banks operating through branches and subsidiaries in the US (such as UBS), the final regulations contain a number of meaningful clarifications and changes. We continue to expect to have nil to limited exposure to BEAT for the foreseeable future, primarily because payments that our US branches and subsidiaries make to related parties outside the US are expected to remain below the applicable BEAT thresholds. US Regulation Best Interest The SEC has adopted rules and interpretations intended to enhance customer protection of retail investors. The effective date of these new provisions will be 30 June 2020. The new rules are intended to align the legal requirements and mandated disclosures for broker-dealers and investment advisers with reasonable investor expectations, while preserving access, in terms of choice and cost, to a variety of investment services and products. Regulation Best Interest elevates the standard of care for broker-dealers from the current “suitability” requirement to a newly defined “best interest” standard, which applies to any securities transaction or investment strategy involving securities offered to a retail customer and makes clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations. The regulation also creates new disclosure requirements and additional compliance program requirements. Implementation of these changes will require operational and supervisory changes for UBS’s US broker-dealers. US Securities and Exchange Commission adopts US security- based swaps regulations In 2019, the SEC adopted a number of rules and rule amendments for security-based swap dealers (SBSDs), including: (i) capital, margin and segregation requirements; (ii) record- keeping, reporting and notification requirements; and (iii) the application of risk mitigation techniques to uncleared portfolios of security-based swaps. In December 2019, the SEC also adopted rules and interpretations (effective 6 April 2020) intended to expand and improve the framework for regulating cross-border security-based swaps. The December 2019 rules address registration requirements for foreign SBSDs, including guidance on the process for obtaining substituted compliance for non-US SBSDs. We expect that UBS AG will be required to register as an SBSD. The date for security-based swap entities to register with the SEC, and to comply with other securities-based (including margin, capital, segregation, swaps regulations record-keeping conduct requirements), is 6 October 2021. and business reporting, and APAC China further opening up its financial sector In July 2019, China’s Office of the Financial Stability and Development Committee and the State Administration of Foreign Exchange announced measures designed to accelerate the opening up of the financial sector to foreign financial institutions and investors. Measures include: the removal of foreign ownership limits on securities, fund management and futures companies one year earlier, in 2020; encouraging overseas financial institutions to establish and invest in asset and wealth management entities and currency brokers, and participate in the bond market; and eliminating requirements and quotas for qualified foreign investors to invest in China. The accelerated removal of the ownership caps for securities companies means that UBS AG is expected to be permitted to increase its stake in UBS Securities China from the current level of 51% to 100% from 1 December 2020. UBS Asset Management will be permitted to apply for a fully owned securities investment fund management company from 1 April 2020. 59 Our strategy, business model and environment Our strategy, business model and environment Risk factors Risk factors Certain risks, including those described below, may affect our ability to execute our strategy or our business activities, financial condition, results of operations and prospects. We are inherently exposed to multiple risks, many of which may become apparent only with the benefit of hindsight. As a result, risks that we do not consider to be material or of which we are not currently aware could also adversely affect us. Within each category, the risks that we consider to be most material are presented first. Market and macroeconomic risks Performance in the financial services industry is affected by market conditions and the macroeconomic climate Our businesses are materially affected by market and macroeconomic conditions. Adverse changes in interest rates, credit spreads, securities prices, market volatility and liquidity, foreign exchange rates, commodity prices, and other market fluctuations, as well as changes in investor sentiment, can affect our earnings and ultimately our financial and capital positions. A market downturn and weak macroeconomic conditions can be precipitated by a number of factors, including geopolitical events, global trade disruption, changes in monetary or fiscal policy, changes in trade policies, natural disasters, pandemics, civil unrest, acts of violence, war or terrorism. Such developments can have unpredictable and destabilizing effects and, because financial markets are global and highly interconnected, even local and regional events can have widespread effects well beyond the countries in which they occur. For example, the outbreak of the Covid-19 virus in China, its spread to other nations as well as quarantine and other efforts to contain the outbreak appear to have had an adverse economic effect on economic activity in China as well as on industries such as travel and tourism. The future effects of the outbreak of Covid-19 are unclear at this time. A significant rise in the number of Covid-19 infections, infections in a wide range of countries and regions, or a prolongation of the outbreak could significantly adversely affect economic growth, affect specific industries or countries or affect our employees and business operations in affected countries. Any of these developments may adversely affect our business or financial results. If individual countries impose restrictions on cross-border payments, trade, or other exchange or capital controls, or change their currency (for example, if one or more countries should leave the eurozone), we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be unable to effectively manage our risks. Should the market experience significant volatility, a decrease in business and client activity and market volumes could result, which would adversely affect our ability to generate transaction fees, commissions and margins, particularly in Global Wealth Management and the Investment Bank, as we experienced in 60 invested assets the fourth quarter of 2018. A market downturn would likely reduce the volume and valuation of assets that we manage on behalf of clients, which would reduce recurring fee income that is charged based on in Global Wealth Management and Asset Management and performance-based fees in Asset Management. Such a downturn could also cause a decline in the value of assets that we own and account for as investments or trading positions. In addition, reduced market liquidity or volatility may limit trading opportunities and may therefore reduce transaction-based income and may also impede our ability to manage risks. We could be materially affected if a crisis develops, regionally or globally, as a result of disruptions in markets due to macroeconomic or political developments, or as a result of the failure of a major market participant. Over time, our strategic plans have become more heavily dependent on our ability to generate growth and revenue in emerging markets, including China, causing us to be more exposed to the risks associated with such markets. Global Wealth Management derives revenues from all the principal regions, but has a greater concentration in Asia than many peers and a substantial presence in the US, unlike many European peers. The Investment Bank’s business is more heavily weighted to Europe and Asia than our peers, while its derivatives business is more heavily weighted to structured products for wealth management clients, in particular with European and Asian underlyings. Our performance may therefore be more affected by political, economic and market developments in these regions and businesses, including the effects of the Covid- 19 outbreak, than some other financial service providers. Low and negative interest rates in Switzerland and the eurozone could continue to negatively affect our net interest income The continuing low or negative interest rate environment may further erode interest margins and adversely affect the net interest income generated by the Personal & Corporate Banking and Global Wealth Management businesses. The Swiss National Bank permits Swiss banks to make deposits up to a threshold at zero interest and has recently increased this threshold. Any reduction in or limitation on the use of this exemption from the otherwise applicable negative interest rates could exacerbate the effect of negative interest rates in Switzerland on our business. Low and negative interest rates may also affect customer behavior and hence our overall balance sheet structure. Mitigating actions that we have taken, or may take in the future, such as the introduction of selective deposit fees or minimum lending rates, have resulted and may further result in the loss of customer deposits (a key source of funding for us), net new money outflows and a declining market share in our Swiss lending business. Our shareholders’ equity and capital are also affected by changes in interest rates. In particular, the calculation of our Swiss pension plan’s net defined benefit assets and liabilities is sensitive to the applied discount rate and to fluctuations in the value of pension plan assets. Any further reduction in interest rates may lower the discount rates and result in pension plan deficits as a result of the long duration of corresponding liabilities. This could lead to a corresponding reduction in our equity and common equity tier 1 (CET1) capital. Our credit risk exposure to clients, trading counterparties and other financial institutions would increase under adverse economic conditions Credit risk is an integral part of many of our activities, including lending, underwriting and derivatives activities. Adverse economic or market conditions may lead to impairments and defaults on these credit exposures. Losses may be exacerbated by declines in the value of collateral securing loans and other exposures. In our prime brokerage, securities finance and Lombard lending businesses, we extend substantial amounts of credit against securities collateral, the value or liquidity of which may decline rapidly. Our Swiss mortgage and corporate lending portfolios are a large part of our overall lending. We are therefore exposed to the risk of adverse economic developments in Switzerland, including the strength of the Swiss franc and its effect on Swiss exports, prevailing negative interest rates by the Swiss National Bank, economic conditions within the eurozone or the EU, and the evolution of agreements between Switzerland and the EU or European Economic Area, which represent Switzerland’s largest export market. In addition, under the IFRS 9 expected credit loss (ECL) regime, credit loss expenses may increase rapidly at the onset of an economic downturn as a result of higher levels of credit impairments (stage 3), as well as higher ECL from stages 1 and 2, only gradually diminishing once the economic outlook improves. Substantial increases in ECL could exceed expected loss for regulatory capital purposes and adversely affect our CET1 capital and regulatory capital ratios. Our plans to ensure uninterrupted business dealings as the UK withdraws from the EU may not be effective Our plans to ensure uninterrupted business dealings as the UK withdraws from the EU may not be effective if the UK and the EU do not reach a deal by the end of the transition period, scheduled to end on 31 December, 2020, resulting in disruptions across the financial sector. To prepare our business for the UK withdrawal from the EU, we completed a merger of UBS Limited, our UK-based subsidiary, into UBS Europe SE, our Germany-headquartered European subsidiary, which is under the direct supervision of the European Central Bank. All clients and counterparties of UBS Limited who would not be able to be serviced by UBS AG, London Branch following the exit of the UK from the EU have been transferred to UBS Europe SE. Regulators in both the UK and Europe have taken measures to minimize business disruption in the financial sector in the event of a no-deal scenario, including the UK implementation of a temporary permissions regime so that firms currently using an EU passport for business into the UK can continue operating within the scope of their existing permissions, as well as the recognition by EU authorities of three UK-authorized central counterparties. Nevertheless, significant risk of a disorderly exit of the UK from the EU remains and, should this risk materialize, it could cause significant disruption across the financial industry and, under extreme conditions, contribute to a weakening of the global economy. Currency fluctuation We are subject to currency fluctuation risks. Although our change from the Swiss franc to the US dollar as our functional and presentation currency in 2018 reduces our exposure to currency fluctuation risks with respect to the Swiss franc, a substantial portion of our assets and liabilities are denominated in currencies other than the US dollar. Additionally, in order to hedge our CET1 capital ratio, our CET1 capital must have foreign currency exposure, which leads to currency sensitivity. As a consequence, it is not possible to simultaneously fully hedge both the amount of capital and the capital ratio. Accordingly, changes in foreign exchange rates may continue to adversely affect our profits, balance sheet and capital leverage and liquidity coverage ratios. Regulatory and legal risks Material legal and regulatory risks arise in the conduct of our business As a global financial services firm operating in more than 50 countries, we are subject to many different legal, tax and regulatory regimes, including extensive regulatory oversight, and are exposed to significant liability risk. We are subject to a large number of claims, disputes, legal proceedings and government investigations, and we expect that our ongoing business activities will continue to give rise to such matters in the future. The extent of our financial exposure to these and other matters is material and could substantially exceed the level of provisions that we have established. We are not able to predict the financial and non- financial consequences these matters may have when resolved. We may be subject to adverse preliminary determinations or court decisions that may negatively affect public perception and our reputation, result in prudential actions from regulators, and cause us to record additional provisions for the matter even when we believe we have substantial defenses and expect to ultimately achieve a more favorable outcome. This risk is illustrated by the award of aggregate penalties and damages of EUR 4.5 billion by the court of first instance in France, which we have appealed and will be retried in the Court of Appeal in June 2020. Resolution of regulatory proceedings may require us to obtain waivers of regulatory disqualifications to maintain certain operations; may entitle regulatory authorities to limit, suspend or terminate licenses and regulatory authorizations; and may permit financial market utilities to limit, suspend or terminate our participation in them. Failure to obtain such waivers, or any limitation, suspension or termination of licenses, authorizations or participations, could have material adverse consequences for us. 61 Our strategy, business model and environment Our strategy, business model and environment Risk factors 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 anti-trust authorities in a number of jurisdictions, including the US and Switzerland. Ever since our material losses arising from the 2007–2009 financial crisis, we have been subject to a very high level of regulatory scrutiny and to certain regulatory measures that constrain our strategic flexibility. While we believe we have remediated the deficiencies that led to those losses, as well as to the unauthorized trading incident announced in September 2011, the effects on our reputation, as well as on relationships with regulatory authorities of the LIBOR-related settlements of 2012 and settlements with some regulators of matters related to our foreign exchange and precious metals business, as well as the extensive efforts required to implement new regulatory expectations, have resulted in continued scrutiny. We are in active dialog with regulators concerning the actions we are taking to improve our operational risk management, risk control, anti-money laundering, data management and other frameworks, and otherwise 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. to meet seek Substantial changes in regulation may adversely affect our businesses and our ability to execute our strategic plans We are subject to significant new regulatory requirements, including recovery and resolution planning, changes in capital and prudential standards, as well as new and revised market standards and fiduciary duties. Notwithstanding attempts by regulators to align their efforts, the measures adopted or proposed for banking regulation differ significantly across the major jurisdictions, making it increasingly difficult to manage a global institution. In addition, Swiss regulatory changes with regard to such matters as capital and liquidity have often proceeded more quickly than those in other major jurisdictions, and Switzerland’s requirements for major international banks are among the strictest of the major financial centers. This could put Swiss banks, such as UBS, at a disadvantage when competing with peer financial institutions subject to more lenient regulation or with unregulated non-bank competitors. Our implementation of additional regulatory requirements and changes in supervisory standards, as well as our compliance laws and regulations, continue to receive with existing 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 62 likely be subject to further regulatory scrutiny as well as measures that might further constrain our strategic flexibility. into subsidiaries to Resolvability and resolution and recovery planning: 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. For example, we have transferred all of our US subsidiaries under a US intermediate holding company to meet US regulatory the requirements, and have operations of Personal & Corporate Banking and Global Wealth Management booked in Switzerland to UBS Switzerland AG to improve resolvability. transferred substantially all These changes, particularly the transfer of operations to subsidiaries, require significant time and resources to implement, and create operational, capital, liquidity, funding and tax inefficiencies. In addition, they may increase our aggregate credit exposure to counterparties as they transact with multiple entities within the Group. Furthermore, our operations in subsidiaries are subject to local capital, liquidity, stable funding, capital planning and stress requirements. These requirements have resulted in increased capital and liquidity requirements in affected subsidiaries, which limit our operational flexibility and negatively affect our ability to benefit from synergies between business units and to distribute earnings to the Group. testing Under the Swiss too-big-to-fail (TBTF) framework, we are required to put in place viable emergency plans to preserve the operation of systemically important functions in the event of a failure. Moreover, under this framework and similar regulations in the US, the UK, the EU and other jurisdictions in which we operate, we are required to prepare credible recovery and resolution plans detailing the measures that would be taken to recover in a significant adverse event or in the event of winding down the Group or the operations in a host country through resolution or insolvency proceedings. If a recovery or resolution plan that we produce is determined by the relevant authority to be inadequate or not credible, relevant regulation may permit the authority to place limitations on the scope or size of our business in that jurisdiction, or oblige us to hold higher amounts of capital or liquidity or to change our legal structure or business in order to remove the relevant impediments to resolution. FINMA is expected to make a formal determination of whether the emergency plans of Swiss systemically relevant banks are “credible” in early 2020. As a result of this review, FINMA may require us to amend the plan or put other measures in place. Capital and prudential standards: As an internationally active Swiss systemically relevant bank (an SRB), we are subject to capital and total loss-absorbing capacity (TLAC) requirements that are among the most stringent in the world. Moreover, many of our subsidiaries must comply with minimum capital, liquidity and similar requirements and, as a result, UBS Group AG and UBS AG have contributed a significant portion of their capital and provide substantial liquidity to these subsidiaries. These funds are available to meet funding and collateral needs in the relevant entities, but are generally not readily available for use by the Group as a whole. We expect our risk-weighted assets (RWA) to further increase as the effective date for capital standards promulgated by the Basel Committee on Banking Supervision (the BCBS) draws nearer, although the effective date of the proposals is likely to be later than 2022 contemplated by the BCBS standard. In addition, the Board of Governors of the Federal Reserve System adopted two proposals last year regarding certain capital and liquidity requirements and enhanced prudential standards applicable (FBOs) with foreign banking organizations significant US operations. Under the proposal, it is expected that UBS Americas Holding LLC would continue to be subject to annual assessments of the Comprehensive Capital Analysis and Review (CCAR) process, a supplementary leverage ratio, newly applicable liquidity coverage ratio ratio requirements. requirements and new net capital plan through funding stable its to These additional increases in capital and liquidity standards could significantly curtail our ability to pursue strategic opportunities and to distribute risk. Market regulation and fiduciary standards: Our wealth and asset management businesses operate in an environment of increasing regulatory scrutiny and changing standards with respect to fiduciary and other standards of care and the focus on mitigating or eliminating conflicts of interest between a manager or advisor and the client, which require effective implementation across the global systems and processes of investment managers and other industry participants. For example, the SEC has adopted a new Regulation Best Interest that is intended to enhance and clarify the duties of brokers and investment advisers to retail customers. Regulation Best Interest will apply to a large portion of Global Wealth Management’s business in the US, and we will likely be required to materially change business processes, policies and the terms on which we interact with these clients in order to comply with these rules. costs incurred substantial Previously, we have in implementing a compliance and monitoring framework in connection the with the Volcker Rule under the Dodd–Frank Act and have modified our business activities both inside and outside the US to conform to the Volcker Rule’s activity limitations. In 2019, US regulators have adopted amendments (the 2019 Final Rule) to their regulations implementing the Volcker Rule prohibitions on proprietary trading and limitations on covered fund activities. The amendments were effective as of 1 January 2020 and compliance is mandatory from 1 January 2021. We may incur additional costs in the short term to implement the changes to the operation of our Volcker compliance program, required by the 2019 Final Rule. However, these changes may reduce the long-term burden on our operations. We may also become subject to other similar regulations substantively limiting the types of activities in which we may engage or the way we conduct our operations. Some of the regulations applicable to UBS AG as a registered swap dealer with the Commodity Futures Trading Commission (CFTC) in the US, and certain regulations that will be applicable when UBS AG registers as a security-based swap dealer with the US Securities and Exchange Commission (the SEC), apply to UBS AG globally, including those relating to swap data reporting, record-keeping, compliance and supervision. As a result, in some cases, US rules duplicate or may conflict with legal requirements applicable to us elsewhere, including in Switzerland, and may place us at a competitive disadvantage to firms that are not required to register in the US with the SEC or CFTC. In many instances, we provide services on a cross-border basis, and we are therefore sensitive to barriers restricting market access for third-country firms. In particular, efforts in the EU to harmonize the regime for third-country firms to access the European market may have the effect of creating new barriers that adversely affect our ability to conduct business in these jurisdictions from Switzerland. In addition, a number of jurisdictions are increasingly regulating cross-border activities based on determinations of equivalence of home country regulation, substituted compliance or similar principles of comity. A negative determination with respect to Swiss equivalence could limit our access to the market in those jurisdictions and may negatively influence our ability to act as a global firm. For example, the EU declined to extend the equivalence determination for Swiss exchanges, which lapsed as of 30 June 2019. Reciprocally, the regulations that Switzerland issued by Swiss adopted to prohibit trading of shares incorporated companies on EU venues came into effect on 1 July 2019. investment and fiscal amnesty programs, UBS experienced cross-border outflows over a number of years as a result of heightened focus by fiscal authorities on in cross-border anticipation of the implementation in Switzerland of the global automatic exchange of tax information, and as a result of the measures UBS has implemented in response to these changes. Further changes in local tax laws or regulations and their cross-border implementation of enforcement, tax information exchange tax amnesty or regimes, national enforcement programs or similar actions may affect our clients’ ability or willingness to do business with us and could result in additional cross-border outflows. the Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly We plan to operate with a CET1 capital ratio of around 13% and a CET1 leverage ratio of around 3.7%. Our ability to maintain these ratios is subject to numerous risks, including the financial results of our businesses, the effect of changes to capital standards, methodologies and interpretations that may adversely affect the calculation of our CET1 ratios, the imposition of risk add-ons or capital buffers, and the application of additional capital, liquidity and similar requirements to subsidiaries. The results of our businesses may be adversely affected by events arising from other factors described herein. In some cases, such as litigation and regulatory risk and operational risk events, losses may be sudden and large. These risks could reduce the amount of capital available for return to shareholders and hinder our ability to achieve our capital returns target of a progressive cash dividend coupled with a share repurchase program. 63 Our strategy, business model and environment Our strategy, business model and environment Risk factors Capital strength is a key component of our business model. 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, the leverage ratio denominator and eligible capital, all of which may fluctuate based on a number of factors, some of which are outside our control. Our eligible capital may be reduced by losses recognized within net profit or other comprehensive income. Eligible capital may also be reduced for other reasons, including acquisitions which change the level of goodwill, changes in temporary differences related to deferred tax assets included in capital, adverse currency movements affecting the value of equity, prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions, and changes in the value of certain pension fund assets and liabilities or in the interest rate and other assumptions used to calculate the changes in our net defined benefit obligation recognized in other comprehensive income. in the economic environment or 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 increased operational risk could result in an increase in RWA. We have significantly reduced our market risk and credit risk RWA in recent years. However, increases in operational risk RWA, particularly those arising from litigation, regulatory and similar matters, and regulatory changes in the calculation of RWA, and regulatory add- ons to RWA, have offset a substantial portion of this reduction. Changes in the calculation of RWA, the imposition of additional supplemental RWA charges or multipliers applied to certain exposures and other methodology changes, as well as the implementation of the capital standards promulgated by the Basel Committee on Banking Supervision, which will take effect in 2022, could substantially increase our RWA. The leverage ratio is a balance sheet-driven measure and therefore limits balance sheet-intensive activities, such as lending, more than activities that are less balance sheet intensive, and it may constrain our business even if we satisfy other risk-based capital requirements. Our leverage ratio denominator is driven by, among other things, the level of client activity, including deposits and loans, foreign exchange rates, interest rates and other market factors. Many of these factors are wholly or partly outside of our control. The effect of taxes on our financial results is significantly influenced by tax law changes and reassessments of our deferred tax assets Our effective tax rate is highly sensitive to our performance, our expectation of future profitability and statutory tax rates. Based on prior years’ tax losses, we have recognized deferred tax assets (DTAs) reflecting the probable recoverable level based on future taxable profit as informed by our business plans. If our 64 performance is expected to produce diminished taxable profit in future years, particularly in the US, we may be required to write down all or a portion of the currently recognized DTAs through the income statement in excess of anticipated amortization. This would have the effect of increasing our effective tax rate in the year in which any write-downs are taken. Conversely, if we expect the performance of entities in which we have unrecognized tax losses to improve, particularly in the US or the UK, we could potentially recognize additional DTAs. The effect of doing so would be to reduce our effective tax rate in years in which additional DTAs are recognized and to increase our effective tax rate in future years. Our effective tax rate is also sensitive to any future reductions in statutory tax rates, particularly in the US, which would cause the expected future tax benefit from items such as tax loss carry-forwards in the affected locations to diminish in value. This, in turn, would cause a write-down of the associated DTAs. For example, the reduction in the US federal corporate tax rate to 21% from 35% introduced by the US Tax Cuts and Jobs Act (TCJA) resulted in a USD 2.9 billion net write-down in the Group’s DTAs in the fourth quarter of 2017. We generally revalue our DTAs in the fourth quarter of the financial year based on a reassessment of future profitability taking into account our updated business plans. We consider the performance of our businesses and the accuracy of historical forecasts, tax rates and other factors in evaluating the recoverability of our DTAs, including the remaining tax loss carry-forward period and our assessment of expected future taxable profits over the life of DTAs. Estimating future profitability is inherently subjective and is particularly sensitive to future economic, market and other conditions, which are difficult to predict. Our results in past years have demonstrated that changes in the recognition of DTAs can have a very significant effect on our reported results. Any future change in the manner in which UBS rate, remeasures DTAs could affect UBS’s effective particularly in the year in which the change is made. tax Our full-year effective tax rate could change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected, or if branches and subsidiaries generate tax losses that we cannot benefit from through the income statement. In particular, losses at entities or branches that cannot offset for tax purposes taxable profits in other group entities, and which do not result in additional DTA recognition, may increase our effective tax rate. In addition, tax laws or the tax authorities in countries where we have undertaken legal structure changes may prevent the transfer of tax losses incurred in one legal entity to newly organized or reorganized subsidiaries or affiliates or may impose limitations on the utilization of tax losses that relate to businesses formerly conducted by the transferor. Were this to occur in situations where there were also limited planning opportunities to utilize the tax losses in the originating entity, the DTAs associated with such tax losses may be required to be written down through the income statement. 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 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. that to Discontinuance of, or changes to, benchmark rates may require adjustments to our agreements with clients and other market participants, as well as to our systems and processes Since April 2013, the UK Financial Conduct Authority (the FCA) has regulated LIBOR, and regulators in other jurisdictions have increased oversight of other interbank offered rates (IBORs) and similar benchmark rates. Efforts to transition from IBORs to several alternative benchmark 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 Liquidity and activity in alternative reference rates (ARRs) continue to develop in markets globally, with work progressing to resolve certain issues associated with transitioning away from IBORs. Regulatory authorities continue to focus on transitioning to ARRs by the end of 2021. The Alternative Reference Rates Committee is considering potential legislative solutions that would mitigate legal risks related to legacy contracts in the event of IBOR discontinuation. In addition, in October 2019, the US Treasury Department and Internal Revenue Service published proposed regulations providing tax relief related to issues that may arise as a result of the modification of debt, derivative, and other financial contracts from LIBOR-based language to ARRs. The European Central Bank published the euro short-term rate, the risk-free rate for euro markets, for the first time on 2 October 2019, reflecting trading activity on 1 October 2019. The Bank of England Working Group on Sterling Risk-Free Reference Rates continues to be supportive of the development of a term (Sterling Overnight Index Average) reference rate. We have a substantial number of contracts linked to IBORs. ARRs do not currently provide a term structure, which will require a change in the contractual terms of products currently indexed on terms other than overnight. In some cases, contracts may contain provisions intended to provide a fallback interest rate in the event of a brief unavailability of the relevant IBOR. These provisions may not be effective or may produce arbitrary results in the event of a permanent cessation of the relevant IBOR. In addition, numerous of our internal systems, limits and processes make use of IBORs as reference rates. Transition to replacement reference rates will require significant investment and effort. If UBS experiences financial difficulties, FINMA has the power to open restructuring or liquidation proceedings or impose protective measures in relation to UBS Group AG, UBS AG or UBS Switzerland AG, and such proceedings or measures may have a material adverse effect on UBS’s shareholders and creditors Under the Swiss Banking Act, FINMA is able to exercise broad statutory powers with respect to Swiss banks and Swiss parent companies of financial groups, such as UBS Group AG, UBS AG and UBS Switzerland AG, if there is justified concern that the entity is over-indebted, has serious liquidity problems or, after the expiration of any relevant deadline, no longer fulfills capital adequacy requirements. Such powers include ordering protective measures, instituting restructuring proceedings (and exercising any Swiss resolution powers in connection therewith), and instituting liquidation proceedings, all of which may have a material adverse effect on shareholders and creditors or may prevent UBS Group AG, UBS AG or UBS Switzerland AG from paying dividends or making payments on debt obligations. UBS would have limited ability to challenge any such protective measures, and creditors and shareholders would have no right under Swiss law or in Swiss courts to reject them, seek their suspension, or challenge their including measures that require or result in the deferment of payments. imposition, 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. 65 Our strategy, business model and environment Our strategy, business model and environment Risk factors to the restructuring proceedings, Upon full or partial write-down of the equity and debt of the relevant entity subject 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. Changes to IFRS or interpretations thereof may cause future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regulatory capital and ratios. For example, we adopted IFRS 9 effective 1 January 2018, which required us to change the accounting treatment of financial instruments measured at amortized cost and certain other positions, to record loans from inception net of expected credit loss (ECL) allowances and provisions instead of recording credit losses on an incurred loss basis. This may result loss allowances in the future and greater volatility in the income statement as ECL changes in response to developments in the credit cycle and composition of our loan portfolio. The effect may be more pronounced in a deteriorating economic environment. in recognized credit in a significant increase FINMA has significant discretion in the exercise of its powers in connection with restructuring proceedings. Furthermore, certain categories of debt obligations, such as certain types of deposits, are subject to preferential treatment. As a result, holders of obligations of an entity subject to a Swiss restructuring proceeding may have their obligations written down or converted into equity even though obligations ranking on par with or junior to such obligations are not written down or converted. Our financial results may be negatively affected by changes to assumptions and valuations, as well as changes to accounting standards We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The application of these accounting standards requires the use of judgment based on estimates and assumptions that may involve significant uncertainty at the time they are made. This is the case, for example, with respect to the measurement of fair value of financial instruments, the recognition of deferred tax assets, the assessment of the impairment of goodwill, expected credit losses and estimation of provisions for contingencies, including litigation, regulatory and similar matters. Such judgments, including the underlying estimates and assumptions, which encompass historical experience, expectations of the future and other factors, are regularly evaluated to determine their continuing relevance based on current conditions. Using different assumptions could cause the reported results to differ. Changes in assumptions, or failure to make the changes necessary to reflect evolving market conditions, may have a significant effect on the financial statements in the periods when changes occur. Estimates of provisions for contingencies may be subject to a wide range of potential outcomes and significant uncertainty. For example, the broad range of potential outcomes in UBS AG’s proceeding in France increases the uncertainty associated with assessing the appropriate provision. If the estimates and assumptions in future periods deviate from the current outlook, UBS AG’s financial results may also be negatively affected. Strategy, management and operations risks We may not be successful in the ongoing execution of our strategic plans We have transformed UBS to focus on our Global Wealth Management business and our universal bank in Switzerland, complemented by Asset Management and a significantly smaller and more capital-efficient Investment Bank; we have substantially reduced the risk-weighted assets and leverage ratio denominator usage in Corporate Center; and made significant cost reductions. Risk remains that going forward we may not succeed in executing our strategy or achieving our performance targets, or may be delayed in doing so. Macroeconomic conditions, geopolitical uncertainty, changes to regulatory requirements and the continuing costs of meeting these requirements have prompted us to adapt our targets and ambitions in the past and we may need to do so again in the future. To achieve our strategic plans, we expect to continue to make significant expenditures on technology and infrastructure to improve client experience, improve and further enable digital offerings and increase efficiency. Our investments in new technology may not fully achieve our objectives or improve our ability to attract and retain customers. In addition, we will likely face competition in providing digitally enabled offerings from both existing competitors and new financial service providers in various portions of the value chain. For example, technological advances and the growth of e-commerce have made it possible for e-commerce firms and other companies to offer products and services that were traditionally offered only by banks. These advances have also allowed financial institutions and other companies financial solutions, including electronic securities trading, payments processing and online automated algorithmic-based investment advice at a low cost to their customers. We may have to lower our prices, or risk losing customers as a result. Our ability to develop and implement competitive digitally enabled offerings and processes will be an important factor in our ability to compete. to provide digitally based 66 As part of our strategy, we seek to improve our operating efficiency, in part by controlling our costs. We may not be able to identify feasible cost reduction opportunities that are consistent with our business goals and cost reductions may be realized later or may be smaller than we anticipate. Higher temporary and permanent regulatory costs and higher business demand than anticipated have partly offset cost reductions and delayed the achievement of our past cost reduction targets, and we could continue to be challenged in the execution of our ongoing efforts to improve operating efficiency. Changes in our workforce as a result of outsourcing, nearshoring, offshoring, insourcing or staff reductions may introduce new operational risks that, if not effectively addressed, could affect our ability to achieve cost and other benefits from such changes, or could result in operational losses. As we implement effectiveness and efficiency programs, we may also experience unintended consequences, such as the unintended loss or degradation of capabilities that we need in order to maintain our competitive position, achieve our targeted returns or meet existing or new regulatory requirements and expectations. third parties, Operational risks affect our business Our businesses depend on our ability to process a large number of transactions, many of which are complex, across multiple and diverse markets in different currencies, to comply with requirements of many different legal and regulatory regimes to which we are subject and to prevent, or promptly detect and stop, unauthorized, fictitious or fraudulent transactions. We also rely on access to, and on the functioning of, systems maintained by including clearing systems, exchanges, information processors and central counterparties. Any failure of our or third-party systems could have an adverse effect on us. Our operational risk management and control systems and processes are designed to help ensure that the risks associated with our activities – including those arising from process error, failed execution, misconduct, unauthorized trading, fraud, system failures, financial crime, cyberattacks, breaches of information security, inadequate or ineffective access controls and failure of security and physical protection – are appropriately controlled. If our internal controls fail or prove ineffective in identifying and 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 use automation as part of our efforts to improve efficiency, reduce the risk of error and improve our client experience. We intend to expand the use of robotic processing, machine learning and artificial intelligence to further these goals. Use of these tools presents their own risks, including the need for effective design and testing; the quality of the data used for development and operation of machine learning and artificial intelligence tools may adversely affect their functioning and result in errors and other operational risks. We and other financial services firms have been subject to breaches of security and to cyber- and other forms of attack, some of which are sophisticated and targeted attacks intended to gain access to confidential information or systems, disrupt service or destroy data. These attacks may be attempted through the introduction of viruses or malware, phishing and other forms of social engineering, distributed denial of service attacks and other means. These attempts may occur directly, or using equipment or security passwords of our employees, third-party service providers or other users. In addition to external attacks, we have experienced loss of client data from failure by employees and others to follow internal policies and procedures and from misappropriation of our data by employees and others. We may not be able to anticipate, detect or recognize threats to our systems or data and our preventative measures may not be effective to prevent an attack or a security breach. In the event of a security breach, notwithstanding our preventative measures, we may not immediately detect a particular breach or attack. Once a particular attack is detected, time may be required to investigate and assess the nature and extent of the attack. A successful breach or circumvention of security of our systems or data could have significant negative consequences for us, including disruption of our operations, misappropriation of confidential information concerning us or our customers, damage to our systems, financial losses for us or our customers, violations of data privacy and similar laws, litigation exposure and damage to our reputation. 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 Protection 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. 67 Our strategy, business model and environment Our strategy, business model and environment Risk factors such to comply with A major focus of US and other countries’ governmental policies relating to financial institutions in recent years has been on fighting money laundering and terrorist financing. We are required to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the identity of our clients under the laws of many of the countries in which we operate. We are also subject to laws and regulations related to corrupt and illegal payments to government officials by others, such as the US Foreign Corrupt Practices Act and the UK Bribery Act. We have implemented policies, procedures and internal controls that are designed regulations. Notwithstanding this, US regulators have found deficiencies in the design and operation of anti-money laundering programs in our US operations. We have undertaken a significant program to address these regulatory findings with the objective of fully meeting regulatory expectations for our programs. Failure to maintain and implement adequate programs to combat money laundering, terrorist financing or corruption, or any failure of our programs in these areas, could have serious consequences both from legal enforcement action and from damage to our reputation. Frequent changes imposed and increasingly complex sanctions imposed on countries, entities and individuals increase our cost of monitoring and complying with sanctions requirements and increase the risk that we will not identify in a timely manner previously permissible client activity that is subject to a sanction. in sanctions laws and As a result of new and changed regulatory requirements and the changes we have made in our legal structure, the volume, frequency and complexity of our regulatory and other reporting has significantly increased. Regulators have also significantly increased expectations regarding our internal reporting and data aggregation, as well as management reporting. We have incurred and continue to incur significant costs to implement infrastructure to meet these requirements. Failure to meet external reporting requirements accurately and in a timely manner or failure to meet regulatory expectations of internal reporting, data aggregation and management reporting could result in enforcement action or other adverse consequences for us. Certain types of operational control weaknesses and failures could also adversely affect our ability to prepare and publish accurate and timely financial reports. In addition, despite the contingency plans that we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses and the communities in which we operate. This may include a disruption due to natural disasters, pandemics, civil unrest, war or communications, transportation or other services that we use or that are used by third parties with whom we conduct business. electrical, terrorism involve and 68 We may not be successful in implementing changes in our wealth management businesses to meet changing market, regulatory and other conditions In recent years, inflows from lower-margin segments and markets have been replacing outflows from higher-margin segments and markets, in particular for cross-border clients. This dynamic, combined with changes in client product preferences as a result of which low-margin products account for a larger share of our revenues than in the past, has put downward pressure on Global Wealth Management’s margins. As the discussion above indicates, we are exposed to possible outflows of client assets in our asset-gathering businesses and to changes affecting the profitability of Global Wealth Management, in particular. Initiatives that we may implement to overcome the effects of changes in the business environment on our profitability, balance sheet and capital positions may not succeed in counteracting those effects and may cause net new money outflows and reductions in client deposits, as happened with our balance sheet and capital optimization program in 2015. There is no assurance that we will be successful in our efforts to offset the adverse effect of these or similar trends and developments. We may be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees The financial services industry is characterized by intense competition, continuous innovation, restrictive, detailed, and sometimes fragmented regulation and ongoing consolidation. We face competition at the level of local markets and individual business lines, and from global financial institutions that are comparable to us in their size and breadth. Barriers to entry in individual markets and pricing levels are being eroded by new technology. We expect 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 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. linked Constraints on the amount or structure of employee compensation, higher levels of deferral, performance conditions and other circumstances triggering the forfeiture of unvested awards may adversely affect our ability to retain and attract key employees. The loss of key staff and the inability to attract qualified replacements could seriously compromise our ability to execute our strategy and to successfully improve our operating and control environment, and could affect our business performance. Swiss law requires that shareholders approve the compensation of the Board of Directors (the BoD) and the GEB each year. If our shareholders fail to approve the compensation for the GEB or the BoD, this could have an adverse effect on our ability to retain experienced directors and our senior management. We depend on our risk management and control processes to avoid or limit potential losses in our businesses Controlled risk-taking is a major part of the business of a financial services firm. Some losses from risk-taking activities are inevitable, but to be successful over time, we must balance the risks we take against the returns generated. Therefore we must diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme, stressed conditions, when concentrations of exposures can lead to severe losses. – As seen during the financial crisis of 2007–2009, we have not always been able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. Our risk measures, concentration controls and the dimensions in which we aggregated risk to identify correlated exposures proved inadequate in a historically severe deterioration in financial markets. As a result, we recorded substantial losses on fixed income trading positions, particularly in 2008 and 2009. We have substantially revised and strengthened our risk management and control framework and increased the capital that we hold relative to the risks that we take. Nonetheless, we could suffer further losses in the future if, for example: – we do not fully identify the risks in our portfolio, in particular risk concentrations and correlated risks; our assessment of the risks identified, or our response to inadequate, 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. 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 to be untimely, trends, proves this portfolio – – – the Swiss real estate market were to occur. We also hold legacy risk positions, primarily in Corporate Center, that, in many cases, are illiquid and may again deteriorate in value. We also manage risk on behalf of our clients. The performance of assets we hold for our clients may be adversely affected by the same factors mentioned above. If clients suffer losses or the performance of their assets held with us is not in line with relevant benchmarks against which clients assess investment performance, we may suffer reduced fee income and a decline in assets under management, or withdrawal of mandates. Investment positions, such as equity investments made as part of strategic initiatives and seed investments made at the inception of funds that we manage, may also be affected by market risk factors. These investments are often not liquid and generally are intended or required to be held beyond a normal trading horizon. Deteriorations in the fair value of these positions would have a negative effect on our earnings. in restrictions financing agreements and 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, the including requirements of applicable law and regulatory, fiscal or other restrictions. In particular, UBS Group AG’s direct and indirect subsidiaries, including UBS AG, UBS Switzerland AG, UBS Americas Holding LLC and UBS Europe SE, are subject to laws and regulations that restrict dividend payments, authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to UBS Group AG, or could affect their ability to repay any loans made to, or other investments in, such subsidiary by UBS Group AG or another member of the Group. For example, the US Comprehensive Capital Analysis and Review process requires that our US intermediate holding company demonstrate that it can continue to meet minimum capital standards over a hypothetical nine-quarter severely adverse economic scenario. If it fails to meet the quantitative capital requirements, or the Federal Reserve Board’s qualitative assessment of the capital planning process is adverse, our US intermediate holding company would be prohibited from paying dividends or making distributions. Restrictions and regulatory actions of this kind could impede access to funds that UBS Group AG may need to meet its obligations or to pay dividends to shareholders. In addition, UBS Group AG’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to all prior claims of the subsidiary’s creditors. 69 Our strategy, business model and environment Our strategy, business model and environment Risk factors Our capital instruments may contractually prevent UBS Group AG from proposing the distribution of dividends to shareholders, other than in the form of shares, if we do not pay interest on these instruments. 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. Furthermore, UBS Group AG may guarantee some of the payment obligations of certain of the Group’s subsidiaries from time to time. These guarantees may require UBS Group AG to provide substantial funds or assets to subsidiaries or their creditors or counterparties at a time when UBS Group AG is in need of liquidity to fund its own obligations. The credit ratings of UBS Group AG or its subsidiaries used for funding purposes could be lower than the ratings of the Group’s operating subsidiaries, which may adversely affect the market value of the securities and other obligations of UBS Group AG or those subsidiaries on a standalone basis. Our reputation is critical to our success Our reputation is critical to the success of our strategic plans, business and prospects. Reputational damage is difficult to reverse, and improvements tend to be slow and difficult to measure. Our reputation has been adversely affected by our losses during the financial crisis, investigations into our cross- border private banking services, criminal resolutions of LIBOR- related and foreign exchange matters, as well as other matters. We believe that reputational damage as a result of these events was an important factor in our loss of clients and client assets across our asset-gathering businesses. New events that cause reputational damage could have a material adverse effect on our results of operation and financial condition, as well as our ability to achieve our strategic goals and financial targets. Liquidity and funding risk Liquidity and funding management are critical to UBS’s ongoing performance The viability of our business depends on the availability of funding sources, and our success depends on our ability to obtain funding at times, in amounts, for tenors and at rates that enable us to efficiently support our asset base in all market conditions. Our funding sources have generally been stable, but could change in the future because of, among other things, general market disruptions or widening credit spreads, which could also influence the cost of funding. A substantial part of our liquidity and funding requirements are met using short-term Moreover, more stringent capital and liquidity and funding requirements will likely lead to increased competition for both secured funding and deposits as a stable source of funding, and to higher funding costs. The addition of loss-absorbing debt as a component of capital requirements, the regulatory requirements to maintain minimum TLAC at UBS’s holding company and at subsidiaries, as well as the power of resolution authorities to bail in TLAC and other debt obligations, and uncertainty as to how such powers will be exercised, will increase our cost of funding and could potentially increase the total amount of funding required, in the absence of other changes in our business. In addition, as experienced 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 connection with Moody’s downgrade of UBS AG’s long-term debt rating in June 2012, rating downgrades can require us to post additional collateral or make additional cash payments under trading agreements. Our credit ratings, together with our capital strength and reputation, also contribute to maintaining client and counterparty confidence, and it is possible that rating changes could influence the performance of some of our businesses. liquidity and The requirement to maintain a liquidity coverage ratio of high-quality liquid assets to estimated stressed short-term net cash outflows, and other similar funding requirements, oblige us to maintain high levels of overall liquidity, limit our ability to optimize interest income and expense, make certain lines of business less attractive and reduce our overall ability to generate profits. The liquidity coverage ratio and net stable funding ratio requirements are intended to ensure that we are not overly reliant on short-term funding and that we have sufficient long-term funding for illiquid assets. The relevant calculations make assumptions about the relative likelihood and amount of outflows of funding and available sources of additional funding in market-wide and firm- specific stress situations. There can be no assurance that in an actual stress situation our funding outflows would not exceed the assumed amounts. 70 Financial and operating performance Management report Changes related to Item 303 of Regulation S-K In our Annual Report 2019 and related 20-F filing, we exclude the discussion of the financial years 2018 compared with 2017 in our Management’s Discussion and Analysis section pursuant to changes related to Item 303 of Regulation S-K, as we have included such discussion already in a prior filing, which can be found under: www.sec.gov/Archives/edgar/data/1114446/000161052019000031/ar1820f.htm Financial and operating performance Critical accounting estimates and judgments Critical accounting estimates and judgments We believe that the judgments, estimates and assumptions we have made are appropriate under the circumstances and that our financial statements fairly present, in all material respects, the financial position of UBS as of 31 December 2019 and the results of our operations and cash flows for 2019, including comparative information, in accordance with IFRS.  Refer to “Note 1a Significant accounting policies” in the “Consolidated financial statements” section of this report for more information  Refer to the “Risk factors” section of this report for more information In preparing our financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), we apply judgment and make estimates and assumptions that may involve significant uncertainty at the time they are made. We regularly reassess those estimates and assumptions, which encompass historical experience, expectations of the future and other pertinent factors, to determine their continuing relevance based on current conditions, and we update them as necessary. Changes in estimates and assumptions may have a significant effect on the financial statements. Furthermore, actual results may differ significantly from our estimates, which could result in significant losses to the Group, beyond what we anticipated or provided for. Key areas involving a high degree of judgment and areas where estimates and assumptions are significant to the consolidated financial statements include: – fair value measurement – expected credit loss measurement – assessment of the business model and certain contractual features when classifying financial instruments – pension and other post-employment benefit plans – income taxes – goodwill – provisions and contingent liabilities – consolidation of structured entities – determination of the functional currency and assessing the earliest date from which it is practical to perform a restatement following a change in presentation currency for the year ended 31 December 2018 72 Significant accounting and financial reporting changes Significant accounting and financial reporting changes in 2019 IFRS 16, Leases We have adopted IFRS 16, Leases, effective 1 January 2019, fundamentally changing how we account for operating leases when acting as a lessee. Upon adoption, assets and liabilities increased by USD 3.5 billion, with a corresponding increase in risk-weighted assets (RWA) and leverage ratio denominator (LRD). In the income statement, the adoption of the new standard has resulted in increases in Interest expense and Depreciation and impairment of property, equipment and software, which have been partly offset by a decrease in General and administrative expenses. The full-year effect of the application of IFRS 16 was a net decrease in profit before tax of approximately USD 60 million, reflecting reductions of approximately USD 120 million and USD 60 million in operating income and expenses, respectively. As permitted by IFRS 16, we have elected not to restate prior- period information.  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the adoption of IFRS 16 Presentation of dividend income and expense from financial instruments measured at fair value through profit or loss Effective 1 January 2019, we refined the presentation of dividend income and expense, reclassifying dividends from financial instruments measured at fair value through profit or loss from Net interest income to Other net income from financial instruments measured at fair value through profit or loss (prior to 1 January 2019: Other net income from fair value changes on financial instruments), in order to align the presentation of dividends with other associated fair value changes. There is no effect on Total operating income or Net profit / (loss). The change reduces the significant volatility in Net interest income that previously arose. Prior periods have been restated for this presentation change. For the financial year 2018, this resulted in a decrease of USD 976 million in Net interest income and a corresponding increase instruments measured at fair value through profit or loss. income from financial in Other net  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information Changes in Corporate Center cost and resource allocation to business divisions In order to further align Group and divisional performance, we have adjusted our methodology for the allocation of Corporate Center funding costs and expenses to the business divisions. At the same time, we updated our funds transfer pricing framework to better reflect the sources and usage of funding. All of these changes became effective as of 1 January 2019. Prior periods have been restated. Together, for the full year 2018, these changes reduced the business divisions’ operating results and thereby increased their adjusted cost / income ratios approximately 1–2 percentage points, while Corporate Center’s 2018 operating loss before tax decreased by USD 0.7 billion. In Corporate Center, we retain funding costs for deferred tax assets, costs relating to our legal entity transformation program and other costs not attributable to, or representative of the performance of, the business divisions. Alongside the updates to cost allocations and to our funds transfer pricing framework, we increased the allocation of balance sheet resources from Corporate Center to the business divisions. For 2018, the restatement resulted in USD 26 billion of additional RWA and USD 93 billion of additional LRD allocated from Corporate Center to the business divisions. The additional USD 3.5 billion RWA and LRD that resulted from the adoption of IFRS 16, Leases, have both been fully allocated to the business divisions.  Refer to “Note 2a Segment reporting” in the “Consolidated financial statements” section of this report for more information 73 Financial and operating performance Financial and operating performance Significant accounting and financial reporting changes Changes in equity attribution in resource allocation from The aforementioned changes Corporate Center to the business divisions are reflected in the equity attribution to the business divisions. Furthermore, we have updated our equity attribution framework, revising the capital ratio for RWA from 11% to 12.5% to better align with Group capital levels, and incrementally allocating to business divisions USD 2 billion of attributed equity that is related to certain common equity tier 1 (CET1) deduction items previously held centrally. In aggregate, we allocated USD 7 billion of additional attributed equity to the business divisions. The remaining attributed equity retained in Corporate Center primarily relates to deferred tax assets, dividend accruals and the Non-core and Legacy Portfolio. Prior periods have been restated. For the full year 2018, the combined effect from the changes in equity attribution and the aforementioned changes in cost and resource allocation to the business divisions led to a 3–7 percentage point reduction in their respective return on attributed equity.  Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information about our equity attribution framework Changes in Corporate Center segment reporting Effective 1 January 2019, and in compliance with IFRS 8, Operating Segments, we provide results for total Corporate Center only and do not separately report Corporate Center – Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Furthermore, we have operationally combined our Group Treasury activities with Group ALM and call this combined function Group Treasury. Prior- period information has been restated.  Refer to “Note 1 Summary of significant accounting policies” revised on 31 October 2019), as well as amendments to existing disclosures in accordance with the Basel Committee on Banking Supervision “Technical Amendment – Pillar 3 disclosure requirements – regulatory treatment of accounting provisions” issued in August 2018.  Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about the changes to Pillar 3 disclosure requirements Significant accounting and financial reporting changes in 2020 Adoption of hedge accounting requirements of IFRS 9, Financial instruments Effective 1 January 2020, we have adopted the hedge accounting requirements of IFRS 9, Financial instruments, for most of our existing hedge accounting programs, including fair value hedges for interest rate risk related to debt instruments, cash flow hedges of forecast transactions and hedges of net investments in foreign operations. As permitted by IFRS 9, we continue to account for our fair value hedges of portfolio interest rate risk related to loans under IAS 39, Financial Instruments: Recognition and Measurement. these The adoption of requirements will have no consequential financial effect on our financial statements. However, the adoption will allow us to designate more effective hedge accounting relationships going forward, including fair value hedges of foreign currency risk using cross-currency swaps, and to reduce income statement volatility caused by foreign currency basis spreads.  Refer to “Note 1c International Financial Reporting Standards and Interpretations to be adopted in 2020 and later and other and “Note 2a Segment reporting” in the “Consolidated financial changes” in the “Consolidated financial statements” section of statements” section of this report for more information this report for more information Amendments to IAS 39, IFRS 9 and IFRS 7 (Interest Rate Benchmark Reform) In September 2019, the IASB issued Interest Rate Benchmark Reform, Amendments to IFRS 9, IAS 39 and IFRS 7, enabling hedge accounting to continue during the period of uncertainty before existing interest rate benchmarks are replaced with alternative the transitional provisions, we early adopted the revisions in 2019. rates. As permitted by risk-free interest  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information Changes to Pillar 3 disclosure requirements During 2019, we introduced several new tables and/or narratives in accordance with the FINMA Pillar 3 disclosure requirements last (FINMA Circular 2016/1 “Disclosure – banks,” as 74 Streamlining of business division expense reporting Over recent years, we have been progressively aligning our support functions, such as Technology, Operations and Real Estate, with the business divisions. In order to reflect this alignment, we will streamline our reporting beginning with our first quarter 2020 report. We will no longer provide the individual operating expense lines but will disclose costs at a total operating expense level for our divisions. We will continue to disclose the full details on operating expenses at the Group level, and explain the drivers of changes in divisional operating expenses in our management’s discussion and analysis. Revenues and costs related to a small residual set of activities that are not directly attributable to or representative of the performance of the business divisions will be renamed as Group items. These changes will have no impact on Business Division or Group operating income, operating expenses and profit before tax. Group performance Income statement USD million Net interest income Other net income from financial instruments measured at fair value through profit or loss 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 financial instruments measured at fair value through profit or loss Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to non-controlling interests NNeett pprrooffiitt // ((lloossss)) aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss Comprehensive income Total comprehensive income Total comprehensive income attributable to non-controlling interests TToottaall ccoommpprreehheennssiivvee iinnccoommee aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss For the year ended % change from 3311..1122..1199 31.12.18 31.12.17 31.12.18 44,,550011 66,,884422 ((7788)) 1199,,111100 ((11,,669966)) 1177,,441133 221122 2288,,888899 1111,,334433 1166,,008844 55,,228888 11,,776655 117755 2233,,331122 55,,557777 11,,226677 44,,331100 66 44,,330044 55,,009911 22 55,,008899 5,048 6,960 (118) 19,598 (1,703) 17,895 428 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 6,070 5,637 (131) 19,362 (1,840) 17,522 524 29,622 11,707 16,199 6,949 1,053 71 24,272 5,351 4,305 1,046 77 969 2,113 326 1,787 (11) (2) (34) (2) 0 (3) (51) (4) (6) 0 (22) 44 169 (4) (7) (14) (5) (13) (5) 20 (69) 20 75 Financial and operating performance Financial and operating performance Group performance Performance of our business divisions and Corporate Center – reported and adjusted1 USD million Operating income as reported of which: net foreign currency translations losses 3 of which: net losses from properties held for sale Operating income (adjusted) 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 Corporate Center 4 of which: impairment of goodwill Operating expenses (adjusted) of which: net expenses for litigation, regulatory and similar matters 5 Operating profit / (loss) before tax as reported Operating profit / (loss) before tax as reported Operating profit / (loss) before tax (adjusted) Operating profit / (loss) before tax (adjusted) USD million Operating income as reported of which: gains related to investments in associates 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 For the year ended 31.12.19 For the year ended 31.12.19 Global Wealth Global Wealth Management Management 16,353 16,353 Personal & Asset Asset Personal & Manage- Corporate Corporate Manage- ment Banking ment Banking 1,938 3,715 1,938 3,715 Investment Investment Bank Bank 7,269 7,269 Corporate Corporate Center2 Center (385) (385) (35) (35) (29) (29) UBS UBS 28,889 28,889 (35) (35) (29) (29) 16,353 16,353 3,715 3,715 1,938 1,938 7,269 7,269 (321) (321) 28,953 28,953 12,955 12,955 2,274 2,274 1,406 1,406 6,485 6,485 0 0 0 0 69 69 0 0 0 0 17 17 6 6 7 7 20 20 12,887 12,887 2,257 2,257 1,373 1,373 135 135 0 0 0 0 3,397 3,397 3,466 3,466 1,441 1,441 1,458 1,458 532 532 565 565 84 84 7 7 77 77 110 110 6,208 6,208 53 53 784 784 1,061 1,061 For the year ended 31.12.18 192 192 113 113 68 68 (183) (183) 23,312 23,312 203 203 81 81 0 0 110 110 194 194 22,918 22,918 (23) (23) 165 165 (577) (577) (515) (515) 5,577 5,577 6,035 6,035 Global Wealth Management 16,785 Personal & Asset Corporate Manage- ment 1,852 Banking 4,161 Investment Bank 8,041 Corporate Center2 (626) 101 359 31 25 UBS 30,213 460 31 25 (270) (270) Operating income (adjusted) 16,684 3,802 1,852 8,041 (413) 29,966 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 Corporate Center 4 of which: gain related to changes to the Swiss pension plan 6 Operating expenses (adjusted) of which: net expenses for litigation, regulatory and similar matters 5 Operating profit / (loss) before tax as reported Operating profit / (loss) before tax as reported Operating profit / (loss) before tax (adjusted) Operating profit / (loss) before tax (adjusted) 13,531 34 2,365 4 1,426 23 16 209 (66) 0 43 (38) 10 33 (10) 6,554 16 11 166 (5) 13,338 2,355 1,370 6,367 619 41 0 (64) 3,254 3,254 3,346 3,346 1,796 1,796 1,447 1,447 426 426 482 482 1,486 1,486 1,674 1,674 346 208 238 (450) (122) 472 62 (971) (971) (885) (885) 24,222 286 275 0 (241) 23,903 657 5,991 5,991 6,063 6,063 76 Performance of our business divisions and Corporate Center – reported and adjusted (continued)1 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 7 of which: net foreign currency translation losses Operating income (adjusted) 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 Corporate Center 4 of which: expenses from modification of terms for certain DCCP awards 8 Operating expenses (adjusted) of which: net expenses for litigation, regulatory and similar matters 5 OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) For the year ended 31.12.17 Global Wealth Management 16,136 Personal & Corporate Banking 3,839 Asset Manage- ment 2,077 153 Investment Bank 7,650 Corporate Center2 (80) 137 16,136 3,839 1,924 7,513 12,917 39 75 474 2,364 7 0 98 1,514 17 22 63 6,563 39 18 310 26 12,329 2,259 1,412 6,171 174 2 (4) (42) 33,,221199 33,,880077 11,,447755 11,,558800 556633 551122 11,,008877 11,,334422 (16) (63) 913 443 532 (945) 883 304 ((999933)) ((994466)) UBS 29,622 153 137 (16) 29,349 24,272 545 647 0 26 23,054 434 55,,335511 66,,229955 11 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework effective 1 January 2019. Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Significant accounting and financial reporting changes” section of this report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting 22 Corporate Center operating expenses presented in this table are after service allocations to business divisions. 33 Related to the disposal or closure of foreign policies, and events after the reporting period. operations. 44 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives. 55 Reflects the net increase in / (release of) provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to “Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information. Also includes recoveries from third parties of USD 11 million, USD 29 million and USD 55 million for the years ended 31 December 2019, 31 December 2018 and 31 December 2017, respectively. 66 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 77 Includes gains on the overall effect on total equity. Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. sale of our investment in the London Clearing House and on the sale of our investment in IHS Markit in the Investment Bank in 2017. 88 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013. 77 Financial and operating performance Financial and operating performance Group performance 2019 compared with 2018 Results recorded net profit attributable We to shareholders of USD 4,304 million in 2019, which included a net tax expense of USD 1,267 million. to shareholders was USD 4,516 million, which included a net tax expense of USD 1,468 million. In 2018, net profit attributable Profit before tax decreased by USD 414 million, or 7%, to USD 5,577 million, reflecting lower operating income, partly offset by a decrease in operating expenses. Operating income decreased by USD 1,324 million, or 4%, to USD 28,889 million, reflecting a USD 665 million decrease in net interest income and other net income from financial instruments measured at fair value through profit or loss, a USD 482 million decrease in net fee and commission income and USD 216 million lower other income. Operating expenses decreased by USD 910 million, or 4%, to USD 23,312 million. This was mainly driven by USD 1,509 million lower general and administrative expenses, largely reflecting USD 533 million lower occupancy expenses and a decrease of USD 492 million in expenses related to litigation, regulatory and similar matters. This was partly offset by USD 537 million higher depreciation and impairment of property, equipment and software, as well as USD 110 million higher amortization and impairment of goodwill and intangible assets. In addition to reporting our results in accordance with International Financial Reporting Standards (IFRS), we report adjusted results, which exclude items that management believes are not representative of the underlying performance of our businesses. Such adjusted results are non-GAAP financial measures as defined by US Securities and Exchange Commission (SEC) regulations. These adjustments include restructuring expenses related to our CHF 2.1 billion cost reduction program completed at the end of 2017 (referred to as our “legacy cost programs” in this report), as well as expenses relating to new restructuring initiatives. For the full year 2019, we incurred a runoff of restructuring expenses associated with our legacy cost programs of USD 205 million, which are now expected to be nil for 2020 and future years. In addition, in connection with the planned structural changes in the incurred USD 79 million of restructuring expenses in the fourth quarter of 2019. We incur restructuring expenses of approximately expect to USD 200 million in 2020 related to additional cost actions across the Group, with the majority of this expense being incurred in the first half of the year. Investment Bank, we In January 2020, we updated and simplified our performance target framework, with our updated performance targets based on reported results. From the first quarter of 2020, we will no longer disclose adjusted results; however, we will continue to provide disclosure of restructuring and litigation expenses as well as other material profit or loss items that management believes are not representative of underlying business performance. For the purpose of determining adjusted results for 2019, we excluded net restructuring expenses of USD 284 million, a USD 110 million loss related to an impairment of goodwill, net foreign currency translation losses of USD 35 million and a loss of USD 29 million related to the remeasurement of properties that were reclassified as properties held for sale. For 2018, we excluded a gain of USD 460 million related to investments in associates, gains of USD 31 million on sale of real estate, gains of USD 25 million on sale of subsidiaries and businesses, a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities China, a gain of USD 241 million related to changes to the Swiss pension plan, and net restructuring expenses of USD 561 million. On this adjusted basis, profit before tax decreased slightly to USD 6,035 million. Net interest income and other net income from financial instruments measured at fair value through profit or loss For the year ended 31.12.18 31.12.19 31.12.19 31.12.17 % change from 31.12.18 Personal & Corporate Banking of which: net interest income of which: transaction-based income from foreign exchange and other intermediary activity 1 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 financial instruments measured at fair value through profit or loss Total Total Global Wealth Management (6) (24) (2) (6) (3) (4) 2 (1) (3) 10 (63) (12) (32) (6) (15) Corporate Center 1 Mainly includes spread-related income in connection with client-driven transactions, foreign currency translation effects and income and expenses from precious metals, which are included in the income statement 1 line Other net income from financial instruments measured at fair value through profit or loss. The amounts reported on this line are one component of Transaction-based income in the management discussion and 2 Investment Bank information is analysis of Global Wealth Management and Personal & Corporate Banking in the “Global Wealth Management” and “Personal & Corporate Banking” sections of this report. 2 provided at the business line level rather than by financial statement reporting line in order to reflect the underlying business activities, which is consistent with the structure of the management discussion and analysis in the “Investment Bank” section of this report. of which: net interest income of which: transaction-based income from foreign exchange and other intermediary activity 1 3,710 1,338 6,960 12,008 5,049 4,101 948 2,451 2,049 402 (35) 4,756 1,051 3,705 (214) 5,018 1,052 5,637 11,707 4,941 3,880 1,062 2,420 2,044 376 (34) 4,272 1,076 3,196 107 3,490 3,490 1,011 1,011 6,842 6,842 11,343 11,343 4,913 4,913 3,947 3,947 966 966 2,436 2,436 1,992 1,992 443 443 (13) (13) 4,189 4,189 716 716 3,473 3,473 (182) (182) Corporate Client Solutions Investor Client Services Asset Management Investment Bank2 78 Operating income Total operating income decreased by USD 1,324 million, or 4%, to USD 28,889 million. On an adjusted basis, total operating income decreased by USD 1,013 million, or 3%, to USD 28,953 million. Net interest income and other net income from financial instruments measured at fair value through profit or loss Total combined net interest income and other net income from financial instruments measured at fair value through profit or loss decreased by USD 665 million to USD 11,343 million. This was mainly driven by lower net income in the Investment Bank and Global Wealth Management. Global Wealth Management In Global Wealth Management, net interest income decreased by USD 154 million to USD 3,947 million, mainly reflecting lower income from lending and deposits, due to margin compression and moves into lower-margin products. These effects were partly offset by higher investment-of-equity income. Transaction-based income from foreign exchange and other intermediary activity increased by USD 18 million to USD 966 million, mainly due to higher revenues from foreign exchange transactions, driven by higher levels of client activity. Personal & Corporate Banking In Personal & Corporate Banking, net interest income decreased by USD 57 million to USD 1,992 million, mainly reflecting higher funding costs for long-term debt that contributes to total loss- absorbing capacity and lower banking book interest income. This was partly offset by higher deposit revenues. Transaction-based income from foreign exchange and other intermediary activity increased by USD 41 million to USD 443 million, mainly due to higher net income from foreign exchange transactions. Investment Bank In the Investment Bank, net interest income and other net income from financial instruments measured at fair value through profit or loss decreased by USD 567 million to USD 4,189 million. This was driven by a USD 335 million decrease in Corporate Client Solutions, mainly reflecting a decrease in leveraged finance revenues and as 2018 included higher gains from transactions across our Equity Capital Markets and Risk Management portfolio. In addition, USD 198 million Credit loss (expense) / recovery USD million Global Wealth Management Personal & Corporate Banking Investment Bank Corporate Center TToottaall lower income in our Equities business was driven by lower prime brokerage client balances and margin compression, as well as lower client activity levels across all Equities product lines. revenues ineffectiveness, Corporate Center In Corporate Center, net interest income and other net income from financial instruments measured at fair value through profit or loss increased by USD 32 million. This reflected USD 421 million higher net treasury income, driven by income from hedge accounting accounting asymmetries, as well as higher net interest income. This was partly offset by USD 252 million lower income in Retained Services, driven by USD 122 million of additional interest expense related to lease liabilities recognized as a result of the application of IFRS 16, Leases, which was adopted in the first quarter of 2019, and approximately USD 130 million higher asset funding costs, mainly driven by increased interest rates. In addition, income in Non-Core and Legacy Portfolio decreased by USD 137 million, mainly as 2018 included higher valuation gains on auction rate securities. from  Refer to “Note 3 Net interest income and other net income from financial instruments measured at fair value through profit or loss” in the “Consolidated financial statements” section of this report for more information Credit loss expense / recovery Total net credit loss expenses were USD 78 million in 2019, compared with USD 118 million, reflecting net credit loss expenses of USD 100 million related to credit-impaired (stage 3) positions, mainly in Personal & Corporate Banking and to a lesser extent in the Investment Bank and Global Wealth Management. This was partly offset by USD 22 million of net releases in expected credit loss expense allowances from stage 1 and 2 positions.  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about IFRS 9  Refer to “Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement” and “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information about credit loss expense / recovery  Refer to the “Risk factors” section of this report for more information For the year ended 31.12.18 (15) (56) (38) (8) (118) 3311..1122..1199 ((2200)) ((2211)) ((3300)) ((77)) ((7788)) 31.12.17 (8) (20) (92) (11) (131) % change from 31.12.18 32 (63) (22) (12) (34) 79 Financial and operating performance Financial and operating performance Group performance Net fee and commission income Net fee and commission income was USD 17,413 million compared with USD 17,895 million. Net brokerage fees decreased by USD 267 million, mainly in the Investment Bank and in Global Wealth Management, largely due to lower levels of client activity across the first half of 2019. Investment fund fees and fees for portfolio management and related services decreased by USD 196 million, driven by Global Wealth Management, largely reflecting lower average invested assets in the first quarter of 2019, as well as margin compression and shifts into lower-margin products. These effects were partly offset by an increase of USD 82 million in Asset Management, reflecting the effect of higher average invested assets, as well as an increase in performance fees, reflecting strong investment performance in a constructive market environment. Underwriting fees decreased by USD 70 million, mainly in our Corporate Client Solutions business in the Investment Bank, driven by lower revenues from public offerings.  Refer to “Note 4 Net fee and commission income” in the “Consolidated financial statements” section of this report for more information to the remeasurement of properties Other income Other income was USD 212 million compared with USD 428 million on a reported basis. 2019 included net foreign currency translation losses of USD 35 million and a loss of USD 29 million related that were reclassified as properties held for sale. The previous year included a valuation gain of USD 460 million on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline, a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities China, gains on sale of real estate of USD 31 million and gains on sale of subsidiaries of USD 25 million. Excluding these items, adjusted other income increased by USD 94 million, mainly driven by gains resulting from the settlement of a litigation claim, gains related to legacy securities positions, and income related to a claim on a defaulted counterparty position. Operating expenses Total operating expenses decreased by USD 910 million, or 4%, to USD 23,312 million. On an adjusted basis, total operating expenses decreased by USD 985 million, or 4%, to USD 22,918 million. Personnel expenses Personnel expenses decreased by USD 48 million to USD 16,084 million on a reported basis, primarily reflecting lower variable compensation, lower expenses for contractors, and lower other personnel expenses. This was largely offset by higher expenses for pension and other post-employment benefit plans, as 2018 included a gain of USD 241 million related to changes to the Swiss pension plan, and higher salary costs. On an adjusted basis, personnel expenses decreased by USD 206 million to USD 15,881 million, primarily driven by the aforementioned decrease in variable compensation. Expenses for salaries increased by USD 70 million to USD 6,518 million, primarily driven by continued insourcing of certain activities from third-party vendors to our Business Solutions Centers, as well as increased staffing to address regulatory requirements. These increases were partly offset by lower salary expenses in Global Wealth Management. On an adjusted basis, expenses for salaries increased by USD 170 million the aforementioned insourcing effects. to USD 6,443 million, mainly reflecting Expenses for total variable compensation decreased by USD 237 million, and adjusted expenses for total variable compensation decreased by USD 261 million, mainly reflecting a decrease in expenses for current year awards. Financial advisor compensation was broadly stable at USD 4,043 million. Other personnel expenses decreased by USD 99 million and adjusted other personnel expenses decreased by USD 103 insurance and million, primarily due recruitment costs. lower medical to  Refer to the “Compensation” section of this report for more  Refer to “Note 5 Other income” in the “Consolidated financial information statements” section of this report for more information  Refer to “Note 6 Personnel expenses,” “Note 29 Pension and  Refer to “Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses” in the “Consolidated other post-employment benefit plans” and “Note 30 Employee benefits: variable compensation” in the “Consolidated financial financial statements” section of this report for more statements” section of this report for more information information about the increase of stake in and consolidation of UBS Securities China General and administrative expenses General and administrative expenses decreased by USD 1,509 million to USD 5,288 million. This was driven by USD 492 million lower expenses related to litigation, regulatory and similar matters, as the prior year included an increase in provisions that largely to our cross-border wealth management businesses, as well as USD 269 million lower expenses related to the outsourcing of IT and other services and USD 133 million lower professional fees. related 80 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 goodwill and intangible assets TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd Adjusting items Personnel expenses of which: restructuring expenses 1 of which: 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 Amortization and impairment of goodwill and intangible assets of which: impairment of goodwill TToottaall aaddjjuussttiinngg iitteemmss For the year ended 31.12.18 3311..1122..1199 31.12.17 % change from 31.12.18 0 (22) 44 169 (4) 1166,,008844 55,,228888 11,,776655 117755 2233,,331122 220033 220033 7722 1100 111100 111100 339944 16,132 6,797 1,228 65 24,222 45 286 (241) 225 50 0 0 319 16,199 6,949 1,053 71 24,272 570 545 26 640 7 0 0 1,217 Operating expenses (adjusted) Personnel expenses General and administrative expenses of which: net expenses for litigation, regulatory and similar matters of which: other general and administrative expenses of which: salaries of which: total variable compensation of which: relating to current year 4 of which: relating to prior years 5 of which: financial advisor compensation 6 of which: other personnel expenses 7 (1) 3 (8) (11) 4 0 (4) (21) (75) (15) 49 Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets 0 TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) (4) 11 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives. 22 Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. 33 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013. 44 Includes expenses relating to performance awards and other variable compensation for the respective performance year. 55 Consists of amortization of prior years’ awards relating to performance awards and other variable 66 Financial advisor compensation consists of formulaic compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the compensation. 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 77 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other personnel expenses. Refer to “Note 6 Personnel are subject to vesting requirements. expenses” in the “Consolidated financial statements” section of this report for more information. 15,628 5,801 3,242 2,538 704 4,064 2,521 6,309 434 5,875 1,046 71 23,054 16,087 6,273 3,167 2,576 592 4,054 2,593 6,572 657 5,916 1,178 65 23,903 1155,,888811 66,,444433 22,,990066 22,,228888 661188 44,,004433 22,,449900 55,,221166 116655 55,,005511 11,,775555 6655 2222,,991188 Occupancy expenses decreased by USD 533 million, primarily following the adoption of IFRS 16, Leases, as of 1 January 2019. This decrease was more than offset by an increase of USD 484 million in depreciation expenses for leased properties and an increase of USD 122 million in interest expense relating to lease liabilities, both also as a direct result of the adoption of IFRS 16. The full year effect of the application of IFRS 16 in 2019 was a net decrease in profit before tax of approximately USD 60 million, reflecting reductions of approximately USD 120 million income and expenses, and USD 60 million respectively. in operating Net expenses for the UK and German bank levies were USD 41 million in 2019 and included a USD 31 million credit related to prior years. In 2018, net expenses for the UK and German bank levies were USD 58 million and included a USD 45 million credit related to prior years. On an adjusted basis, general and administrative expenses decreased by USD 1,356 million to USD 5,216 million, largely due to the aforementioned decreases in expenses related to litigation, regulatory and similar matters, costs for outsourcing of IT and other services and professional fees. We believe that the industry continues to operate in an environment in which expenses associated with litigation, regulatory and similar matters will remain elevated for the foreseeable future and we continue to be exposed to a number of significant claims and regulatory matters. The outcome of many of these matters, the timing of a resolution, and the potential effects of resolutions on our future business, financial results or financial condition are extremely difficult to predict.  Refer to “Note 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 Depreciation and impairment of property, equipment and software increased by USD 537 million to USD 1,765 million on a reported basis, and by USD 577 million to USD 1,755 million on an adjusted basis, mainly driven by the aforementioned USD 484 million higher depreciation expenses resulting from the application of IFRS 16. 81 Financial and operating performance Financial and operating performance Group performance Amortization and impairment of goodwill and intangible assets increased by USD 110 million to USD 175 million on a reported basis, as a result of a USD 110 million impairment of goodwill in the Investment Bank in the fourth quarter of 2019. Excluding this item, these expenses were broadly unchanged.  Refer to “Note 15 Property, equipment and software” and “Note 16 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information Tax We recognized an income tax expense of USD 1,267 million in 2019, representing an effective tax rate of 22.7%, compared with USD 1,468 million for 2018. This included net Swiss tax expenses of USD 630 million and net non-Swiss tax expenses of USD 637 million. The Swiss tax expenses included current tax expenses of USD 365 million related to taxable profits earned by Swiss subsidiaries. In addition, they included deferred tax expenses of USD 265 million, which primarily reflect the amortization of deferred tax assets (DTAs) previously recognized in relation to deductible temporary differences. The non-Swiss tax expenses included current tax expenses of USD 426 million related to taxable profits earned by non-Swiss subsidiaries and branches. In addition, they included deferred tax expenses of USD 211 million. These included expenses of USD 471 million that primarily reflected the amortization of DTAs previously recognized in relation to tax losses carried forward and deductible temporary differences, including the amortization of US tax loss DTAs at the level of UBS Americas Inc. These were partly offset by a benefit of USD 260 million in respect of additional DTA recognition that resulted from the contribution of real estate assets by UBS AG to UBS Americas Inc. in the year. The additional DTA recognition related to the elections that were made in the fourth quarter of 2018 to capitalize certain historic real estate costs. For 2020, we expect a full-year tax rate of approximately 25%, excluding any potential effects from the reassessment of deferred tax assets.  Refer to “Note 8 Income taxes” in the “Consolidated financial statements” section of this report for more information  Refer to the “Risk factors” section of this report for more information 82 Total comprehensive income attributable to shareholders In 2019, total comprehensive income attributable to shareholders was USD 5,089 million, reflecting net profit of USD 4,304 million and other comprehensive income (OCI), net of tax, of USD 785 million. OCI related to cash flow hedges was positive USD 1,143 million, mainly reflecting an increase in net unrealized gains on US dollar hedging derivatives resulting from decreases in the relevant long-term US dollar interest rates. In 2018, OCI related to cash flow hedges was negative USD 269 million. OCI associated with financial assets measured at fair value through OCI was positive USD 117 million, compared with negative USD 45 million, primarily reflecting net unrealized gains following decreases in the relevant US dollar long-term interest rates in 2019. Foreign currency translation OCI was positive USD 104 million in 2019. This was mainly due to the strengthening of the Swiss franc and the pound sterling against the US dollar as well as the reclassification of net losses totaling USD 38 million to the income statement. These effects were partly offset by the weakening of the euro. In 2018, OCI related to foreign currency translation was negative USD 541 million. OCI related to own credit on financial liabilities designated at fair value was negative USD 392 million, compared with positive USD 509 million, primarily due to tightening credit spreads in 2019. Defined benefit plan OCI, net of tax, was negative USD 186 million compared with positive USD 56 million. Total pre-tax OCI related to UK defined benefit plans was negative USD 78 million, reflecting OCI losses of USD 361 million from the remeasurement of the defined benefit obligation (DBO), mainly driven by a loss of USD 552 million due to a decrease in the applicable discount rate, partly offset by a gain of USD 132 million due to a decrease in the expected rate of pension increase. This was partly offset by an OCI gain of USD 284 million due to a positive return on plan assets. Total pre-tax OCI related to the Swiss defined benefit plan was negative USD 22 million. This reflected losses of USD 1,728 million from the DBO remeasurement and of USD 353 million from an increase in the effect of the IFRS asset ceiling, almost entirely offset by a gain of USD 2,059 million due to a positive return on plan assets. The DBO remeasurement loss of USD 1,728 million was driven by a loss of USD 1,887 million due to a decrease in the applicable discount rate and an experience loss of USD 284 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred. These losses were partly offset by gains of USD 243 million resulting from a decrease in the expected rate of interest credit on retirement savings and of USD 199 million due to other changes in actuarial assumptions.  Refer to “Statement of comprehensive income” in the “Consolidated financial statements” section of this report for more information  Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information about defined benefit plans including a description of an enhancement to the asset ceiling calculation methodology effective in the first quarter of 2020 Sensitivity to interest rate movements As of 31 December 2019, we estimate that a parallel shift in yield curves by +100 basis points could lead to a combined increase in annual net interest income of approximately USD 0.6 billion in Global Wealth Management and Personal & Corporate Banking. A parallel shift in yield curves by minus 100 basis points could lead to a combined reduction in annual net interest income of approximately USD 0.6 billion. These estimates are based on a hypothetical scenario of an immediate change in interest rates, equal across all currencies and relative to implied forward rates applied to our banking book. These estimates further assume no change to balance sheet size and structure, constant foreign exchange rates and no specific management action. Key figures Below we provide an overview of selected key figures of the Group. For further information about key figures related to capital management, refer to the “Capital management” section of this report. Adjusted cost / income ratio The adjusted cost / income ratio was 78.9%, compared with 79.5%, reflecting a reduction in adjusted operating expenses, offset by a decrease in adjusted operating income. Common equity tier 1 capital Common equity tier 1 (CET1) capital increased by USD 1.5 billion to USD 35.6 billion, mainly driven by operating profit before tax of USD 5.6 billion, partly offset by accruals for capital returns to shareholders of USD 2.6 billion, a USD 0.8 billion effect from our share repurchase program and current tax expenses of USD 0.8 billion. Return on CET1 capital Our return on CET1 capital (RoCET1) was 12.4%, compared with 13.1%, driven by a USD 0.2 billion decrease in net profit attributable to shareholders and a USD 0.4 billion increase in the average CET1 capital. Risk-weighted assets Risk-weighted assets (RWA) decreased by USD 4.5 billion to USD 259.2 billion, reflecting decreases from asset size and other movements of USD 8.0 billion and regulatory add-ons of USD 0.7 billion, partly offset by methodology and policy change of USD 2.0 billion, model updates of USD 1.2 billion and currency effects of USD 0.9 billion. Common equity tier 1 capital ratio Our CET1 capital ratio increased 0.8 percentage points to 13.7%, reflecting the USD 1.5 billion increase in CET1 capital and a USD 4.5 billion decrease in RWA. Leverage ratio denominator The leverage ratio denominator (LRD) increased by USD 7 billion to USD 911 billion. The increase was driven by currency effects of USD 5 billion and policy changes of USD 4 billion, partly offset in asset size and other movements of by a decrease USD 2 billion. Common equity tier 1 leverage ratio Our CET1 leverage ratio increased from 3.77% to 3.90% as of 31 December 2019, reflecting the aforementioned increase in CET1 capital, partly offset by a USD 7 billion increase in the LRD. Going concern leverage ratio Our going concern leverage ratio increased from 5.1% to 5.7%, reflecting a USD 5.6 billion increase in our going concern capital, partly offset by the aforementioned increase in the LRD. Personnel We employed 68,601 personnel (full-time equivalents) as of 31 December 2019. The net increase of 1,713 compared with 31 December 2018 was largely driven by a 2,583 increase in Corporate Center, mainly as a result of the ongoing insourcing of certain activities from third-party vendors to our Business Solutions Centers, resulting in a decrease of approximately 2,200 outsourced staff. This was partly offset by a 944 decrease in Global Wealth Management, reflecting the effect of cost management initiatives and a review of advisor portfolios. Net new money and invested assets Management’s discussion and analysis on net new money and invested assets is provided in the “Global Wealth Management” and “Asset Management” sections of this report. Seasonal characteristics Our revenues may show seasonal patterns, notably in the Investment Bank and Global Wealth Management. These business divisions typically show the highest client activity levels in the first quarter, with lower levels throughout the rest of the year, especially during the summer months and end-of-year holiday season. Net new money can be affected by annual tax payments, which are concentrated in the second quarter in the US. 83 Financial and operating performance Financial and operating performance Group performance Return on equity USD million, except where indicated Net profit Net profit / (loss) attributable to shareholders Equity Equity attributable to shareholders Less: goodwill and intangible assets Tangible equity attributable to shareholders Less: other CET1 deductions Common equity tier 1 capital Return on equity Return on equity (%) Return on tangible equity (%) Return on common equity tier 1 capital (%) Net new money1 USD billion Global Wealth Management Global Wealth Management Asset Management2 Asset Management2 of which: excluding money market flows of which: money market flows As of or for the year ended 31.12.19 31.12.19 31.12.18 31.12.17 4,304 4,304 4,516 969 54,533 54,533 6,469 6,469 48,064 48,064 12,482 12,482 35,582 35,582 7.9 7.9 9.0 9.0 12.4 12.4 52,928 6,647 46,281 12,162 34,119 8.6 9.8 13.1 52,495 6,563 45,932 12,416 33,516 1.8 2.0 3.0 For the year ended 31.12.19 31.12.19 31.12.18 31.12.17 31.6 31.6 17.8 17.8 12.6 12.6 5.2 5.2 24.7 32.2 24.7 7.5 44.8 59.5 48.3 11.2 1 Net new money excludes interest and dividend income. 1 information restated. The adjustments have no effect on total net new money. 2 Effective 1 January 2019, certain assets have been reclassified between asset classes to better reflect their underlying nature, with prior-period 2 Invested assets USD billion Global Wealth Management Global Wealth Management Asset Management1 Asset Management1 of which: excluding money market funds of which: money market funds As of % change from 31.12.19 31.12.19 31.12.18 31.12.17 31.12.18 2,635 2,635 2,260 2,403 903 903 801 801 102 102 781 686 95 796 708 88 17 16 17 6 1 Effective 1 January 2019, certain assets have been reclassified between asset classes to better reflect their underlying nature, with prior-period information restated. The adjustments have no effect on total 1 invested assets. 84 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) / recovery TToottaall ooppeerraattiinngg iinnccoommee Personnel expenses Salaries and other personnel costs Financial advisor variable compensation4,5 Compensation commitments with recruited financial advisors4,6 General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets TToottaall ooppeerraattiinngg eexxppeennsseess BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx Adjusted results TToottaall ooppeerraattiinngg iinnccoommee aass rreeppoorrtteedd of which: gain related to investments in associates TToottaall ooppeerraattiinngg iinnccoommee ((aaddjjuusstteedd)) TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd of which: personnel-related restructuring expenses 7 of which: non-personnel-related restructuring expenses 7 of which: restructuring expenses allocated from Corporate Center 7,8 of which: gain related to changes to the Swiss pension plan TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) Performance measures Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth (%) Adjusted performance measures Pre-tax profit growth (%) Cost / income ratio (%) As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 33,,994477 99,,225588 33,,005599 111100 1166,,337733 ((2200)) 1166,,335533 77,,662211 33,,557788 33,,550011 554422 11,,221177 44,,005566 33,,992222 55 5566 1122,,995555 33,,339977 1166,,335533 1166,,335533 1122,,995555 00 00 6699 1122,,888877 33,,339977 33,,446666 44..44 7799..11 11..44 33..66 7788..77 4,101 9,577 2,971 151 16,800 (15) 16,785 7,683 3,628 3,470 584 1,724 4,070 3,936 4 50 13,531 3,254 16,785 101 16,684 13,531 34 16 209 (66) 13,338 3,254 3,346 1.1 80.5 1.0 (12.1) 79.9 (4) (3) 3 (27) (3) 32 (3) (1) (1) 1 (7) (29) 0 0 22 13 (4) 4 (3) (2) (4) (3) 4 4 85 Financial and operating performance Financial and operating performance Global Wealth Management Global Wealth Management (continued)1 USD million, except where indicated As of or for the year ended 31.12.19 31.12.19 31.12.18 % change from 31.12.18 2 (3) 5 (1) (1) Additional information Recurring income9 Recurring income as a percentage of income (%) Average attributed equity (USD billion)10 Return on attributed equity (%)10 Risk-weighted assets (USD billion)10 Leverage ratio denominator (USD billion)10 Goodwill and intangible assets (USD billion) Net new money (USD billion) Invested assets (USD billion) 17 Net margin on invested assets (bps)11 1 Gross margin on invested assets (bps) (5) Client assets (USD billion) 15 Loans, gross (USD billion)12 3 Customer deposits (USD billion)12,13 6 Recruitment loans to financial advisors4 (11) Other loans to financial advisors4 (17) Personnel (full-time equivalents)14 (4) Advisors (full-time equivalents) (6) 1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework 1 effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and 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 events after the reporting period. 2 3 Transaction-based income consists of the non-recurring portion of net fee and commission income, mainly composed of brokerage and transaction- account-keeping fees, which are generated on client assets. 3 4 Relates to based investment fund fees, as well as credit card fees and fees for payment transactions, together with Other net income from financial instruments measured at fair value through profit or loss. 4 5 Financial advisor variable compensation consists of formulaic compensation based directly on compensable licensed professionals with the ability to provide investment advice to clients in the Americas. 5 revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, new assets and other variables. 6 Compensation commitments with 7 Reflects restructuring recruited financial advisors represent expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting requirements. 7 9 Recurring income consists of net expenses related to legacy cost programs as well as expenses for new restructuring initiatives. 9 interest income and recurring net fee income. 10 Refer to the “Capital management” section of this report for more information. 11 Calculated as operating profit before tax (annualized as applicable) divided by 10 average invested assets. 12 Loans and Customer deposits in this table include customer brokerage receivables and payables, respectively, which, with the adoption of IFRS 9, effective 1 January 2018, have been 13 Customer deposits in Global Wealth Management have been restated as of 31 December 2018 to reflect a reclassification of balances from reclassified to a separate reporting line on the balance sheet. 13 Corporate Center, with no impact on customer deposits reported for the Group. This has resulted in an increase in customer deposits reported for Global Wealth Management of USD 6.3 billion as of 31 December 2018. 14 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 6. 13,205 13,205 80.6 80.6 16.6 16.6 20.5 20.5 78.1 78.1 312.7 312.7 5.1 5.1 31.6 31.6 2,635 2,635 14 14 66 66 2,909 2,909 179.3 179.3 296.1 296.1 2,053 2,053 824 824 22,674 22,674 10,077 10,077 13,678 81.4 16.3 20.0 74.3 315.8 5.2 24.7 2,260 14 70 2,519 174.7 278.1 2,296 994 23,618 10,677 8 Prior periods may include allocations (to) / from other business divisions. 8 12 14 11 6 Regional breakdown of performance measures As of or for the year ended 31.12.19 USD billion, except where indicated Net new money Net new money growth (%) Invested assets Loans, gross Advisors (full-time equivalents) EMEA (excluding Switzerland) 10.5 10.5 2.1 2.1 552 552 37.1 37.1 1,660 1,660 Americas (17.4) (17.4) (1.4) (1.4) 1,403 1,403 62.52 62.52 6,549 6,549 1 Excluding minor functions with 101 advisors, USD 3 billion of invested assets, USD 0.6 billion of loans and USD 0.4 billion of net new money outflows in 2019. 1 which with the adoption of IFRS 9, effective 1 January 2018, have been reclassified to a separate reporting line on the balance sheet. globally managed unit. Asia Pacific 31.4 31.4 Switzerland 7.5 7.5 Total of of which: ultra high regions1 net worth (UHNW) 45.5 32.0 32.0 8.8 8.8 450 450 43.1 43.1 3.7 3.7 228 228 36.0 36.0 1.4 1.4 2,633 2,633 178.7 178.7 4.0 1,371 1,041 1,041 1,042 3 2 Loans include customer brokerage receivables, 2 3 Represents advisors who exclusively serve ultra high net worth clients in a 3 9,976 9,976 727 727 86 2019 compared with 2018 Results Profit before tax increased by USD 143 million, or 4%, to USD 3,397 million. Excluding a USD 101 million valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline in 2018, a prior-year credit of USD 66 million related to our Swiss pension plan and restructuring expenses, adjusted profit before tax increased by USD 120 million, or 4%, to USD 3,466 million, reflecting lower operating expenses, partly offset by lower operating income. Operating income included a USD 75 million fee received from Personal & Corporate Banking for the shift of USD 6 billion of business volume from Global Wealth Management to Personal & Corporate Banking, as a result of a detailed client segmentation review. Operating income Total operating income decreased by USD 432 million, or 3%, to USD 16,353 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted total operating income decreased by USD 331 million, or 2%, mainly driven by lower recurring net fee income and net interest income, partly offset by higher transaction-based income and other income. Net interest income decreased by USD 154 million to USD 3,947 million, mainly as a result of lower deposit and loan margins, partly offset by higher investment-of-equity income. Recurring net fee income decreased by USD 319 million to USD 9,258 million, reflecting margin compression and moves into lower-margin products, partly offset by an increase in mandate penetration. Transaction-based income increased by USD 88 million to USD 3,059 million, predominantly due to the aforementioned fee received from Personal & Corporate Banking.  Refer to the “Group performance” section of our third quarter 2019 report for more information about the realignment of our client coverage between Global Wealth Management and Personal & Corporate Banking Other income decreased by USD 41 million to USD 110 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted other income increased by USD 60 million, primarily due to a gain related to the repositioning of the liquidity portfolio in the Americas and gains related to legacy securities positions.  Refer to the “Recent developments” section of our fourth quarter 2018 report for more information about the Worldline acquisition of SIX Payment Services Operating expenses Total operating expenses decreased by USD 576 million, or 4%, to USD 12,955 million and adjusted operating expenses decreased by USD 451 million, or 3%, to USD 12,887 million. Personnel expenses decreased by USD 62 million to USD 7,621 million. Excluding the aforementioned credit related to changes to our Swiss pension plan and restructuring expenses, adjusted personnel expenses decreased by USD 93 million, mainly due to lower variable compensation and lower staffing levels. General and administrative expenses decreased by USD 507 million to USD 1,217 million. Excluding restructuring expenses, adjusted general and administrative expenses decreased by USD 492 million, predominantly driven by lower expenses for provisions for litigation, regulatory and similar matters. Net expenses for services to/from Corporate Center and other business divisions decreased by USD 14 million to USD 4,056 million. Excluding restructuring expenses, adjusted net expenses for services increased by USD 126 million to USD 3,988 million, mainly due to higher expenses for regulatory projects and IT development costs. Pre-tax profit growth Pre-tax profit growth in 2019 was 4.4% compared with 1.1%. On an adjusted basis, pre-tax profit growth was positive 3.6%, compared with negative 12.1%, and was below our target range of 10–15% over the cycle. Cost / income ratio The cost / income ratio decreased to 79.1% from 80.5%. On an adjusted basis, the ratio decreased to 78.7% from 79.9% and was above our 2019 target of around 75%. Net new money Net new money inflows were USD 31.6 billion, compared with inflows of USD 24.7 billion, reflecting an annualized net new money growth rate of 1.4%, compared with 1.0%, and was below our 2019 target range of 2–4%. Invested assets Invested assets increased by USD 375 billion to USD 2,635 billion, mainly driven by positive market performance of USD 336 billion, net new money inflows of USD 32 billion and positive currency effects of USD 6 billion. Mandate penetration increased to 34.3% from 33.6%. Personnel Global Wealth Management employed 22,674 personnel (full- time equivalents) as of 31 December 2019, a decrease of 944 compared with 23,618 personnel as of 31 December 2018. The number of advisors decreased by 600 to 10,077. These decreases reflect the effect of cost management initiatives and a review of advisor portfolios. 87 Financial and operating performance Financial and operating performance Personal & Corporate Banking Personal & Corporate Banking Personal & Corporate Banking – in Swiss francs1 CHF million, except where indicated Results Net interest income Recurring net fee income2 Transaction-based income3 Other income Income Credit loss (expense) / recovery Total operating income Total operating income Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets Total operating expenses Total operating expenses Business division operating profit / (loss) before tax Business division operating profit / (loss) before tax Adjusted results Total operating income as reported Total operating income as reported of which: gains related to investments in associates Total operating income (adjusted) Total operating income (adjusted) Total operating expenses as reported Total 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 Corporate Center 4,5 of which: gain related to changes to the Swiss pension plan Total operating expenses (adjusted) Total operating expenses (adjusted) Business division operating profit / (loss) before tax as reported Business division operating profit / (loss) before tax as reported Business division operating profit / (loss) before tax (adjusted) Business division operating profit / (loss) before tax (adjusted) Performance measures Pre-tax profit growth (%) Cost / income ratio (%) Net interest margin (bps) Adjusted performance measures Pre-tax profit growth (%) Cost / income ratio (%) 88 As of or for the year ended 31.12.19 31.12.19 31.12.18 % change from 31.12.18 (1) 1 (4) (86) (10) (60) (9) 8 (20) (5) (4) (6) (2) (19) (9) (1) (2) (3) (19) 3 1,980 1,980 634 634 1,041 1,041 60 60 3,714 3,714 (22) (22) 3,692 3,692 850 850 222 222 1,173 1,173 1,286 1,286 13 13 0 0 2,259 2,259 1,433 1,433 3,692 3,692 3,692 3,692 2,259 2,259 0 0 0 0 17 17 2,242 2,242 1,433 1,433 1,450 1,450 (18.6) (18.6) 60.8 60.8 150 150 2.6 2.6 60.4 60.4 2,003 625 1,082 419 4,128 (55) 4,074 786 279 1,234 1,336 14 0 2,313 1,760 4,074 359 3,715 2,313 4 0 42 (35) 2,302 1,760 1,413 21.6 56.0 153 (8.8) 61.1 Personal & Corporate Banking – in Swiss francs (continued)1 CHF million, except where indicated Additional information Average attributed equity (CHF billion)6 Return on attributed equity (%)6 Risk-weighted assets (CHF billion)6 Leverage ratio denominator (CHF billion)6 Business volume for personal banking (CHF billion) Net new business volume for personal banking (CHF billion) Net new business volume growth for personal banking (%)7 Goodwill and intangible assets (CHF billion) Client assets (CHF billion)8 Loans, gross (CHF billion) Customer deposits (CHF billion) As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 88..44 1177..11 6655..00 221177..11 116688 77..33 44..77 00..00 668855 113322..22 115500..55 7.8 22.5 62.8 210.2 156 6.6 4.2 0.0 638 131.0 141.7 8 3 3 8 0 7 1 6 Secured loan portfolio as a percentage of total loan portfolio, gross (%) Impaired loan portfolio as a percentage of total loan portfolio, gross (%)9 (1) Personnel (full-time equivalents) 11 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and 22 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 events after the reporting period. account-keeping fees, which are generated on client assets. 33 Transaction-based income comprises the non-recurring portion of net fee and commission income, mainly consisting of brokerage and transaction- 44 Reflects based investment fund fees, as well as credit card fees and fees for payment transactions, together with Other net income from financial instruments measured at fair value through profit or loss. restructuring expenses related to legacy cost programs. 55 Prior periods may include allocations (to) / from other business divisions. 66 Refer to the “Capital management” section of this report for more information. 77 Calculated as net new business volume for the period (annualized as applicable) divided by business volume at the beginning of the period. 88 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. 99 Refer to the “Risk management and control” section of this report for more information about (credit-)impaired exposures. 11..11 55,,114488 1.3 5,183 9922..66 92.0 89 Financial and operating performance Financial and operating performance Personal & Corporate Banking 2019 compared with 2018 Results Profit before tax decreased by CHF 327 million, or 19%, to CHF 1,433 million. Adjusted profit before tax increased by CHF 37 million, or 3%, to CHF 1,450 million, reflecting lower operating expenses and lower operating income. This excluded a prior-year CHF 359 million valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline, a credit related to changes to our Swiss plan in 2018 and restructuring expenses. Operating income included a CHF 73 million fee paid to Global Wealth Management for the shift of CHF 6 billion of business volume from Global Wealth Management to Personal & Corporate Banking, as a result of a detailed client segmentation review. Operating income Total operating income decreased by CHF 382 million, or 9%, to CHF 3,692 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted operating income lower decreased by CHF 23 million, mainly transaction-based income and lower net interest income, partly offset by lower credit loss expenses and higher recurring net fee income. Net income decreased by CHF 23 million to CHF 1,980 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. reflecting interest Recurring net fee income increased by CHF 9 million to CHF 634 million, mainly reflecting higher fees from bundled products. Transaction-based income decreased by CHF 41 million to CHF 1,041 million, mainly reflecting the aforementioned fee paid to Global Wealth Management, partly offset by higher revenues from credit card and foreign exchange transactions.  Refer to the “Group performance” section of our third quarter 2019 report for more information about the realignment of our client coverage between Global Wealth Management and Personal & Corporate Banking Other income decreased by CHF 359 million to CHF 60 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted other income remained stable.  Refer to the “Recent developments” section of our fourth quarter 2018 report for more information about the Worldline acquisition of SIX Payment Services We recorded a net credit loss expense of CHF 22 million compared with CHF 55 million. This reflects stage 1 and 2 net credit recoveries of CHF 23 million compared with CHF 0 million for 2018, primarily attributable to a minor improvement in loan book quality following continued positive developments of 90 selected economic input data, as well as stage 3 net credit loss expenses of CHF 44 million compared with CHF 55 million.  Refer to “Credit risk” in the “Risk management and control” section of this report for more information about expected credit losses Operating expenses Operating expenses decreased by CHF 54 million to CHF 2,259 million. Excluding a credit of CHF 35 million related to changes to our Swiss pension plan in 2018 and restructuring expenses, adjusted total operating expenses decreased by CHF 60 million to CHF 2,242 million, mainly reflecting CHF 40 million lower expenses for provisions for litigation, regulatory and similar matters and CHF 36 million lower net expenses services to/from Corporate Center and other business divisions. Personnel expenses increased by CHF 64 million to CHF 850 million. Excluding the aforementioned credit related to changes to our Swiss pension plan in 2018, adjusted personnel expenses increased by CHF 33 million, mainly reflecting higher variable compensation. General and administrative expenses decreased by CHF 57 million to CHF 222 million, primarily reflecting CHF 40 million lower expenses for provisions for litigation, regulatory and similar matters. Net expenses for services to/from Corporate Center and other business divisions decreased by CHF 61 million to CHF 1,173 million. Adjusted net expenses for services decreased by CHF 36 million to CHF 1,156 million, mainly reflecting lower expenses for regulatory projects and real estate. Pre-tax profit growth Pre-tax profit growth in 2019 was negative 18.6% compared with positive 21.6%, mainly due to the aforementioned valuation gain on our equity ownership in SIX in 2018. On an adjusted basis, pre-tax profit growth was positive 2.6%, compared with negative 8.8%, and was slightly below our target range of 3–5% over the cycle. Cost / income ratio The cost / income ratio increased to 60.8% from 56.0%, mainly due to the aforementioned valuation gain on our equity ownership in SIX in 2018. On an adjusted basis, the ratio decreased to 60.4%, compared with 61.1%, and was slightly above our 2019 target of around 59%. Net interest margin The net interest margin was 150 basis points compared with 153 basis points on both a reported and adjusted basis, as net interest income decreased and average loan volume increased. Personnel Personal & Corporate Banking employed 5,148 personnel (full-time equivalents) as of 31 December 2019, a decrease of 35 compared with 5,183 personnel as of 31 December 2018. 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 TToottaall ooppeerraattiinngg iinnccoommee Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets TToottaall ooppeerraattiinngg eexxppeennsseess BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx Adjusted results TToottaall ooppeerraattiinngg iinnccoommee aass rreeppoorrtteedd of which: gains related to investments in associates TToottaall ooppeerraattiinngg iinnccoommee ((aaddjjuusstteedd)) TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd of which: personnel-related restructuring expenses 4 of which: non-personnel-related restructuring expenses 4 of which: restructuring expenses allocated from Corporate Center 4,5 of which: gain related to changes to the Swiss pension plan TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) Performance measures Pre-tax profit growth (%) Cost / income ratio (%) Net interest margin (bps) Adjusted performance measures Pre-tax profit growth (%) Cost / income ratio (%) As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 11,,999922 663388 11,,004455 6600 33,,773366 ((2211)) 33,,771155 885566 222244 11,,118811 11,,229944 1133 00 22,,227744 11,,444411 33,,771155 33,,771155 22,,227744 00 00 1177 22,,225577 11,,444411 11,,445588 ((1199..77)) 6600..99 114499 00..88 6600..44 2,049 640 1,108 420 4,217 (56) 4,161 803 285 1,263 1,367 14 0 2,365 1,796 4,161 359 3,802 2,365 4 0 43 (38) 2,355 1,796 1,447 21.8 56.1 153 (8.4) 61.0 (3) 0 (6) (86) (11) (63) (11) 7 (21) (7) (5) (7) (4) (20) (11) (2) (4) (4) (20) 1 91 Financial and operating performance Financial and operating performance Personal & Corporate Banking Personal & Corporate Banking – in US dollars (continued)1 USD million, except where indicated Additional information Average attributed equity (USD billion)6 Return on attributed equity (%)6 Risk-weighted assets (USD billion)6 Leverage ratio denominator (USD billion)6 Business volume for personal banking (USD billion) Net new business volume for personal banking (USD billion) Net new business volume growth for personal banking (%)7 Goodwill and intangible assets (USD billion) Client assets (USD billion)8 Loans, gross (USD billion) Customer deposits (USD billion) As of or for the year ended 31.12.19 31.12.19 31.12.18 % change from 31.12.18 8.4 8.4 17.1 17.1 67.1 67.1 224.2 224.2 174 174 7.3 7.3 4.6 4.6 0.0 0.0 708 708 136.6 136.6 155.5 155.5 8.0 22.5 63.9 213.7 158 6.7 4.2 0.0 648 133.3 144.1 5 5 5 10 2 9 2 8 Secured loan portfolio as a percentage of total loan portfolio, gross (%) Impaired loan portfolio as a percentage of total loan portfolio, gross (%)9 (1) Personnel (full-time equivalents) 1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework 1 effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and 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 events after the reporting period. 2 3 Transaction-based income comprises the non-recurring portion of net fee and commission income, mainly consisting of brokerage and transaction- account-keeping fees, which are generated on client assets. 3 4 Reflects based investment fund fees, as well as credit card fees and fees for payment transactions, together with Other net income from financial instruments measured at fair value through profit or loss. 4 6 Refer to the “Capital management” section of this report for more 5 Prior periods may include allocations (to) / from other business divisions. restructuring expenses related to legacy cost programs. 5 6 information. 8 Client assets are comprised of invested assets and 8 other assets held purely for transactional purposes or custody only. We do not measure net new money for Personal & Corporate Banking. 9 Refer to the “Risk management and control” section of this report for more information about (credit-)impaired exposures. 7 Calculated as net new business volume for the period (annualized as applicable) divided by business volume at the beginning of the period. 7 1.1 1.1 5,148 5,148 1.3 5,183 92.0 92.6 92.6 9 92 Asset Management Asset Management1 USD million, except where indicated Results Net management fees2 Performance fees TToottaall ooppeerraattiinngg iinnccoommee Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets TToottaall ooppeerraattiinngg eexxppeennsseess BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx Adjusted results TToottaall ooppeerraattiinngg iinnccoommee aass rreeppoorrtteedd TToottaall ooppeerraattiinngg iinnccoommee ((aaddjjuusstteedd)) TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd of which: personnel-related restructuring expenses 3 of which: non-personnel-related restructuring expenses 3 of which: restructuring expenses allocated from Corporate Center 3 of which: gain related to changes to the Swiss pension plan TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) Performance measures Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth excluding money market flows (%)4 Adjusted performance measures Pre-tax profit growth (%)5 Cost / income ratio (%) Information by business line / asset class NNeett nneeww mmoonneeyy ((UUSSDD bbiilllliioonn))44 Equities Fixed Income of which: money market Multi-asset & Solutions Hedge Fund Businesses Real Estate & Private Markets TToottaall nneett nneeww mmoonneeyy of which: net new money excluding money markets As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 11,,777788 116600 11,,993388 772222 119977 448866 553311 11 00 11,,440066 553322 11,,993388 11,,993388 11,,440066 66 77 2200 11,,337733 553322 556655 2244..99 7722..66 11..88 1177..11 7700..88 2233..88 ((99..22)) 55..22 55..11 ((33..22)) 11..33 1177..88 1122..66 1,772 80 1,852 703 202 518 563 2 1 1,426 426 1,852 1,852 1,426 23 10 33 (10) 1,370 426 482 (24.3) 77.0 3.5 (0.8) 74.0 8.8 8.3 7.5 13.6 0.3 1.1 32.2 24.7 0 100 5 3 (3) (6) (6) (53) (1) 25 5 5 (1) 0 25 17 93 Financial and operating performance Financial and operating performance Asset Management Asset Management (continued)1 USD million, except where indicated Invested assets (USD billion)4 Invested assets (USD billion)4 Equities Fixed Income of which: money market Multi-asset & Solutions Hedge Fund Businesses Real Estate & Private Markets Total invested assets Total invested assets of which: passive strategies Information by region Invested assets (USD billion) Invested assets (USD billion) Americas Asia Pacific Europe, Middle East and Africa (excluding Switzerland) Switzerland Total invested assets Total invested assets Information by channel Invested assets (USD billion) Invested assets (USD billion) Third-party institutional Third-party wholesale UBS’s wealth management businesses Total invested assets Total invested assets As of or for the year ended 31.12.19 31.12.19 31.12.18 % change from 31.12.18 367 367 253 253 102 102 155 155 42 42 86 86 903 903 374 374 206 206 155 155 236 236 306 306 903 903 552 552 98 98 253 253 903 903 272 253 95 132 42 82 781 298 192 141 189 259 781 484 78 219 781 35 0 6 17 (1) 5 16 26 7 11 25 18 16 14 25 15 16 Additional information Average attributed equity (USD billion)6 Return on attributed equity (%)6 Risk-weighted assets (USD billion)6 6 Leverage ratio denominator (USD billion)6 (2) Goodwill and intangible assets (USD billion) 0 Net margin on invested assets (bps)7 22 Gross margin on invested assets (bps) 2 (1) Personnel (full-time equivalents) 1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework 1 effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Net management fees include transaction fees, fund administration revenues (including net interest and trading income from lending activities and foreign exchange hedging as 3 Reflects restructuring expenses related to legacy cost part of the fund services offering), gains or losses from seed money and co-investments, funding costs, and other items that are not performance fees. 3 4 Effective 1 January 2019, certain assets have been reclassified between asset classes to better reflect their underlying nature, with prior-period programs as well as expenses for new restructuring initiatives. 4 6 Refer to the “Capital management” section of this report for information restated. The adjustments have no effect on total net new money and total invested assets. 6 more information. 7 Calculated as operating profit before tax (annualized as applicable) divided by average invested assets. 1.8 23.5 4.3 5.0 1.4 5 23 2,301 1.8 1.8 29.7 29.7 4.6 4.6 5.0 5.0 1.4 1.4 6 6 23 23 2,284 2,284 5 Excluding the effect of business exits. 5 (1) 2 7 94 2019 compared with 2018 Results Profit before tax increased by USD 106 million, or 25%, to USD 532 million. Excluding a credit of USD 10 million related to changes to our Swiss pension plan in the first quarter of 2018 and restructuring expenses, adjusted profit before tax increased by USD 83 million, or 17%, to USD 565 million, reflecting higher operating income and stable operating expenses. Operating income Total operating income increased by USD 86 million, or 5%, to USD 1,938 million. Net management fees increased by USD 6 million to USD 1,778 million, reflecting the effect of higher average invested assets, partly offset by continued pressure on margins. Performance fees increased by USD 80 million to USD 160 million, mainly driven by increases in performance fees in Equities and in Hedge Fund Businesses, reflecting strong investment performance in a constructive market environment. Operating expenses Total operating expenses decreased by USD 20 million, or 1%, to USD 1,406 million, while adjusted total operating expenses were broadly stable at USD 1,373 million. Personnel expenses increased by USD 19 million to USD 722 million. Excluding the aforementioned credit related to changes to our Swiss pension plan in the first quarter of 2018 and personnel-related restructuring expenses, adjusted personnel expenses increased by USD 26 million to USD 716 million, driven by higher expenses for variable compensation. General and administrative expenses decreased by USD 5 million to USD 197 million. Adjusted general and administrative expenses were broadly stable at USD 190 million. Net expenses for services to/from Corporate Center and other business divisions decreased by USD 32 million to USD 486 million. Adjusted net expenses for services from Corporate Center and other business divisions decreased by USD 19 million to USD 466 million, primarily driven by a shift of market data service charges from Group Operations to Asset Management, which were partly offset by higher expenses from Group Technology. Pre-tax profit growth On a reported basis, 2019 pre-tax profit growth was positive 24.9% compared with negative 24.3%. On an adjusted basis, pre-tax profit growth was positive 17.1% compared with negative 0.8% and was above our target of around 10% over the cycle. Cost / income ratio The cost / income ratio was 72.6% compared with 77.0%. On an adjusted basis, the ratio was 70.8% compared with 74.0%, which is below our 2019 target of around 72%. Net new money Net new money was USD 17.8 billion, compared with inflows of USD 32.2 billion. Excluding money market flows, net new money was USD 12.6 billion compared with inflows of USD 24.7 billion, primarily driven by our third-party wholesale and UBS’s wealth management businesses channels. The net new money growth rate, excluding money market flows, was positive 1.8%, compared with positive 3.5%, and was below our 2019 target range of 3–5%. Net inflows were mainly driven by Europe and Switzerland. Invested assets Invested assets increased to USD 903 billion from USD 781 billion, mainly due to positive market performance of USD 101 billion, net new money inflows of USD 18 billion, and positive foreign currency translation effects of USD 3 billion. Personnel Asset Management employed 2,284 personnel (full-time equivalents) as of 31 December 2019, a decrease of 17 compared with 2,301 personnel as of 31 December 2018. 95 Financial and operating performance Financial and operating performance Asset Management Investment performance 2019 saw most risk assets perform strongly. The US Federal Reserve dramatically reversed its policy guidance in early 2019, triggering a significant rally from depressed valuations and supporting markets into the year-end. In 2019, 79% of our active traditional funds outperformed their benchmark and 69% outperformed peer medians. Long- term performance remains strong despite a challenging 2018, with 85% outperforming their benchmark and 82% outperforming peer medians over five years. Investment performance as of 31 December 2019 Active funds versus benchmark Percentage of fund assets exceeding benchmark Equities1 Fixed income1 Multi-asset1 Total traditional investments Total traditional investments Active funds versus peers Percentage of fund assets ranking in first or second quartile / exceeding peer index Equities1 Fixed income1 Multi-asset1 Total traditional investments Total traditional investments Passive funds tracking accuracy Annualized 1 year 3 years 5 years 82 98 17 79 79 79 51 69 69 69 87 100 48 86 86 92 58 75 77 77 89 100 33 85 85 92 77 72 82 82 Percentage of passive fund assets within applicable tracking tolerance All asset classes2 1 Percentage of active fund assets above benchmark (gross of fees) / peer median. Based on the universe of Europe-domiciled active wholesale funds available to UBS’s wealth management businesses and other 1 wholesale intermediaries as of 31 December 2019. Source of comparison versus peers: Thomson Reuters LIM (Lipper Investment Management). Source of comparison versus benchmark: UBS. Universe represents approximately 64% of all active traditional fund assets (Equities, Fixed Income excluding money market, and Multi-asset), 24% of all actively managed traditional assets including segregated accounts (Equities, Fixed Income excluding money market, and Multi-asset) and 17% of all actively managed assets including segregated accounts (Equities, Fixed Income excluding money market, Multi-asset, Hedge Fund Businesses, and Real Estate & Private Markets) as of 31 December 2019. 2 Percentage of passive fund assets within applicable tracking tolerance on a gross of fees basis. Tracking accuracy information represents a universe of Europe-domiciled institutional and wholesale funds representing approximately 40% of our total passive invested assets as of 31 December 2019. Source: UBS. 93 93 94 2 96 Investment Bank Investment Bank1 USD million, except where indicated Results CCoorrppoorraattee CClliieenntt SSoolluuttiioonnss Advisory Equity Capital Markets Debt Capital Markets Financing Solutions Risk Management IInnvveessttoorr CClliieenntt SSeerrvviicceess Equities Foreign Exchange, Rates and Credit Income Credit loss (expense) / recovery TToottaall ooppeerraattiinngg iinnccoommee Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets TToottaall ooppeerraattiinngg eexxppeennsseess BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx Adjusted results TToottaall ooppeerraattiinngg iinnccoommee aass rreeppoorrtteedd TToottaall ooppeerraattiinngg iinnccoommee ((aaddjjuusstteedd)) TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd of which: personnel-related restructuring expenses 2 of which: non-personnel-related restructuring expenses 2 of which: restructuring expenses allocated from Corporate Center 2 of which: gain related to changes to the Swiss pension plan of which: impairment of goodwill TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd BBuussiinneessss ddiivviissiioonn ooppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 22,,226677 770077 663311 665522 227700 77 55,,003322 33,,445533 11,,557799 77,,229999 ((3300)) 77,,226699 22,,774488 668888 22,,992266 22,,998800 88 111155 66,,448855 778844 77,,226699 77,,226699 66,,448855 8844 77 7777 111100 66,,220088 778844 11,,006611 2,621 717 785 769 278 72 5,458 3,850 1,609 8,079 (38) 8,041 2,941 651 2,942 2,995 8 12 6,554 1,486 8,041 8,041 6,554 16 11 166 (5) 6,367 1,486 1,674 (13) (1) (20) (15) (3) (90) (8) (10) (2) (10) (22) (10) (7) 6 (1) (1) (9) 833 (1) (47) (10) (10) (1) (3) (47) (37) 97 Financial and operating performance Financial and operating performance Investment Bank Investment Bank (continued)1 USD million, except where indicated Performance measures Return on attributed equity (%)3 Cost / income ratio (%) Adjusted performance measures Return on attributed equity (%)3 Cost / income ratio (%) As of or for the year ended 31.12.19 31.12.19 31.12.18 % change from 31.12.18 6.4 6.4 88.9 88.9 8.6 8.6 85.1 85.1 11.5 81.1 12.9 78.8 Additional information Pre-tax profit growth (%) Adjusted pre-tax profit growth (%) Average attributed equity (USD billion)3 Risk-weighted assets (USD billion)3 Return on risk-weighted assets, gross (%) Leverage ratio denominator (USD billion)3 Return on leverage ratio denominator, gross (%) 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 (%)4,5 Personnel (full-time equivalents)6 2 1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework 1 effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and 4 Refer to the “Risk 3 Refer to the “Capital management” section of this report for more information. events after the reporting period. 4 3 management and control” section of this report for more information about (credit-)impaired loan exposures. 5 Impaired loan portfolio as a percentage of total loan portfolio, gross, as of 31 December 2018 has 5 been restated, resulting in a decrease of 0.1%. 6 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 1. (47.3) (47.3) (36.6) (36.6) 12.3 12.3 81.1 81.1 8.2 8.2 293.2 293.2 2.5 2.5 0.0 0.0 37.7 37.7 9 9 0.7 0.7 5,331 5,331 36.7 24.7 13.0 93.2 9.0 283.4 2.6 0.1 36.4 11 1.4 5,205 2 Reflects restructuring expenses related to legacy cost programs. 2 (5) (13) (16) (96) 3 6 98 2019 compared with 2018 Results Profit before tax decreased by USD 702 million, or 47%, to USD 784 million. Excluding restructuring expenses and a goodwill charge, adjusted profit before tax decreased by USD 613 million, or 37%, to USD 1,061 million. This was driven by lower operating income, partly offset by lower operating expenses. Operating income Total operating income decreased by USD 772 million, or 10%, to USD 7,269 million. The prior year included net income of around USD 100 million, consisting mainly of previously deferred day-1 profits that were subsequently recognized as a result of enhanced observability and revised valuations in the funding curve used to value UBS interest rate-linked notes, and USD 53 million of revenues from Group Treasury for the rebalancing of the Group’s currency exposures in connection with the change of functional and presentation currencies. Excluding these items, total operating income decreased 8%. Net credit loss expense was USD 30 million compared with USD 38 million. Operating income by business unit Corporate Client Solutions Corporate Client Solutions revenues decreased by USD 354 million, or 13%, to USD 2,267 million, as a result of lower revenues across all income lines. Advisory revenues decreased by USD 10 million, or 1%, to USD 707 million, reflecting lower revenues from merger and acquisition transactions, while the global fee pool decreased 10%. Lower revenues from public transactions were partly offset by higher revenues from private transactions. Equity Capital Markets revenues decreased 20% to USD 631 million from a stronger prior year of USD 785 million, largely driven by lower revenues from private transactions. Revenues from public offerings were also lower, against a decrease in the global fee pool of 5%. Debt Capital Markets revenues decreased 15% to USD 652 million from USD 769 million, mainly reflecting lower leveraged finance revenues, against a global fee pool decrease of 14%. Financing Solutions revenues decreased 3% to USD 270 million from USD 278 million, reflecting lower levels of client activity. Risk Management revenues decreased 90% to USD 7 million from USD 72 million, mainly due to lower gains on a smaller portfolio of loans that were largely exited in 2018, and due to lower gains on a restructured debt position. Investor Client Services Investor Client Services revenues decreased by USD 426 million, or 8%, to USD 5,032 million, reflecting lower revenues in both Equities and Foreign Exchange, Rates and Credit. Equities Equities revenues decreased by USD 397 million, or 10%, to USD 3,453 million, with lower revenues across all product lines. Cash revenues decreased to USD 1,169 million from USD 1,258 million, mainly reflecting lower market volumes. Derivatives revenues decreased to USD 851 million from USD 1,041 million, reflecting a strong prior year and lower client activity levels. Financing Services revenues decreased to USD 1,452 million from USD 1,610 million, primarily driven by prime brokerage. Foreign Exchange, Rates and Credit Foreign Exchange, Rates and Credit revenues decreased 2% to USD 1,579 million from USD 1,609 million, primarily due to the second quarter of 2018 including net income of around USD 100 million, consisting mainly of the aforementioned previously deferred day-1 profits. The comparison of Foreign Exchange, Rates and Credit revenues was also affected by the fourth quarter of 2018, including USD 53 million of the aforementioned revenues from Group Treasury. Excluding these items, Foreign Exchange, Rates and Credit revenues increased 9%, reflecting an increase in Rates and Credit revenues, mainly due to higher client activity levels in a more constructive trading environment, partly offset by a decrease in Foreign exchange revenues, reflecting lower levels of volatility and client activity levels. Operating expenses Total operating expenses decreased by USD 69 million, or 1%, to USD 6,485 million, and adjusted operating expenses decreased by USD 159 million, or 3%, to USD 6,208 million. Personnel expenses decreased to USD 2,748 million from USD 2,941 million, and adjusted personnel expenses decreased to USD 2,664 million from USD 2,930 million, mainly reflecting lower variable compensation expenses. General and administrative expenses increased to USD 688 million from USD 651 million, and on an adjusted basis increased to USD 682 million from USD 640 million, mostly due to the prior year including a USD 64 million net release of provisions for litigation, regulatory and similar matters. Net expenses for services to/from Corporate Center and other business divisions decreased from USD 2,942 million. Excluding restructuring expenses, adjusted net expenses increased to USD 2,849 million from USD 2,776 million, mainly due to higher expenses for IT development and amortization of software and compliance costs. to USD 2,926 million 99 Financial and operating performance Risk-weighted assets Risk-weighted assets (RWA) decreased by USD 12 billion to USD 81 billion as of 31 December 2019, driven by lower market risk RWA, reflecting lower average regulatory and stressed value-at-risk levels.  Refer to the “Capital management” section of this report for more information Leverage ratio denominator The leverage ratio denominator (LRD) increased by USD 10 billion to USD 293 billion as of 31 December 2019, due to an increase reflecting market appreciation, partly offset by lower derivative and securities financing transaction exposures. trading portfolio assets, in  Refer to the “Capital management” section of this report for more information Personnel The Investment Bank employed 5,331 personnel (full-time equivalents) as of 31 December 2019, an increase of 126 compared with 5,205 personnel as of 31 December 2018, primarily as a result of the consolidation of the Documentation Unit and Client Hub into the Investment Bank. Financial and operating performance Investment Bank Amortization and impairment of goodwill and intangible assets increased by USD 103 million to USD 115 million. Excluding a USD 110 million goodwill charge, amortization and impairment of goodwill and intangibles assets on an adjusted basis decreased by USD 7 million to USD 6 million. As we continue to realign our Investment Bank and execute on a number of strategic initiatives to drive profitable growth, IAS 36, Impairment of Assets, requires us to give consideration to the range of possible forecast cash flows and uncertainties in macroeconomic factors that currently exist when determining the recoverability of goodwill. With this write-down, goodwill in the Investment Bank is now nil. Cost / income ratio The cost / income ratio increased to 88.9% from 81.1%. On an adjusted basis, the cost / income ratio increased to 85.1% from 78.8%, and was above our 2019 target range of around 78%. Return on attributed equity Return on attributed equity for 2019 was 6.4%, and 8.6% on an adjusted basis, below our target of around 15% over the cycle.  Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information 100 Corporate Center Corporate Center1,2 USD million, except where indicated Results OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx of which: Group Treasury of which: Non-core and Legacy Portfolio of which: Retained Services Adjusted results TToottaall ooppeerraattiinngg iinnccoommee aass rreeppoorrtteedd of which: gains on sale 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) of which: net gains / (losses) from properties held for sale TToottaall ooppeerraattiinngg iinnccoommee ((aaddjjuusstteedd)) TToottaall ooppeerraattiinngg eexxppeennsseess aass rreeppoorrtteedd of which: gain related to changes to the Swiss pension plan of which: net restructuring (credits) / expenses TToottaall ooppeerraattiinngg eexxppeennsseess ((aaddjjuusstteedd)) OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx aass rreeppoorrtteedd OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx ((aaddjjuusstteedd)) As of or for the year ended 3311..1122..1199 31.12.18 % change from 31.12.18 ((557777)) ((6699)) ((8844)) ((442244)) ((338855)) ((3355)) ((2299)) ((332211)) 119922 ((22)) 119944 ((557777)) ((551155)) (971) (445) (128) (398) (626) 31 25 (270) (413) 346 (122) (4) 472 (971) (885) (41) (84) (35) 7 (38) (22) (44) (49) (59) (41) (42) Additional information Average attributed equity (USD billion)3 Risk-weighted assets (USD billion)3 Leverage ratio denominator (USD billion)3 (12) Personnel (full-time equivalents)4 8 11 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 22 The presentation of reported results in this table has been amended to focus on operating profit / (loss), providing a breakdown into Group Treasury, Non-core and Legacy Portfolio, and Retained Services. 33 Refer to the “Capital management” section of this report for more information. 44 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 54. 7766..22 3333,,116644 86.5 30,581 2288..33 13.3 28.1 1155..11 13 1 101 Financial and operating performance Financial and operating performance Corporate Center 2019 compared with 2018 Results Corporate Center recorded a loss before tax of USD 577 million, compared with a loss of USD 971 million in the prior year. The adjusted loss before tax was USD 515 million compared with a loss of USD 885 million, excluding the remeasurement loss related to the increase of our shareholding in UBS Securities China in 2018, a prior-year credit related to changes to our Swiss pension plan and other adjusting items. Group Treasury Group Treasury The Group Treasury result was a loss of USD 69 million, compared with a loss of USD 445 million. The adjusted loss before tax was USD 33 million, compared with a loss of USD 443 million, excluding net foreign currency translation losses in 2019 and restructuring expenses. income accounting asymmetries that were positive USD 103 million, compared with negative USD 77 million. Revenues relating to centralized Group Treasury risk management services were negative USD 168 million, compared with negative revenues of USD 320 million. Revenues related to hedge accounting ineffectiveness were positive USD 118 million, compared with positive USD 25 million. Adjusted operating expenses increased to USD 93 million, compared with USD 81 million. included from Non-core and Legacy Portfolio The Non-core and Legacy Portfolio result was a loss of USD 84 million, compared with a loss of USD 128 million. The improved result was mainly due to lower operating expenses driven by the release of litigation provisions and decreased net expenses for services from business divisions and other Corporate Center units. Net operating income decreased, mainly due to 2018 including higher valuation gains on auction rate securities. This was partly offset by a gain related to the settlement of a litigation claim and income related to a claim on a defaulted counterparty position. Retained Services The Retained Services result was a loss of USD 424 million, compared with a loss of USD 398 million. 2019 included losses from the remeasurement of properties reclassified as properties held for sale, while 2018 included gains on sale of real estate, a gain on the sale of subsidiaries and businesses and the remeasurement loss related to the increase of our shareholding in UBS Securities China. Excluding the aforementioned adjusting items and restructuring expenses, the adjusted result was negative USD 400 million, compared with negative USD 317 million, mainly due to higher funding costs related to deferred tax assets, reflecting higher interest rates. Personnel As of 31 December 2019, Corporate Center employed 33,164 personnel (full-time equivalents), a net increase of 2,583 compared with 31 December 2018. The increase was mainly driven by the ongoing insourcing of certain activities from third- party vendors to our Business Solutions Centers, resulting in a decrease of approximately 2,200 outsourced staff. 102 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 –  – indicates the end of the audited section, table or chart. Table of contents 107 105 111 109 108 105 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 119 138 Market risk Country risk Operational risk 115 116 153 148 156 156 170 173 174 175 175 177 180 185 188 190 192 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 104 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 businesses, 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 broadly unchanged in 2019 and we continued to manage market risks at generally low levels. business divisions and Corporate Center. This illustrates how the activities in our business divisions and Corporate Center 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 about RWA, LRD and our equity attribution Operational resilience, conduct and prevention of financial framework crime remain key focus topics. risk-weighted assets The “Risk measures and performance” table on the next page shows ratio denominator (the 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 leverage (RWA), the  Refer to “Statistical measures” in this section for more information about RBC  Refer to the “Performance of our business divisions and Corporate Center – reported and adjusted” table in the “Group performance” section of this report for more information 105 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Key risks, risk measures and performance by business division and Corporate Center Business divisions and Corporate Business divisions and Corporate Center Center Global Wealth Global Wealth Management Management Personal & Corporate Personal & Corporate Banking Banking Asset Management Asset Management Investment Bank Investment Bank Corporate Center Corporate Center Key risks arising from business Key risks arising from business activities activities Small amounts of credit and market risk Credit risk from lending Credit risk against securities collateral and mortgages, and a small amount of derivatives trading activity Credit risk from retail Credit risk business, mortgages, secured and unsecured corporate lending, and a small amount of derivatives trading activity Market risk from municipal Market risk securities and taxable fixed-income securities Minimal contribution to market risk market risk Credit and market risk Credit market risk arising from management of the Group’s balance sheet, capital, profit or loss and liquidity portfolios Credit risk from lending Credit risk (take and hold as well as temporary loan underwriting activities), derivatives trading and securities financing Market risk from primary Market risk underwriting activities and secondary trading Operational risk, which includes compliance and conduct risks, is an inevitable consequence of being in business, as losses can result from inadequate or failed internal processes, Operational risk 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. 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 capital2 Average attributed tangible equity3 Total assets Operating profit / (loss) before tax (as reported) Operating profit / (loss) before tax (adjusted)4 Global Wealth Global Wealth Management Management 78.1 78.1 35.0 35.0 0.8 0.8 35.9 35.9 312.7 312.7 6.6 6.6 11.5 11.5 309.8 309.8 3.4 3.4 3.5 3.5 31.12.19 31.12.19 Personal & Personal & Corporate Corporate Asset Asset Banking Management Banking Management 4.6 4.6 1.8 1.8 0.0 0.0 2.0 2.0 5.0 5.0 0.4 0.4 0.4 0.4 34.6 34.6 0.5 0.5 0.6 0.6 67.1 67.1 57.3 57.3 0.0 0.0 7.7 7.7 224.2 224.2 4.9 4.9 8.4 8.4 209.4 209.4 1.4 1.4 1.5 1.5 31.12.18 Investment Investment Bank Bank 81.1 81.1 50.6 50.6 4.6 4.6 22.5 22.5 293.2 293.2 7.0 7.0 12.2 12.2 315.9 315.9 0.8 0.8 1.1 1.1 Corporate Corporate Center Center 28.3 28.3 8.3 8.3 1.1 1.1 9.4 9.4 76.2 76.2 16.1 16.1 15.1 15.1 102.6 102.6 (0.6) (0.6) (0.5) (0.5) Group Group 259.2 259.2 153.0 153.0 6.6 6.6 77.5 77.5 911.3 911.3 35.0 35.0 47.6 47.6 972.2 972.2 5.6 5.6 6.0 6.0 Personal & Corporate USD billion, as of or for the year ended Risk-weighted assets1 Group 263.7 147.9 of which: credit and counterparty credit risk 20.0 of which: market risk 77.6 of which: operational risk Leverage ratio denominator1 904.6 Risk-based capital2 33.3 Average attributed tangible equity3 45.9 958.4 Total assets 6.0 Operating profit / (loss) before tax (as reported) Operating profit / (loss) before tax (adjusted)4 6.1 1 Refer to the “Capital management” section of this report for more information. 2 Refer to “Statistical measures” in this section for more information on risk-based capital. 3 Average attributed tangible equity 1 of the business divisions and Corporate Center as of 31 December 2018 has been restated for the changes in equity attribution in the first quarter of 2019. Refer to the “Significant accounting and financial 4 Refer to the “Performance of our business divisions and Corporate Center – reported and adjusted” table in the “Group performance” section of reporting changes” section in this report for more information. 4 this report for more information. Asset Banking Management 4.3 1.8 0.0 2.0 5.0 0.4 0.4 28.1 0.4 0.5 Global Wealth Management 74.3 32.5 1.3 36.0 315.8 5.0 11.2 313.7 3.3 3.3 Investment Bank 93.2 51.3 16.8 22.5 283.4 6.6 12.9 302.1 1.5 1.7 Corporate Center 28.1 7.7 1.9 9.4 86.5 16.7 13.3 113.7 (1.0) (0.9) 63.9 54.7 0.0 7.7 213.7 4.5 8.0 200.7 1.8 1.4 2 3 106 Risk categories We categorize the risk exposures of our business divisions and Corporate Center 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 obligations 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.  Audited | Market risk (traded and non-traded): the risk of loss resulting from adverse movements in market variables. Market variables include observable variables, such as interest rates, foreign exchange rates, equity prices, credit spreads and commodity (including precious metal) prices, and variables that may be unobservable or only indirectly observable, such as volatilities and correlations. Market risk includes issuer risk and investment risk. Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an issuer to which we are exposed through tradable securities or derivatives referencing the issuer. Investment risk: issuer risk associated with positions held as financial investments.  Business management and Group Treasury Risk Control Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events arising from country-specific political or macroeconomic developments. 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 that the bank will not be able to efficiently meet both expected and unexpected current and forecast cash flows and collateral needs without affecting either daily operations or the financial condition of the firm.  Audited | Funding risk: the risk that the bank will be unable, on an ongoing basis, to borrow funds in the market on an unsecured (or even secured) basis at an acceptable price to fund actual or proposed commitments; i.e., the risk that UBS s funding capacity is not sufficient to support the firm s current business and desired strategy.  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 the US dollar. ’ ’ 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 has longer-term financial consequences. Business management Group Compliance, Regulatory & Gov- ernance (GCRG) Legal Legal risk: the financial or reputational implications resulting from the risk of: (i) being held liable for a breach of applicable 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 supervise external legal counsel advising on business legal risk and other matters; and (v) a 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. 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. Cybersecurity 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. Pension risk: the risk of a negative impact on our capital as a result of deteriorating funded status from decreases in the fair value of assets held in the defined benefit pension funds and/or changes in the value of defined benefit pension obligations due to changes in actuarial assumptions (e.g., discount rate, life expectancy, rate of pension increase) and/or changes to plan designs. Environmental and social risk: the risk that UBS supports clients, or sources from suppliers, who cause or con tribute to severe envi- ronmental damage or human rights infringements. Environmental and social risks can also arise if UBS’s operational activities and its employees (or contractors working on behalf of UBS) fail to operate within relevant environmental and human rights regulations. Environ- mental and social risks (including human rights and climate-related risks) may result in adverse financial and reputation impacts for UBS.  Refer to the “Management of environmental and social risks” section of the Sustainability Report 2019 Model risk: 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. GCRG GCRG GCRG GCRG Risk Control and Finance Risk Control Business management and Group Technology Human Resources Business management Model owner Risk Control Business risks: the risks arising from the commercial, strategic and economic environment in which our businesses operate Business risk: 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 107 Risk, treasury and capital management proceedings and government investigations, as noted in “Regulatory and legal risks” in the “Risk factors” section of this report. Information about 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 inability to keep pace with evolving cyber threats, such as data theft and data leakage, 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 resilience scenarios such as process error, failed execution, system failures and fraud. including money – Financial crime, – Conduct risks are inherent in our businesses. 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. laundering, 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. Risk, treasury and capital management Risk management and control Top and emerging risks The top and emerging risks disclosed below reflect those that we currently think have the potential to materialize within one year and which could significantly affect the Group. Investors should also carefully consider all information set out in the “Risk factors” section of this report, where we discuss these and other material risks that 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 business 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, asset valuation adjustments. Accordingly, these macroeconomic factors are considered in the development of stress testing scenarios for our ongoing risk management activities. impairments and other – The outbreak of Covid-19 in China and its subsequent spread to other countries is likely to have at least a short-term adverse effect on economic activity in China and other affected countries, with a collateral impact on the global economy. A significant rise in the number of Covid-19 infections, infections in a wide range of countries and regions, or a prolongation of the outbreak, could increase the adverse economic effects. These adverse effects may materialize through adverse market performance, increased credit risk or negative effects on operational resilience. – 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 risk and we are subject to various claims, disputes, legal 108 Risk governance Our risk governance framework operates along three lines of defense. risks, including setting risk appetite and protecting against non- compliance with applicable laws and regulations. Our first line of defense, business management, owns its risk exposures and is required to maintain effective processes and systems to manage its risks, including robust and comprehensive internal controls and documented procedures. Business management has appropriate supervisory controls and review processes in place, which are designed to identify control weaknesses and inadequate processes. 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 Our third line of defense, Group Internal Audit, reports to the Audit Committee of the Board of Directors. This function evaluates risk including the management and the control environment, assessment of how the first and second lines of defense meet their objectives. the overall effectiveness of governance, 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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(cid:77) (cid:77) (cid:85) (cid:85) (cid:75) (cid:75) (cid:52) (cid:52) (cid:85) (cid:71) (cid:71) (cid:86) (cid:86) (cid:75) (cid:79) (cid:79) (cid:81) (cid:69) (cid:2) (cid:77) (cid:85) (cid:75) (cid:84) (cid:2) (cid:78) (cid:67) (cid:80) (cid:81) (cid:75) (cid:86) (cid:69) (cid:80) (cid:87) (cid:72) (cid:2) (cid:70) (cid:80) (cid:67) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:91) (cid:91) (cid:86) (cid:86) (cid:75) (cid:75) (cid:78) (cid:78) (cid:75) (cid:75) (cid:68) (cid:68) (cid:67) (cid:67) (cid:75) (cid:75) (cid:78) (cid:78) (cid:2) (cid:2) (cid:70) (cid:70) (cid:80) (cid:80) (cid:67) (cid:67) (cid:2)(cid:50) (cid:67)(cid:84)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71) (cid:2)(cid:86) 109 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Audited | The Board of Directors (the BoD) is responsible for approving the risk management and control framework of the Group, including the overall risk appetite of the Group and business divisions. The BoD is supported by the BoD Risk Committee, which monitors and oversees the Group’s risk profile and the implementation of the risk framework as approved by the BoD, 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 stakeholder concerns and expectations pertaining to UBS’s societal contribution and corporate culture. The Audit Committee supports the BoD in fulfilling its oversight duty relating to financial reporting and internal controls over financial reporting, the effectiveness of the external and internal audit functions, and the effectiveness of whistleblowing procedures. The Group Executive Board (the 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 (the 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. The business division Presidents are responsible for the success, risks, results and value of their business division. This includes controlling and administering the dedicated financial resources and risk appetite of the business division. 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 (the Group CRO) is responsible for the development of the Group’s risk management and control framework (including risk principles and risk appetite) for credit, market, country, funding, model, and environmental and social risks. This includes risk measurement and aggregation, portfolio controls and risk reporting. The Group CRO is responsible for setting risk limits and approving credit and market risk transactions and exposures. Risk Control is also the central function for model risk management and control for all models used in the firm. The risk control process is liquidity, 110 supported by a framework of policies and authorities. The business division CROs are responsible for the implementation and enforcement of risk management and control framework within their business division. The regional Chief Risk Officers provide independent oversight of risks within their region. the The Group Chief Compliance and Governance Officer is responsible for ensuring that all operational risks, including compliance and conduct risks, as well as cyber and information security risks, are identified, owned and managed according to the firm’s risk appetite, supported by an effective control framework. the Group’s The Group Chief Financial Officer (the Group CFO) is responsible for transparency in and assessing the financial performance of the Group and the business divisions, and for managing financial accounting, controlling, forecasting, planning and reporting processes in line with regulatory and financial reporting requirements, corporate governance standards and global best practice to maintain high quality and include managing UBS’s tax affairs, as well as treasury and capital management, including funding and liquidity risk and UBS’s regulatory capital ratios. timeliness. Additional responsibilities The Group General Counsel (the Group GC) is responsible for managing the Group’s legal affairs and ensuring effective and timely assessment of legal matters impacting the Group or its businesses, and for the management and reporting of all litigation matters. (GIA) Group Internal Audit independently assesses the effectiveness of processes to define strategy and risk appetite, as well as overall adherence to the approved strategy and the effectiveness of governance processes and of risk management at Group, business division and regional levels, including compliance with legal and regulatory requirements, as well as with internal policies, constitutional documents 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 management and control framework.  Risk appetite framework We have a defined Group level risk appetite, covering all financial and non-financial risk types, via a complementary set of qualitative and quantitative risk appetite statements. This is reviewed and recalibrated annually and presented to the BoD for approval. 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 at a firm-wide level and is embedded throughout our business divisions and legal entities by means of Group, business division and legal entity policies, limits and authorities. UBS is the largest truly global wealth manager and a leading personal and corporate bank in Switzerland, with focused investment bank and asset management divisions. We are subject to consolidated supervision by FINMA and related ordinances, which impose, among other requirements, minimum standards for capital, liquidity, risk concentration and internal organization. Our risk appetite is reviewed and recalibrated annually with an aim to ensure that risk-taking at every level of the organization is in line with our strategic priorities, our capital and liquidity plans, our pillars, principles and behaviors, as well as minimum regulatory requirements. The risk appetite statements are a critical foundation for 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 that we maintain the desired risk culture. Quantitative risk appetite objectives are (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) 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. A standardized financial firm-wide operational risk appetite has been established at the Group and business division level. Operational risk events that exceed predetermined risk tolerances, expressed as percentages of the Group’s operating income, must be escalated as per the firm-wide escalation framework 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 a portfolio level. These may apply across the Group, within a business division or business, 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: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:14)(cid:2)(cid:84)(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:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:14)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:85) (cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:82)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85) (cid:115)(cid:2)(cid:37)(cid:81)(cid:70)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:37)(cid:81)(cid:80)(cid:70)(cid:87)(cid:69)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:39)(cid:86)(cid:74)(cid:75)(cid:69)(cid:85) (cid:115)(cid:2)(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85) (cid:115)(cid:2)(cid:49)(cid:84)(cid:73)(cid:67)(cid:80)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:17)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:75)(cid:71)(cid:85) (cid:115)(cid:2)(cid:52)(cid:81)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:115)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85) (cid:115)(cid:2)(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85) (cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:85) (cid:115)(cid:2)(cid:35)(cid:87)(cid:86)(cid:74)(cid:81)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:75)(cid:85)(cid:69)(cid:78)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:14)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:14)(cid:2)(cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73) Risk reports containing aggregated measures of risk across products and businesses provide insight 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. 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. Our risk appetite framework 111 Risk, treasury and capital management Risk, treasury and capital management Risk management and control 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. 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 Risk management and control principles appropriate risk-taking and the establishment of robust risk management and control processes. These principles are supported by a range of initiatives covering employees at all levels. This includes the UBS House View on Leadership, which is a set of explicit expectations for leaders that establishes consistent leadership standards across UBS. These initiatives also include our principles of good 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 foldout pages of this report for more information about 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 Protection of financial strength financial strength Protection of reputation Protection of reputation 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 Business management Business management accountability accountability 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 controls Independent controls Risk disclosure Risk disclosure Independent control functions that monitor the effectiveness of the businesses’ risk management and oversee risk-taking activities Disclosure of risks to senior management, the BoD, investors, regulators, credit rating agencies and other stakeholders with an appropriate level of comprehensiveness and transparency To support an environment where our employees 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 ensuring that appropriate training for and communication to staff and legal entity representatives are made available on an ongoing basis, including with regard to new regulatory requirements. We also have mandatory training programs covering 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 has 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. Additionally, we want to be the financial provider of choice for clients wishing to direct capital toward investments that support the Sustainable Development Goals and the transition to a low-carbon economy. Our comprehensive environmental and social risk framework governs client and supplier relationships, applies firm-wide to all activities, meets the highest industry standards and is integrated in management practices and control principles. We also seek to protect our assets from climate change risks by limiting our risk appetite for carbon- related assets. 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. 112 Through the annual business planning process, we review the business strategy of the firm, assess the risk profile as a result of our operations and activities, and stress-test our risk profile. 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 firm-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.  Refer to “Risk measurement” in this section for more information about our stress testing and statistical frameworks (cid:20)(cid:18)(cid:19)(cid:27)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85) 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(cid:69)(cid:81)(cid:79)(cid:68)(cid:75)(cid:80)(cid:71)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:71)(cid:85)(cid:86)(cid:2) (cid:37)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:47)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:37)(cid:81)(cid:87)(cid:80)(cid:86)(cid:84)(cid:91)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2) (cid:85)(cid:71)(cid:86)(cid:86)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:81)(cid:67)(cid:80)(cid:2) (cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:89)(cid:84)(cid:75)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:11)(cid:124) (cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:84)(cid:2) (cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2) (cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:11) (cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2) (cid:84)(cid:75)(cid:85)(cid:77) (cid:53)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:67)(cid:78)(cid:2) (cid:40)(cid:58)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:46)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2) (cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:50)(cid:71)(cid:80)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77) (cid:50)(cid:84)(cid:75)(cid:79)(cid:67)(cid:84)(cid:91)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:85) (cid:37)(cid:81)(cid:80)(cid:85)(cid:71)(cid:83)(cid:87)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:85) (cid:54)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:75)(cid:85)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:79)(cid:71)(cid:86)(cid:84)(cid:75)(cid:69)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:73)(cid:84)(cid:67)(cid:80)(cid:87)(cid:78)(cid:67)(cid:84)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:71)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:75)(cid:85)(cid:74)(cid:71)(cid:85)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:85)(cid:74)(cid:81)(cid:78)(cid:70)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:16) (cid:41)(cid:84)(cid:67)(cid:80)(cid:87)(cid:78)(cid:67)(cid:84)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77) 113 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Our risk capacity is underpinned by our performance targets and capital guidance as per our latest three-year strategic plan. When 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 the previous page provides an overview of our quantitative risk appetite objectives during 2019. For 2020, we have adjusted the one-year firm-wide minimum post-stress CET1 capital and leverage ratio objectives from 10% and 2.5% to 9% and 2.7%, respectively. The new objectives account for the various ongoing enhancements to stress measures, many of which lead to higher results for the same amount of underlying risk. We have also introduced three-year minimum post-stress capital and leverage ratio objectives of 7.5% and 2.2%, respectively, to better align with regulatory scenarios. Risk appetite objectives define the aggregate risk exposure acceptable at the firm-wide level, given our risk capacity. The maximum acceptable is supported by a risk exposure comprehensive suite of risk limits, triggers and targets, which are cascaded to businesses and portfolios. These limits, triggers and targets are intended to ensure that our risks in aggregate remain under the maximum acceptable level of risk exposure. Risk appetite statements at the business division level are derived from the firm-wide risk appetite. They may also comprise objectives specific to the division, related to the specific activities and risks in that division. Risk appetite statements are also set for certain legal entities. These must be consistent with the firm- 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. Risk appetite following adoption of IFRS 9 The introduction of the expected credit loss (ECL) framework under IFRS 9 in 2018 fundamentally changed how credit risk arising from loans, loan commitments, guarantees and certain revocable facilities is accounted for. The ECL framework 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 ECLs 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 that the IFRS 9 ECL framework has on our solvency objectives, we have not changed either our risk appetite and management practices or 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 about our accounting policy for allowances and provisions for ECL  Refer to “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information about ECL measurement  Refer to “Credit risk” in this section for more information about the ECL methodology under IFRS 9 114 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, along with aggregate views of risks at the firm-wide level, including the status of our risk appetite objectives and results of firm-wide stress testing. The Group Risk Report is distributed internally to the BoD Risk Committee and the GEB, and to senior members of Risk Control, Group Internal Audit, Finance, and Legal. Additionally, an extract of the Group Risk Report is provided to the 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 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. 115 Risk, treasury and capital management 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.  Models must be approved and are regularly reviewed in accordance with regulatory requirements as well as internal policies to test whether 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 about 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 the firm-wide, business division, legal entity and portfolio levels. Stress test results are regularly reported to the BoD, the BoD 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. 116 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 firm-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 BoD 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) as prescribed by FINMA, Comprehensive Capital Analysis and Review (CCAR) for Americas Holding LLC as prescribed by the US Federal Reserve Board, and Comprehensive Assessment Stress Test for UBS Europe SE as prescribed by the European Central Bank. in The Enterprise-wide Stress Committee (the ESC) is responsible for ensuring the consistency and adequacy of the assumptions and scenarios used for our firm-wide stress measures. As part of these responsibilities, the ESC seeks to ensure that the suite of stress scenarios adequately reflects current and potential the macroeconomic and geopolitical developments 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, which is a panel of senior representatives from the business divisions, Risk Control and economic research, and 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. Through 2019, 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 leading 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. In 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. ratios. The assumed changes leverage The CST risk exposure was broadly stable over the year with most of the month-on-month variability arising primarily from changes in volumes of temporary loan underwriting exposure in the Investment Bank. As part of the CST framework, we routinely monitored four additional stress scenarios throughout 2019. – The 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. The 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. The 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. – – – The 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 binding stress scenario in our CST framework for 2020 and renamed it Global Crisis scenario. The scenario maintains a eurozone crisis at its core, but has greater focus on risks threatening the global economy, such as protectionism. In addition, central banks in the eurozone, Switzerland and Japan are assumed to push policy rates further into negative territory to provide more monetary stimulus. A China hard landing remains a feature of the scenario. 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 are not modeled on any historical events. 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 about stress loss measures  Refer to the “Treasury management” section of this report for more information about 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 117 Risk, treasury and capital management 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 for deriving the contributions of business divisions and Corporate Center 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 about the equity attribution framework Portfolio and position limits The firm-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 control framework that is applied to our business divisions and Corporate Center, as well as the significant legal entities, as relevant to the key risks arising from their businesses. 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- foreign exchange for-sale portfolios, and 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 include sensitivities to exposures. Market risk sensitivities 118 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 on a daily basis. Counterparty measures capture the individual current and potential counterparty, legally enforceable netting agreements. into account collateral and future exposure to an taking  Refer to “Credit risk” in this section for more information about 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 the correlations of those factors. Also important in our assessment is the liquidity of the markets where the positions are traded, as well as 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.   Refer to “Credit risk” and “Market risk” in this section for more information about the compositions of our portfolios  Refer to the “Risk factors” section of this report for more information Credit risk Key developments Audited | Overview of measurement, monitoring and management techniques from risk arising transactions with individual Credit counterparties is measured based on our estimates of probability of default, exposure at default and loss given default. Limits are established for individual counterparties and groups of related counterparties covering banking and traded products, as well as settlement amounts. Risk control authorities are approved by the Board of Directors, and are delegated to the Group Chief Executive Officer, the 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 to 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 the portfolio and sub-portfolio levels with regard to sector exposure, country risk and specific product exposures.  Total net credit loss expenses were USD 78 million in 2019, reflecting net credit loss expenses of USD 100 million related to credit-impaired in Personal & (stage 3) positions, mainly Corporate Banking and to a lesser extent in the Investment Bank and Global Wealth Management, partly offset by USD 22 million of net releases in expected credit loss (ECL) expense allowances and provisions from stage 1 and 2 positions.  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 about IFRS 9 and ECLs Our Swiss lending portfolios, which account for approximately half of our loan exposure, continued to perform well. We aim to manage our Swiss lending portfolios prudently and remain watchful for signs of deterioration in the Swiss economy that could affect our counterparties. – – – Within the Investment Bank, our leveraged loan underwriting – business’s overall ability to distribute risk remained sound. Audited | Main sources of credit risk – – – – – residential properties and A substantial portion of our lending exposure arises from our Swiss domestic business, which offers mortgage loans, secured mainly by income- producing real estate, as well as corporate loans, 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. Derivatives trading and securities financing are 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 (Lombard) lending and mortgage lending. Credit risk within Non-core and Legacy Portfolio in Corporate Center relates to derivative transactions, predominantly carried out on a cash-collateralized basis, and securitized positions.  119 Risk, treasury and capital management 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 ECL measurement requirements of IFRS. loans, guarantees and Internally, we categorize credit risk exposures into two broad categories: banking products and traded products. Banking products comprise drawn 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 in the “Banking and traded products exposure in our business divisions and Corporate Center” table below and on the next page 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 515 billion corresponds to the ECL gross exposure of USD 670 billion, cash cash, securities receivables collateral including other financial assets measured at amortized cost, but financing from excluding transactions, receivables on derivative instruments, financial assets at fair value through other (FVOCI), comprehensive committed revocable loans, unconditionally prolongation of existing committed credit lines, and forward starting reverse repurchase and securities borrowing agreements. irrevocable income The table reflects the total exposures (stages 1–3) in scope of ECL requirements, allowances and provisions by ECL stages and separately credit-impaired exposures, gross (stage 3). Total gross banking products exposure was USD 515 billion as of 31 December 2019, compared with USD 518 billion at the end of the prior year.  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about our accounting policy for allowances and provisions for ECLs  Refer to “Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement” and “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information about ECL measurement requirements under IFRS  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 in our business divisions and Corporate Center USD million Banking products1,2 Banking products1,2 Gross exposure of which: loans and advances to customers (on-balance sheet) of which: guarantees and loan commitments (off-balance sheet) Traded products2,3 Traded products2,3 Gross exposure of which: over-the-counter derivatives of which: securities financing transactions of which: exchange-traded derivatives Other credit lines, gross4 Other credit lines, gross4 Total credit-impaired exposure, gross (stage 3)1 Total allowances and provisions for expected credit losses (stages 1 to 3) of which: stage 1 of which: stage 2 of which: stage 3 (allowances and provisions for credit-impaired exposures) Global Wealth Global Wealth Management Management Personal & Personal & Corporate Corporate Banking Banking Asset Asset Management Management Investment Investment Bank Bank Corporate Corporate Center Center 31.12.19 31.12.19 239,032 239,032 174,510 174,510 5,578 5,578 194,395 194,395 136,572 136,572 23,142 23,142 2,914 2,914 1 1 0 0 48,170 48,170 10,585 10,585 16,009 16,009 30,570 30,570 5,882 5,882 960 960 8,830 8,830 6,571 6,571 0 0 2,259 2,259 10,735 10,735 902 902 209 209 59 59 34 34 116 116 841 841 804 804 0 0 36 36 20,986 20,986 1,694 1,694 696 696 81 81 122 122 493 493 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 38,233 38,233 9,832 9,832 20,821 20,821 7,580 7,580 3,227 3,227 91 91 87 87 38 38 3 3 46 46 144 144 427 427 37 37 3 3 0 0 34 34 Group Group 515,081 515,081 327,550 327,550 45,689 45,689 47,904 47,904 17,207 17,207 20,821 20,821 9,876 9,876 35,092 35,092 3,113 3,113 1,029 1,029 181 181 160 160 688 688 120 Banking and traded products exposure in our business divisions and Corporate Center (continued) USD million BBaannkkiinngg pprroodduuccttss11 Gross exposure of which: loans and advances to customers (on-balance sheet) of which: guarantees and loan commitments (off-balance sheet) TTrraaddeedd pprroodduuccttss22,,33 Gross exposure of which: over-the-counter derivatives of which: securities financing transactions of which: exchange-traded derivatives OOtthheerr ccrreeddiitt lliinneess,, ggrroossss44 Global Wealth Management 239,835 170,413 6,111 10,606 5,960 153 4,494 10,345 Personal & Corporate Banking 186,802 133,253 20,609 873 762 0 111 22,994 31.12.185 Asset Management Investment Bank Corporate Center 2,751 7 0 59,980 9,090 22,290 28,357 8,362 348 0 0 0 0 0 30,771 9,441 16,004 5,325 3,202 94 Group 517,725 321,125 49,358 42,250 16,163 16,157 9,930 36,634 Total credit-impaired exposure, gross (stage 3)1 Total allowances and provisions for expected credit losses (stages 1 to 3) of which: stage 1 of which: stage 2 of which: stage 3 (allowances and provisions for credit-impaired exposures) 3,154 1,054 176 183 695 11 ECL 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 22 Internal FVOCI, irrevocable committed prolongation of existing loans and unconditionally revocable committed credit lines and forward starting reverse repurchase and securities borrowing agreements. management view of credit risk, which differs in certain respects from IFRS. 33 As counterparty risk for traded products is managed at counterparty level, no further split between exposures in the Investment Bank and Corporate Center is provided. 44 Unconditionally revocable committed credit lines. 55 The comparative figures have been restated for the changes in Corporate Center resource allocation to the business divisions. Refer to the “Significant accounting and financial reporting changes” section of this report for more information. 1,974 697 78 146 474 625 223 62 34 127 415 26 3 0 23 140 108 34 3 71 0 0 0 0 0 Global Wealth Management Gross banking products exposure within Global Wealth Management decreased slightly to USD 239 billion from USD 240 billion. The portfolio of mortgage loans secured by properties in EMEA and Asia Pacific decreased to USD 6.4 billion from USD 6.5 billion. The overall quality of this portfolio remained high during 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 as 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 17.2 billion from USD 14.3 billion. The overall quality of this portfolio remained high, with an average loan-to- value (LTV) ratio of 59.1%, compared with 58.7% (the comparative figure has been restated) as of 31 December 2018, 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 (27%), New York (14%), Florida (10%), Texas (5%) and New Jersey (4%). Global Wealth Management and Personal & Corporate Banking loans and advances to customers, gross 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 TToottaall llooaannss aanndd aaddvvaanncceess ttoo ccuussttoommeerrss,, ggrroossss AAlllloowwaanncceess TToottaall llooaannss aanndd aaddvvaanncceess ttoo ccuussttoommeerrss,, nneett ooff aalllloowwaanncceess Global Wealth Management Personal & Corporate Banking 3311..1122..1199 5544,,338833 22,,661199 1166,,885522 8888,,668844 1100,,559911 11,,338811 117744,,551100 ((9933)) 117744,,441177 31.12.18 51,251 2,233 15,529 90,946 9,469 986 170,413 (102) 170,312 3311..1122..1199 110000,,664455 1177,,113311 11,,556699 11,,776666 55,,335511 1100,,111111 113366,,557722 ((559955)) 113355,,997788 31.12.18 96,841 16,887 1,467 1,647 5,754 10,657 133,253 (594) 132,659 121 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Personal & Corporate Banking Gross banking products exposure (excluding exposure re- allocated from Group Treasury) within Personal & Corporate Banking increased to USD 163 billion (CHF 158 billion) from USD 157 billion (CHF 155 billion), partly driven by the appreciation of the Swiss franc. Net banking products exposure was USD 162 billion (CHF 157 billion), compared with USD 157 billion (CHF 154 billion), of which approximately 63% was classified as investment grade, similar to 2018. Around 50% of the exposure is categorized in the lowest loss given default (LGD) bucket of 0–25%, similar to 2018. The size of Personal & Corporate Banking’s gross loan portfolio increased by USD 3 billion (CHF 1 billion) to USD 137 billion (CHF 132 billion). As of 31 December 2019, 93% 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 5% related to lending to public authorities. Based on our internal ratings, 46% of the unsecured loan portfolio was rated as investment grade, compared with 47% in 2018. Credit loss expense for banking products remained low in 2019. Our Swiss corporate banking products portfolio, which was USD 26 billion (CHF 26 billion) compared with USD 27 billion (CHF 27 billion) in 2018, consists of loans, guarantees and loan commitments to multi-national and domestic counterparties. The small and medium-sized enterprises portfolio, in particular, 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 corporate clients. The delinquency ratio was 0.5% for the corporate portfolio, compared with 0.3% at the end of 2018.  Refer to “Credit risk models” in this section for more information about loss given default, rating grades and rating agency mappings (CHF 129 billion) of 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 146 billion (CHF 141 billion), mainly originate from Personal & Corporate Banking, but also from Global Wealth Management Region Switzerland. USD 133 billion those mortgage loans related to residential properties that the borrower was either occupying or renting out, with full recourse to the borrower. Of this USD 133 billion (CHF 129 billion), USD 97 billion (CHF 94 billion) is related to properties occupied by the borrower, with an average LTV ratio of 54%, compared with 56% as of 31 December 2018. The average LTV for newly originated loans for this portion was 65%, compared with 66% in 2018. The remaining USD 36 billion (CHF 35 billion) of the Swiss residential mortgage loan portfolio relates to properties rented out by the borrower and the average LTV of that portfolio was 54%, compared with 55% as of 31 December 2018. The average LTV for newly originated Swiss residential mortgage loans for properties rented out by the borrower was 58%, compared with 57% in 2018. 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, more than 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% (i.e., a 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. Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings and loss given default (LGD) buckets1 USD million, except where indicated 31.12.18 Internal UBS rating2 Investment grade Sub-investment grade of which: 6−9 of which: 10−13 Defaulted / Credit-impaired 31.12.19 31.12.19 LGD buckets LGD buckets Exposure Exposure 102,491 102,491 58,597 58,597 0–25% 0–25% 58,331 58,331 23,937 23,937 51–75% 26–50% 26–50% 51–75% 8,314 34,250 34,250 8,314 76–100% 76–100% 1,597 1,597 21,368 21,368 11,287 11,287 53,811 53,811 21,715 21,715 19,783 10,502 19,783 10,502 4,786 4,786 1,694 1,694 2,222 2,222 33 33 1,585 1,585 1,409 1,409 785 785 252 252 2,005 2,005 1,812 1,812 193 193 0 0 3,602 3,602 Weighted Weighted average average LGD (%) LGD (%) 27 27 34 34 34 34 32 32 40 40 29 29 Weighted average LGD (%)3 27 35 34 35 37 30 Exposure3 97,854 57,350 53,130 4,220 1,974 157,178 Total exposure before deduction of allowances and provisions 162,782 162,782 82,302 82,302 57,026 57,026 19,852 19,852 Less: allowances and provisions Net banking products exposure1 Net banking products exposure1 1 Excluding balances at central banks and Group Treasury reallocations. 2 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale 1 and mapping of external ratings” table in this section. 3 Exposure and weighted average LGD have been restated. 3 156,515 162,121 162,121 (663) (660) (660) 2 122 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 EExxppoossuurree,, ggrroossss 3311..1122..1199 UUSSDD mmiilllliioonn 113355 11,,887733 8811 11,,553366 11,,660099 449977 223366 11,,998811 11,,885500 331133 %% 11..33 1188..55 00..88 1155..22 1155..99 44..99 22..33 1199..66 1188..33 33..11 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 1100,,111111 110000..00 10,657 100.0 Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments and loan-to-value (LTV) buckets 3311..1122..1199 LLTTVV bbuucckkeettss ≤≤3300%% 3311 5500%% – – 5511 6600%% – – 6611 7700%% – – 7711 8800%% – – 8811 110000%% – – >>110000%% TToottaall USD billion, except where indicated Exposure segment Residential mortgages Income-producing real estate Corporates Other segments MMoorrttggaaggee ccoovveerreedd eexxppoossuurree - - 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 Mortgage-covered exposure 31.12.18 Net EAD as a % of total 7766..00 6600 1122..00 6644 66..11 6644 00..55 6666 9944..66 6600 89.9 60 3344..55 1100..00 2277 44..77 2255 22..33 2244 00..22 2200 4411..77 2277 40.6 27 88 11..11 66 00..66 66 00..00 66 1111..88 88 11.6 8 55..22 44 00..66 33 00..33 33 00..00 44 66..11 44 6.1 4 11..77 11 00..22 11 00..11 22 00..00 22 22..11 11 2.3 2 00..22 00 00..00 00 00..11 11 00..00 22 00..44 00 0.4 0 31.12.18 Total 123.4 17.9 9.0 0.7 00..11 112277..77 00 00..00 00 00..00 00 00..00 00 110000 1188..77 110000 99..66 110000 00..77 110000 00..11 115566..77 151.0 00 110000 0.0 151.0 0 100 Asset Management Gross banking products exposure within Asset Management was USD 2.9 billion as of 31 December 2019, compared with USD 2.8 billion as of 31 December 2018. Banking products relate primarily to balances at central banks and to a lesser extent 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 including balances at reallocations as of central banks and Group Treasury 31 December 2019 was USD 48 billion, compared with USD 60 billion as of 31 December 2018. Gross banking products exposure excluding balances at central banks and Group Treasury reallocations decreased to USD 32 billion from USD 40 billion, mostly driven by reductions in guarantees and loan commitments. Based on our internal ratings, 54% of this gross banking products exposure was classified as investment grade. The vast majority of the gross banking products exposure had an estimated LGD below 50%. Our loan underwriting business’s overall ability to distribute risk remained sound. Total temporary loan underwriting exposure ended 2019 at USD 4.8 billion, USD 2.5 billion higher than the prior year. Loan underwriting exposures are classified as held for trading, with fair values reflecting market conditions at the end of 2019.  Refer to “Credit risk models” in this section for more information about loss given default, rating grades and rating agency mappings 123 Risk, treasury and capital management 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) buckets1 USD million, except where indicated 31.12.18 31.12.19 31.12.19 LGD buckets LGD buckets Internal UBS rating2 Investment grade Sub-investment grade of which: 6−9 of which: 10−13 Defaulted / Credit-impaired Exposure Exposure 17,541 17,541 0–25% 0–25% 4,485 4,485 26–50% 26–50% 9,853 9,853 51–75% 51–75% 2,111 2,111 76–100% 76–100% 1,091 1,091 14,598 14,598 10,746 10,746 3,852 3,852 91 91 4,796 4,796 3,421 3,421 1,376 1,376 26 26 4,272 4,272 2,141 2,141 2,132 2,132 25 25 5,465 5,465 5,121 5,121 344 344 27 27 64 64 64 64 0 0 13 13 Weighted Weighted average average LGD (%) LGD (%) 40 40 18 18 14 14 30 30 40 40 Weighted average LGD (%) 39 15 11 29 36 Exposure 24,239 15,490 12,169 3,321 140 Banking products exposure1 Banking products exposure1 30 9,307 9,307 1 Excluding balances at central banks and Group Treasury reallocations. 2 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale 1 and mapping of external ratings” table in this section. 39,869 32,229 32,229 14,150 14,150 7,604 7,604 1,168 1,168 30 30 2 Investment Bank: banking products exposure by geographical region1 Asia Pacific Latin America Middle East and Africa North America Switzerland Rest of Europe Exposure1 Exposure1 1 Excluding balances at central banks and Group Treasury reallocations. 1 Investment Bank: banking products exposure by industry sector1 Banks Chemicals Electricity, gas, water supply Financial institutions, excluding banks Manufacturing Mining Public authorities Real estate and construction Retail and wholesale Technology and communications Transport and storage Other 31.12.19 31.12.19 USD million USD million 5,080 5,080 844 844 467 467 16,553 16,553 779 779 8,505 8,505 32,229 32,229 31.12.19 31.12.19 USD million USD million 5,375 5,375 766 766 534 534 12,944 12,944 1,705 1,705 1,699 1,699 872 872 1,291 1,291 1,842 1,842 2,302 2,302 458 458 2,441 2,441 % % 15.8 15.8 2.6 2.6 1.5 1.5 51.4 51.4 2.4 2.4 26.4 26.4 100.0 100.0 % % 16.7 16.7 2.4 2.4 1.7 1.7 40.2 40.2 5.3 5.3 5.3 5.3 2.7 2.7 4.0 4.0 5.7 5.7 7.1 7.1 1.4 1.4 7.6 7.6 31.12.18 USD million 6,123 1,170 471 18,865 2,588 10,652 39,869 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 Exposure1 Exposure1 1 Excluding balances at central banks and Group Treasury reallocations. 1 32,229 32,229 100.0 100.0 39,869 % 15.4 2.9 1.2 47.3 6.5 26.7 100.0 % 17.0 1.8 4.4 36.3 5.9 4.4 1.8 3.9 6.2 5.9 1.8 10.5 100.0 124 Corporate Center Gross banking products exposure within Corporate Center, which arises primarily in connection with treasury activities, increased by USD 2 billion to USD 31 billion.  Refer to “Balance sheet assets” in the “Treasury management” 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.  to, certain bilateral from, and posted section of this report for more information  Refer to the “Corporate Center” section under “Financial and operating performance” of this report for more information  Refer to “Note 11 Derivative instruments” in the “Consolidated financial statements” section of this report for more information about our over-the-counter derivatives settled through central Traded products 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, Non-core and Legacy Portfolio and Group Treasury 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, an initial margin is taken to cover some or all of the calculated close-out exposure. This is in addition to the variation margin taken to settle changes in the market value of transactions. Regulations governing the margining of uncleared OTC derivatives continue to evolve. These generally expand the counterparties  Refer to “Note 25 Offsetting financial assets and financial liabilities” in the “Consolidated financial statements” section of this report for more information about the effect of netting and collateral arrangements on our derivative exposures Credit risk arising from traded products, after the effects of master netting agreements but excluding credit valuation adjustments and hedges, increased by USD 6 billion to USD 48 billion as of 31 December 2019. OTC derivatives accounted for USD 17 billion, exposures from SFTs were USD 21 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. The majority of the gross traded products exposures were within the Investment Bank, Non-core and Legacy Portfolio, and Group Treasury, totaling USD 38 billion, compared with USD 31 billion as of 31 December 2018. As counterparty risk for traded products is managed at the counterparty level, no further split is provided between exposures in the Investment Bank and those in Non-core and Legacy Portfolio and Group Treasury. The traded products exposure includes OTC derivatives gross exposures of USD 10 billion in the Investment Bank and Non- core and Legacy Portfolio, an increase of USD 0.4 billion from the prior year. During 2019, SFT exposures increased by USD 5 billion to USD 21 billion, mainly due to increases in trading relationships and in posted collateral. ETD exposures increased by USD 2 billion to USD 8 billion. The tables on the next page provide more information about the OTC derivatives, SFT and ETD exposures of the Investment Bank, Non-core and Legacy Portfolio and Group Treasury. 125 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Investment Bank, Non-core and Legacy Portfolio and Group Treasury: traded products exposure USD million OTC derivatives OTC derivatives ETD ETD SFTs SFTs 31.12.19 31.12.19 Total exposure, before deduction of credit valuation adjustments and hedges Less: credit valuation adjustments and allowances Less: credit protection bought (credit default swaps, notional) Net exposure after credit valuation adjustments, allowances and hedges Net exposure after credit valuation adjustments, allowances and hedges 9,830 9,830 (38) (38) (242) (242) 9,550 9,550 20,821 20,821 7,580 7,580 20,821 20,821 7,580 7,580 Total Total 38,232 38,232 (38) (38) (242) (242) 37,952 37,952 Total Total 31.12.18 30,769 (136) (288) 30,346 Investment Bank, Non-core and Legacy Portfolio and Group Treasury: distribution of net OTC derivatives and SFT exposure across internal UBS ratings and loss given default (LGD) buckets USD million, except where indicated 31.12.18 31.12.19 31.12.19 LGD buckets LGD buckets Exposure Exposure 76–100% 0–25% 26–50% 51–75% 76–100% 0–25% 26–50% 51–75% Weighted Weighted average average LGD (%) LGD (%) Weighted average LGD (%) Exposure Internal UBS rating1 Net OTC derivatives exposure Net OTC derivatives exposure Investment grade Sub-investment grade of which: 6−9 of which: 10−12 of which: 13 and defaulted 9,247 9,247 189 189 7,488 7,488 1,379 1,379 304 304 176 176 112 112 16 16 32 32 18 18 0 0 14 14 55 55 52 52 4 4 0 0 182 182 75 75 107 107 0 0 191 191 34 34 31 31 1 1 2 2 47 47 56 56 57 57 58 58 19 19 8,737 280 242 19 19 Total net OTC derivatives exposure, after credit valuation adjustments Total net OTC derivatives exposure, after credit valuation adjustments and hedges and hedges 9,550 9,550 221 221 7,543 7,543 1,561 1,561 225 225 47 47 9,016 Net SFT exposure Net SFT exposure Investment grade 20,524 20,524 1 1 18,397 18,397 1,737 1,737 388 388 40 40 15,668 Sub-investment grade Total net SFT exposure Total net SFT exposure 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. 1 174 174 18,571 18,571 297 297 20,821 20,821 34 34 1,772 1,772 90 90 478 478 336 16,004 62 62 40 40 0 0 1 1 Investment Bank, Non-core and Legacy Portfolio and Group Treasury: net OTC derivatives and SFT exposure by geographical region Asia Pacific Latin America Middle East and Africa North America Switzerland Rest of Europe Exposure Exposure Net OTC derivatives Net OTC derivatives Net SFT exposure Net SFT exposure 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 USD million USD million 1,383 1,383 97 97 123 123 2,421 2,421 1,022 1,022 4,503 4,503 9,550 9,550 % % 14.5 14.5 1.0 1.0 1.3 1.3 25.3 25.3 10.7 10.7 47.2 47.2 100.0 100.0 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 USD million 5,055 5,055 4 4 900 900 4,714 4,714 852 852 9,297 9,297 20,821 20,821 % % 24.3 24.3 0.0 0.0 4.3 4.3 22.6 22.6 4.1 4.1 44.7 44.7 100.0 100.0 USD million 3,408 62 549 3,014 1,375 7,597 16,004 Investment Bank, Non-core and Legacy Portfolio and Group Treasury: net OTC derivatives and SFT exposure by industry sector Net OTC derivatives Net OTC derivatives Net SFT exposure Net SFT exposure 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 USD million USD million 4,608 4,608 4 4 99 99 3,188 3,188 67 67 9 9 1,019 1,019 17 17 383 383 156 156 9,550 9,550 % % 48.3 48.3 0.0 0.0 1.0 1.0 33.4 33.4 0.7 0.7 0.1 0.1 10.7 10.7 0.2 0.2 4.0 4.0 1.6 1.6 100.0 100.0 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 USD million 3,713 3,713 0 0 0 0 15,593 15,593 0 0 0 0 1,514 1,514 0 0 0 0 0 0 20,821 20,821 % % 17.8 17.8 0.0 0.0 0.0 0.0 74.9 74.9 0.0 0.0 0.0 0.0 7.3 7.3 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 USD million 3,495 0 0 11,404 0 0 1,102 0 0 3 16,004 Banks Chemicals Electricity, gas, water supply Financial institutions, excluding banks Manufacturing Mining Public authorities Retail and wholesale Transport, storage and communication Other Exposure Exposure 126 46 54 56 45 37 47 41 63 41 % 21.3 0.4 3.4 18.8 8.6 47.5 100.0 % 21.8 0.0 0.0 71.3 0.0 0.0 6.9 0.0 0.0 0.0 100.0 Credit risk mitigation Audited | We actively manage the credit risk in our portfolios by taking collateral against exposures and by utilizing credit hedging.  Lending secured by real estate Audited | We use a scoring model as part of a standardized front- to-back process to support credit decisions for the origination or modification of Swiss mortgage loans. The two key factors within this model are an affordability calculation relative to gross income and the loan-to-value (LTV) ratio.  The calculation of affordability takes into account interest 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.  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 (a 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 action taken where considered necessary. 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 our internally developed models. 127 Risk, treasury and capital management Risk, treasury and capital management Risk management and control 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 loan 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.   Refer to “Swiss mortgage loan portfolio” in this section for more information about LTV in our Swiss mortgage portfolio  Refer to “Global Wealth Management” in this section for more information about LTV in our Global Wealth Management Region Americas mortgage portfolio Lombard lending Audited | Lombard loans are secured by pledges 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 pledged 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 collateral quality. 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 at a counterparty level, as well as at a divisional level across counterparties. Additionally, we perform targeted Group-wide reviews of concentrations. A concentration of collateral in single securities, issuers or issuer groups, industry sectors, countries, regions or currencies may result in higher risk and reduced liquidity. In such cases, the lending value of the collateral, margin call and close-out levels are adjusted accordingly.  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 tolerance. 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 the shortfall is not corrected within the required period, then 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 at a counterparty level. In limits applied across certain addition, there are portfolio businesses or collateral types.  Refer to “Stress loss” in this section for more information about our stress testing 128 Credit hedging Audited | We utilize single-name credit default swaps (CDSs), credit index CDSs, bespoke protection and other instruments to actively manage credit risk in the Investment Bank and Non-core and Legacy Portfolio. This is aimed at reducing concentrations of risk from specific counterparties, sectors or portfolios and, in the case of counterparty credit risk, the profit or loss effect arising from changes in credit valuation adjustments (CVA). We maintain strict guidelines for taking credit hedges into account for credit risk mitigation purposes. For example, when monitoring exposures against counterparty limits, we do not usually 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 with regard to the protection provider. We monitor and limit our exposures to credit protection providers and we also monitor the effectiveness of credit hedges as part of our overall credit exposures to the relevant counterparties. Trading with such counterparties is typically collateralized. For credit protection purchased to hedge the lending portfolio, this includes monitoring mismatches between the maturity of the credit protection purchased and the maturity of the associated loan. Such mismatches result in basis risk and may reduce the effectiveness of the credit protection. Mismatches are routinely reported to credit officers and mitigating actions are taken when deemed necessary.   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 the use of multi-lateral and bilateral agreements with counterparties, including payment netting. through The most significant source of our settlement risk is foreign exchange transactions. We are a member of Continuous Linked Settlement (CLS), an industry utility that provides a multi-lateral 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); exposure at default (EAD); and loss given default (LGD). 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.  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 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about the regulatory capital calculation under the advanced internal ratings-based approach 129 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Key features of our main credit risk models Asset class Asset class Central governments and central banks Model Model approach approach Score card Probability of Probability of default default Portfolio in scope Portfolio in scope Sovereigns and central banks Owner-occupied mortgages in Switzerland and the US Income-producing real estate mortgages Retail: residential mortgages Retail: residential mortgages, Corporates: specialized lending Number of Number of main models Main drivers main models Main drivers Number of Number of years loss years loss data1 data1 1 Political, institutional and economic indicators >10 Behavioral data, affordability relative to income, property type, loan-to-value. Separate models for Score card 2 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 Score card 1 clients Loan-to-value, historical asset returns, behavioral Lombard lending Retail: other Merton type 1 data Small and medium-sized enterprises Corporates: other lending Score card 1 segment Financial data including balance sheet ratios and profit and loss, behavioral data. Weights of risk drivers differ depending on the corporate client sub- Banks Commodity traders Banks and securities dealers Corporates: specialized lending Aircraft financing Corporates: other lending Large corporates Corporates: other lending Loss given default Loss given default Other portfolios Owner-occupied mortgages in Switzerland and the US Corporates: other lending, Public-sector entities and multilateral development banks Retail: residential mortgages Retail: residential Income-producing real estate mortgages, Corporates: mortgages specialized lending Lombard lending Retail: other 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 Financial data including balance sheet ratios and profit and loss. Separate models for banks – developed markets, banks – emerging markets, 4 broker-dealers and investment banks, private banks Financial data including balance sheet ratios and 1 profit and loss, as well as non-financial criteria 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 4 and real estate business Financial data and/or historical portfolio performance for pooled ratings. Separate models for hedge funds, managed funds, insurance companies, commercial real estate loans, mortgage originators, public sector entities and multilateral development 9 banks/supranationals Loan-to-value, time since last valuation. Separate 2 models for mortgages in Switzerland and the US Loan-to-value, time since last valuation, property 1 type, location indicator 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- Small and medium-sized enterprises Investment Bank – all counterparties Corporates: other lending model 2 mortgage models: historical observed loss rates 11–17 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 Statistical Across the asset classes model 2 banking sector and institutional quality Exposure at default Banking products Exposure at default Across the asset classes Traded products Across the asset classes Statistical model Statistical model Separate models based on exposure type (committed credit lines, revocable credit lines, contingent 3 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 2 the credit exposure measure 1 For sovereign and Investment Bank PD models, the length of internal portfolio history is shown in Number of years loss data. 130 25 25 13 25 12 21 13 12 12 11 11 11 5–10 >10 n/a Audited | Internal UBS rating scale and mapping of external ratings IInntteerrnnaall UUBBSS rraattiinngg 00 aanndd 11 22 33 44 55 66 77 88 99 1100 1111 1122 1133 CCoouunntteerrppaarrttyy iiss iinn ddeeffaauulltt 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  Probability of default 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 required under the Basel III framework. Additionally, for Swiss owner-occupied mortgages we apply an 8-basis-point PD floor and for Lombard loans a 4-basis-point PD floor. PD is assessed using rating tools tailored to the various categories of counterparties. Statistically developed scorecards, 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 is designed to ensure a consistent (masterscale), which 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 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. Exposure at default Exposure at default (EAD) represents the amount we expect to be owed by a counterparty at the time of a possible default. We derive EAD from our current exposure to the counterparty and the possible future development of that exposure. The EAD of an on-balance sheet loan is its notional amount. For off-balance sheet commitments that are not drawn, credit conversion factors (CCFs) are applied in order to obtain an expected on-balance sheet amount. Such CCFs are 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 EAD will be no less than the drawn amount one year prior to default. For traded products, we derive 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 movements over the potential time it would take to close out our positions. For ETDs, our calculation of EAD takes into account collateral margin calls. When measuring individual counterparty exposure against credit limits, we consider the maximum likely exposure measured to a high level of confidence. However, when aggregating exposures to different counterparties for portfolio risk measurement purposes, we use the expected exposure to each counterparty at a given time period (usually one year) generated by the same model. 131 Risk, treasury and capital management Risk, treasury and capital management Risk management and control the factors driving We assess our exposures where there is a material correlation the between counterparty and those driving the potential future value of our traded products exposure (wrong-way risk), and we have established specific controls to mitigate such risks. the credit quality of 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 are typically 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 apply 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. 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, i.e., 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 EL provides an indication of the level of risk in our portfolio and it may change 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. 132 IFRS 9 – ECL credit risk models The IFRS 9 expected credit loss (ECL) concept differs from our standard credit risk models in some important aspects. The following ECL definitions 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 about our accounting policy for allowances and provisions for ECL Probability of default 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 PDs that are derived from through-the- cycle PDs and scenario forecasts. This modeling is region-, industry- and client segment-specific and considers both macroeconomic scenario-dependencies and client-idiosyncratic information. To derive the cumulative lifetime PD per scenario, the series of 12-month point-in-time PDs are transformed into marginal point-in-time PDs, taking into account any assumed default events from prior periods. Exposure at default 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. ECL-specific CCFs have been modeled to capture client segment- and product- standard-specific specific patterns after limitations, i.e., conservatism, and focus on a 12-month period prior to default. removing Basel Loss given default 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. LGD is commonly expressed as a percentage of the relevant EAD. Expected credit loss Expected credit losses (ECLs) 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 requirements, expected cash shortfalls are determined by considering expected future drawdowns. Rather than focusing on an average through-the-cycle expected annual loss, its purpose is to estimate the amount of losses inherent in a portfolio based on current conditions and future outlook (a point-in-time 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 regulatory Basel III 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 thereof. Most notably, regulatory Basel III EL parameters are through-the- cycle / downturn estimates, which might include a margin of conservatism, while IFRS 9 ECL parameters are typically point-in- time, 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. Basel III EL is not particularly sensitive to prevailing economic conditions with its through-the-cycle / downturn view. ECL, in contrast, is grounded in point-in-time 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. It does not, therefore, cover a point-in-time 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: BBaasseell IIIIII EELL ((aaddvvaanncceedd iinntteerrnnaall rraattiinnggss--bbaasseedd aapppprrooaacchh)) IIFFRRSS 99 EECCLL SSccooppee 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. 1122--mmoonntthh vveerrssuuss lliiffeettiimmee eexxppeecctteedd lloossss The Basel III A-IRB approach takes into account expected losses resulting from expected default events occurring within the next 12 months. EExxppoossuurree aatt ddeeffaauulltt ((EEAADD)) PPrroobbaabbiilliittyy ooff ddeeffaauulltt ((PPDD)) 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. LLoossss ggiivveenn ddeeffaauulltt ((LLGGDD)) LGD includes prudential adjustments, such as downturn LGD assumptions and floors. Similar to PD, LGD is determined on a TTC basis. UUssee ooff sscceennaarriiooss N/A In the absence of a significant increase in credit risk (SICR), 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. 133 Risk, treasury and capital management 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 about 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 analyses of the evolution of portfolios to identify such changes in the structure and credit quality of portfolios. This includes analyses 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 about 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 and 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, there is evidence that our predicted LGD is too low. In such cases, and where these differences are outside expectations, models are recalibrated. Main credit models backtesting by regulatory asset class Length of time series used for the calibration (in years) Actual rates in % Average of last 5 years1 Min. of last 5 years2 Max. of last 5 years2 Estimated average rates at the start of 2019 in % Probability of default3 Probability 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 Loss given default Loss 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 Credit conversion factors Credit conversion factors Corporates >104 >10 >10 >10 >10 >20 >10 >10 >10 >10 >10 >10 >20 >10 0.00 0.03 0.15 0.32 0.25 0.21 0.00 7.40 26.40 0.80 29.20 0.00 0.00 0.00 0.15 0.21 0.12 0.00 0.00 8.00 0.20 17.90 0.00 0.21 0.53 0.60 0.29 0.28 0.01 34.60 28.00 1.70 65.30 0.17 0.19 0.64 1.21 0.46 0.56 0.30 51.00 27.50 48.70 23.20 37.70 20.70 27.40 >10 15.80 6.90 44.30 40.20 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 1 Average of all observations over the last five years. 1 2 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. 3 4 134 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 2019. In Personal & Corporate Banking and Global Wealth Management, we completed the phasing-in of RWA increases related to PD and LGD changes of the revised models for Swiss residential mortgages that were implemented in 2017. With regard to the EAD, the CCF for zero-balance securities-backed lending and margin loans in Global Wealth Management was changed from 5% to 15%. Within the Investment Bank, selected portfolios with lower materiality levels and exposures rated by expert judgment were moved to the Standardized Approach for the RWA calculation. Where required, changes to models and model parameters were approved by the Swiss Financial Market Supervisory Authority (FINMA) prior to implementation.  Refer to “Risk-weighted assets” in the “Capital management” section of this report for more information about the effect of the changes to models and model parameters on credit risk RWA Future credit risk-related regulatory capital developments In December 2017, the Basel Committee on Banking Supervision announced the finalization of the Basel III framework, which we currently expect FINMA to introduce into national law later than the originally communicated effective date of 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 corporate clients, 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 prepare for 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 about the development of RWA  Refer to “Risk measurement” in this section for more information about 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 The “Exposure categorization” chart on the next page illustrates how we categorize banking products and securities financing transactions as non-performing, defaulted, credit-impaired and purchased or originated credit-impaired. Non-performing 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 or there is other evidence that payment obligations will not be fully met without recourse to collateral. 135 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Default and credit-impaired 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 those 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, insolvency proceedings or enforced liquidation have 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. (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) The latter may be the case even if, to date, all contractual payments have been made when due. If one claim against a counterparty is defaulted on, generally all claims against the counterparty are treated as defaulted. if An instrument is classified as credit-impaired the counterparty is classified as defaulted, and/or the instrument is identified as purchased or originated credit-impaired (POCI). An instrument is POCI if it has been purchased at a deep 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:50)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73) (cid:48)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:19) (cid:53)(cid:86)(cid:67)(cid:73)(cid:71)(cid:2)(cid:19) (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:53)(cid:86)(cid:67)(cid:73)(cid:71)(cid:2)(cid:21)(cid:2)(cid:10)(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:19) (cid:2) 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(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: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: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: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:16) 136 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 offering preferential interest rates, extending 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 is generally classified as defaulted. 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 tolerance. Contractual adjustments when there is no evidence of imminent payment default, or where changes to terms and conditions are within our usual risk tolerance, are not considered to be forborne.  Loss history statistics 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 2015 to 2017, the amounts are based on IAS 37 and IAS 39; for 2018 and 2019, the amounts are based on IFRS 9. Credit-impaired loans and advances to banks and customers were USD 2.3 billion as of 31 December 2019, unchanged compared with 31 December 2018. 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%, unchanged compared with 31 December 2018.  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 about ECL measurement  Refer to “Note 17a Other financial assets measured at amortized cost” in the “Consolidated financial statements” section of this report for more details 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 Write-offs3 of which: write-offs for loans and advances to banks and customers 3311..1122..1199 IIFFRRSS 99 334400,,000033 22,,330099 22,,446666 11,,002299 777700 114422 112222 ((7788)) 31.12.18 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) Credit loss (expense) / recovery4 RRaattiiooss 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 for loans and advances to banks and customers 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 0.0 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 33 Includes net write-offs for loan million; 31 December 2015: USD 0 million). commitments and securities financing transactions. 44 Includes credit loss (expense) / recovery for other financial assets at amortized cost, guarantees, loan commitments, and securities financing transactions. 22 Includes provisions for ECL of guarantees and loan commitments and allowances for securities financing transactions. 00..22 00..77 00..77 0.7 0.3 0.3 0.7 0.6 0.7 0.2 00..00 0.2 0.2 0.1 0.0 0.0 0.4 0.5 0.2 137 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Market risk Key developments Market risk remained at low levels as a result of our continued focus on managing tail risks. Average management VaR (1-day, 95% confidence level) decreased to USD 11 million from USD 12 million in the prior year, mainly driven by the Investment Bank’s Equities business. The number of negative backtesting exceptions within a 250-business-day window decreased from 2 to 0 by the end of the year. The FINMA VaR multiplier for market risk RWA remained unchanged at 3 as of 31 December 2019. Audited | Main sources of market risk Market risks arise from both our trading and non-trading business activities. – Trading market risks arise mainly in connection with primary debt and equity underwriting, securities and derivatives trading for market-making and client facilitation within our Investment Bank, as well as the remaining positions within Non-core and Legacy Portfolio in Corporate Center and our municipal securities trading business within Global Wealth Management. – Non-trading market risks arise 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. – Group Treasury 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.  Audited | Overview of measurement, monitoring and management techniques – Market risk limits are set for the Group, the business divisions, Group Treasury and Non-core and Legacy Portfolio 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 (the BoD). 138 – 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 Group Treasury 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.   Refer to “Currency management” in the “Treasury management” section of this report for more information about Group Treasury’s management of foreign exchange risks  Refer to the “Capital management” section of this report for more information about 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, Group Treasury and Non-core and Legacy Portfolio; 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 about 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 or 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. 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. 139 Risk, treasury and capital management Risk, treasury and capital management Risk management and control We also use stressed VaR (SVaR) for the calculation of market risk Management VaR for the period RWA. SVaR adopts broadly the same methodology as regulatory The tables below show minimum, maximum, average and VaR and is calculated using the same population, holding period period-end management VaR by business division and Corporate (10-day) and confidence level (99%). However, unlike regulatory Center, and by general market risk type. We continued to VaR, the historical data set for SVaR is not limited to five years, but manage management VaR at low levels with average VaR instead spans the time period from 1 January 2007 to the present. decreasing to USD 11 million from USD 12 million in the prior 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.  year.  Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about the regulatory capital calculation under the advanced internal ratings-based approach Audited | Management value-at-risk (1-day, 95% confidence, 5 years of historical data) of our business divisions and Corporate Center by general market risk type1 For the year ended 31.12.19 For the year ended 31.12.19 USD million Total management VaR, Group Total management VaR, Group Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center Diversification effect2,3 USD million Min. Min. 6 6 0 0 0 0 0 0 4 4 4 4 Min. Max. Max. Average Average 18 18 1 1 0 0 0 0 17 17 8 8 31.12.19 31.12.19 9 9 1 1 0 0 0 0 7 7 5 5 (4) (4) 11 11 1 1 0 0 0 0 9 9 5 5 (5) (5) Equity Equity 2 2 14 14 6 6 5 5 0 0 0 0 0 0 6 6 1 1 (1) (1) Interest Interest rates rates 6 6 12 12 9 9 8 8 Credit Credit spreads spreads 3 3 8 8 5 5 5 5 Average (per business division and risk type) Average(perbusinessdivisionandrisktype) Foreign Foreign exchange exchange 2 2 8 8 3 3 3 3 Commodities Commodities 1 1 6 6 2 2 3 3 1 1 0 0 0 0 7 7 5 5 (4) (4) 1 1 0 0 0 0 4 4 2 2 (2) (2) 0 0 0 0 0 0 3 3 1 1 (1) (1) 0 0 0 0 0 0 2 2 0 0 0 0 For the year ended 31.12.18 Max. Average 31.12.18 12 Equity 3 22 8 5 Interest rates 5 11 8 7 Credit spreads 5 9 7 5 Average (per business division and risk type) Foreign exchange 1 13 3 6 Commodities 1 4 2 2 5 26 12 Total management VaR, Group Total management VaR, Group 0 Global Wealth Management 0 Personal & Corporate Banking 0 Asset Management 2 Investment Bank 0 Corporate Center Diversification effect2,3 0 1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business 1 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 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. 0 0 0 3 1 (1) 2 0 0 6 2 (3) 0 0 0 8 1 (1) 1 0 0 6 4 (4) 1 0 0 10 6 (5) 1 0 0 11 5 (5) 2 0 0 25 7 0 0 0 4 4 3 2  140 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 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.  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 or 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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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 Group Chief Market & Treasury Risk Officer. 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 2019. 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. VaR model developments in 2019 Audited | We did not make any material changes to the VaR model in 2019.  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). As per the Swiss timelines for adopting Basel III, the new accord is expected to enter into force on 1 January 2023 at the earliest. 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 the implementation objectives in more detail and to provide 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 in addition to for more information about the development of RWA  Refer to “Risk measurement” in this section for more information about our approach to model confirmation procedures  Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information The actual trading backtesting revenues, intraday revenues. revenues include, The number of negative backtesting exceptions within a 250-business-day window decreased from 2 to 0 by the end of the year. The FINMA VaR multiplier for market risk RWA remained unchanged at 3 as of 31 December 2019. 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 P&L distribution, not just the tails, and at multiple levels within the business division and Corporate Center hierarchies.  Refer to “Risk measurement” in this section for more information about our approach to model confirmation procedures 142 Interest rate risk in the banking book – Changes to our interest rate risk in the banking book disclosure Based on the 2016 standards of the Basel Committee on Banking Supervision, FINMA published the revised Circular “2019/2 Interest Rate Risk – Banks,” which sets out minimum standards for the measurement, management, monitoring and control of interest rate risks in the banking book (IRRBB). This circular came into effect in January 2019, with the first enhanced Pillar 3 disclosure provided in our 30 June 2019 Pillar 3 report. We have aligned the IRRBB disclosure in our financial reports to the new Pillar 3 requirements. In particular, the economic value of equity (EVE) sensitivity is assessed under six regulatory rate-shock scenarios defined by FINMA in the circular, which are currency-specific and not subject to flooring. Sources of interest rate risk in the banking book Audited | IRRBB arises from balance sheet positions such as Loans and advances to banks, Loans and advances to customers, Financial assets at fair value not held for trading, Financial assets measured at amortized cost, Customer deposits, Debt issued measured at amortized cost, and derivatives, including those used for cash flow hedge accounting purposes. These positions may affect other comprehensive income (OCI) or the income statement, depending on their accounting treatment. Our largest banking book interest rate exposures arise from customer deposits and lending products in Global Wealth Management and Personal & Corporate Banking. The inherent interest rate risks are generally transferred from Global Wealth Management and Personal & Corporate Banking to Group Treasury, to manage them centrally within Corporate Center. This allows for the netting of interest rate risks across different sources, while the originating businesses with commercial margin and volume management. The residual interest rate risk is mainly hedged with interest rate swaps, to the vast majority of which we apply hedge accounting. Short- term exposures and high-quality liquid assets classified as Financial assets at fair value not held for trading are hedged with derivatives accounted for on a mark-to-market basis. Long-term fixed-rate debt issued is hedged with interest rate swaps designated in fair value hedge accounting relationships. leaving Risk management and governance IRRBB is measured using a number of metrics, the most relevant of which are the following: – Interest rate sensitivities to parallel shifts in yield curves, calculated as changes in the present value of future cash flows irrespective of accounting treatment. These are also the key risk factors for statistical and stress-based measures, such as value-at-risk and stress scenarios (including EVE sensitivity), and are measured and reported with a daily frequency. EVE sensitivity is the exposure arising from the most adverse regulatory rate scenario after netting across currencies. In addition to the regulatory measure, we apply an internal EVE sensitivity metric that includes equity, goodwill, real estate and additional tier 1 (AT1) capital instruments. interest Net interest income (NII) sensitivity assesses the change in NII over a set time horizon compared with the baseline NII, which we internally calculate by assuming that interest rates in all currencies develop according to their market-implied forward rates and under the assumption of constant business volumes and no specific management actions. The internal NII sensitivity, which includes the contribution from cash held at central banks, unlike the Pillar 3 disclosure requirements, is measured and reported on a monthly basis. We actively manage IRRBB, with the objective of reducing the volatility of NII, while keeping the EVE sensitivity within set internal risk limits. EVE and NII sensitivity are monitored against limits and triggers, both at consolidated and at significant legal entity levels. We also assess the sensitivity of EVE and NII under stressed market conditions by applying a suite of parallel and non-parallel interest rate scenarios, as well as specific economic scenarios. The Interest Rate Risk in the Banking Book Strategy Committee, which is a sub-committee of the Group Asset and Liability Committee (ALCO), and, where relevant, ALCOs at a legal entity level, perform independent oversight over the management of IRRBB. IRRBB is also subject to Group Internal Audit and model governance.  Refer to “Group Internal Audit” in the “Corporate governance” section of this report and to “Risk measurement” in this section for more information Key modeling assumptions The cash flows from customer deposits and lending products used in the calculation of EVE sensitivity exclude commercial margins and other spread components, are aggregated for each business day and are discounted using risk-free rates. Our external issuances are discounted using UBS’s senior debt curve, and capital instruments are modeled to the first call date. NII sensitivity is calculated over a one-year time horizon, assuming constant balance sheet structure and volumes, and considers the flooring effect of embedded interest rate options. The average repricing maturity of non-maturing deposits and loans is determined via replication portfolio strategies that are designed to protect product margin. Optimal replicating portfolios are determined at a granular currency- and product- specific level by simulating and applying a real-world market rate model to historically calibrated client rate and volume models. We use an econometric prepayment model to forecast prepayment rates on US mortgage loans in UBS Bank USA, as well as agency mortgage-backed securities (MBSs) held in various liquidity portfolios of UBS Americas Holding LLC consolidated. These prepayment rates are used to forecast both mortgage loan and MBS balances under various macroeconomic scenarios. The prepayment model is used for a variety of purposes, including risk management and regulatory stress testing. Mortgages in Switzerland and fixed-term deposits generally do not carry similar optionality, due to prepayment and early redemption penalties.  143 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Effect of interest rate changes on shareholders’ equity and CET1 capital The “Accounting and capital effect of changes in interest rates” table below illustrates the effects on shareholders’ equity and CET1 capital of gains and losses resulting from changes in in the main banking book positions. For interest rates 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. 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 such reduction to be offset over time through higher NII on our core banking products. 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. 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 Accounting and capital effect of changes in interest rates1 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, are, on the whole, more sensitive to changes in longer-duration interest rates, whereas our deposits and a significant portion of our loans 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 designated as cash flow hedges are not recognized for regulatory capital purposes. Fair value losses on instruments designated at fair value are expected to be offset by economic hedges. Recognition Recognition Shareholders’ equity Shareholders’ equity CET1 capital CET1 capital Loans and deposits at amortized cost2,3 Other financial assets and liabilities measured at amortized cost2 Debt issued measured at amortized cost2,3 Receivables and payables from securities financing transactions2 Timing Timing Gradual Gradual Gradual Gradual Income statement / OCI Income statement / OCI Income statement Income statement Income statement Income statement Financial assets at fair value not held for trading Immediate Income statement Financial assets at fair value through other comprehensive income Derivatives designated as cash flow hedges Derivatives transacted as economic hedges Immediate Immediate OCI OCI4 Immediate Income statement Gains         Losses         Gains      Losses         1 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’ 1 3 For hedge accounted items, a fair value equity and CET1 capital. 3 adjustment is applied in line with the treatment of the hedging derivatives. 4 Excluding hedge ineffectiveness that is recognized in the income statement in accordance with IFRS. 2 For fixed-rate financial instruments, changes in interest rates affect the income statement when these instruments roll over and reprice. 2 4 Net interest income sensitivity At the end of 2019, the net interest income sensitivity of Global Wealth Management and Personal & Corporate Banking was assessed under the following scenarios: – Negative Interest Rates: Yield curves drop 100 basis points in – Rates Bear Steepener: Yield curves across all currencies undergo a sharp increase for long tenors, with a lower increase at 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. parallel with no zero-floor applied and therefore can become – Rates Bear Flattener: Yield curves across all currencies negative, or more negative. undergo a sharp increase for short tenors, with a lower increase at 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 Bull Flattener: Yield curves across all currencies undergo a sharp decrease for long tenors, with a lower decrease at 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 – Parallel +100 basis points: All yield curves rise 100 basis basis points for +10-year tenors. points in parallel. – Rates Bull Steepener: Yield curves across all currencies – Constant Rates: All rates stay at current levels. undergo a sharp decrease for short tenors, with a lower decrease at 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. 144 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 9%, while the most beneficial scenario is the Rates Bear Flattener, which would lead to an improvement in Baseline NII of approximately 10%. In addition to the above scenario analysis, we also monitor the sensitivity of 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. As of 31 December 2019, the baseline NII would have been approximately 16% lower under a parallel shock of –200 basis points, whereas under a parallel +200-basis-point shock, the baseline NII would have been approximately 23% 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. The loss of such equilibrium on the balance sheet, for example, due to unattractive pricing relative to our peers for either our mortgages or deposits, 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 reduce our NII as we might not be able to offset the higher costs for our cash holdings, 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 under pressure. 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. The NII impact of a net decrease in deposits would depend on various factors including the currency, its interest rate level, as well as the balance sheet situation, as this could be offset by a reduction in negative-yielding liquidity portfolios or require alternative funding. In the latter case, the cost would also significantly depend on the term and nature of the replacement funding, whether such funding is raised in the wholesale markets or from swapping with available funding denominated in another currency. On the other hand, imbalances leading to an excess deposit position could require additional investments at negative yields, which we might not be able to compensate for sufficiently through our excess deposit balance charging mechanisms. Economic value sensitivity Audited |. Interest rate risk in the banking book is subject to a regulatory threshold of 15% of tier 1 capital to identify outlier banks. The exposure is calculated as the theoretical change in the present value of the banking book under the most adverse of the six FINMA interest rate scenarios. As of 31 December 2019, the interest rate sensitivity of our banking book to a +1-basis-point parallel shift in yield curves was negative USD 25.1 million. The reported interest rate sensitivity excludes the AT1 capital instruments, as per FINMA Pillar 3 disclosure requirements, and our equity, goodwill and real estate with a modeled sensitivity of approximately USD 4 million per basis point in Swiss francs and USD 15 million per basis point in US dollars. The most adverse of the six FINMA interest rate scenarios with regard to EVE was the “Parallel up” scenario, resulting in a change of the economic value of equity of negative USD 5.0 billion, representing a pro forma reduction of 9.6% of tier 1 capital, which is well below the regulatory outlier test of 15% of tier 1 capital. The immediate effect of the “Parallel up” scenario on tier 1 capital as of 31 December 2019 would be a reduction of 1.3%, or USD 0.7 billion, arising from the part of our banking book that is measured at fair value through profit or loss and from the financial assets measured at fair value through other comprehensive income. This scenario would, however, have had a positive effect on net interest income.   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 about sensitivity to interest rate movements 145 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Audited | Interest rate risk – banking book USD million CHF EUR GBP USD Other Total effect on economic value of equity as per Pillar 3 requirement as of Total effect on economic value of equity as per Pillar 3 requirement as of 31.12.19 31.12.19 Additional tier 1 (AT1) capital instruments Total including AT1 capital instruments as of 31.12.19 Total including AT1 capital instruments as of 31.12.19 +1 bp +1 bp Parallel up1 Parallel down1 Steepener2 Parallel up1 Parallel down1 Steepener2 Flattener3 Short-term up4 Short-term down5 Flattener3 Short-term up4 Short-term down5 (3.3) (3.3) (0.4) (0.4) 0.1 0.1 (463.1) (463.1) (73.6) (73.6) 8.9 8.9 519.6 519.6 79.3 79.3 (23.0) (23.0) (235.7) (235.7) 143.9 143.9 (5.3) (5.3) (6.7) (6.7) (7.3) (7.3) 6.4 6.4 (44.7) (44.7) (28.0) (28.0) 11.5 11.5 (20.8) (20.8) (4,317.5) (4,317.5) 3,570.0 3,570.0 (566.9) (566.9) (450.5) (450.5) (2,019.7) (2,019.7) (0.8) (0.8) (157.9) (157.9) 169.9 169.9 (1.4) (1.4) (29.8) (29.8) (85.0) (85.0) (25.1) (25.1) 5.0 5.0 (20.1) (20.1) (5,003.2) (5,003.2) 954.3 954.3 (4,048.9) (4,048.9) 4,315.9 4,315.9 (1,024.6) (1,024.6) 3,291.2 3,291.2 (816.1) (816.1) (42.2) (42.2) (858.3) (858.3) (337.2) (337.2) 253.5 253.5 (83.7) (83.7) (2,166.0) (2,166.0) 610.8 610.8 (1,555.2) (1,555.2) 47.6 47.6 29.5 29.5 (11.0) (11.0) 2,132.4 2,132.4 93.5 93.5 2,292.0 2,292.0 (638.5) (638.5) 1,653.5 1,653.5 3 Short-term rates 3  1 Rates across all tenors move by ±150 bps for Swiss franc, ±200 bps for euro and US dollar and ±250 bps for pound sterling. 1 increase and long-term rates decrease. 4 Short-term rates increase more than long-term rates. 5 Short-term rates decrease more than long-term rates. 4 5 2 Short-term rates decrease and long-term rates increase. 2 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 about 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 Group Treasury 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 about 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 about our hedges of net investments in foreign operations Equity investments Audited | Under International Financial Reporting Standards (IFRS) effective on 31 December 2019, 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. 146 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 2019, we held equity investments totaling USD 2.4 billion, of which USD 1.3 billion was 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.   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 about the classification of financial instruments Debt investments Audited | Debt investments classified as Financial assets measured at fair value through OCI as of 31 December 2019 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 6.3 billion as of 31 December 2019 compared with USD 6.7 billion as of 31 December 2018.   Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” section of this report for more information  Refer to “Economic value sensitivity” in this section for more information  Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the classification of financial instruments 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 value of a plan’s assets or in the investment returns, an increase in defined benefit obligations, or a combination of the above. 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 about 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 limited number of UBS Group AG shares, primarily in its capacity as a market-maker with regard to 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 2019, we have acquired shares for an aggregate consideration of CHF 800 million (USD 806 million). The total consideration for shares repurchased in 2018 and 2019 amounted to CHF 1,550 million (USD 1,567 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 such shares, shares acquired in the repurchase program will be held in Group Treasury.  Refer to “UBS shares” in the “Capital management” section of this report for more information 147 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Country risk Country risk framework Country risk includes all country-specific events that occur within a sovereign 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 a sovereign rating to each foreign country, 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 we 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 developing of plausible stress scenarios for combined stress testing and the identification 148 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 also used for combined stress testing, 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 that 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. As a result, we 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 hedge exposures. 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 with, for example, 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, although 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 Global 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 2019. 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 2019, and not taking into account the risk- reducing effect of master netting agreements, we had purchased USD 6 billion gross notional of single-name CDS protection on issuers domiciled in Greece, Italy, Ireland, Portugal and Spain (GIIPS) and had sold USD 7 billion gross notional of single-name CDS protection for these same countries. On a net basis, taking into account the risk-reducing effect of master netting agreements, this equates to USD 1 billion notional purchased and USD 2 billion notional sold. All investment grade gross protection purchased was from 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. 149 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Exposures to eurozone countries rated lower than AAA / Aaa by at least one major rating agency USD million Total Total Banking products (loans, guarantees, loan commitments) Exposure before hedges 125 125 0 Net of hedges1 124 124 0 of which: unfunded 84 84 Net of hedges1 3,148 3,148 183 0 438 2,527 609 609 3 3 88 88 405 405 342 39 7 7 342 39 7 7 64 60 382 382 64 61 382 382 7 0 490 490 7 0 494 494 188 306 12 12 414 195 965 965 112 414 195 965 965 112 3,183 3,183 216 0 438 2,529 609 609 39 814 3,353 3,353 1,355 0 845 1,152 8 8 0 39 814 3,473 3,473 1,472 0 847 1,154 16 16 0 31.12.19 Austria Austria Sovereign, agencies and central bank Local governments Banks Other2 Belgium Belgium Sovereign, agencies and central bank Local governments Banks Other2 Finland Finland Sovereign, agencies and central bank Local governments Banks Other2 France France Sovereign, agencies and central bank Local governments Banks Other2 Greece Greece Sovereign, agencies and central bank Local governments Banks Other2 Ireland3 Ireland3 Sovereign, agencies and central bank Local governments Banks Other2 Italy Italy Sovereign, agencies and central bank Local governments Banks Other2 Portugal Portugal Sovereign, agencies and central bank Local governments Banks Other2 Spain Spain Sovereign, agencies and central bank Local governments Banks Other2 Other4 Other4 Total Total 1 Before deduction of IFRS 9 ECL allowances and provisions. 1 4 Represents aggregate exposures to Andorra, Cyprus, Estonia, Latvia, Lithuania, Malta, Monaco, Montenegro, San Marino, Slovakia and Slovenia. 4 33 50 358 700 9 9 72 72 2,451 11,310 2,451 11,310 2 Includes corporates, insurance companies and funds. 2 58 826 1,240 1,240 25 53 422 739 94 94 47 58 826 1,139 1,139 11 52 422 654 94 94 47 50 671 56 56 11,001 11,001 33 387 26 26 2,594 2,594 18 29 745 745 24 18 29 774 774 24 9 17 420 420 9 17 391 391 186 305 4 4 394 286 26 26 394 371 26 26 43 205 765 765 43 295 680 680 5 3 884 884 13 3 884 884 12 0 338 338 4 0 338 338 360 360 625 625 26 26 51 51 4 4 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) Exposure before hedges 446 446 216 Net of hedges 412 412 183 Net long per issuer 2,612 2,612 28 201 182 182 69 112 614 614 16 599 951 951 402 100 449 58 58 9 49 150 150 18 53 20 59 59 59 47 3 9 17 17 28 201 182 182 69 112 614 614 16 599 834 834 285 100 449 58 58 9 49 135 135 4 52 20 59 59 59 47 3 9 17 17 0 346 2,266 46 46 3 43 344 344 112 17 215 2,029 2,029 1,070 0 560 399 4 4 0 1 3 488 488 6 482 324 324 7 8 309 9 9 6 3 337 337 24 3 14 299 28 28 6,221 6,221 3 The majority of the Ireland exposure relates to funds and foreign bank subsidiaries. 3 4 14 18 18 2,495 2,495 4 14 18 18 2,328 2,328 1,649 1,649 150 Exposure from single-name credit default swaps referencing Greece, Italy, Ireland, Portugal or Spain (GIIPS) Net position (after application of counterparty master netting agreements) PPrrootteeccttiioonn ssoolldd PPrrootteeccttiioonn bboouugghhtt of which: counterparty domiciled in GIIPS country of which: counterparty domicile is the same as the reference entity domicile USD million 31.12.19 Greece Italy Ireland Portugal Spain TToottaall Notional 33 55,,558855 114422 111166 446622 66,,331100 RV 00 ((2277)) ((77)) ((22)) ((1111)) ((4488)) Notional 00 00 00 00 5500 5500 RV 00 00 00 00 00 00 Notional 00 00 00 00 00 00 RV 00 00 00 00 00 00 Notional ((88)) RV 11 ((66,,009944)) ((2222)) ((2277)) ((114466)) ((558866)) ((66,,886622)) 33 22 1177 11 Buy notional 00 779911 112211 6622 117733 Sell notional ((55)) ((11,,330000)) ((66)) ((9911)) ((229977)) 11,,114477 ((11,,669999)) PRV 11 2233 00 11 1100 3355 NRV 00 ((7722)) ((55)) ((11)) ((44)) ((8822)) Holding CDSs for credit default protection does not necessarily protect the buyer of protection against losses, as the contracts will only pay out under certain scenarios. The effectiveness of our CDS protection as a hedge of default risk is influenced by a number of factors, including the contractual terms under which the CDS was written. Generally, only the occurrence of a credit event as defined by the CDS terms (which may include, among other events, failure to pay, restructuring or bankruptcy) results in a payment under the purchased credit protection contracts. For CDS contracts on sovereign obligations, repudiation can also be deemed as a default event. The determination as to whether a credit event has occurred is made by the relevant International Swaps and Derivatives Association (ISDA) determination committees (comprised of various ISDA member firms) based on the terms of the CDS and the facts and circumstances surrounding the event. Exposure to emerging market countries The “Emerging market net exposure by major geographical region and product type” table on the following page shows the five largest emerging market country exposures in each major geographical area by product type as of 31 December 2019 compared with 31 December 2018. Based on the sovereign rating categories, as of 31 December 2019, 79% of our emerging market country exposure was rated investment grade, compared with 84% as of 31 December 2018. Our direct net exposure to China was USD 4.7 billion, a decrease of USD 1.6 billion compared with 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 TToottaall 3311..1122..1199 31.12.18 1133,,669933 33,,772211 1177,,441144 15,763 3,039 18,803 11 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. 151 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Emerging market net exposures by major geographical region and product type USD million Emerging America Emerging America Brazil Mexico Colombia Argentina Chile Other Emerging Asia Emerging Asia China Hong Kong South Korea India Thailand Other Emerging Europe Emerging Europe Russia Turkey Azerbaijan Ukraine Bulgaria Other Middle East and Africa Middle East and Africa South Africa United Arab Emirates Saudi Arabia Kuwait Israel Other Total Total Total Total 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 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 1,512 1,512 1,262 1,262 121 121 45 45 22 22 20 20 42 42 11,627 11,627 4,717 4,717 2,850 2,850 1,118 1,118 895 895 616 616 1,431 1,431 1,382 1,382 547 547 398 398 186 186 76 76 47 47 128 128 2,893 2,893 668 668 624 624 556 556 277 277 190 190 578 578 1,505 1,137 174 30 27 28 108 13,890 6,302 2,920 1,282 909 1,176 1,301 1,189 400 434 145 53 76 82 613 613 498 498 22 22 28 28 17 17 9 9 39 39 3,306 3,306 1,140 1,140 1,000 1,000 60 60 492 492 62 62 552 552 820 573 102 22 10 13 101 4,307 1,060 1,377 523 553 147 647 1,076 1,076 1,015 380 380 359 359 184 184 66 66 44 44 42 42 270 413 139 50 76 67 2,219 1,316 1,316 1,245 362 572 275 379 113 519 176 176 404 404 147 147 56 56 37 37 497 497 6,311 6,311 73 418 166 71 42 476 7,387 17,414 17,414 18,803 368 368 288 288 56 56 14 14 0 0 8 8 1 1 262 183 56 7 0 11 5 2,235 2,235 1,693 456 456 823 823 403 403 125 125 26 26 402 402 138 138 93 93 4 4 0 0 0 0 0 0 40 40 1,027 1,027 129 129 215 215 401 401 222 222 51 51 9 9 473 442 391 144 25 218 125 111 4 1 0 0 10 659 60 142 108 308 5 34 3,767 3,767 2,739 531 531 476 476 43 43 3 3 5 5 2 2 2 2 6,086 6,086 3,121 3,121 1,027 1,027 655 655 277 277 528 528 478 478 169 169 74 74 34 34 2 2 10 10 4 4 46 46 550 550 363 363 5 5 7 7 0 0 102 102 72 72 7,335 7,335 422 381 16 1 17 4 3 7,890 4,769 1,101 368 212 1,005 435 49 19 16 5 3 0 6 315 229 11 0 0 66 9 8,676 1 Before deduction of IFRS 9 ECL allowances and provisions. 1 152 Operational risk Key developments The key risk themes for UBS and the financial industry overall continue to be operational resilience, conduct and financial crime. risk management Operational resilience remains a key focus for the firm. Our regulators have recently released consultation papers and set up working groups focused on the topic and the industry is preparing for new regulations over the coming years. We continually enhance our ability to maintain effective day-to-day business activities through the anticipation of, preparation for and response to changes in business conditions, disruption and stress scenarios. Cybersecurity, technology, data protection, third-party continuity management are critical elements of operational resilience. Our cybersecurity objectives are set international standards and our data protection and privacy standards are designed to align with applicable regulations and standards. We continue to invest in preemptive and detective measures to defend UBS against evolving and highly sophisticated cyberattacks. We focus on: (i) increasing readiness to identify and respond to cyber threats and data loss; (ii) employee training and behaviors; and (iii) application and infrastructure security (including vulnerability management). and business line with in Global policies and improved risk-based frameworks for third- party risk management have been developed and are being rolled out to all regions and business divisions. UBS has not been affected by any significant business continuity or operational resilience event in 2019. Where local events have occurred, our business continuity procedures have allowed us to ensure the safety of staff and to continue our operations with minimal disruption. 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. We continue to focus on effectively embedding the framework across our activities, enhancing conduct risk management information and maintaining momentum on fostering a strong 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 and 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. 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 Fidleg in Switzerland, Regulation Best Interest in the US, and the Markets in Financial Instruments Directive II (MiFID II) in the EU, continue to significantly impact the industry control processes on a to and geographically aligned basis. 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. require adjustments laundering, Financial crime terrorist (including money financing, sanctions violations, fraud, bribery and corruption) continues to present a major 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. New risks are emerging, such as virtual currencies and related activities or investments. The Office of the Comptroller of the Currency issued a Cease and Desist Order against the firm in May 2018 relating to this risk category. As a response, the firm initiated a comprehensive program for the purpose of ensuring sustainable remediation of US-relevant Bank Secrecy Act / anti-money laundering (AML) issues across all US legal entities. UBS has implemented significant improvement measures in 2019 and expects to continue implementing these measures in 2020. We have also been focusing on strategic enhancements in the areas of AML, know your client (KYC) and sanctions on a global scale to cope with the evolving risk profile and regulatory expectations. This includes our significant investments 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 more sophisticated rule-based monitoring by applying self-learning systems to identify potentially suspicious transactions. Furthermore, we continue in AML public–private partnerships with public-sector stakeholders, including law enforcement, to improve information sharing and better detect financial crimes. to actively participate Cross-border risk remains an area of regulatory attention for global financial institutions, with a strong focus on fiscal transparency. There is evolving risk related to permanent establishment (PE) as a result of changes to the global economy and political pressure under which tax authorities are becoming increasingly demanding in asserting PEs, including retrospective application of current and future potential law concepts. The firm is actively assessing if and what further measures are required to respond to this recent focus area for authorities. 153 Risk, treasury and capital management discharge of this responsibility by confirming the end-to-end completeness and effectiveness of the control environment and the operational risk management within their Group function. Collectively, divisional Presidents, Group function heads and accountable in charge of legal entity executives are implementing the operational risk framework. (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 for ensuring that operational risks are understood, owned and managed in accordance with the firm’s risk appetite. C&ORC sits within the Group Compliance, Regulatory & Governance (GCRG) function, reporting to the Group Chief Compliance and Governance Officer, who is a member of the Group Executive Board. C&ORC is an integrated function covering both operational risk as well as compliance and conduct topics. The operational risk framework forms the common basis for managing and assessing operational risk; however, there are additional C&ORC activities that are intended to ensure the firm is able to demonstrate compliance with applicable laws, rules and regulations. In 2019, we further improved our operational risk framework, remediating control for sustainably enhancing processes deficiencies, risk management processes for UBS entities, and senior management reporting tools to better embed the framework as a key tool used by the businesses to manage their risks day to day. All functions within the firm are required to assess the design and operating effectiveness of their internal controls periodically. The output of these assessments 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). Key control deficiencies identified during the internal control and risk assessment processes must be reported in the operational risk inventory, and sustainable remediation must be defined and executed. These control deficiencies are assigned to owners at senior management level and the remediation progress in the respective manager’s annual performance measurement and management objectives. To assist with prioritizing the most material control deficiencies and measuring aggregated risk exposure, irrespective of origin, a common rating methodology is applied across all three lines of defense, as well as by external audit. is reflected Risk, treasury and capital management Risk management and control During 2018 and 2019, the firm performed a systematic review of risk themes and initiated programs to drive sustainable remediation, which have contributed to a reduction in the overall portfolio of operational risk issues and the number of new deficiencies being discovered. This trend indicates a more holistic approach to identification of operational risk issues, accountability for ownership, and focus on resolution of the underlying root causes. Operational risk framework Operational risk is an inherent part of the firm’s business. Losses can result from inadequate or failed internal processes, people and systems, or from external causes. The operational risk definition incorporates both conduct and compliance risks. UBS defines a Group-wide framework that supports identifying, managing, assessing and mitigating operational risks to achieve an agreed balance between risk and return. The operational risk framework establishes requirements for managing and controlling operational risks at UBS. It is built on the following pillars: – classifying risk taxonomy, which defines the universe of material operational risks that can arise as a consequence of the firm’s business activities and external factors; the operational inherent through risks – assessing the design and operating effectiveness of controls through the control assessment process; – proactively and sustainably remediating identified control deficiencies; – defining operational risk appetite (including a financial operational risk appetite statement at Group and business division level for operational risk events) through quantitative metrics and thresholds and qualitative measures, and assessing risk exposure against appetite; and – assessing inherent and residual risk through risk assessment processes, and assessing whether additional remediation plans are required to address identified deficiencies. Divisional Presidents and accountable legal entity executives are responsible for the effectiveness of operational risk management and for the robustness of the front-to-back control environment within their respective areas. Group function heads are accountable for supporting the divisional Presidents and accountable legal entity executives of our legal entities in the 154 Advanced measurement approach model AMA model calibration and review The operational risk framework detailed above underpins the calculation of regulatory capital for operational risk, which enables us to quantify operational risk and to define effective risk mitigating management incentives as part of the related operational risk capital allocation approach to the business divisions. 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 AMA methodology utilizes both historical internal losses and external losses suffered by the broader industry for the model calibration. We measure Group 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, while for other regulated entities the basic for indicators or standardized approaches are adopted regulatory capital in agreement with local regulators. In addition, the methodology of the Group AMA is leveraged for entity- specific Internal Capital Adequacy Assessment Processes. Currently, the model includes 15 AMA units of measure (UoM), which are aligned with our operational risk taxonomy as closely as possible. For each of the model’s UoM, frequency and severity distributions are calibrated. The modeled distribution functions for both frequency and severity are then used 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. in business Initial model outputs driven by loss history are reviewed and adjusted to reflect fast-changing external developments such as new regulations, geopolitical change, volatile market and economic conditions, as well as internal factors including changes framework enhancements. The resulting baseline data-driven frequency and severity distributions are reviewed by subject matter experts and where necessary adjusted based on a review of qualitative information about the business environment and internal control factors as well as expert judgment with the aim of forecasting losses. strategy and control To maintain risk sensitivity, our model is reviewed regularly and is 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 governance The Group and entity-specific AMA models are subject to an independent validation performed by Model Risk Management & Control (MRMC) in line with the Group’s model risk management framework.  Refer to “Capital management objectives, planning and activities” in the “Capital management” section of this report for more information about the development of risk-weighted assets  Refer to “Risk measurement” in this section for more information about our approach to model confirmation procedures  Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information 155 Risk, treasury and capital management Risk, treasury and capital management Treasury management Treasury management Balance sheet, liquidity and funding management measures to be invoked, Group Treasury is responsible for coordinating liquidity generation with representatives of the relevant business areas. Group Treasury reports on the Group’s overall liquidity and funding position, including funding status and concentration risks, at least monthly, to the Group ALCO and the Risk Committee of the BoD. Audited | Liquidity and funding limits, triggers 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 liability structure. Structural limits, triggers and targets focus on the structure and composition of the balance sheet, while supplementary limits, triggers and targets are designed to drive the utilization, diversification and allocation of resources. To complement and support this framework, Group Treasury monitors the markets for early warning indicators reflecting the current liquidity situation. These 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.  in the asset and funding  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 Strategy, objectives and governance We manage the structural risk of our balance sheet, including interest rate risk (e.g., investment of equity, banking book exposures from Global Wealth Management and Personal & Corporate Banking), structural foreign exchange risk and collateral risk, as well as the risks associated with our liquidity and funding portfolios. Audited | Our management of the balance sheet, liquidity and funding positions serves 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 Committee (the Group ALCO), which is a committee of the Group Executive Board, and is overseen by the Risk Committee of the Board of Directors (the BoD).  This section provides more detailed information about regulatory requirements, our governance structure, our balance sheet, liquidity and funding management (including our sources of liquidity and funding), and our contingency planning and stress testing. The balances disclosed in this section represent year-end positions, unless indicated otherwise. Intra-period balances fluctuate in the ordinary course of business and may differ from year-end positions. Group Treasury monitors and oversees the implementation and execution of our liquidity and funding strategy and is responsible for adherence to policies, limits, triggers 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 Group Treasury. In addition, should a crisis require contingency funding 156 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, triggers 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 Group and subsidiary liquidity requirements.  Assets % change from 31.12.18 USD billion (1) Cash and balances at central banks Lending1 1 Securities financing transactions at amortized cost (12) Trading portfolio2 22 Derivatives and cash collateral receivables on derivative instruments (3) Brokerage receivables 7 Other financial assets measured at amortized cost and fair value3 (5) Non-financial assets and financial assets for unit-linked investment contracts 17 TToottaall aasssseettss 1 11 Consists of loans and advances to banks and customers. 22 Consists of financial assets at fair value held for trading. 33 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. 31.12.18 108.4 337.2 95.3 104.4 149.8 16.8 90.5 56.1 958.5 3311..1122..1199 110077..11 333399..22 8844..22 112277..55 114455..11 1188..00 8855..66 6655..44 997722..22 As of Balance sheet assets Group As of 31 December 2019, balance sheet assets totaled USD 972 billion, an increase of USD 14 billion from 31 December 2018, driven mainly by increases in trading portfolio assets as well as in non-financial assets and for unit-linked investment contracts. These effects were partly offset by decreases in securities financing transactions at amortized cost, in other financial assets measured at amortized cost and fair value, as well as in derivatives and cash collateral receivables on derivative instruments. financial assets Total assets excluding derivatives and cash collateral receivables on derivative instruments increased by USD 18 billion to USD 827 billion as of 31 December 2019. Excluding currency effects, total assets excluding derivatives and cash collateral receivables on derivative instruments increased by USD 13 billion. Trading portfolio assets increased by USD 23 billion, mainly in our Equities business in the Investment Bank, largely reflecting market-driven movements and increased hedging requirements resulting from client activity. Non-financial assets and financial assets for unit-linked investment contracts increased by USD 9 billion, mainly driven by an increase of USD 6 billion in assets held to hedge unit-linked investment contracts in Asset Management, with a related increase in the associated liabilities, reflecting mainly market- driven movements and net new money inflows. In addition, the adoption of IFRS 16 resulted in a USD 3 billion increase following the recognition of right-of-use assets as of 1 January 2019. securities transactions at amortized cost decreased by USD 11 billion, driven by increased funding consumption by the business divisions and lower collateral sourcing requirements. Receivables financing from Other financial assets at amortized cost and fair value decreased by USD 5 billion, mainly as a result of movements within our high-quality liquid assets (HQLA) portfolio from debt securities to cash and balances at central banks. Derivatives and cash collateral receivables on derivative instruments decreased by USD 5 billion, mainly driven by lower client activity levels in Global Wealth Management and in our Equities business in the Investment Bank. This was partly offset by an increase in our Foreign Exchange, Rates and Credit business in the Investment Bank, mainly reflecting market-driven movements.  Refer to the “Consolidated financial statements” section of this report for more information 157 Risk, treasury and capital management Asset Management Asset Management total assets increased by USD 6 billion to USD 35 billion, reflecting an increase in financial assets for unit- linked investment contracts mainly due to market-driven movements and net new money inflows, with an increase in the corresponding liabilities. Corporate Center Corporate Center total assets decreased by USD 11 billion to USD 103 billion, primarily reflecting a reduction in Group Treasury to fund the redemption of short-term borrowings. 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 local limitations are regulatory 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 28 billion of assets were excluded from our daily average Group HQLA for the fourth quarter of 2019. Amounts held in excess of local liquidity requirements that are not subject to other restrictions are generally available for transfer within the Group. the result of local LCR and typically including The total weighted liquidity value of HQLA decreased by USD 7 billion to USD 166 billion. Risk, treasury and capital management Treasury management Changes in Corporate Center cost and resource allocation to business divisions Effective 1 January 2019, UBS has increased the allocation of balance sheet resources from Corporate Center to the business divisions. Prior-period information has been restated. As of 31 December 2018, the restatement resulted in an increase of total assets in Global Wealth Management of USD 114 billion, in Personal & Corporate Banking of USD 62 billion, in Asset Management of USD 4 billion and in the Investment Bank of USD 44 billion, with a corresponding decrease of assets in Corporate Center of USD 223 billion. These changes had no effect on the reported results or financial position of the Group.  Refer to “Note 2 Segment reporting” in the “Consolidated financial statements” section of this report for more information Investment Bank Investment Bank total assets increased by USD 14 billion to USD 316 billion, driven by a USD 23 billion increase in trading portfolio assets, largely reflecting market-driven movements and increased hedging requirements resulting from client activity. This increase was partly offset by an USD 8 billion decrease in HQLA requirements. Global Wealth Management Global Wealth Management total assets decreased by USD 4 billion to USD 310 billion, mainly reflecting a USD 7 billion decrease in HQLA requirements. This was partly offset by an increase of USD 3 billion in lending assets, as a result of higher mortgage and Lombard loans. Personal & Corporate Banking Personal & Corporate Banking total assets increased by USD 9 billion to USD 209 billion, mainly driven by a USD 5 billion increase in HQLA requirements, as well as an increase of USD 3 billion in lending assets, reflecting currency effects and increases in mortgage loans. 158 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%. 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 in order to manage any currency significant currencies mismatches between HQLA and the net expected cash outflows in times of stress. Our daily average LCR for the fourth quarter of 2019 was 134%, compared with 136% in the fourth quarter of 2018, remaining above the 110% Group LCR minimum communicated by FINMA. The decrease in the LCR mainly reflected reduced HQLA, primarily driven by higher funding consumption by the business divisions and reductions in issued debt that were partly offset by higher deposit balances and a reduction in assets subject to transfer restrictions in the European entities. In addition, net cash outflows decreased, mainly driven by a net reduction of securities financing transactions, partly offset by higher outflows caused by increased customer deposits.  Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about the LCR  Refer to the “Significant regulated subsidiary and sub-group information” section of this report for more information about the LCR 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) TToottaall hhiigghh qquuaalliittyy lliiqquuiidd aasssseettss44 -- Cash outflows5 Retail deposits and deposits from small business customers Unsecured wholesale funding Secured wholesale funding Other cash outflows TToottaall ccaasshh oouuttfflloowwss Cash inflows5 Secured lending Inflows from fully performing exposures Other cash inflows TToottaall ccaasshh iinnfflloowwss Liquidity coverage ratio High-quality liquid assets AAvveerraaggee 44QQ11991 Average 4Q181 110000 6666 116666 2288 110066 7744 4400 224488 8811 2299 1133 112233 116666 96 78 173 26 102 76 42 246 79 29 10 119 173 Net cash outflows 127 136 LLiiqquuiiddiittyy ccoovveerraaggee rraattiioo ((%%)) 11 Calculated based on an average of 64 data points in the fourth quarter of 2019 and 64 data points in the fourth quarter of 2018. 22 Calculated after the application of haircuts. 33 Includes cash and balances at central banks and other eligible balances as prescribed by FINMA. 44 Calculated in accordance with FINMA requirements. 55 Calculated after the application of inflow and outflow rates. 112244 113344 159 Risk, treasury and capital management 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, financial assets for unit- linked investment contracts, 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. 160 Asset encumbrance as of 31 December 2019 - - USD million OOnn bbaallaannccee sshheeeett aasssseettss 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg 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 DDeerriivvaattiivvee ffiinnaanncciiaall iinnssttrruummeennttss BBrrookkeerraaggee rreecceeiivvaabblleess of which: customer brokerage of which: prime brokerage FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee nnoott hheelldd ffoorr ttrraaddiinngg TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee Investments in associates Property, equipment and software Goodwill and intangible assets Deferred tax assets Other non-financial assets TToottaall nnoonn ffiinnaanncciiaall aasssseettss TToottaall oonn bbaallaannccee sshheeeett - - - - - - USD million OOffff bbaallaannccee sshheeeett aasssseettss FFaaiirr vvaalluuee ooff sseeccuurriittiieess aacccceepptteedd aass ccoollllaatteerraall 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 TToottaall oonn aanndd ooffff bbaallaannccee sshheeeett aasssseettss aass ooff 3311 DDeecceemmbbeerr 22001199 -- -- of which: high-quality liquid assets 11 Includes USD 41,285 million of assets pledged as collateral that may be sold or repledged by counterparties. 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 107,068 3,131 9,316 18,399 18,399 1,212 1199,,661111 5566,,44115511 2,700 2 1,947 2,671 49,096 2,986 620 377 77,,111144 224422 4 42 96 100 12,863 111199,,993311 6688,,888866 8,760 365 145 5,925 6,100 47,590 118888 5566,,660044 2299,,667766 2299,,991177 117766 3344,,440011 110033,,228866 66,,116699 303,306 159,749 1,444 331144,,006666 11,,997711 1,971 1133,,008822 1155,,005533 1,051 12,804 2 22 3377,,221100 4,597 44,,559977 223333,,998844 1133,,885555 334422,,997744 Assets that cannot be pledged as collateral Total Group assets (IFRS) 107,068 12,447 84,245 9,507 74,738 23,289 326,786 178,149 22,980 557766,,881155 112277,,551144 11,464 365 147 7,914 8,867 96,786 1,971 112211,,884411 1188,,000077 4,877 13,131 8833,,994444 335511,,330077 66,,334455 1,051 12,804 6,469 9,537 7,856 3377,,771177 997722,,118833 84,245 9,507 74,738 20,303 4,460 7,085 111166,,009922 112211,,884411 1188,,000077 4,877 13,131 66,,559988 114466,,444466 6,469 9,537 3,256 1199,,226622 228811,,880011 7766,,221155 Encumbered Assets otherwise restricted and not available to secure funding 77,,000033 248 5,914 833 8 Assets pledged as collateral 335500,,447777 6,857 198,540 140,312 4,750 18 442266,,669911 4444,,221133 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) 111122,,004400 3,502 86,138 21,685 716 334466,,002244 178,641 66,,220066 6,206 447755,,772266 10,606 290,591 162,830 5,474 6,224 334499,,118800 228811,,880011 161 Risk, treasury and capital management Risk, treasury and capital management Treasury management Asset encumbrance as of 31 December 2018 USD million On-balance sheet assets On-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 Total financial assets measured at amortized cost Total financial assets measured at amortized cost Financial assets at fair value held for trading Financial 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 Derivative financial instruments Derivative financial instruments Brokerage receivables Brokerage receivables of which: customer brokerage of which: prime brokerage Financial assets at fair value not held for trading Financial assets at fair value not held for trading Total financial assets measured at fair value through profit or loss Total financial assets measured at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial 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 Total non-financial assets Total non-financial assets Total on-balance sheet Total on-balance sheet USD million Off-balance sheet assets Off-balance sheet assets Fair value of securities accepted as collateral Fair value of securities accepted as collateral 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 Assets otherwise restricted and not available to secure funding 14,954 14,954 390 11,204 3,356 4 Assets pledged as collateral 356,745 356,745 10,110 211,156 130,853 4,621 5 Total on- and off-balance sheet assets as of 31 December 2018 Total on- and off-balance sheet assets as of 31 December 2018 418,841 418,841 51,712 51,712 of which: high-quality liquid assets 1 Includes USD 32,121 million of assets pledged as collateral that may be sold or repledged by counterparties. 1 162 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 108,370 5,140 11,703 18,804 18,804 18,804 18,804 43,2921 43,2921 4,776 1,660 3,541 33,315 3,205 935 197 9,477 9,477 3,589 3,589 187 898 2,504 13,446 121,816 121,816 53,924 53,924 6,385 258 134 4,921 5,277 36,949 43,292 43,292 23,514 23,514 27,104 27,104 171 171 39,186 39,186 93,110 93,110 6,495 6,495 294,307 151,301 1,091 307,101 307,101 3,566 3,566 3,566 9,826 9,826 13,392 13,392 1,099 9,348 6 6 6 36,758 36,758 4,298 4,298 4,298 225,719 225,719 10,447 10,447 330,940 330,940 62,096 62,096 Encumbered Assets that cannot be pledged as collateral Total Group assets (IFRS) 25 95,349 13,061 82,288 20,397 6,306 7,828 129,905 129,905 126,210 126,210 16,840 16,840 4,384 12,457 10,163 10,163 153,213 153,213 6,647 10,105 3,106 19,858 19,858 302,976 302,976 108,370 16,868 95,349 13,061 82,288 23,602 320,352 170,105 22,563 587,104 587,104 104,370 104,370 11,161 258 134 6,768 9,716 72,768 3,566 126,210 126,210 16,840 16,840 4,384 12,457 82,690 82,690 330,110 330,110 6,667 6,667 1,099 9,348 6,647 10,105 7,410 34,608 34,608 958,489 958,489 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) 109,310 109,310 3,922 87,788 16,598 1,003 335,029 335,029 184,361 2,678 2,678 2,678 483,688 483,688 14,421 310,148 150,807 5,628 2,683 333,618 333,618 302,976 302,976 Assets available to secure funding on a Group and/or legal entity level by currency USD million Swiss franc US dollar Euro Other TToottaall 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 aim to ensure that immediate corrective measures to absorb potential sudden liquidity shortfalls can be put into effect.  We model our liquidity exposures under two main potential scenarios that encompass stressed 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 about stress testing Stressed scenario As a liquidity crisis could have a myriad of causes, the stressed scenario encompasses potential stress effects across all markets, currencies and products, but it is typically not firm-specific. In addition to the loss of the ability to replace maturing wholesale funding, it assumes a gradual decline of otherwise stable client deposits and liquidity outflows corresponding to a two-notch downgrade in our long-term credit rating, and a corresponding downgrade in our short-term rating. We use a cash capital model that incorporates the stress scenario and measures the amount of long-term funding available to fund illiquid assets. The illiquid portion of an asset is the difference between the carrying amount 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’ 3311..1122..1199 7799,,881199 114466,,660011 3322,,880011 8866,,880033 334466,,002244 31.12.18 79,595 131,838 36,874 86,720 335,029 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. Combined scenario The combined 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. The combined scenario is run daily to project potential cash outflows under it 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 portfolios, available and unutilized liquidity facilities at several major central banks, contingent reductions of liquid trading portfolio assets and other available management actions.  163 Risk, treasury and capital management Risk, treasury and capital management Treasury management Liabilities and funding management Audited | Group Treasury regularly monitors our funding status, including concentration risks, aiming to ensure that 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.  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. In the execution of the Funding Plan, Group Treasury considers factors such as currency, market and tenor diversification. For specific product types, the operational execution of funding transactions defined in the Funding Plan 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, triggers and targets for funding generation including concentration limits, weighted average maturity floors and volume. 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 the overall contribution of a particular funding source to the liability mix. 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. 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 enable institutional and private investors who are active in the markets of Europe, the US and Asia Pacific to customize their investments in UBS’s debt. Collectively, these broad product offerings and funding sources, together with the global scope of our business activities, support our funding stability. Balance sheet liabilities Total liabilities increased by USD 12 billion to USD 917 billion as of 31 December 2019, driven mainly by increases in customer deposits, in non-financial liabilities and in financial liabilities 164 related to unit-linked investment contracts, as well as in long- term debt issued. These effects were partly offset by decreases in short-term borrowings and in securities financing transactions at amortized cost. Total liabilities excluding derivatives and cash collateral payables on derivative increased by USD 14 billion to USD 765 billion as of 31 December 2019. Excluding currency effects, total liabilities excluding derivatives and cash collateral payables on derivative instruments increased by USD 12 billion. instruments Customer deposits increased by USD 28 billion, mainly in Switzerland and Asia Pacific. As of 31 December 2019, our ratio of customer deposits to outstanding loan balances was 137% (31 December 2018: 131%). Non-financial liabilities and financial liabilities related to unit- linked investment contracts increased by USD 6 billion, driven by an investment contracts, with a in unit-linked corresponding increase in associated assets. increase Long-term debt issued increased by USD 5 billion. This was the result of a USD 10 billion increase in debt issued designated at fair value, mainly reflecting market-driven movements, partly offset by a USD 5 billion decrease in long-term debt held at amortized cost. The aforementioned decrease was primarily as a result of the maturing and early redemption of USD 9.7 billion equivalent of senior unsecured debt and the maturing of USD 1.1 The aforementioned instances of maturities were partly offset by the issuance of USD 3.8 billion equivalent of US dollar-, Swiss franc-, Australian dollar- and Singapore dollar-denominated high- trigger loss-absorbing additional tier 1 (AT1) capital instruments and the issuance of USD 1.9 billion equivalent of Swiss franc- and US dollar-denominated senior unsecured debt that contributes to our total loss-absorbing capacity (TLAC). equivalent covered bonds. billion of During the financial year 2020, USD 1.8 billion equivalent of TLAC-eligible benchmark instruments will mature and USD 1.3 billion equivalent of AT1 capital was called in February 2020. UBS is already compliant with its 2020 going and gone concern capital rationally and opportunistically with respect to refinancing of any callable capital incremental issuances. instruments as well as any potential requirements and expects to act Short-term borrowings decreased by USD 22 billion, mainly reflecting net maturities of commercial papers and certificates of deposit. Derivatives and cash collateral payables on derivative instruments decreased by USD 2 billion, in line with the aforementioned increase in derivative assets and cash collateral receivables.  Refer to the document titled “UBS Group AG consolidated capital instruments and TLAC-eligible senior unsecured debt,” available under “Bondholder information” at www.ubs.com/investors, for more information  Refer to the “Consolidated financial statements” section of this report for more information Liabilities and equity As of % change from 31.12.19 31.12.19 31.12.18 USD billion Short-term borrowings1 28.4 (43) 28.4 Securities financing transactions at amortized cost 7.8 (24) 7.8 Customer deposits 448.3 448.3 7 Long-term debt issued2 155.5 155.5 3 Trading portfolio3 30.6 30.6 6 152.3 Derivatives and cash collateral payables on derivative instruments 152.3 (2) 37.2 Brokerage payables 37.2 (3) Other financial liabilities measured at amortized cost and fair value4 17.5 17.5 (7) 39.9 Non-financial liabilities and financial liabilities related to unit-linked investment contracts 39.9 17 917.5 Total liabilities 917.5 1 Total liabilities 0.3 Share capital 0.3 0 18.1 Share premium 18.1 (13) (3.3) Treasury shares (3.3) 26 34.2 Retained earnings 34.2 12 Other comprehensive income5 5.3 5.3 35 54.5 Total equity attributable to shareholders 54.5 3 Total equity attributable to shareholders 0.2 0.2 (1) Equity attributable to non-controlling interests 54.7 54.7 3 Total equity Total equity 1 972.2 972.2 Total liabilities and equity Total liabilities and equity 2 Consists of long-term debt issued measured at amortized cost and debt issued designated at fair value. The 1 Consists of short-term debt issued measured at amortized cost and amounts due to banks. 1 2 classification of debt issued into short-term and long-term does not consider any early redemption features. Long-term debt issued also includes debt with a remaining time to maturity of less than one year. 3 Consists of financial liabilities at fair value held for trading. 4 Consists of financial liabilities at fair value not held for trading, financial liabilities measured at fair value through other comprehensive income and 3 other financial liabilities measured at amortized cost, but excludes financial liabilities related to unit-linked investment contracts. 5 Excludes defined benefit plans and own credit that are recorded directly in Retained earnings. 31.12.18 50.0 10.3 419.8 150.3 28.9 154.6 38.4 18.8 34.2 905.4 0.3 20.8 (2.6) 30.4 3.9 52.9 0.2 53.1 958.5 5 4 Asset funding USD billion, except where indicated As of 31.12.19 120 Cash and balances at central banks Loans and advances to banks 84 Securities fnancing transactions 128 Trading portfolio 18 327 Brokerage receivables Loans and advances to customers 175 Other (including net derivative assets) Short-term borrowings Securities fnancing transactions Trading portfolio Brokerage payables Demand deposits USD 76 billion collateral surplus Retail savings/deposits Time deposits Fiduciary deposits 137% coverage USD 121 billion surplus s t i s o p e d r e m o t s u C ¹ d e u s s i t b e d m r e t - g n o L Debt issued designated at fair value 67 156 Debt issued measured at amortized cost 28 8 31 37 176 448 169 62 41 89 89 55 165 1 Long-term debt issued also includes debt with a remaining time to maturity of less than one year. Assets Liabilities and equity Other Total equity Risk, treasury and capital management Risk, treasury and capital management Treasury management Liabilities by product and currency Short-term borrowings of which: due to banks of which: short-term debt issued1 Securities financing transactions Customer deposits of which: demand deposits of which: retail savings / deposits of which: time deposits of which: fiduciary deposits Long-term debt issued2 of which: senior unsecured debt of which: covered bonds of which: subordinated debt of which: debt issued through the Swiss central mortgage institutions of which: other long-term debt of which: debt issued measured at fair value Trading portfolio Derivatives and cash collateral payables on derivative instruments Brokerage payables Other financial liabilities measured at amortized cost and fair value3 Non-financial liabilities and financial liabilities related to unit-linked investment contracts Total liabilities Total liabilities USD billion USD billion All currencies All currencies 31.12.19 31.12.18 31.12.19 50.0 28.4 28.4 11.0 6.6 6.6 21.8 39.0 21.8 7.8 10.3 7.8 448.3 419.8 448.3 176.0 176.0 181.9 168.6 168.6 165.8 62.3 53.6 62.3 41.4 18.6 41.4 150.3 155.5 155.5 63.0 55.7 55.7 2.6 3.9 2.6 21.8 17.7 21.8 USD USD 31.12.19 31.12.18 31.12.19 3.1 1.6 1.6 0.4 0.2 0.2 2.7 1.4 1.4 0.9 0.8 0.8 17.0 15.8 17.0 4.5 4.4 4.4 6.0 6.0 6.0 3.8 4.8 4.8 1.5 1.7 1.7 9.5 10.0 10.0 3.7 3.5 3.5 0.0 0.0 0.0 1.5 1.8 1.8 CHF CHF 31.12.19 31.12.18 31.12.19 0.3 0.3 0.3 0.3 0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 21.4 20.0 21.4 7.6 7.6 7.6 11.7 11.8 11.8 0.6 0.3 0.3 0.1 1.8 1.8 1.4 1.6 1.6 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 As a percentage of total liabilities As a percentage of total liabilities EUR EUR 31.12.19 31.12.18 31.12.19 1.3 0.6 0.6 0.2 0.1 0.1 1.1 0.5 0.5 0.0 0.0 0.0 5.8 6.2 5.8 5.2 4.4 4.4 0.6 0.5 0.5 0.1 0.0 0.0 0.3 0.8 0.8 4.0 3.4 3.4 2.4 1.9 1.9 0.4 0.3 0.3 0.4 0.4 0.4 Other Other 31.12.19 31.12.18 31.12.19 0.8 0.7 0.7 0.3 0.2 0.2 0.5 0.5 0.5 0.2 0.0 0.0 4.6 4.4 4.6 2.8 2.7 2.7 0.0 0.0 0.0 1.4 1.7 1.7 0.2 0.2 0.2 1.7 1.9 1.9 0.6 0.5 0.5 0.0 0.0 0.0 0.1 0.2 0.2 8.6 8.6 0.0 0.0 8.6 0.1 66.8 66.8 30.6 30.6 57.0 28.9 0.0 0.0 0.0 0.0 4.8 4.8 1.1 1.1 0.0 0.0 4.2 1.5 152.3 152.3 37.2 37.2 154.6 38.4 13.7 13.7 3.0 3.0 14.2 2.9 17.5 17.5 18.8 1.2 1.2 1.3 0.9 0.9 0.0 0.0 0.5 0.5 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2 0.9 0.0 0.4 0.1 0.2 0.1 0.2 0.0 0.0 0.0 0.0 0.8 0.8 0.5 0.5 1.8 1.8 0.3 0.3 0.2 0.2 0.0 0.0 0.7 0.4 1.0 0.3 0.5 0.0 0.0 0.0 0.0 1.2 1.2 1.7 1.7 0.9 0.9 0.6 0.6 0.3 0.3 0.0 0.0 0.9 1.2 1.7 0.9 0.2 All currencies All currencies 31.12.19 31.12.18 31.12.19 5.5 3.1 3.1 1.2 0.7 0.7 4.3 2.4 2.4 1.1 0.8 0.8 48.9 46.4 48.9 20.1 19.2 19.2 18.3 18.4 18.4 5.9 6.8 6.8 2.0 4.5 4.5 16.6 16.9 16.9 6.9 6.1 6.1 0.4 0.3 0.3 1.9 2.4 2.4 0.9 0.9 0.0 0.0 7.3 7.3 3.3 3.3 0.9 0.0 6.2 3.2 16.6 16.6 4.1 4.1 17.1 4.2 1.9 1.9 2.0 39.9 39.9 917.5 917.5 34.2 905.4 0.6 0.6 49.0 49.0 0.6 49.9 0.2 0.2 24.1 24.1 0.2 22.5 0.1 0.1 12.7 12.7 0.2 13.9 3.4 3.4 14.2 14.2 2.7 13.7 4.4 4.4 100.0 100.0 3.7 100.0 2 Consists of long-term debt issued measured at amortized 1 Short-term debt issued is comprised of certificates of deposit, commercial paper, acceptances and promissory notes, and other money market paper. 1 2 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. Long-term debt issued also includes debt with a 3 Consists of financial liabilities at fair value not held for trading, financial liabilities measured at fair value through other comprehensive income and other remaining time to maturity of less than one year. 3 financial liabilities measured at amortized cost, but excludes financial liabilities related to unit-linked investment contracts. 166 funding, short-term wholesale Net stable funding ratio The net stable funding ratio (NSFR) framework is intended to limit overreliance on to 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. is in completed Switzerland, 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. It will continue to be refined when NSFR rule- making regulatory interpretations evolve and as new models and associated systems are enhanced. After delaying the introduction of the NSFR framework in Switzerland for the past two years in order to align with developments in the EU and the US, the Swiss Federal Council has decided to adopt the associated ordinance amendments in early summer 2020, and to bring them into force by mid-2021. The Federal Department of Finance has been mandated to finalize the necessary regulatory texts jointly with relevant stakeholders, including those from industry, in the upcoming months. as As of 31 December 2019, our estimated pro forma NSFR was 111%, an increase of 1 percentage point compared with 31 December 2018. This mainly reflected a USD 19 billion increase in available stable funding, mainly driven by an increase in deposits. This effect was largely offset by a USD 16 billion increase in required stable funding, mainly due to an increase in trading assets and calculation refinements. Pro forma net stable funding ratio USD billion, except where indicated Available stable funding Required stable funding PPrroo ffoorrmmaa nneett ssttaabbllee ffuunnddiinngg rraattiioo ((%%)) Internal funding and funds transfer pricing We utilize 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 Treasury 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 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 mechanisms aim 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 is, for major subsidiaries, entity-specific. We regularly review our internal funds transfer pricing mechanisms and make enhancements where appropriate to help better accomplish our liquidity and funding management objectives. 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. 3311..1122..1199 31.12.18 448888 444422 111111 469 426 110 167 Risk, treasury and capital management Risk, treasury and capital management Treasury management If our credit ratings were to be downgraded, rating trigger clauses could result in an immediate cash settlement or the need to deliver additional collateral to counterparties from contractual obligations related to over-the-counter (OTC) derivative positions and other obligations. Based on our credit ratings as of 31 December 2019, USD 0.0 billion, USD 0.5 billion and USD 0.9 billion would have been 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 0.6 billion, respectively. required There was one main rating action on UBS Group AG’s and UBS AG’s solicited credit ratings in 2019. On 21 November 2019, Rating and Investment Information (R&I) upgraded UBS Group AG’s issuer rating to A+ from A, while revising its outlook from positive to stable.  Refer to “Liquidity and funding management are critical to UBS’s ongoing performance” in the “Risk factors” section of this report for more information Equity Equity attributable to shareholders increased by USD 1,605 million to USD 54,533 million as of 31 December 2019. Total comprehensive income attributable to shareholders was positive USD 5,089 million, reflecting net profit of USD 4,304 million and positive other comprehensive income (OCI) of USD 785 million. OCI consisted of positive cash flow hedge OCI of USD 1,143 million, positive OCI related to financial assets measured at fair value through OCI of USD 117 million and positive foreign currency translation OCI of USD 104 million, partly offset by negative OCI related to own credit of USD 392 million and negative defined benefit plan OCI of USD 186 million. Share premium decreased by USD 2,779 million, mainly due to the dividend distribution of USD 2,544 million to shareholders out of the capital contribution reserve of UBS Group AG and a reduction of USD 886 million from the delivery of treasury shares under share-based compensation plans, partly offset by an increase of USD 619 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 695 million, mainly as a result of share repurchases of USD 806 million in 2019 under our share repurchase program, partly offset by the net disposal of treasury shares related to employee share-based compensation awards. The effect of adopting IFRIC 23, Uncertainty over Income Tax Treatments, decreased equity attributable to shareholders by USD 11 million. Equity attributable to non-controlling interests decreased by USD 2 million to USD 174 million.  Refer to the “Group performance” and “Consolidated financial statements” sections of this report for more information  Refer to “UBS shares” in the “Capital management” section of this report for more information about the share repurchase program  Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial statements” section of this report for more information about the adoption of IFRIC 23 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 amount in this table differs from “Note 27 Maturity analysis of financial liabilities” in the “Consolidated financial statements” section of this report, where these liabilities are presented on an 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. 168 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 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee Investments in associates Property, equipment and software Goodwill and intangible assets Deferred tax assets Other non-financial assets TToottaall aasssseettss aass ooff 3311 DDeecceemmbbeerr 22001199 TToottaall aasssseettss aass ooff 3311 DDeecceemmbbeerr 22001188 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 TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss Provisions Other non-financial liabilities TToottaall lliiaabbiilliittiieess aass ooff 3311 DDeecceemmbbeerr 22001199 TToottaall lliiaabbiilliittiieess aass ooff 3311 DDeecceemmbbeerr 22001188 GGuuaarraanntteeeess,, ccoommmmiittmmeennttss aanndd ffoorrwwaarrdd ssttaarrttiinngg ttrraannssaaccttiioonnss Loan commitments Guarantees Reverse repurchase agreements Securities borrowing agreements TToottaall aass ooff 3311 DDeecceemmbbeerr 22001199 TToottaall aass ooff 3311 DDeecceemmbbeerr 22001188 107.0 11.2 57.2 23.3 118.9 5.1 322.6 127.5 41.3 121.8 18.0 36.6 303.9 0.2 6.6 663333..44 626.5 5.3 7.4 31.4 422.9 4.3 5.8 477.2 30.6 120.9 37.2 20.4 34.1 243.2 3.0 3.7 772277..11 699.7 33.1 19.1 21.9 7744..11 63.0 0.6 16.8 36.7 0.6 54.8 4.8 4.8 0.1 0.2 4.3 14.0 0.4 18.9 5.2 5.2 0.3 0.2 4.0 8.3 0.7 13.2 2.8 2.8 0.2 0.1 1.0 9.1 0.6 10.7 0.0 0.8 27.1 1.9 29.7 0.2 0.2 60.6 5.9 66.8 0.1 0.0 52.0 7.8 60.0 4.7 4.7 0.3 15.2 11.4 15.2 11.4 0.4 0.2 1.9 1.9 4.7 5599..88 63.0 2244..44 24.2 1166..22 17.0 1155..77 18.9 4455..33 37.4 1.3 7799..66 80.6 0.0 6666..66 62.2 0.3 0.1 16.0 4.4 0.1 21.0 17.3 0.4 17.7 2.6 4411..22 41.4 0.5 00..55 0.3 0.1 0.3 4.3 13.8 0.1 18.6 3.9 0.2 4.1 0.2 0.0 0.9 8.6 0.1 9.9 4.1 0.2 4.4 0.1 0.3 0.2 0.0 1.8 6.5 0.1 8.6 2.1 0.0 2.1 1.1 9.9 0.5 11.7 10.2 0.0 10.3 1.2 28.4 1.2 30.9 2.0 0.4 2.3 0.0 20.3 1.8 22.1 6.7 0.6 7.3 2222..77 28.6 1144..33 17.6 1100..77 11.7 2222..00 23.6 3333..33 37.7 2299..44 32.7 0.2 0.0 00..22 0.2 0.1 0.0 0.0 0.0 00..11 0.1 00..00 0.2 00..00 0.0 00..00 0.0 00..00 0.0 Total 107.1 12.4 84.2 23.3 326.8 23.0 576.8 127.5 41.3 121.8 18.0 83.9 1.3 1.3 351.3 0.0 1.1 12.8 6.5 9.5 3311..22 28.6 14.3 14.3 2.5 1166..88 12.5 6.3 1.1 12.8 6.5 9.5 7.9 997722..22 958.5 6.6 7.8 31.4 448.3 110.5 9.7 614.3 30.6 120.9 37.2 66.8 35.9 291.5 3.0 8.8 991177..55 905.4 33.9 19.1 21.9 7744..99 63.6 169 Risk, treasury and capital management Risk, treasury and capital management Treasury management Off-balance sheet Off-balance sheet arrangements In the normal course of business, we enter into transactions where, in accordance with International Financial Reporting Standards, the maximum contractual exposure may not be recognized in whole or in part on our balance sheet. 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. 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 The following paragraphs provide more information about several distinct off-balance sheet arrangements. Additional off- balance sheet information is primarily provided in Notes 10, 11, 21, 23, 24i, 26, 31 and 34 in the “Consolidated financial statements” section of this report, as well as in the 31 December report under “Pillar 3 disclosures” at 2019 Pillar 3 www.ubs.com/investors. Off-balance sheet development in 2019 Forward starting reverse repurchase agreements increased by USD 13 billion, mainly reflecting higher client activity levels related to forward starting transactions in the repo market. Forward starting repurchase agreements were stable at USD 8 billion and guarantees were also stable at USD 16 billion. Loan commitments decreased by USD 1 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. Committed unconditionally revocable credit lines decreased by USD 2 billion. % change from 31.12.18 USD billion Total guarantees1 (3) Loan commitments1 (3) Forward starting reverse repurchase agreements1 143 Forward starting repurchase agreements1 (2) Committed unconditionally revocable credit lines2 (4) 1 These lines are aligned with the scope disclosed in “Note 34 Guarantees, commitments and forward starting transactions” in the “Consolidated financial statements” section of this report. Total guarantees and 1 2 Refer to “Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement” in the “Consolidated financial Loan commitments are shown net of sub-participations. 2 statements” section of this report for more information. 31.12.18 17.0 34.1 9.0 8.3 36.6 31.12.19 31.12.19 16.5 16.5 33.1 33.1 21.9 21.9 8.1 8.1 35.1 35.1 As of 170 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 2019, 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. 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. As of 31 December 2019, the net exposure (gross values less sub-participations) from guarantees and similar instruments was USD 16.5 billion compared with USD 17.0 billion as of 31 December 2018. Fee income from issuing guarantees was not significant to total revenues in 2019 and 2018. 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. The committed unconditionally revocable credit lines are generally open-ended. 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 2019, we recognized net credit loss recoveries of USD 6 million related to loan commitments, guarantees and other credit facilities in scope of expected credit loss measurement compared with net credit loss expenses of USD 12 million in 2018. Provisions recognized for guarantees loan commitments were USD 114 million as of and 31 December 2019 and USD 116 million as of 31 December 2018.  Refer to “Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement” and “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information about provisions for loan commitments and guarantees into partial For certain obligations, we enter sub- participations to mitigate various risks from guarantees and loan commitments. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of the credit facility. We retain the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. We only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor. Furthermore, we provide representations, warranties and indemnifications to third parties in the normal course of business. 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 above certain non-institutional deposits EUR 100,000 and below EUR 235 million per depositor until 31 December 2019, from 1 January 2020 above EUR 100,000 and below EUR 176 million) in the event that UBS Europe SE becomes unable to meet its obligations. amounts (for The aforementioned deposit requirements represent a contingent payment obligation and expose us to additional risk. As of 31 December 2019, we considered the probability of a material loss from our obligations to be remote. insurance 171 Risk, treasury and capital management Risk, treasury and capital management Treasury management Contractual obligations USD million Long-term debt obligations Lease obligations Purchase obligations Total as of 31 December 2019 Total as of 31 December 2019 Contractual obligations The table above summarizes payments due by period under contractual obligations as of 31 December 2019. All contractual obligations included in this table, with the exception of purchase obligations (i.e., those in which we are committed to purchasing goods and services), and lease commitments included within Lease obligations, are recognized as liabilities on our balance sheet. Amounts in the table above are presented on an undiscounted basis. Long-term debt obligations as of 31 December 2019 were USD 169 billion. They consisted of debt issued designated at fair value (USD 68 billion) and long-term debt issued measured at amortized cost (USD 101 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 More than half of total long-term debt obligations had a fixed-rate of interest. Amounts due on interest rate swaps used to hedge interest rate risk inherent in floating-rate debt issued, and designated in fair value hedge accounting relationships, are not included in the table above. The notional amount of these interest rate swaps was USD 65 billion as of 31 December 2019. Payment due by period Within 1 year 1–3 years 3–5 years Over 5 years 66,652 658 1,069 68,379 68,379 37,534 1,107 780 39,421 39,421 21,519 898 301 22,717 22,717 43,622 2,073 111 45,806 45,806 Total 169,327 4,736 2,260 176,323 176,323 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, obligations to employees under mandatory notice periods are excluded (i.e., the periods 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 172 Currency management Strategy, objectives and governance Group Treasury 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 Treasury 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 other 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. Hedging of anticipated non-US dollar profits and losses The Group ALCO may at any time instruct Group Treasury 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 about our active management of sensitivity to currency movements and its effect on our key ratios Dividend distribution Following the change in functional currency of UBS Group AG to the US dollar, effective from 1 October 2018, dividends were accrued in US dollars over the course of 2019 to align the dividend declaration currency to the functional currency. As a result, starting with the dividend for the financial year 2019, UBS Group AG will declare dividends in US dollars going forward. Shareholders whose SIX (ISIN: CH0244767585) will receive dividends in Swiss francs, based on a published exchange rate calculated up to five decimal places, on the day prior to the ex-dividend date. Shareholders holding shares through DTC (ISIN: CH0244767585; CUSIP: H42097107) will be paid dividends in US dollars. through shares held are  Refer to “Note 1a Significant accounting policies” and “Note 11 Derivative instruments” in the “Consolidated financial  Refer to the “Standalone financial statements” section of this report for more information about the proposed dividend statements” section of this report for more information distribution of UBS Group AG Sell-down of non-US dollar reported profits and losses Income statement items of foreign subsidiaries and branches of UBS AG with a functional currency other than the US dollar are translated into US dollars at average rates. To reduce earnings volatility on the translation of previously recognized earnings in foreign currencies, Group Treasury 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. 173 Risk, treasury and capital management Risk, treasury and capital management Treasury management Cash flows As a global financial institution, our cash flows are complex and often may bear little relation to our net earnings and net assets. Consequently, we believe that a traditional cash flow analysis is less meaningful when 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 2019, cash and cash equivalents totaled USD 119.9 billion, a decrease of USD 6.2 billion from 31 December 2018, driven by net cash outflows from financing and investing activities, partly offset by net cash inflows from operating activities. Operating activities Net cash inflows from operating activities were USD 19.7 billion in 2019. Net operating cash flow, before changes in operating assets and liabilities and income taxes paid, was an inflow of USD 14.3 billion. Changes in operating assets and liabilities resulted in net cash inflows of USD 5.4 billion, mainly driven by a USD 23.2 billion net inflow related to customer deposits and an USD 8.7 billion inflow from securities financing transactions. These inflows were partly offset by a net outflow from financial assets and liabilities at fair value held for trading and derivative financial instruments of USD 18.8 billion and net outflows from loans and advances to banks of USD 4.3 billion and from lending balances to customers of USD 3.1 billion. 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, an USD 11.1 billion net inflow from financial assets at fair value not held for trading and other financial assets and liabilities, an 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. Investing activities Investing activities resulted in a net cash outflow of USD 1.6 billion in 2019, primarily related to net cash outflows of USD 3.4 billion from the purchase of financial assets measured at fair value through other comprehensive income and a USD 1.6 billion outflow from the purchase of property, equipment and software. These outflows were partly offset by a net inflow from the disposal and redemption of financial assets measured at fair value through other comprehensive income of USD 3.9 billion. In 2018, investing activities resulted in a net cash outflow of USD 6.1 billion, primarily related to net cash outflows of USD 3.8 billion from the purchase and redemption of debt securities measured at amortized cost. Financing activities Financing activities resulted in a net cash outflow of USD 25.6 billion in 2019, mainly due to the net repayment of USD 17.1 billion of short-term debt and the net repayment of USD 3.8 billion of long-term debt, which includes debt issued designated at fair value. In addition, a dividend distribution to shareholders of USD 2.5 billion and net cash used to acquire treasury shares of USD 1.6 billion contributed to the net cash outflow. In 2018, financing activities resulted in a net cash inflow of USD 0.2 billion, 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 the net repayment 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.  Refer to “Primary financial statements” in the “Consolidated financial statements” section of this report for more information about cash flows 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 Net increase / (decrease) in cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year Cash and cash equivalents at the end of the year 174 For the year ended 31.12.19 31.12.19 19,705 19,705 (1,558) (1,558) (25,614) (25,614) 1,261 1,261 (6,207) (6,207) 31.12.18 28,913 (6,132) 190 (1,726) 21,245 119,873 119,873 126,079 Capital management Capital management objectives, planning and activities Capital management objectives Audited | An adequate level of total loss-absorbing capacity (TLAC) in accordance with both our internal assessment and regulatory requirements is a prerequisite for conducting our business activities. 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 2019, our common equity tier 1 (CET1) capital ratio and our CET1 leverage ratio were 13.7% and 3.9%, respectively, each of which is above 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. The BCBS announced the finalization of the Basel III framework in December 2017 and published the final rules on (the the minimum capital requirements for market risk Fundamental Review of the Trading Book) in January 2019. We currently expect the Swiss Financial Market Supervisory Authority (FINMA) to implement these regulations later than the originally communicated effective date of 1 January 2022. We will monitor implementation and assess the effect on UBS once the final national law is available. In the absence of the final national law, we continue to make progress on our internal assessment of to infrastructure design and operational governance anticipate the upcoming adoption of these rules. We have previously provided guidance on the approximate impact of Basel III finalization on RWA. As the implementation has now been extended by at least a year, the day-1 impact could be lower than we originally believed, but there is still too much uncertainty for an update to be provided.  Refer to the “Our strategy” and “Performance targets and measurement” sections of this report for more information about our capital and resource guidelines 2020–2022  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 about the risks related to our capital ratios Capital planning and activities Audited | We manage our balance sheet, RWA, the leverage ratio denominator (the 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 (the 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. 175 Risk, treasury and capital management Risk, treasury and capital management Capital management Limits and targets are established at both the Group and business division levels, and are submitted to the BoD for approval at least annually. In the target-setting process, we take into account 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. 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 and sub-groups 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 2019, we continued to focus on meeting the Swiss SRB capital requirements applicable as of 1 January 2020, based on the Capital Adequacy Ordinance effective until 31 December 2019. Therefore we executed a series of transactions, including:  the issuances of USD 2.5 billion, USD 0.5 billion, USD 0.5 billion and USD 0.3 billion equivalent of high-trigger loss- absorbing AT1 capital instruments denominated in US dollars, Australian dollars, Singapore dollars and Swiss francs, respectively;  the issuances of USD 1.6 billion, USD 0.4 billion and USD 0.1 billion equivalent of TLAC-eligible senior unsecured debt denominated in US dollars, Swiss francs and Australian dollars, respectively; and  the call of USD 0.2 billion equivalent of low-trigger loss- absorbing tier 2 capital instruments.  As of 31 December 2019, these transactions had an effect on our TLAC ratio, which amounted to 34.6% of our RWA and 9.8% of our LRD compared with the respective minimum requirements of 24.3%, excluding countercyclical buffer requirements, and 8.6%, which are applicable as of 1 January 2020. These minimum requirements include the currently applicable rebates.  Refer to the “Swiss SRB going and gone concern requirements – time series” table in this section for more information 176 Swiss SRB total loss-absorbing capacity framework The disclosures in this section are provided for UBS Group AG on a consolidated basis and focus on key developments during the reporting period and information in accordance with the Basel III framework, as applicable to Swiss systemically relevant banks (SRBs). Additional regulatory disclosures for UBS Group AG on a consolidated basis are provided in our 31 December 2019 Pillar 3 report. The Pillar 3 report further includes information relating to our significant regulated subsidiaries and sub-groups (UBS AG standalone, UBS Switzerland AG standalone, UBS Europe SE consolidated and UBS Americas Holding LLC consolidated) as of 31 December 2019 and is available under “Pillar 3 disclosures” at www.ubs.com/investors. Capital and other regulatory information for UBS AG consolidated in accordance with the Basel III framework, as applicable to Swiss SRBs, is provided in the combined UBS Group AG and UBS AG Annual Report 2019 available under “Annual reporting” at www.ubs.com/investors. 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; and 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. Regulatory framework The Basel III framework came into effect in Switzerland on 1 January 2013 and is embedded in the Swiss Capital Adequacy Ordinance (the CAO). The CAO also includes the too-big-to-fail provisions applicable to Swiss SRBs, which became effective on 1 July 2016 subject to phasing 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. low-trigger Outstanding high- and 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.  Refer to “Bondholder information,” available at www.ubs.com/investors, for more information about the eligibility of capital and senior unsecured debt instruments and about key features and terms and conditions of capital instruments  Refer to the “Regulatory and legal developments” section of this report for information about changes to the gone concern capital requirements 177 Risk, treasury and capital management Risk, treasury and capital management Capital management Total loss-absorbing capacity and leverage ratio requirements Going concern capital requirements Following the Swiss SRB requirements being 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 (the LRD). The add-on for UBS is expected to be 1.08% of RWA and 0.375% of our LRD. Finally, 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, and we countercyclical buffer are requirements implemented in other Basel Committee member jurisdictions, which result in an additional buffer requirement of 0.31%. The total going concern capital requirements applicable starting as of 1 January 2020 are 14.25% of RWA (including countercyclical buffer requirements) and 4.875% of the LRD. Furthermore, of the total going concern capital requirement of 14.25% of RWA, at least 9.95% 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 4.875%, 3.375% must be met with CET1 capital, while a maximum of 1.5% can be met with high-trigger loss-absorbing AT1 capital instruments. to apply additional required The applicable market share add-on requirements as of 31 December 2018 were 0.72% for RWA and 0.25% for LRD purposes. These add-ons were reduced to 0.36% of RWA and 0.125% of LRD from November 2019, reflecting a reduction in UBS’s market share in the Swiss credit business to less than 17%. The applicable LRD add-on requirements remained unchanged at 0.72% for RWA and 0.25% for LRD purposes, as our Group LRD remained within the same range. 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. tier 2 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, low-trigger 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 low- trigger exceed 5.34 percentage points for the RWA-based requirement of 13.94% and 1.875 percentage points for the LRD-based requirement of 4.875%. The amount of the rebate for improved resolvability is assessed annually by FINMA, and was phased in until 1 January 2020. Based on actions we completed up to December 2018 to improve resolvability, FINMA granted a rebate on the gone concern requirement of 42.5% of the aforementioned maximum rebate in the third quarter of 2019, which resulted in a reduction of 2.27 percentage points for the RWA-based requirement and 0.80 percentage points for the LRD-based requirement. UBS also qualifies for an additional rebate for the use of low-trigger tier 2 capital instruments to fulfill gone concern requirements, allowing a further reduction of 1.33 percentage points for the RWA-based requirement and 0.38 percentage points for the LRD-based requirements. instruments may not capital 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 Swiss SRB going and gone concern requirements – time series Risk-weighted assets (%) Risk-weighted assets (%) Requirements Requirements Leverage ratio (%) Leverage ratio (%) Requirements Requirements 31.12.19 31.12.19 1.1.20 1.1.20 31.12.19 31.12.19 1.1.20 1.1.20 Going concern Going concern Minimum capital Buffer capital1 Total going concern Total going concern of which: common equity tier 1 capital 1 of which: maximum additional tier 1 capital Gone concern Gone concern Base requirement including applicable add-ons and reductions of which: rebate granted (equivalent to 42.5% of maximum rebate) of which: reduction for usage of low-trigger tier 2 capital instruments 8.00 5.71 13.71 13.71 9.81 3.90 11.33 (1.82) Total gone concern Total gone concern Total loss-absorbing capacity Total loss-absorbing capacity 1 Going concern buffer capital requirements as of 31 December 2019 include applicable add-ons based on market share and LRD as well as a countercyclical buffer requirement of 0.31%. 1 9.51 9.51 23.23 23.23 3.27 3.27 7.77 7.77 8.00 6.25 14.25 14.25 9.95 4.30 13.94 (2.27) (1.33) 10.34 10.34 24.59 24.59 3.00 1.50 4.50 4.50 3.20 1.30 3.91 (0.64) 3.00 1.88 4.88 4.88 3.38 1.50 4.88 (0.80) (0.38) 3.70 3.70 8.58 8.58 178 Swiss SRB going and gone concern requirements and information AAss ooff 3311..1122..1199 USD million, except where indicated RReeqquuiirreedd ggooiinngg ccoonncceerrnn ccaappiittaall TToottaall ggooiinngg ccoonncceerrnn ccaappiittaall CCoommmmoonn eeqquuiittyy ttiieerr 11 ccaappiittaall of which: minimum capital of which: buffer capital of which: countercyclical buffer MMaaxxiimmuumm aaddddiittiioonnaall ttiieerr 11 ccaappiittaall of which: additional tier 1 capital of which: additional tier 1 buffer capital EElliiggiibbllee ggooiinngg ccoonncceerrnn ccaappiittaall TToottaall ggooiinngg ccoonncceerrnn ccaappiittaall Common equity tier 1 capital TToottaall lloossss aabbssoorrbbiinngg aaddddiittiioonnaall ttiieerr 11 ccaappiittaall22 - - 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 RReeqquuiirreedd ggoonnee ccoonncceerrnn ccaappiittaall TToottaall ggoonnee ccoonncceerrnn lloossss aabbssoorrbbiinngg ccaappaacciittyy - - of which: base requirement of which: additional requirement for market share and LRD 3 of which: applicable reduction on requirements of which: rebate granted (equivalent to 42.5% of maximum rebate) of which: reduction for usage of low-trigger tier 2 capital instruments EElliiggiibbllee ggoonnee ccoonncceerrnn ccaappiittaall TToottaall ggoonnee ccoonncceerrnn lloossss--aabbssoorrbbiinngg ccaappaacciittyy TToottaall ttiieerr 22 ccaappiittaall of which: low-trigger loss-absorbing tier 2 capital of which: non-Basel III-compliant tier 2 capital TTLLAACC eelliiggiibbllee sseenniioorr uunnsseeccuurreedd ddeebbtt - - SSwwiissss SSRRBB,, iinncclluuddiinngg ttrraannssiittiioonnaall aarrrraannggeemmeennttss SSwwiissss SSRRBB aass ooff 11..11..2200 RRWWAA iinn %% LLRRDD iinn %% RRWWAA iinn %% LLRRDD iinn %% 1133..7711 99..8811 4.90 4.60 0.31 33..9900 3.10 0.80 2222..0011 13.73 88..2288 5.36 0.93 1.99 3355,,554433 2255,,443344 12,701 11,924 810 1100,,110099 8,035 2,074 5577,,005566 35,582 2211,,447744 13,892 2,414 5,168 99..5511 10.52 0.81 (1.82) 2244,,666622 27,269 2,100 (4,706) 44..5500 33..2200 1.70 1.50 11..3300 1.30 66..2266 3.90 22..3366 1.52 0.26 0.57 33..2277 3.63 0.28 (0.64) 4411,,001100 2299,,116622 15,493 13,670 1111,,884477 11,847 5577,,005566 35,582 2211,,447744 13,892 2,414 5,168 2299,,778899 33,036 2,563 (5,810) 1144..225511 99..9955 4.50 5.14 0.31 44..3300 3.50 0.80 2200..0022 13.73 66..2299 5.36 0.93 3366,,994433 2255,,779977 11,664 13,323 810 1111,,114466 9,072 2,074 5511,,888888 35,582 1166,,330066 13,892 2,414 44..888811 33..3388 1.50 1.88 11..5500 1.50 55..6699 3.90 11..7799 1.52 0.26 4444,,442277 3300,,775577 13,670 17,087 1133,,667700 13,670 5511,,888888 35,582 1166,,330066 13,892 2,414 1100..3344 12.86 1.08 (3.60) 2266,,880055 33,334 2,799 (9,329) 33..7700 4.50 0.38 (1.17) 3333,,771199 41,010 3,417 (10,708) (1.82) (4,706) (0.64) (5,810) (2.27) (5,883) (0.80) (7,262) (1.33) (3,446) (0.38) (3,446) 1122..5577 00..8877 0.67 0.21 1111..7700 3322,,558855 22,,226633 1,724 540 3300,,332222 33..5588 00..2255 0.19 0.06 33..3333 3322,,558855 22,,226633 1,724 540 3300,,332222 1144..5566 22..8877 2.66 0.21 1111..7700 3377,,775533 77,,443311 6,892 540 3300,,332222 44..1144 00..8822 0.76 0.06 33..3333 3377,,775533 77,,443311 6,892 540 3300,,332222 - - TToottaall lloossss aabbssoorrbbiinngg ccaappaacciittyy - RReeqquuiirreedd ttoottaall lloossss aabbssoorrbbiinngg ccaappaacciittyy 7788,,114466 6600,,220055 - - EElliiggiibbllee ttoottaall lloossss aabbssoorrbbiinngg ccaappaacciittyy 8899,,664411 8899,,664411 - 11 Includes applicable add-ons of 1.08% for RWA and 0.375% for LRD. 22 Includes outstanding low-trigger loss-absorbing additional tier 1 and tier 2 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, limited to 31 December 2019 for tier 2 instruments. Thereafter, these instruments are eligible to meet the gone concern requirements. 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, as reflected in this table. Under the revised Capital Adequacy Ordinance issued in November 2019, effective 1 January 2020, the 50% haircut is no longer applied; refer to the 33 A lower add-on requirement for market share was applied in the fourth quarter of 2019, of which 0.27% was applied for RWA “Regulatory and legal developments” section of this report for more information. and 0.09% for LRD under the transitional rules, 0.36% was applied for RWA and 0.125% for LRD under the final rules as of 1 January 2020. 7700,,779999 8899,,664411 6633,,774488 8899,,664411 2244..5599 3344..5588 2233..2233 3344..5588 88..5588 99..8844 77..7777 99..8844 179 Risk, treasury and capital management Risk, treasury and capital management Capital management Total loss-absorbing capacity Swiss SRB going and gone concern information USD million, except where indicated Eligible going concern capital Eligible going concern capital Total going concern capital Total going concern capital Total tier 1 capital Total tier 1 capital Common equity tier 1 capital Total loss-absorbing additional tier 1 capital Total loss-absorbing additional tier 1 capital of which: high-trigger loss-absorbing additional tier 1 capital of which: low-trigger loss-absorbing additional tier 1 capital Total tier 2 capital Total tier 2 capital of which: low-trigger loss-absorbing tier 2 capital1 Eligible gone concern capital2 Eligible gone concern capital2 Total gone concern loss-absorbing capacity Total gone concern loss-absorbing capacity Total tier 2 capital Total tier 2 capital of which: low-trigger loss-absorbing tier 2 capital1 of which: non-Basel III-compliant tier 2 capital3 TLAC-eligible senior unsecured debt TLAC-eligible senior unsecured debt Total loss-absorbing capacity Total loss-absorbing capacity Total loss-absorbing capacity Total loss-absorbing capacity Risk-weighted assets / leverage ratio denominator Risk-weighted assets / leverage ratio denominator Risk-weighted assets Leverage ratio denominator Capital and loss-absorbing capacity ratios (%) 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 Total loss-absorbing capacity ratio Swiss SRB, including transitional Swiss SRB, including transitional arrangements arrangements Swiss SRB as of 1.1.20 Swiss SRB as of 1.1.20 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 57,056 57,056 51,888 51,888 35,582 35,582 16,306 16,306 13,892 13,892 2,414 2,414 5,168 5,168 5,168 5,168 32,585 32,585 2,263 2,263 1,724 1,724 540 540 30,322 30,322 52,287 46,279 34,119 12,160 9,790 2,369 6,008 6,008 31,452 1,464 771 693 29,988 51,888 51,888 51,888 51,888 35,582 35,582 16,306 16,306 13,892 13,892 2,414 2,414 37,753 37,753 7,431 7,431 6,892 6,892 540 540 30,322 30,322 46,279 46,279 34,119 12,160 9,790 2,369 37,460 7,471 6,779 693 29,988 89,641 89,641 83,738 89,641 89,641 83,738 259,208 259,208 911,325 911,325 263,747 904,598 259,208 259,208 911,325 911,325 263,747 904,598 22.0 22.0 13.7 13.7 12.6 12.6 34.6 34.6 19.8 12.9 11.9 31.7 20.0 20.0 13.7 13.7 14.6 14.6 34.6 34.6 17.5 12.9 14.2 31.7 Leverage ratios (%) Leverage ratios (%) Going concern leverage ratio of which: common equity tier 1 leverage ratio 5.1 3.77 4.1 Gone concern leverage ratio Total loss-absorbing capacity leverage ratio 9.3 Total loss-absorbing capacity leverage ratio 1 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 1 portion qualifying as gone concern loss-absorbing capacity. 2 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, as reflected in this table. Under the revised Capital Adequacy Ordinance issued in November 2019, effective 1 January 2020, the 50% haircut is no longer applied; refer to the “Regulatory and legal developments” section of this report for more information. 3 Non-Basel III-compliant tier 2 capital instruments qualify as gone concern instruments. 5.8 3.77 3.5 9.3 6.3 6.3 3.90 3.90 3.6 3.6 9.8 9.8 5.7 5.7 3.90 3.90 4.1 4.1 9.8 9.8 3 2 180 Audited | Reconciliation of IFRS equity to Swiss SRB common equity tier 1 capital USD million TToottaall IIFFRRSS eeqquuiittyy 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 provisions Unrealized (gains) / losses from cash flow hedges, net of tax Own credit related to (gains) / losses on financial liabilities measured at fair value that existed at the balance sheet date, net of tax Prudential valuation adjustments Accruals for proposed dividends to shareholders Other TToottaall ccoommmmoonn eeqquuiittyy ttiieerr 11 ccaappiittaall 3311..1122..1199 5544,,770077 ((117744)) ((99)) ((66,,112211)) ((222211)) ((66,,117788)) ((119955)) ((11,,771177)) ((449955)) ((11,,226600)) 4488 ((110044)) ((22,,662288)) ((7722)) 3355,,558822 31.12.18 53,103 (176) 0 (6,107) (586) (6,514) (251) (1,652) (368) (109) (397) (120) (2,648) (56) 34,119 11 Includes goodwill related to significant investments in financial institutions of USD 178 million as of 31 December 2019 (31 December 2018: USD 176 million) presented on the balance sheet line Investments in associates.  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 1.5 billion to USD 35.6 billion as of 31 December 2019, mainly as a result of operating profit before tax and foreign currency translation effects, partly offset by accruals for capital returns to shareholders, our share repurchase program, current in compensation-related regulatory capital accruals and defined benefit plans. tax expenses, changes  Refer to “UBS shares” in this section for more information about the share repurchase program Our loss-absorbing additional tier 1 (AT1) capital increased by USD 4.1 billion to USD 16.3 billion as of 31 December 2019, primarily due to four issuances of USD 3.8 billion equivalent of AT1 capital instruments denominated in US dollars, Australian dollars, Singapore dollars and Swiss francs, as well as currency effects.  Gone concern loss-absorbing capacity and movement Audited | Our total gone concern loss-absorbing capacity included USD 30.3 billion of TLAC-eligible senior unsecured debt, and increased by USD 0.3 billion to USD 37.8 billion as of 31 December 2019. The increase was due to a USD 2.1 billion issuance of TLAC-eligible senior unsecured debt and hedge effects of USD 0.8 billion, partly offset by a USD 2.3 billion decrease in the eligibility of two TLAC-eligible senior unsecured bonds due to the shortening of the residual tenor and the call of a low-trigger tier 2 capital instrument, as well as currency effects of USD 0.2 billion. Loss-absorbing capacity and leverage ratios Our CET1 capital ratio increased 0.8 percentage points to 13.7%, reflecting the USD 1.5 billion increase in CET1 capital and a USD 4.5 billion decrease in risk-weighted assets (RWA). Our CET1 leverage ratio increased from 3.77% to 3.90% as of 31 December 2019, reflecting the aforementioned increase in CET1 capital, partly offset by a USD 7 billion increase in LRD. Our gone concern loss-absorbing capacity ratio increased 0.4 percentage points the aforementioned decrease in RWA. Our gone concern leverage ratio remained stable at 4.1%. to 14.6%, mainly driven by 181 Risk, treasury and capital management Risk, treasury and capital management Capital management Swiss SRB total loss-absorbing capacity movement USD million Going concern capital Common equity tier 1 capital as of 31.12.18 Common equity tier 1 capital as of 31.12.18 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 program1 Accruals for proposed dividends to shareholders Other Common equity tier 1 capital as of 31.12.19 Common equity tier 1 capital as of 31.12.19 Loss-absorbing additional tier 1 capital as of 31.12.18 Loss-absorbing additional tier 1 capital as of 31.12.18 Issuance of high-trigger loss-absorbing additional tier 1 capital Foreign currency translation and other effects Loss-absorbing additional tier 1 capital as of 31.12.19 Loss-absorbing additional tier 1 capital as of 31.12.19 Tier 2 capital as of 31.12.18 Tier 2 capital as of 31.12.18 Amortization due to shortening of residual tenor Foreign currency translation and other effects Tier 2 capital as of 31.12.19 Tier 2 capital as of 31.12.19 Total going concern capital as of 31.12.18 Total going concern capital as of 31.12.18 Total going concern capital as of 31.12.19 Total going concern capital as of 31.12.19 Gone concern loss-absorbing capacity Tier 2 capital as of 31.12.18 Tier 2 capital as of 31.12.18 Amortized portion, which qualifies as gone concern loss-absorbing capacity Call of a low-trigger loss-absorbing tier 2 capital instrument Foreign currency translation and other effects Tier 2 capital as of 31.12.19 Tier 2 capital as of 31.12.19 TLAC-eligible senior unsecured debt as of 31.12.18 TLAC-eligible senior unsecured debt as of 31.12.18 Issuance of TLAC-eligible senior unsecured debt instruments Decrease in eligibility due to shortening of residual tenor Foreign currency translation and other effects TLAC-eligible senior unsecured debt as of 31.12.19 TLAC-eligible senior unsecured debt as of 31.12.19 Total gone concern loss-absorbing capacity as of 31.12.18 Total gone concern loss-absorbing capacity as of 31.12.18 Total gone concern loss-absorbing capacity as of 31.12.19 Total gone concern loss-absorbing capacity as of 31.12.19 Total loss-absorbing capacity Total loss-absorbing capacity as of 31.12.18 Total loss-absorbing capacity as of 31.12.18 Total loss-absorbing capacity as of 31.12.19 Total loss-absorbing capacity as of 31.12.19 1 Refer to “UBS shares” in this section for more information about the publicly announced share repurchase program. 1 Swiss SRB, including Swiss SRB, including transitional arrangements transitional arrangements Swiss SRB as of 1.1.20 Swiss SRB as of 1.1.20 34,119 34,119 5,577 (791) 105 (216) (195) (806) (2,628) 416 35,582 35,582 12,160 12,160 3,815 331 16,306 16,306 6,008 6,008 (953) 113 5,168 5,168 52,287 52,287 57,056 57,056 1,464 1,464 953 (160) 7 2,263 2,263 29,988 29,988 2,078 (2,330) 585 30,322 30,322 31,452 31,452 32,585 32,585 83,738 83,738 89,641 89,641 34,119 34,119 5,577 (791) 105 (216) (195) (806) (2,628) 416 35,582 35,582 12,160 12,160 3,815 331 16,306 16,306 46,279 46,279 51,888 51,888 7,471 7,471 (160) 120 7,431 7,431 29,988 29,988 2,078 (2,330) 585 30,322 30,322 37,460 37,460 37,753 37,753 83,738 83,738 89,641 89,641 182 Additional information Active management of sensitivity to currency movements Group Treasury 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, pounds sterling 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 non-USD 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 Committee (the ALCO), 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 1.1 billion as of 31 December 2019 (31 December 2018: USD 11 billion and USD 1.2 billion, respectively) and decreased our CET1 capital ratio 14 basis points (31 December 2018: 9 basis points). Conversely, we estimate that a 10% appreciation of the US dollar against other currencies would have decreased our RWA by USD 10 billion and our CET1 capital by USD 1.0 billion (31 December 2018: USD 10 billion and USD 1.1 billion, respectively) and increased our CET1 capital ratio 14 basis points (31 December 2018: 9 basis points). 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 (31 December 2018: USD 57 billion) and decreased our Swiss SRB going concern leverage ratio 18 basis points (31 December 2018: 15 basis points). Conversely, we estimate that a 10% appreciation of the US dollar against other currencies would have decreased our LRD by USD 51 billion (31 December 2018: USD 51 billion) and increased our Swiss SRB going concern leverage ratio 18 basis points (31 December 2018: 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 employed 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 4.3 billion as of 31 December 2019, a reduction of USD 0.2 billion from 31 December 2018. 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 control” section of this report for more information these operational categories risk  Refer to “Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information 183 Risk, treasury and capital management Risk, treasury and capital management Capital management Capital and capital ratios of our significant regulated subsidiaries UBS Group AG is a holding company and conducts substantially all operations through UBS AG and subsidiaries thereof. 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. 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 2019, the liability of UBS Switzerland AG amounted to CHF 16.8 billion (the US dollar equivalent of 17.4 billion). We expect further reductions in 2020 in addition to the contractual redemptions due to an ongoing actively managed reduction program. The respective liability of UBS AG has been substantially extinguished.  Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more capital and other regulatory information about our significant regulated subsidiaries and sub-groups 184 Risk-weighted assets RWA development in 2019 As of 31 December 2019, RWA decreased by USD 4.5 billion to USD 259.2 billion, mainly driven by a USD 13.4 billion decrease in market risk, partly offset by a USD 5.1 billion increase in credit and counterparty credit risk and a USD 3.8 billion increase in non-counterparty-related risk. The total RWA decrease was primarily driven by an USD 8.0 billion decrease from asset size and other movements and a USD 0.7 billion decrease in regulatory add-ons primarily related to market risk. This decrease was partly offset by increases from methodology and policy changes of USD 2.0 billion, model updates of USD 1.2 billion and currency effects of USD 0.9 billion.  Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about 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 TToottaall RWA as of 31.12.18 147.9 18.3 20.0 77.6 226633..77 Currency effects 0.8 Methodology and policy changes (1.5) Model updates / changes 2.8 Regulatory add-ons 0.6 Asset size and Other1 2.4 RRWWAA aass ooff 3311..1122..1199 115533..00 0.1 0.0 0.0 00..99 3.5 0.0 0.0 22..00 0.0 (1.6) 0.0 11..22 0.0 (1.3) 0.0 ((00..77)) 0.2 (10.6) 0.0 ((88..00)) 2222..11 66..66 7777..55 225599..22 11 Includes the Pillar 3 categories “Asset size,” “Credit quality of counterparties,” “Acquisitions and disposals” and “Other.” Refer to the 31 December 2019 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 22 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 5.1 billion to USD 153.0 billion as of 31 December 2019. This increase was primarily driven by increases from model updates of USD 2.8 billion, asset size and other movements of USD 2.4 billion, currency effects of USD 0.8 billion and regulatory add- ons of USD 0.6 billion, partly offset by decreases from methodology and policy changes of USD 1.5 billion. Movement in credit and counterparty credit risk RWA by key driver1 USD billion TToottaall ccrreeddiitt aanndd ccoouunntteerrppaarrttyy ccrreeddiitt rriisskk RRWWAA aass ooff 3311..1122..1188 Asset size Asset quality Model updates Methodology and policy changes Regulatory add-ons Acquisitions and disposals Foreign exchange movements Other TToottaall mmoovveemmeenntt TToottaall ccrreeddiitt aanndd ccoouunntteerrppaarrttyy ccrreeddiitt rriisskk RRWWAA aass ooff 3311..1122..1199 Global Wealth Management 3322..55 Personal & Corporate Banking 5544..77 Asset Management 11..88 Investment Bank 5511..33 Corporate Center 77..77 0.6 0.7 1.1 0.0 0.0 0.0 0.2 0.0 22..55 3355..00 2.0 (1.1) 1.6 0.0 0.0 0.0 0.6 (0.4) 22..77 5577..33 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00..11 11..88 1.5 (0.5) 0.1 (1.8) 0.1 0.0 0.0 (0.1) ((00..77)) 5500..66 0.1 (0.3) 0.0 0.3 0.5 (0.1) 0.1 0.0 00..66 88..33 GGrroouupp 114477..99 44..22 ((11..22)) 22..88 ((11..55)) 00..66 ((00..11)) 00..88 ((00..55)) 55..11 115533..00 11 Refer to the 31 December 2019 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for the definitions of credit and counterparty credit risk RWA movement categories. 185 Risk, treasury and capital management Risk, treasury and capital management Capital management loss given default Model updates The increase in credit and counterparty credit risk RWA from model updates of USD 2.8 billion was driven by the continued phasing-in of RWA increases related to probability of default (PD) and the from residential implementation of mortgages, which resulted in an RWA increase of USD 1.6 billion in Personal & Corporate Banking and of USD 0.4 billion in Global Wealth Management. In addition, changes of the credit conversion factor for zero-balance securities-backed lending and margin loans exposures increased RWA in Global Wealth Management by USD 0.8 billion. (LGD) changes for Swiss revised models In the first quarter of 2020, we expect further regulatory- driven increases in credit risk RWA of around USD 2.0 billion to USD 3.0 billion, predominantly relating to the implementation of the standardized approach for counterparty credit risk (SA-CCR).  Refer to “Credit risk models” in the “Risk management and control” section of this report for more information about model updates Regulatory add-ons A regulatory add-on of USD 0.6 billion was agreed with FINMA for certain portfolios awaiting the development of a formalized rating tool, resulting in an RWA increase of USD 0.5 billion in Corporate Center, and USD 0.1 billion in the Investment Bank. Methodology changes The decrease from methodology and policy changes of USD 1.5 billion was predominantly driven by the exclusion of certain collar financing transactions from credit risk RWA in the Investment Bank, due to their non-credit bearing nature.  Refer to the “Risk management and control” section of this report and the 31 December 2019 Pillar 3 report, available Non-counterparty credit risk Non-counterparty credit risk RWA increased by USD 3.8 billion to USD 22.1 billion as of 31 December 2019, primarily driven by an increase of USD 3.5 billion from the adoption of IFRS 16, Leases. Market risk Market risk RWA decreased by USD 13.4 billion to USD 6.6 billion as of 31 December 2019, mainly driven by a USD 10.6 billion decrease in asset size and other movements, a reduction of USD 1.6 billion related to the ongoing parameter update of the VaR model and USD 1.3 billion lower regulatory add-ons reflecting updates from the monthly risks-not-in-VaR (RniV) assessment. A USD 10.6 billion decrease in other movements was primarily driven by lower average VaR and stressed VaR levels observed in the Investment Bank’s Equities business, resulting from decreased market volatility and continued management of tail risks.  Refer to the “Risk management and control” section of this report and the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors for more information about market risk developments Operational risk Operational risk RWA remained largely unchanged at USD 77.5 billion as of 31 December 2019. An increase in the first quarter of 2019 driven by an update to model inputs related to the verdict in the French cross-border matter, was completely offset by the effect of the annual recalibration of the advanced measurement approach (AMA) model used for the calculation of operational risk capital in the fourth quarter of 2019.  Refer to “Advanced measurement approach model” in the “Risk under “Pillar 3 disclosures” at www.ubs.com/investors, for management and control” section of this report for more more information about credit and counterparty credit risk information about the AMA model developments 186 Risk-weighted assets by business division and Corporate Center USD billion Credit and counterparty credit risk1 Non-counterparty-related risk2 Market risk Operational risk TToottaall Credit and counterparty credit risk1 Non-counterparty-related risk2 Market risk Operational risk TToottaall Credit and counterparty credit risk1 Non-counterparty-related risk2 Market risk Operational risk TToottaall GGlloobbaall WWeeaalltthh MMaannaaggeemmeenntt PPeerrssoonnaall && CCoorrppoorraattee BBaannkkiinngg AAsssseett -- MMaannaaggee mmeenntt 3311..1122..1199 IInnvveessttmmeenntt BBaannkk CCoorrppoorraattee CCeenntteerr TToottaall RRWWAA 35.0 6.4 0.8 35.9 7788..11 32.5 4.5 1.3 36.0 7744..33 2.5 1.8 (0.5) 0.0 33..99 57.3 2.1 0.0 7.7 6677..11 54.7 1.5 0.0 7.7 6633..99 2.7 0.6 0.0 0.0 33..33 1.8 0.8 0.0 2.0 44..66 31.12.18 1.8 0.6 0.0 2.0 44..33 50.6 3.4 4.6 22.5 8811..11 51.3 2.5 16.8 22.5 9933..22 31.12.19 vs 31.12.18 0.1 0.2 0.0 0.0 00..22 (0.7) 0.8 (12.2) 0.0 ((1122..11)) 8.3 9.5 1.1 9.4 2288..33 7.7 9.2 1.9 9.4 2288..11 0.6 0.3 (0.7) 0.0 00..22 153.0 22.1 6.6 77.5 225599..22 147.9 18.3 20.0 77.6 226633..77 5.1 3.8 (13.4) 0.0 ((44..55)) 11 Includes settlement risk, credit valuation adjustments, equity exposures in the banking book and securitization exposures in the banking book. 22 Non-counterparty-related risk includes deferred tax assets recognized for temporary differences (31 December 2019: USD 9.0 billion; 31 December 2018: USD 8.8 billion), property, equipment and software (31 December 2019: USD 12.8 billion; 31 December 2018: USD 9.3 billion) and other items (31 December 2019: USD 0.4 billion; 31 December 2018: USD 0.2 billion). 187 Risk, treasury and capital management Risk, treasury and capital management Capital management Leverage ratio denominator The leverage ratio denominator (LRD) increased by USD 7 billion to USD 911 billion as of 31 December 2019, primarily driven by increases from currency effects of USD 5 billion and policy changes of USD 4 billion, partly offset by a decrease of USD 2 billion from asset size and other movements. 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 LRD as of LRD as of 31.12.18 31.12.18 663.1 95.4 130.9 29.0 (13.8) Currency effects 4.4 Policy changes 3.5 Asset size and other 19.3 0.1 0.3 0.1 0.0 (6.5) (13.8) (1.2) 0.6 LRD as of LRD as of 31.12.19 31.12.19 690.3 690.3 89.0 89.0 117.5 117.5 27.9 27.9 (13.3) (13.3) 911.3 Total 911.3 Total 1 Excludes positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables 1 related to securities financing transactions, which are presented separately under Derivative exposures and Securities financing transactions in this table. 904.6 904.6 (1.6) (1.6) 4.8 4.8 3.5 3.5 The LRD movements described below exclude currency effects. On-balance sheet exposures (excluding derivative exposures and securities financing transactions (SFTs)) increased by USD 23 billion, primarily driven by higher trading portfolio assets in the Investment Bank’s Equities business as a result of market-driven movements and increased hedging activities against client positions and notes sold, as well as an increase of USD 3.5 billion from the adoption of IFRS 16, Leases. Derivative exposures decreased by USD 7 billion, reflecting lower client activity levels in Global Wealth Management and the Investment Bank’s Equities business, as well as a reduction in the derivatives portfolio in Corporate Center. SFTs decreased by USD 14 billion as a result of increased funding consumption by the business divisions, lower collateral sourcing requirements, and client-driven decreases in other financial assets at fair value not held for trading.  Refer to “Balance sheet, liquidity and funding management” in the “Treasury management” section of this report for more information about balance sheet movements 188 Leverage ratio denominator by business division and Corporate Center USD billion - - Total IFRS assets Difference in scope of consolidation1 Less: derivative exposures and SFTs2 OOnn bbaallaannccee sshheeeett eexxppoossuurreess Derivative exposures Securities financing transactions Off-balance sheet items Items deducted from Swiss SRB tier 1 capital TToottaall - - Total IFRS assets Difference in scope of consolidation1 Less: derivative exposures and SFTs2 OOnn bbaallaannccee sshheeeett eexxppoossuurreess Derivative exposures Securities financing transactions Off-balance sheet items Items deducted from Swiss SRB tier 1 capital TToottaall GGlloobbaall WWeeaalltthh MMaannaaggeemmeenntt PPeerrssoonnaall && CCoorrppoorraattee BBaannkkiinngg AAsssseett MMaannaaggeemmeenntt IInnvveessttmmeenntt BBaannkk CCoorrppoorraattee CCeenntteerr 3311..1122..1199 309.8 (0.1) (34.9) 227744..77 6.4 32.1 4.7 (5.2) 331122..77 313.7 (0.2) (41.6) 227722..00 8.6 35.5 5.0 (5.3) 331155..88 209.4 0.0 (20.6) 118888..88 1.4 19.6 14.8 (0.4) 222244..22 200.7 0.0 (18.9) 118811..88 1.2 18.1 13.0 (0.3) 221133..77 34.6 (28.2) (0.9) 55..55 0.0 0.9 0.0 (1.4) 55..00 31.12.18 28.1 (21.7) (1.0) 55..44 0.0 1.0 0.0 (1.4) 55..00 315.9 0.0 (141.9) 117733..99 73.2 38.9 7.3 (0.2) 229933..22 302.1 (0.4) (148.1) 115533..66 75.2 44.3 10.6 (0.2) 228833..44 31.12.19 vs 31.12.18 102.6 0.1 (55.3) 4477..44 8.0 26.0 1.0 (6.2) 7766..22 113.7 0.0 (63.4) 5500..33 10.3 32.0 0.5 (6.7) 8866..55 TToottaall 972.2 (28.3) (253.6) 669900..33 89.0 117.5 27.9 (13.3) 991111..33 958.4 (22.3) (273.0) 666633..11 95.4 130.9 29.0 (13.8) 990044..66 - - 13.8 Total IFRS assets Difference in scope of consolidation1 (6.0) Less: derivative exposures and SFTs2 19.4 2277..22 OOnn bbaallaannccee sshheeeett eexxppoossuurreess (6.4) Derivative exposures (13.5) Securities financing transactions (1.1) Off-balance sheet items Items deducted from Swiss SRB tier 1 capital 0.5 TToottaall 66..77 11 Represents the difference between the IFRS and the regulatory scope of consolidation, which is the applicable scope for the LRD calculation. 22 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. (11.1) 0.0 8.0 ((33..00)) (2.4) (6.0) 0.5 0.5 ((1100..33)) 13.7 0.4 6.2 2200..44 (2.0) (5.4) (3.2) 0.1 99..77 8.7 0.0 (1.6) 77..11 0.2 1.4 1.9 (0.1) 1100..55 (4.0) 0.0 6.6 22..77 (2.2) (3.4) (0.3) 0.1 ((33..22)) 6.4 (6.5) 0.1 00..00 0.0 (0.1) 0.0 0.0 ((00..11)) 189 Risk, treasury and capital management Risk, treasury and capital management Capital management Equity attribution and return on attributed equity We have updated our equity attribution framework as of 1 January 2019. Specifically, we have revised the capital ratio for risk-weighted assets (RWA) from 11% to 12.5% to better align with actual group capital levels and incrementally allocated to business divisions USD 2 billion of attributed equity that is related to certain common equity tier 1 (CET1) deduction items, previously held centrally. In aggregate we allocated USD 7 billion of additional attributed equity to the business divisions. Prior periods have been restated to reflect this change.  Refer to the “Significant accounting and financial reporting changes” section of this report for more information about the changes to our equity attribution framework Under our equity attribution framework, tangible equity is attributed based on a weighting of 50% each for average RWA and average leverage ratio denominator (LRD), which both include resource allocations from Corporate Center to the business divisions. Average RWA and LRD are converted to their CET1 capital equivalents based on capital ratios of 12.5% and 3.75%, respectively. If the attributed tangible equity calculated under the weighted-driver approach is less than the CET1 capital equivalent of risk-based capital (RBC) for any business division, the CET1 capital equivalent of RBC is used as a floor for that business division. Furthermore, we allocate to business divisions attributed equity that is related to certain CET1 deduction items, such as compensation-related components and the expected losses on advanced internal ratings-based portfolio less general provisions. In addition to tangible equity, we allocate equity to our businesses to support goodwill and intangible assets. We attribute all remaining Basel III capital deduction items to Corporate Center Group items. These deduction items include deferred tax assets (DTAs) recognized for tax loss carry-forwards and DTAs on temporary differences in excess of the threshold, which together constitute the largest component of Corporate Center Group items, dividend accruals and unrealized gains from cash flow hedges. Average equity attributed to business divisions and Corporate Center increased by USD 1.8 billion to USD 54.2 billion in 2019, primarily due to an increase in attributed equity for Corporate Center, mainly reflecting higher unrealized gains from cash flow hedges and the recognition of the Swiss pension plan surplus on the balance sheet at the end of the third quarter of 2019, resulting in higher equity attributable to shareholders. The Swiss pension plan surplus was subsequently derecognized in the fourth quarter of 2019.  Refer to “Balance sheet, liquidity and funding management” in the “Treasury management” section of this report for more information about movements in equity attributable to shareholders 190 Average attributed equity USD billion Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center 31.12.17 15.4 7.5 1.8 12.0 17.2 10.1 3.0 0.0 4.1 AAvveerraaggee eeqquuiittyy aattttrriibbuutteedd ttoo bbuussiinneessss ddiivviissiioonnss aanndd CCoorrppoorraattee CCeenntteerr 53.9 11 Includes average attributed equity related to the Basel III capital deduction items for deferred tax assets (deferred tax assets recognized for tax loss carry-forwards and deferred tax assets on temporary differences, excess over threshold) as well as retained RWA and LRD related to deferred tax assets. 22 Excludes average attributed equity related to retained RWA and LRD related to deferred tax assets. of which: deferred tax assets1 of which: related to retained RWA and LRD2 of which: defined benefit plans of which: dividend accruals and others 3311..1122..1199 1166..66 88..44 11..88 1122..33 1155..11 77..11 22..88 00..55 44..66 5544..22 For the year ended 31.12.18 16.3 8.0 1.8 13.0 13.3 7.1 3.0 0.0 3.2 52.4 Return on attributed equity1 In % RReeppoorrtteedd Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank AAddjjuusstteedd Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank 11 Return on attributed equity for Corporate Center is not shown, as it is not meaningful. For the year ended 3311..1122..1199 31.12.18 31.12.17 2200..55 1177..11 2299..77 66..44 2200..99 1177..33 3311..55 88..66 20.0 22.5 23.5 11.5 20.5 18.1 26.6 12.9 20.9 19.5 30.8 9.1 24.7 20.9 28.0 11.2 191 Risk, treasury and capital management Risk, treasury and capital management Capital management UBS shares UBS Group AG shares Audited | As of 31 December 2019, IFRS equity attributable to shareholders amounted to USD 54,533 million, represented by 3,859,055,395 shares increased by issued. Shares 3,420,646 shares in 2019, reflecting the issuance of shares out of conditional share capital upon exercise of employee share options. issued Each share has a par value of CHF 0.10, carries one vote if entered into the share register as having the right to vote, and also entitles the holder to 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.   Refer to the “Corporate governance” section of this report for more information about UBS shares UBS Group share information Shares issued Treasury shares of which: related to share repurchase program 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 Market capitalization (USD million) As of or for the year ended 31.12.19 31.12.19 31.12.18 3,859,055,395 3,859,055,395 3,855,634,749 243,021,296 243,021,296 117,706,540 117,706,540 166,467,802 48,318,800 3,616,034,099 3,616,034,099 3,689,166,947 1.17 1.17 1.14 1.14 1.17 1.17 1.14 1.14 54,533 54,533 6,469 6,469 48,064 48,064 15.08 15.08 13.29 13.29 12.63 12.63 45,661 45,661 1.21 1.18 1.18 1.14 52,928 6,647 46,281 14.35 12.55 12.44 45,907 % change from 31.12.18 0 46 144 (2) (3) (3) (1) 0 3 (3) 4 5 6 2 (1) 1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 1 are calculated based on a translation of net profit / (loss) under our US dollar presentation currency. spot rate. 2 Basic and diluted earnings per share in Swiss francs 2 3 Represents the share price as listed on the SIX Swiss Exchange, translated to US dollars using the respective 3 192 Share delivery obligations related to employee share-based totaled 156 million shares as of compensation awards 31 December 2019 (31 December 2018: 146 million). Share delivery obligations are calculated on the basis of undistributed 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 2019, the number of UBS Group AG shares that could have been issued out of conditional capital for this purpose was 122 million (31 December 2018: 125 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. 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 with regard to UBS Group AG shares and related derivatives and to hedge certain issued structured debt instruments. As of 31 December 2019, we held a total of 243,021,296 treasury shares (31 December 2018: 166,467,802), or 6.3% (31 December 2018: 4.3%) of issued. Treasury shares acquired under our share shares repurchase program totaled 117.7 million as of 31 December 2019 (31 December 2018: 48.3 million) for a total consideration of CHF 1,550 million (USD 1,567 million). The remaining shares were primarily held to hedge our share delivery obligations related to employee share-based compensation awards and totaled 125.2 million shares as of 31 December 2019 (31 December 2018: 117.9 million). Treasury share purchases Month of purchase3 January 2019 February 2019 March 2019 April 2019 May 2019 June 2019 July 2019 August 2019 September 2019 October 2019 November 2019 December 2019 Share repurchase program1 Other treasury shares purchased2 Number of shares Average price in CHF Remaining volume of share repurchase program in CHF million 1,250 4,000,000 11,570,700 8,545,700 6,000,000 22,253,000 14,000,000 3,018,340 13.72 12.54 11.70 11.30 10.43 11.73 11.85 1,250 1,250 1,195 1,050 950 882 650 650 486 450 4504 Number of shares Average price in USD 25,000,000 7,200,000 21,800,000 12.19 11.64 11.72 11 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. 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. 22 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 966,902 UBS Group AG shares during the year and held 15,701,125 UBS Group AG shares as of 31 December 2019. 33 Based on the transaction date of the respective treasury share purchases. 44 The remaining volume of the share repurchase program as of 31 December 2019 was USD 465 million. This was calculated based on the remaining volume of CHF 450 million as of 31 December 2019 and the respective currency translation 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 3311..1122..1199 31.12.18 31.12.17 44,,116611,,555555 3,277,995 3,084,804 1166,,771133 220033,,996677 880099 13,165 166,728 664 12,290 146,902 585 193 Risk, treasury and capital management 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 (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. During 2019, the average daily trading volume of UBS Group AG shares was 16.7 million shares on SIX and 0.8 million shares on the NYSE. 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 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 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 Trading exchange Trading exchange SIX Swiss Exchange New York Stock Exchange SIX/NYSE SIX/NYSE Bloomberg Bloomberg UBSG UBS UBSG SW UBS UN Reuters Reuters UBSG.S UBS.N ISIN Valoren CUSIP CH0244767585 CH0244767585 24 476 758 24 476 758 CINS H42097 10 7 CINS H42097 10 7 194 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 complies 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 (the 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 (the 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, available at www.ubs.com/governance and www.ubs.com/ ubs-ag-governance, for more information  The SIX Swiss Exchange’s Directive on Information Relating to Corporate Governance is available at www.six-exchange-regulation.com/en/home/regulation/ issuer.html, the Swiss Code of Best Practice for Corporate Governance is available at www.economiesuisse.ch/en/publications/ swiss-code-best-practice-corporate-governance and the NYSE rules are available at www.nyse.com/publicdocs/nyse/ listing/NYSE_Corporate_Governance_Guide.pdf 196 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 (the 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 (the 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. 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 (the 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, the compensation thereof. 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 to 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 about the Board of Directors’ committees  Refer to “Share capital structure” in this section for more information about UBS Group AG’s capital 197 Corporate governance and compensation Corporate governance and compensation Corporate governance Group structure and shareholders Operational Group structure 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 (the 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 (the 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 required to notify the company and the SIX if they reach, exceed or fall below the threshold percentages. companies that Pursuant to the Swiss Code of Obligations, we disclose in “Note 24 Significant shareholders” to the UBS Group AG standalone financial statements the identity of any shareholder with a holding of more than 5% of the total share capital of UBS Group AG. As of 31 December 2019, 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.  Refer to the “Our businesses” section on page 20 of this report for more information about our business divisions and Corporate Center  Refer to “Financial and operating performance” on page 71 and to “Note 2 Segment reporting” in the “Consolidated financial statements” section on page 347 of this report for more information  Refer to the “Our evolution” section on page 14 of this report for more information Listed and non-listed companies belonging to the Group The Group includes a number of consolidated entities, of which only UBS Group AG shares are listed. UBS Group AG’s registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland. UBS Group AG shares are listed on the SIX Swiss Exchange (ISIN: CH0244767585) and on the NYSE (CUSIP: H42097107).  Refer to “UBS shares” in the “Capital management” section on page 192 of this report for information about 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 on page 458 of this report for more information about the significant subsidiaries of the Group 198 Shareholders subject to FMIA disclosure notifications According to the mandatory FMIA disclosure notifications filed with UBS Group AG and the SIX, as of 31 December 2019, the following entities held more than 3% of the total share capital of UBS Group AG: Artisan Partners Limited Partnership, Milwaukee, disclosed a holding of 3.02% of the total share capital of UBS Group AG on 20 September 2019; Norges Bank, Oslo, disclosed a holding of 3.01% on 24 July 2019; Dodge & Cox, San Francisco, disclosed a holding of 3.03% 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. As registration in the UBS share register is optional, shareholders crossing the aforementioned thresholds requiring SIX notification under FMIA, do not necessarily appear in the below table. The above disclosures have not been subsequently superseded, and no new disclosures of significant shareholdings have been made since 31 December 2019. 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 with 3% or more of the share capital of UBS Group AG As a supplement to the mandatory disclosure requirements according to the SIX Swiss Exchange Corporate Governance Directive, we disclose in the table below the shareholders (acting in their own name or in their capacity as nominees for other investors or beneficial owners), who were registered in the UBS share register with 3% or more of the total share capital of UBS Group AG as of 31 December 2019.  Refer to “Shareholders’ participation rights” on page 205 of this section for more information about “Voting rights, restrictions and representation” 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., London1 DTC (Cede & Co.), New York1,2 3311..1122..1199 31.12.18 31.12.17 1100..9944 77..5577 12.08 7.23 11.16 6.64 Nortrust Nominees Ltd., London1 11 Nominee companies and securities clearing organization cannot autonomously decide how voting rights are exercised and are therefore not obligated to notify UBS and the SIX if they reach, exceed or fall below the threshold percentages according to the FMIA disclosure notification. Consequently, they do not appear in the above section “Shareholders subject to FMIA disclosure notifications.” 22 DTC (Cede & Co.), New York, “The Depository Trust Company,” is a US securities clearing organization. 4.11 4.14 44..9900  199 Corporate governance and compensation Corporate governance and compensation Corporate governance Share capital structure Ordinary share capital At year-end 2019, UBS Group AG had 3,859,055,395 issued shares with a par value of CHF 0.10 each, leading to a share capital of CHF 385,905,539.50. 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 2019, 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 3,420,646 shares, as shares were issued out of existing conditional capital due to the exercise of employee options. Issued share capital of UBS Group AG As of 31 December 2018 As of 31 December 2018 Issue of shares out of conditional capital due to employee options exercised in 2019 As of 31 December 2019 As of 31 December 2019 Share capital in CHF Share capital in CHF Number of shares Number of shares Par value in CHF 385,563,475 385,563,475 342,065 385,905,540 385,905,540 3,855,634,749 3,855,634,749 3,420,646 3,859,055,395 3,859,055,395 0.10 0.10 0.10 0.10 0.10 Distribution of UBS shares As of 31 December 2019 As of 31 December 2019 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 5,000,001–38,590,553 (1%) 1–2% 2–3% 3–4% 4–5% Over 5% Total registered Unregistered3 Total Total Shareholders registered Shareholders registered Shares registered Shares registered Number % of shares issued Number 23,723 112,996 75,672 7,953 617 86 26 1 0 0 1 21 % 10.7 51.1 34.2 3.6 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,326,318 54,147,606 222,934,423 190,968,118 180,530,257 192,076,612 333,943,353 62,176,439 0 0 189,027,452 714,426,618 221,077 100.0 2,141,557,1962 221,077 221,077 100.0 100.0 3,859,055,395 3,859,055,395 1,717,498,199 0.0 1.4 5.8 4.9 4.7 5.0 8.7 1.6 0.0 0.0 4.9 18.5 55.5 44.5 100.0 100.0 1 On 31 December 2019, Chase Nominees Ltd., London, entered as a fiduciary / nominee, was registered with 10.94% of all UBS shares issued. However, according to the provisions of UBS Group AG, voting rights 1 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 7.57% of all UBS shares issued and is 3 Shares not entered in the UBS share register as of not subject to this 5% voting limit as a securities clearing organization. 3 31 December 2019. 2 Of the total shares registered, 374,219,777 shares did not carry voting rights. 2 200 Conditional share capital – At year-end 2019, 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. represented by A maximum of CHF 12,170,583.00 121,705,830 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 to employees and members of issued AG for more information about the terms and conditions of the issue of shares out of existing conditional capital. The Articles of Association are available at www.ubs.com/governance Conditional capital of UBS Group AG AAss ooff 3311 DDeecceemmbbeerr 22001199 Employee equity participation plans Conversion rights / warrants granted in connection with bonds TToottaall MMaaxxiimmuumm nnuummbbeerr ooff sshhaarreess ttoo bbee iissssuueedd 121,705,830 Year approved by Extraor- dinary General Meeting 2014 380,000,000 550011,,770055,,883300 2014 %% ooff sshhaarreess iissssuueedd 3.15 9.85 1133..0000 Authorized share capital Ownership UBS Group AG had no authorized capital available to issue on 31 December 2019. Changes in capital In accordance with International Financial Reporting Standards, Group equity attributable to shareholders was USD 54.5 billion as of 31 December 2019 (2018: USD 52.9 billion; and 2017: USD 52.5 billion). UBS Group AG shareholders’ equity was represented by 3,859,055,395 issued shares as of 31 December 2019 (2018: 3,855,634,749 shares; and 2017: 3,853,096,603 shares).  Refer to “Statement of changes in equity” in the “Consolidated financial statements” section on page 304 of this report for more information about 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 2019, 1,767,337,419 UBS Group AG shares were registered in the share register and carried voting rights, 374,219,777 shares were registered in the share register without voting rights, and 1,717,498,199 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 have been issued by UBS Group AG. 201 Corporate governance and compensation Corporate governance and compensation Corporate governance Shareholders, legal entities and nominees: type and geographical distribution As of 31 December 2019 As of 31 December 2019 Individual shareholders Legal entities Nominees, fiduciaries Total registered shares Unregistered shares Total Total Americas Americas of which: USA Asia Pacific Asia Pacific Europe, Middle East and Africa Europe, Middle East and Africa of which: Germany of which: UK of which: rest of Europe of which: Middle East and Africa Switzerland Switzerland Total registered shares Unregistered shares Total Total Shareholders registered Shareholders registered Number 216,339 4,537 201 % 97.9 2.0 0.1 221,077 221,077 100.0 100.0 Individual shareholders Individual shareholders Legal entities Legal entities Nominees Nominees Total Total Number 1,959 1,959 1,406 5,195 5,195 12,548 12,548 4,036 4,652 3,560 300 196,637 196,637 % 0.9 0.9 0.6 2.3 2.3 5.7 5.7 1.8 2.1 1.6 0.1 88.9 88.9 Number 118 118 60 111 111 230 230 29 8 189 4 4,078 4,078 % 0.1 0.1 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.1 0.0 1.8 1.8 Number 93 93 87 18 18 55 55 4 6 44 1 35 35 % 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Number 2,170 2,170 1,553 5,324 5,324 12,833 12,833 4,069 4,666 3,793 305 200,750 200,750 % 1.0 1.0 0.7 2.4 2.4 5.8 5.8 1.8 2.1 1.7 0.1 90.8 90.8 216,339 216,339 97.9 97.9 4,537 4,537 2.0 2.0 201 201 0.1 0.1 221,077 221,077 100.0 100.0 portion of the granted EOP award if an employee commits certain harmful acts, and in most cases trigger forfeiture where employment has been terminated. To encourage our employees to develop and manage the business in a way that delivers sustainable returns, EOP awards granted to certain senior employees will only vest if both Group and business division performance conditions are met. As of 31 December 2019, UBS employees held an estimated 6% of UBS shares outstanding (including approximately 4% in from our unvested/blocked actual and notional 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 2019, an estimated 31% of all employees held UBS shares through the firm’s employee share participation plans. shares  Refer to the “Compensation” section on page 236 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 set out under one vote “Transferability, voting rights and nominee registration” on the following page. restrictions subject the to We have no participation certificates outstanding. At year-end 2019, UBS owned 243,021,296 UBS Group AG registered shares, which corresponded to 6.30% of the total share capital of UBS Group AG. At the same time, we had acquisition and disposal positions relating to 270,270,154 and 177,652,614 voting rights of UBS Group AG, corresponding to 7.01% and 4.61% of the total voting rights of UBS Group AG, respectively. Of the disposal positions, 4.03% 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 made possible 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 excluding GEB members, Group Managing Directors (GMDs) and Group or Divisional Vice Chair role holders, with total compensation greater than USD / CHF 300,000. These employees receive 60% of their deferred performance award under the EOP in notional shares (variations apply for Asset Management). The plan includes provisions that allow the firm to reduce or fully forfeit the unvested deferred 202 SShhaarreess rreeggiisstteerreedd Number 491,586,703 510,091,779 1,139,878,714 2,141,557,196 1,717,498,199 33,,885599,,005555,,339955 IInnddiivviidduuaall sshhaarreehhoollddeerrss LLeeggaall eennttiittiieess NNoommiinneeeess TToottaall Number of shares 22,,889933,,996622 1,473,734 2244,,777755,,005544 4488,,119900,,669977 13,583,401 23,463,495 9,829,854 1,313,947 441155,,772266,,999900 491,586,703 0 449911,,558866,,770033 % 00..11 0.0 00..66 11..22 0.4 0.6 0.3 0.0 1100..88 12.7 1122..77 Number of shares 3322,,776688,,883377 12,917,654 1177,,664400,,550099 2255,,333388,,552255 435,407 698,369 24,002,859 201,890 443344,,334433,,990088 510,091,779 0 551100,,009911,,777799 % 00..88 0.3 00..55 00..77 0.0 0.0 0.6 0.0 1111..33 13.2 1133..22 Number of shares 339955,,667733,,776600 395,320,657 1111,,112266,,551155 770077,,661122,,116633 15,106,719 661,504,543 30,950,329 50,572 2255,,446666,,227766 1,139,878,714 0 11,,113399,,887788,,771144 % 1100..33 10.2 00..33 1188..33 0.4 17.1 0.8 0.0 00..77 29.5 2299..55 Number of shares 443311,,333366,,555599 409,712,045 5533,,554422,,007788 778811,,114411,,338855 29,125,527 685,666,407 64,783,042 1,566,409 887755,,553377,,117744 2,141,557,196 1,717,498,199 33,,885599,,005555,,339955 % 12.7 13.2 29.5 55.5 44.5 110000..00 % 1111..22 10.6 11..44 2200..22 0.8 17.8 1.7 0.0 2222..77 55.5 44.5 110000..00 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 on page 192 of this report for more information Distributions to shareholders Provided that the proposed dividend distribution out of retained earnings and out of the capital contribution reserve will be approved at the 2020 AGM, the payment of USD 0.73 per share will be made on 7 May 2020 to holders of shares on the record date 6 May 2020. The shares will be traded ex-dividend as of 5 May 2020 and, accordingly, the last day on which the shares may be traded with entitlement to receive the dividend will be 4 May 2020. The decision to pay a dividend and the amount of any dividend depend on a variety of factors, including our profits, cash flow generation and capital ratios. At the 2020 AGM, the BoD intends to propose to shareholders for approval a dividend of USD 0.73 per share for the financial year 2019. Shareholders whose shares are held through SIX SIS AG will receive dividends in Swiss francs, based on a public exchange rate on the day prior to the ex-dividend date. Shareholders holding shares through The Depository Trust Company in New York and Computershare will be paid dividends in US dollars. As newly required under Swiss tax law, 50% of the dividend will be paid out of retained earnings and the balance will be paid out of capital contribution reserves. Dividends paid out of capital contribution reserves are not subject to Swiss withholding tax. The portion of the dividend paid out of retained earnings will be subject to a 35% Swiss withholding tax. For US federal income tax purposes, we expect that the dividend will be paid out of current or accumulated earnings and profits. 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. Under the program, UBS repurchased shares totaling In 2019, we USD 1.567 billion during 2018 and 2019. purchased a total of USD 0.8 billion of shares under our share repurchase program. For the first half of 2020, we expect to repurchase an additional USD 0.45 billion of shares. We will in the second half of 2020 assess further repurchases idiosyncratic any considering business developments. conditions and  Refer to “UBS shares” in the “Capital management” section on page 192 of this report for more information about the share repurchase program 203 Corporate governance and compensation Corporate governance and compensation Corporate governance Transferability, voting rights and nominee registration Convertible bonds and options 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 2019 to The Depository Trust Company in New York.  Refer to “Shareholders’ participation rights” in this section for more information As of 31 December 2019, there were no contingent capital securities or convertible bonds outstanding requiring the issuance of new shares.  Refer to the “Capital management” section on page 175 of this report for more information about our outstanding capital instruments As of 31 December 2019, there were no employee options and stock appreciation rights outstanding. The last remaining option awards and stock appreciation rights expired during 2019. Option-based compensation plans are sourced by issuing new shares out of conditional capital. As of 31 December 2019, 121,705,830 unissued UBS Group AG shares in conditional share capital were available for the issuance of new shares 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 on page 450 of this report for more information about outstanding options and stock appreciation rights 204 Shareholders’ participation rights We are committed to shareholder participation in our decision- making process. During 2019, 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 login to our online voting platform, where they can enter their voting instructions or order an admission card for the general meeting. For the 2019 general meeting, we introduced various technological measures to be more environmentally friendly. 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 online voting as well as a reference to www.ubs.com/agm, where all information for the upcoming general meeting is available. 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 14 of the Articles of Association (the 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 article 14 of the Articles of Association of UBS Group AG for more information about the issuing of instructions to independent voting right representatives. The Articles of Association are available at www.ubs.com/governance Relations with shareholders Statutory quorums We regularly inform all our shareholders about our activities and performance, as well as other developments.  Refer to “Information policy” in this section for more information The Annual General Meeting of shareholders (the AGM) offers shareholders the opportunity to raise any questions to the Board of Directors (the BoD) and the 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, which 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 those regarding 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 the given 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. 205 Corporate governance and compensation Corporate governance and compensation Corporate governance 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 after the publication of the first quarter results. In 2020, the AGM will take place on 29 April. 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, require, by way of a written statement, that an EGM 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 end of January, 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(s) 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. Around 220,000 shareholders are directly registered in the UBS share register and some 145,000 US shareholders are registered via nominee companies. 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 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. 206 Board of Directors The Board of Directors (the BoD) of UBS Group AG, under the leadership of the Chairman of the BoD (the Chairman), consists of between 6 and 12 members as per our Articles of Association (the AoA). Additionally, ADB Altorfer Duss & Beilstein AG was elected as independent proxy agent. Following their election, the BoD appointed David Sidwell as Vice Chairman and Senior Independent Director of UBS Group AG. The BoD decides on the strategy of the Group upon recommendation by the Group Chief Executive Officer (the Group CEO) and is responsible for the overall direction, supervision and control of the Group and its management, as well as for supervising compliance with applicable laws, rules and regulations. The BoD exercises oversight over UBS Group AG and its subsidiaries and is responsible for establishing a clear Group governance framework to provide effective steering and supervision of the Group, taking into account the material risks to which UBS Group AG and its subsidiaries are exposed. The BoD has ultimate responsibility for the success of the Group and for delivering sustainable shareholder value within a framework of prudent and effective controls. 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 2 May 2019, David Sidwell, Jeremy Anderson, Reto Francioni, Fred Hu, Julie G. Richardson, Isabelle Romy, Robert W. Scully, Beatrice Weder di Mauro and Dieter Wemmer were re-elected as members of the BoD. Michel Demaré and Ann F. Godbehere did not stand for re-election, as they both retired after serving for the BoD since 2009 and reaching their 10-year term limit; the biographies of Mr. Demaré and Ms. Godbehere can be found on pages 227 and 228 of the UBS Group AG Annual Report 2018 available under “Annual reporting” at www.ubs.com/investors. William C. Dudley and Jeanette Wong were elected for their first term. At the same time, Axel A. Weber was re-elected Chairman of the BoD, and Julie G. Richardson, Dieter Wemmer, Reto Francioni and Fred Hu were elected as members of the Compensation Committee. On 10 January 2020, the BoD announced that Nathalie Rachou and Mark Hughes would be nominated for election to the UBS Group AG and UBS AG BoD at the forthcoming annual general meetings. Nathalie Rachou is a senior advisor at Rouvier Associés and Mark Hughes was Group Chief Risk Officer of Royal Bank of Canada until 2018. David Sidwell and Isabelle Romy will not stand for re-election, after completing terms of office on the BoD of twelve and eight years, respectively. 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 2019, 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 currently carries out or has carried out over the past three years 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 2019, UBS AG’s BoD had three permanent committees: the Audit Committee, the Compensation Committee and the Risk Committee. In addition to the aforementioned permanent committees, UBS Group AG also had the Corporate Culture and Responsibility Committee, as well as the Governance and Nominating Committee. 207 Corporate governance and compensation Corporate governance and compensation Corporate governance Axel A. Weber Chairman, non-executive member of the Board Year of initial election UBS: 2012 (UBS Group AG: 2014, UBS AG: 2012) Year of birth | Nationality 1957 | German 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 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 international economics, monetary economics and economic theory at the universities of Cologne, Frankfurt am Main, Bonn and Chicago. Mr. Weber holds a master’s degree in economics from the University of Constance and a PhD in economics from the University of Siegen, where he also received his habilitation. He holds honorary doctorates from the universities of Duisburg-Essen and Constance. in Other activities and functions – Member of the Board of the Swiss Bankers Association – Member of the Board of Trustees of Avenir Suisse – Member of the Board 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 Councils of the China Banking and Insurance Regulatory Commission and China Securities Regulatory Commission – 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 – Member of the Advisory Board of the Department of Economics, University of Zurich – Member of the Trilateral Commission Key competencies – Finance, audit, accounting – Risk management – Regulatory authority, central bank – ESG (environment, social and governance) Leadership experience – CEO, Chairman 208 David Sidwell Vice Chairman, Senior Independent Director, non-executive member of the Board Year of initial election UBS: 2008 (UBS Group AG: 2014, UBS AG: 2008) Year of birth | Nationality 1953 | American (US) and British Jeremy Anderson Non-executive member of the Board Year of initial election UBS: 2018 Year of birth | Nationality 1958 | British Professional history and education David Sidwell was elected to the BoD of UBS AG at the 2008 AGM and of UBS Group AG in 2014. He is Vice Chairman and Senior Independent Director. 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 Member of the Board of Chubb Limited Member of the Board of GAVI Alliance Member of the Board of Village Care, New York Key competencies – Banking (wealth management, asset management, personal and corporate banking; insurance) Investment banking, capital markets Finance, audit, accounting Risk management – – – Leadership experience – Executive board leadership 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. Since 2019, he has been a member of the Governance and Nominating Committee. 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. Mr. 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 the Group Management Board of Atos Origin 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 in 1980. software developer with Triad Computing Systems Mr. Anderson holds a bachelor’s degree in economics from University College London. Other activities and functions – – – – Member of the Board of Prudential plc Trustee of the UK’s Productivity Leadership Group Trustee of Kingham Hill Trust Trustee of St. Helen’s Bishopsgate Key competencies – Banking (wealth management, asset management, personal and corporate banking; insurance) Finance, audit, accounting Risk management Technology, cybersecurity – – – Leadership experience – Executive board leadership 209 Corporate governance and compensation Corporate governance and compensation Corporate governance William C. Dudley Reto Francioni Non-executive member of the Board Non-executive member of the Board Year of initial election UBS: 2019 Year of birth | Nationality 1953 | American (US) Year of initial election UBS: 2013 (UBS Group AG: 2014, UBS AG: 2013) Year of birth | Nationality 1955 | Swiss Professional history and education William C. Dudley was elected to the BoD of UBS AG and UBS Group AG at the 2019 AGM. He has been a member of the Corporate Culture and Responsibility Committee and of the Risk Committee since 2019. Currently, Mr. Dudley is a Senior Research Scholar at the Griswold Center for Economic Policy Studies at Princeton University. He became CEO of the Federal Reserve Bank of New York (the NY Fed) in 2009 and held that position until 2018. During this time, his focus areas included cultural behavior and social and governance topics in the financial world. As CEO, he served as the vice chairman and a permanent member of the Federal Open Market Committee. Previously, Mr. Dudley served as Executive Vice President of the Markets Group at the NY Fed and Head of the Markets Group from 2007 to 2009. Prior to his time with the NY Fed, Mr. Dudley joined Goldman Sachs in 1986 and held several senior management positions. He was a Partner and Managing Director and for a decade the Chief US Economist. In 2012, Mr. Dudley was appointed chairman of the Committee on the Global Financial System of the Bank for International Settlements (BIS). Prior to that, he served as chairman of the former Committee on Payment and Settlement Systems of the BIS from 2009 to 2012. He was a member of the Board of Directors of the BIS from 2009 to 2018. He holds a bachelor’s degree from New College of Florida and received his doctorate in economics from the University of California, Berkeley in 1982. Other activities and functions – Member of the Group of Thirty – Member of the Council on Foreign Relations – Member of the Bretton Woods Committee’s Advisory Council Professional history and education Reto Francioni was elected to the BoD of UBS AG at the 2013 AGM and of UBS Group AG in 2014. He has been a member of the Risk Committee since 2015 and of the Compensation Committee since 2019. He was CEO of Deutsche Börse AG from 2005 to 2015. Since 2006, he has been a professor of Financial Market Research at the University of Basel. From 2002 to 2005, Mr. Francioni was Chairman of the Supervisory Board and President of the SWX Group, Zurich, placing him at the heart of digitalization within the 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 Credit Suisse, holding positions legal departments. He started his professional career in 1981 in the commerce division of Union Bank of Switzerland. Mr. Francioni completed his law degree at the University of Zurich in 1981 and earned his PhD from that same university in 1987. in the equity sales and Other activities and functions – Member of the Board of Coca-Cola HBC AG (Senior Independent Non-Executive Director, chair of the nomination committee) – Chairman of the Board of Swiss International Air Lines AG – Member of the Board of MedTech Innovation Partners AG – Executive Director and member of myTAMAR GmbH Key competencies – Investment banking, capital markets – Risk management – Regulatory authority central bank – ESG (environment, social and governance) Leadership experience – CEO, Chairman Key competencies – Investment banking, capital markets – Risk management – Human resources management, including compensation – Technology, cybersecurity Leadership experience – CEO, Chairman 210 Fred Hu Julie G. Richardson Non-executive member of the Board Non-executive member of the Board Year of initial election UBS: 2018 Year of birth | Nationality 1963 | Chinese Year of initial election UBS: 2017 Year of birth | Nationality 1963 | American (US) in the areas of mobile 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 a member of the Compensation Committee since 2019. Mr. Hu has been chairman of Primavera Capital Group, a China-based global investment firm, since 2010. Through his numerous investments in leading technology companies over the years, he has obtained profound knowledge internet, digitalization and cybersecurity. Prior to founding Primavera, Mr. 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 a Partner and chairman of Greater China from 2008 to 2010 and a Partner and Co-Head of 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 a professor at Tsinghua University. Mr. Hu holds a master’s in engineering science from Tsinghua University, and a master’s and a PhD in economics from Harvard University. Other activities and functions – Non-executive Chairman of the Board of Yum China Holdings (chair of the nomination and governance committee) Member of the Board of ICBC Member of the Board of Hong Kong Exchanges and Clearing Ltd. Member of the Board of China Asset Management Member of the Board of Minsheng Financial Leasing Co. Trustee of the China Medical Board Governor of the Chinese International School in Hong Kong 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. Member of the Global Advisory Board of the Council on Foreign Relations – – – – – – – – – Key competencies – – – – Investment banking, capital markets Risk management Technology, cybersecurity Regulatory authority, central bank Leadership experience – CEO, Chairman investments Professional history and education Julie G. Richardson was elected to the BoD of UBS AG and UBS Group AG at the 2017 AGM. She has been a member of the Compensation Committee since 2018 and its Chairperson since 2019. She also has been a member of the Risk Committee since 2017 and of the Governance and Nominating Committee since 2019. 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 specializing in in media, communications, education and equity information companies. She acted as a senior advisor to the partnership until 2014. From 1998 to 2003, Ms. Richardson served as Vice Chairman of the Investment Banking division of JPMorgan Chase & Co. 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 being 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 from the University of Wisconsin-Madison with a bachelor’s degree in business administration. Other activities and functions – – Member of the Board of Yext (chair of the audit committee) Member of the Board of Vereit, Inc. (chair of the compensation committee) Member of the Board of Datadog (chair of the audit committee) Member of the Board of The Hartford Financial Services Group, Inc (resignation effective 1 April 2020) – – Key competencies – – – – Investment banking, capital markets Risk management Human resources management, including compensation Technology, cybersecurity 211 Corporate governance and compensation Corporate governance and compensation Corporate governance Isabelle Romy Robert W. Scully Non-executive member of the Board Non-executive member of the Board Year of initial election UBS: 2012 (UBS Group AG: 2014, UBS AG: 2012) Year of birth | Nationality 1965 | Swiss Year of initial election UBS: 2016 Year of birth | Nationality 1950 | American (US) Professional history and education Isabelle Romy was elected to the BoD of UBS AG at the 2012 AGM and of UBS Group AG in 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 doctorate in law (Dr. iur.) at the University of Lausanne in 1990 and has been a qualified attorney- at-law admitted to the bar since 1991. From 1992 to 1994, she was a visiting scholar at Boalt Hall School of Law, University of California, Berkeley, and completed her professorial thesis at the University of Fribourg in 1996. Professional history and education Robert W. Scully was elected to the BoD of UBS AG and UBS Group AG at the 2016 AGM. He has been a member of the Risk Committee since 2016. Mr. Scully served as a member of the Office of the Chairman of Morgan Stanley from 2007 to 2009 and was its Co-President responsible for Asset Management, Discover Credit Cards from 2006 to 2007. Prior to assuming the position of Co-President, he was Chairman of Global Capital Markets from 2004 to 2006, Vice Chairman of Investment Banking from 1999 to 2006, and Managing Director from 1996 to 2009. Mr. Scully was Managing Director at Lehman Brothers from 1993 to 1996, having worked for Scully Brothers Foss & Wight from 1989 to 1993 as Managing Director and for Salomon Brothers in Investment Banking and Capital Markets from 1980 to 1989, where he became a Managing Director in 1984. He began his career in the banking industry with Chase Manhattan Bank in 1972 and then worked as an investment banker for Blyth Eastman Dillon & Co. from 1977 to 1980. Mr. Scully graduated from Princeton University in 1972 with a bachelor’s degree in psychology and holds an MBA from Harvard University. Other activities and functions – Member of the Board of Froriep Legal AG – Chair of the Board of Central Real Estate Holding AG – Chair of the Board of Central Real Estate Basel AG – Vice Chairman of the Sanction Commission of the SIX Swiss Exchange – Member of the Fundraising Committee of the Swiss National Committee for UNICEF – Member of the Supervisory Board of the CAS program Financial Regulation of the University of Bern and University of Geneva Key competencies – Finance, audit, accounting – Legal, compliance – Regulatory authority, central bank – ESG (environment, social and governance) Other activities and functions – Member of the Board of Chubb Limited (chair of the audit committee) – Member of the Board of Zoetis, Inc. – Member of the Board of KKR & Co. Inc. – Member of the Board of Teach For All Key competencies – Banking (wealth management, asset management, personal and corporate banking; insurance) – Investment banking, capital markets – Finance, audit, accounting – Risk management Leadership experience – Executive board leadership 212 Beatrice Weder di Mauro Dieter Wemmer Non-executive member of the Board Non-executive member of the Board Year of initial election UBS: 2012 (UBS Group AG: 2014, UBS AG: 2012) Year of birth | Nationality 1965 | Swiss and Italian Year of initial election UBS: 2016 Year of birth | Nationality 1957 | Swiss and German 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 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 2019, Ms. Weder di Mauro has been a professor of international economics at the Graduate Institute Geneva (IHEID) and since 2018 has been President of the Centre for Economic Policy Research in London. Since 2016, she has been a 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 that, 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 finance, leading companies pharmaceuticals, technology and insurance. in development Other activities and functions – – – Member of the Supervisory Board of Robert Bosch GmbH Member of the Board of Bombardier Inc. Member of the Foundation Board of the International Center for Monetary and Banking Studies (ICMB) Key competencies – – – – Finance, audit, accounting Risk management Regulatory authority, central bank ESG (environment, social and governance) 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 Compensation Committee since 2018 and of the Audit Committee since 2019. 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 “Global Property & Casualty” Center of Competence. He was CFO of Zurich Insurance Group from 2007 to 2011. From 2010 to 2011, he was Zurich’s Regional Chairman of Europe. Prior to that, 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. Mr. Wemmer began his career in the insurance industry within the Zurich Group in 1986 in Cologne, after graduating from the University of Cologne with a master’s degree and acquiring his doctorate in mathematics in 1985. Other activities and functions – Member of the Board of Ørsted A/S (chair of the audit and risk committee) Member of the Berlin Center of Corporate Governance – Key competencies – Banking (wealth management, asset management, personal and corporate banking; insurance) Investment banking, capital markets Finance, audit, accounting Risk management – – – Leadership experience – Executive board leadership 213 Corporate governance and compensation Corporate governance and compensation Corporate governance Jeanette Wong Non-executive member of the Board Year of initial election UBS: 2019 Year of birth | Nationality 1960 | Singaporean Professional history and education Jeanette Wong was elected to the BoD of UBS AG and UBS Group AG at the 2019 AGM. She has been a member of the Audit Committee since 2019. Ms. Wong was Group Executive responsible for the Institutional Banking business at the Singapore-based DBS Group from 2008 to March 2019, encompassing Corporate Banking, Global Transaction Services, Strategic Advisory and Mergers & Acquisitions. Previously, she served as Chief Financial Officer of the DBS Group between 2003 and 2008. Ms. Wong has spent more than 30 years working in different senior management roles within the financial industry in Singapore. She started her career in 1982 with positions at Banque Paribas and Citibank, before helping to build up JP Morgan’s Asia and emerging markets business over a sixteen-year career with the firm. She holds an MBA from the University of Chicago and a bachelor’s in business administration from the National University of Singapore. Other activities and functions – Member of the Board of Essilor International / EssilorLuxottica – Member of the Board of Jurong Town Corporation – Member of the Board of PSA International – Member of the Board of FFMC Holdings Pte. Ltd. and of Fullerton Fund Management Company Ltd. – Member of the Management Advisory Board of NUS Business School – Member of the Global Advisory Board, Asia, University of Chicago Booth School of Business – Member of the Securities Industry Council Key competencies – Banking (wealth management, asset management, personal and corporate banking; insurance) – Investment banking, capital markets – Finance, audit, accounting – ESG (environment, social and governance) Leadership experience – Executive board leadership 214 Markus Baumann Group Company Secretary Year of birth | Nationality 1963 | Swiss Professional history and education Markus Baumann was appointed Group Company Secretary of UBS Group AG and Company Secretary of UBS AG by the BoD in 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. Elections and terms of office Shareholders annually elect each member of the BoD individually, as well as the Chairman and the members of the Compensation Committee, 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 2019, a total of 23 BoD meetings and calls were held, 15 of which were attended by GEB members. Average participation in the BoD meetings and calls was 98%. 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 145 minutes. In 2019, the frequency and length of the combined meetings were the same for UBS Group AG and UBS AG. Additionally, eight ad hoc calls were held, two of which were without GEB members. Furthermore, a two-day crisis management and simulation exercise was held. 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 2019, four UBS AG meetings were held with members of the Executive Board in attendance. Standalone meetings are held on a regular basis to discuss and agree on legal entity governance and other topics related to UBS AG. Furthermore, we enhanced the coordination and exchange of information between UBS Group AG and its significant group entities. Joint meetings between the Group BoD and the boards of directors of all significant group entities have been introduced. In addition, a two-day annual workshop attended by all independent members of the boards of the Group and significant group entities was held, for the third time, to strengthen entity governance. 215 Corporate governance and compensation Corporate governance and compensation Corporate governance Performance assessment An external assessment of the effectiveness of the BoD was started at the end of 2018 and concluded in May 2019. This external review was commissioned in line with the regular schedule of performing an independent external assessment every third year. In each year when there is no independent external assessment, a thorough self-assessment is completed at the level of the BoD, while the committees perform self- assessments every year. All BoD members, the Group CEO, selected members of the GEB, the Head Group Internal Audit and lead audit partner were interviewed as part of the external review. The external appraisers also attended BoD meetings and selected committee meetings as observers and reviewed governance-related documentation. The results of the in-depth external assessment concluded that the BoD and its committees were operating effectively, in line with best practice and best in class in comparison with leading European peers. The final report did not raise any material issues, but did make a number of recommendations for consideration by the BoD. These led to minor adjustments in the BoD agenda and served as a source for the definition of the BoD’s priorities for 2019/2020. Areas of particular focus for the BoD were strategy, growth and value creation, as well as succession planning. Furthermore, a particular focus remained on the oversight of the regulatory, risk and legal issues as well as on digital transformation. Environment, social and governance topics, in particular sustainability and the continued emphasis on cultural values were other key priorities. BoD Committees 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 the Risk Committee hold at least four joint meetings a year. During 2019, a total of ten joint committee meetings were held for UBS Group AG (nine joint committee meetings were held for UBS AG). The Risk Committee held one meeting with the Compensation Committee, one with the Corporate Culture and Responsibility Committee, and eight with the Audit Committee. Board of Directors Members in 2019 Axel A. Weber, Chairman Michel Demaré¹ David Sidwell Jeremy Anderson William C. Dudley² Reto Francioni Ann F. Godbehere¹ Fred Hu Julie G. Richardson Isabelle Romy Robert W. Scully Beatrice Weder di Mauro Dieter Wemmer Jeanette Wong² Meeting attendance Meeting and call without GEB3 attendance with GEB4 Key responsibilities include: 8/8 2/2 8/8 8/8 6/6 8/8 2/2 7/8 8/8 8/8 8/8 8/8 8/8 6/6 100% 15/15 100% 5/5 100% 15/15 100% 15/15 100% 8/10 80% The Board has ultimate responsibility for the success of the Group and for delivering sustainable shareholder value within a framework of prudent and effective controls. It decides on the Group’s strategy and the necessary financial and human resources upon recommendation of the Group CEO and sets the Group’s values and standards to ensure that its obligations to shareholders and other stakeholders are met.  Refer to the Organization Regulations of UBS Group AG, 15/15 100% available at www.ubs.com/governance, for more information 5/5 100% 100% 100% 100% 100% 100% 100% 88% 13/15 87% 100% 100% 100% 100% 100% 100% 15/15 100% 15/15 100% 15/15 100% 15/15 100% 15/15 100% 10/10 100% 1 Michel Demaré and Ann F. Godbehere did not stand for re-election at the 2019 AGM; indicated are their attended and total meetings up to the 2019 AGM. 2 William C. Dudley and Jeanette Wong were elected to the Board at the 2019 AGM; indicated are their attended and total meetings after their election. 3 Additionally, two ad hoc calls took place in 2019. 4 Additionally, six ad hoc calls took place in 2019. 216 Audit Committee five BoD members The Audit Committee consisted of throughout 2019, 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 oversees the work of the external auditors, Ernst & Young Ltd, who in turn are responsible for auditing UBS Group AG’s and UBS AG’s annual financial statements and for reviewing the quarterly financial statements. In particular, the Audit Committee monitors the integrity of the financial statements of UBS Group AG and UBS AG and any announcements related to financial performance, and reviews significant financial reporting judgments contained in them, before recommending their approval to the BoD or proposing any adjustments the Audit Committee considers appropriate. the expertise, qualifications, The Audit Committee oversees the relationship with and assesses effectiveness, independence and performance of the external auditors and their lead audit partner, and supports the BoD in reaching a decision in relation to the appointment, reappointment 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. meetings and eight calls with a participation rate of 98%. The average duration of each of the meetings and calls was approximately 150 minutes. In 2019, for both UBS Group AG and UBS AG, the frequency and length of meetings were the same. All of the meetings and calls of the Audit Committee were attended by the Group Chief Financial Officer as well as the Group Controller and Chief Accounting Officer. In 2019, 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 (the 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 2019, 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 did not serve on the audit committees of more than two other public companies. During 2019, the Audit Committee held eight committee Audit Committee Members in 2019 Meeting and call attendance Key responsibilities include: Jeremy Anderson (Chairperson) 16/16 Michel Demaré¹ Ann F. Godbehere¹ Isabelle Romy 100% The function of the Audit Committee is to support the Board in fulfilling its oversight duty relating to financial reporting and internal controls over financial reporting, the effectiveness of the external and internal audit functions, and the effectiveness of whistleblowing procedures. 100% 100% 8/8 8/8 16/16 100% Management is responsible for the preparation, presentation and integrity of the financial statements, while the external auditors are responsible for auditing financial statements. The Audit Committee’s responsibility is one of oversight and review. Beatrice Weder di Mauro 14/16 88% Dieter Wemmer² Jeanette Wong² 8/8 8/8 100% 100%  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information 1 Michel Demaré and Ann F. Godbehere did not stand for re-election at the 2019 AGM; indicated are their attended and total meetings up to the 2019 AGM. 2 Following the 2019 AGM, Dieter Wemmer and Jeanette Wong became members of this committee; indicated are their attended and total meetings after their election. 217 Corporate governance and compensation Corporate governance and compensation Corporate governance Compensation Committee The Compensation Committee consisted of four independent BoD members throughout 2019 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 2019, the Compensation Committee held six meetings and two calls with a participation rate of 97%. The average duration of each of the meetings and calls was approximately 135 minutes. All meetings were held in the presence of the Chairman and most were attended by the Group CEO and external advisors. In 2019, the Chairperson met on a regular basis with core supervisory authorities.  Refer to “Board of Directors compensation” in the “Compensation” section on page 267 of this report for more information about the Compensation Committee’s decision- making procedures Corporate Culture and Responsibility Committee Throughout 2019, 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 one of the meetings as guests. During 2019, six meetings were held, with an average participation rate of 96%. The average duration of each of the meetings was approximately 100 minutes. Compensation Committee Members in 2019 Ann F. Godbehere (Chairperson)¹ Julie G. Richardson (Chairperson) Michel Demaré¹ Reto Francioni² Fred Hu² Dieter Wemmer Meeting and call attendance Key responsibilities include: 2/2 8/8 2/2 6/6 5/6 8/8 100% 100% 100% 100% 83% 100% The Compensation Committee is responsible for: (i) supporting the Board in its duties to set guidelines on compensation and benefits; (ii) approving the total compensation for the Chairman and the non-independent Board 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 per formance targets for the other GEB members; (iv) reviewing, in consultation with the Chairman, the performance of the Group CEO in meeting agreed targets, as well as informing the Board of the individual performance assessments of the GEB members; (v) proposing, together with the Chairman, total individual compensation for the independent Board members and Group CEO for approval by the Board; and (vi) proposing to the Board for approval, upon recommendation from the Group CEO, the total individual compensation for GEB members.  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information 1 Michel Demaré and Ann F. Godbehere did not stand for re-election at the 2019 AGM; indicated are their attended and total meetings up to the 2019 AGM. 2 Reto Francioni and Fred Hu were elected to this commit- tee at the 2019 AGM; indicated are their attended and total meetings after their election. Corporate Culture and Responsibility Committee Members in 2019 Axel A. Weber (Chairperson) Jeremy Anderson William C. Dudley¹ Reto Francioni² Beatrice Weder di Mauro Meeting attendance Key responsibilities include: 6/6 100% 6/6 3/4 100% 75% 2/2 100% 6/6 100% The Corporate Culture and Responsibility Committee supports the Board 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 Responsi bility 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.  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information 1 Following the 2019 AGM, William C. Dudley became a member of this committee; indicated are his attended and total meetings after his election. 2 After the 2019 AGM, Reto Francioni was no longer member of this committee, instead he was elected member of the Compensation Committee; indicated are his attended and total meetings up to the 2019 AGM. 218 Governance and Nominating Committee In 2019, the Governance and Nominating Committee consisted of the Chairperson and three independent members as listed in the table below; after the AGM, there were four independent members. During 2019, nine meetings were held with a participation rate of 100%. The average duration of each of the meetings was approximately 130 minutes and, additionally, three ad hoc calls took place. The Group CEO attended all meetings. Risk Committee In 2019, the Risk Committee comprised five independent BoD members as listed in the table below. During 2019, the Risk Committee held nine committee meetings and six calls with a participation rate of 100%. The average duration of each of the meetings and calls was approximately 190 minutes. In 2019, 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 Counsel attended the meetings and calls. In 2019, the Chairperson and the committee met on a regular basis with core supervisory authorities. Ad hoc committees The Special Committee and the Strategy Committee are two ad hoc committees that have a standing composition and that hold meetings as and when required. The Special Committee is composed of four BoD members and its primary purpose is to oversee activities related to key litigation and investigation matters, review management’s respective proposals and submit recommendations for decision to the BoD. For 2019, the key focus was the French cross- border matter, following the first court verdict in February 2019. Jeremy Anderson chaired the Special Committee, with Julie G. Richardson, David Sidwell and Axel A. Weber as additional members. The Group CEO was a permanent guest. During 2019, a half-day workshop, two meetings and three calls were held. The frequency and length of the meetings were the same for both UBS Group AG and UBS AG. The Strategy Committee is composed of four BoD members and its primary purpose is to support management and the BoD with regard to the assessment of strategic considerations, as well as to assist the planning of the annual strategy meetings for the BoD and the GEB. The committee submits recommendations for decision to the BoD. Axel A. Weber chaired the Strategy Committee, with Fred Hu, Robert W. Scully and Dieter Wemmer as additional members. The Group CEO, the Group CFO and the Head of Strategy were permanent guests. During 2019, two meetings and six calls were held. The frequency and length of the meetings were the same for both UBS Group AG and UBS AG. Governance and Nominating Committee Members in 2019 Axel A. Weber (Chairperson) Jeremy Anderson¹ Michel Demaré² Julie G. Richardson¹ Isabelle Romy David Sidwell Meeting attendance Key responsibilities include: The function of the Governance and Nominating Committee is to support the Board in fulfilling its duty to establish best practices in corporate governance across the Group, including conducting a Board assessment, establishing and maintaining a process for appointing new Board and GEB members as well as for the annual performance assessment of the Board.  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information 9/9 6/6 3/3 6/6 9/9 9/9 100% 100% 100% 100% 100% 100% 1 Following the 2019 AGM, Jeremy Anderson and Julie G. Richardson became members of this committee; indicated are their attended and total meetings after their election. 2 Michel Demaré did not stand for re-election at the 2019 AGM; indicated are his attended and total meetings up to the 2019 AGM. Risk Committee Members in 2019 Meeting and call attendance Key responsibilities include: David Sidwell (Chairperson) 15/15 100% The function of the Risk Committee is to oversee and support the Board in fulfilling its duty to set and William C. Dudley¹ 11/11 100% supervise an appropriate risk management and control framework in the areas of: (i) risk management and control, including credit, market and treasury risks as well as legal, compliance Reto Francioni Julie G. Richardson Robert W. Scully Dieter Wemmer ² 15/15 100% and operational risks, including conduct risks; and 15/15 100% 15/15 100% 4/4 100% (ii) balance sheet, treasury and capital management, including funding, liquidity and equity attribution. The Risk Committee considers the potential effects of the aforementioned risks on the Group’s reputation.  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information 1 Following the 2019 AGM, William C. Dudley became a member of this committee; indicated are his attended and total meetings after his election. 2 After the 2019 AGM, Dieter Wemmer was no longer a member of this committee, instead he became a member of the Audit Committee; indicated are his attended and total meetings up to the 2019 AGM. 219 Corporate governance and compensation Corporate governance and compensation Corporate governance Roles and responsibilities of the Chairman of the Board of Directors independent BoD members and acts as a point of contact for shareholders and stakeholders seeking discussions with an independent BoD member. 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 on page 43 and to the foldout pages of this report for more information about our Pillars, Principles and Behaviors In 2019, 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 regard to 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. David Sidwell has been appointed as Vice Chairman and 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 without the participation of the Chairman. In 2019, two independent BoD meetings were held for UBS Group AG and UBS AG, with an average participation rate of 77% and an average duration of approximately 160 minutes. The Senior Independent Director also relays to the Chairman any issues or concerns raised by the 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 of those at UBS AG to be independent. For this purpose, independence is determined in the FINMA Circular 2017/1 “Corporate accordance with governance – banks” and the NYSE rules. In 2019, 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 467 of this report for more information Checks and balances: Board of Directors and Group Executive Board We operate under a strict dual board structure, as mandated by Swiss banking law. The separation of responsibilities between the BoD and the GEB is clearly defined in the Organization Regulations. The BoD decides on the strategy of the Group upon recommendations by the Group CEO and exercises ultimate supervision over management, whereas the GEB, headed by the Group CEO, has executive management responsibility. The functions of Chairman of the BoD and Group CEO are assigned to two different people, leading to a separation of power. This structure establishes checks and balances and preserves the institutional independence of the BoD from the day-to-day management of the Group, for which responsibility is delegated to the GEB, under the leadership of the Group CEO. No member of one board may simultaneously be a member of the other. Supervision and control of the GEB remains with the BoD. The authorities and responsibilities of the two bodies are governed by the Articles of Association and the Organization Regulations. 220 Skills, expertise and training of the Board of Directors The BoD is composed of members with a broad spectrum of skills, educational backgrounds, experience and expertise from a range of sectors that reflect the nature and scope of the firm’s business. With a view to recruiting needs, the Governance and Nominating Committee uses a competencies and experience matrix as a tool to identify any gaps in the competencies considered most relevant to the BoD, taking into consideration risk profile, strategy and the geographic reach. firm’s business exposure, We asked our BoD members to rate their four key competencies from the following nine categories and to rate one of the two categories indicating the experience in a held senior position: Key competencies – banking (wealth management, asset management, personal and corporate banking; insurance) investment banking, capital markets finance, audit, accounting risk management human resources management, including compensation legal, compliance technology, cybersecurity regulatory authority, central bank environment, social and governance (ESG) – – – – – – – – Leadership experience – – experience as chief executive officer or chairman executive board leadership experience (e.g., as chief financial officer, chief risk officer or chief operating officer of a listed company) The Governance and Nominating Committee reviews these categories and ratings annually to confirm that the BoD continues to possess the most relevant experience and competencies to perform BoD duties. For 2019, competencies in all 11 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 on page 109 of this report for information about our risk governance framework Terms of office Geographic diversity1 Gender Competencies and experience2 Key competences 0 2 4 6 8 10 4 <3 years 3 3 6 years 4 7 9 years 1 >9 years – – 33% Switzerland 17% Europe 33% USA / Canada 17% Asia 67% male 33% female Banking3 Investment banking, capital markets Finance, audit, accounting Risk management HR management, incl. compensation Legal, compliance Technology, cybersecurity Regulatory authority, central bank ESG4 Leadership experience 0 2 4 6 8 10 Chief executive officer or chairman Executive board5 1 In the case of dual-nationals, the domicile applies. ment, personal and corporate banking; insurance. 4 Environmental, social and governance. 2 The bars represent the main strengths of the BoD, up to a maximum of four key competencies and one leadership experience. 3 Wealth management, asset manage- 5 For example a chief financial officer, chief risk officer or chief operating officer of a listed company. 221 Corporate governance and compensation Corporate governance and compensation Corporate governance Succession planning 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. While the recruiting process for BoD and GEB members takes into account a broad spectrum of factors, such as skills, backgrounds, experience and expertise, our approach with regard to diversity considerations does not constitute a diversity policy within the meaning of the EU Directive on Non-Financial Reporting and Swiss law does not require UBS to maintain such a policy. The succession plans for the GEB and the management layer below are managed under the lead of the Group CEO. The BoD reviews and approves the succession plans of the GEB. For the BoD, the Chairman leads a systematic succession planning process as illustrated in the chart below. Board of Directors’ succession planning process Strategy / environment Information and control instruments with regard to the Group Executive Board The BoD is kept informed of the activities of the GEB in various ways, including regular meetings between the Chairman, the Group CEO and GEB members. The Group CEO and other GEB members also participate in BoD meetings to update its members on all significant issues. Furthermore, the BoD receives comprehensive reports on a regular basis, covering financial, capital, funding, liquidity, regulatory, compliance and legal 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 meeting material and minutes of the GEB meetings. BoD members may request from other BoD or GEB members any information about matters concerning the Group that they require in order to fulfill their duties. When these requests are raised outside of BoD meetings, 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 accordance with in our Organization Regulations. The Audit Committee monitors and assesses the effectiveness, independence and performance of the Head GIA and GIA, approves GIA’s audit plan and objectives for the year and monitors GIA’s discharge of these objectives. its responsibilities as set forth 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 trends based on individual audit results; continuous risk assessment; and assurance results. The reports are provided to the Chairman of the BoD, the 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 115 of this report for information about reporting to the BoD Onboarding Existing board composition AGM election Search Selection 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 is in line with the demanding requirements of a leading global financial services firm. 222 Group Executive Board The Board of Directors (the BoD) delegates the management of the business to the Group Executive Board (the GEB). Responsibilities, authorities and organizational principles of the Group Executive Board The GEB, under the leadership of the Group CEO, is comprised of 13 members. It has executive management responsibility for the steering of the Group and its business and assumes overall responsibility for developing and implementing the strategies of the Group, business divisions and Group functions as approved by the BoD. The GEB is also the risk council of the Group, with overall responsibility for establishing and supervising the implementation of risk management and control principles, as well as for managing the risk profile of the Group, as determined by the BoD and the Risk Committee. At UBS AG management of the business is also delegated, and its 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 P. Lehmann, as President UBS Switzerland AG. In 2019, the GEB held 29 meetings for UBS Group AG and for UBS AG. Of these, five were strategy workshops and seven were supplementary meetings dedicated to risk remediation oversight. In addition, four standalone Executive Board meetings were held for UBS AG.  Refer to the Organization Regulations of UBS Group AG, available at www.ubs.com/governance, for more information about the authorities of the Group Executive Board Members of the Group Executive Board On 29 August 2019, we announced that Suni Harford and Iqbal Khan were to join the GEB. Suni Harford, former internal Head Investments in Asset Management, was to succeed Ulrich Körner as President Asset Management. Iqbal Khan, formerly an executive board member at Credit Suisse, was to succeed Martin Blessing as Co-President Global Wealth Management, alongside Tom Naratil. Martin Blessing and Ulrich Körner stepped down from the GEB. The biographies of Martin Blessing and Ulrich Körner can be found on pages 240 and 242 of the UBS Group AG Annual Report 2018 at www.ubs.com/annualreport. Group Chief Operating Officer Sabine Keller-Busse was given the additional role of President UBS Europe, Middle East and Africa. These changes were effective as per 1 October 2019. On 19 February 2020, the Board of Directors appointed Ralph Hamers as the new Group CEO, succeeding Sergio P. Ermotti effective 1 November 2020. Mr. Hamers will join UBS as a member of the Group Executive Board on 1 September 2020. The biographies on the following pages provide information about the GEB members in office as at 31 December 2019. 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 GEB members may hold outside the UBS Group to one board membership in a listed company and five additional mandates in non-listed companies. Mandates in companies that are controlled by UBS or that control UBS are not subject to this limitation. In addition, GEB members may not hold more than 10 mandates at a time at the request of the company and eight mandates in associations, charitable organizations, foundations, trusts and employee welfare foundations. On 31 December 2019, no member of the GEB reached the aforementioned thresholds. Responsibilities and authorities of the Group Asset and Liability Committee in line with the Group’s strategy, The Group Asset and Liability Committee (the 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 regulatory liabilities commitments and the interests of shareholders and other stakeholders. The 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 2019, the Group ALCO held 10 meetings for UBS Group AG. At the same time, 10 meetings were held by the Asset and Liability Committee of UBS AG, a committee responsible for managing UBS AG’s assets and liabilities in line with the UBS AG and Group strategy and regulatory requirements. Management contracts We have not entered into management contracts with any companies or natural persons that do not belong to the Group. 223 Corporate governance and compensation Corporate governance and compensation Corporate governance 224 Sergio P. Ermotti Group Chief Executive Officer Year of initial appointment UBS: 2011 (UBS Group AG: 2014, UBS AG: 2011) Year of birth | Nationality 1960 | Swiss Professional history and education Sergio P. Ermotti has been Group Chief Executive Officer of UBS Group AG since 2014, having held the same position at UBS AG since 2011. Mr. Ermotti became a member of the GEB in 2011 and was Chairman and CEO of UBS Group Europe, Middle East and Africa before taking over as Group CEO. From 2007 to 2010, he was Group Deputy Chief Executive Officer at UniCredit, and was responsible for the strategic business areas of Corporate and Investment Banking, and Private Banking. He joined UniCredit in 2005 as Head of the 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 Program at Oxford University. Other activities and functions – Member of the Board of UBS Switzerland AG – Chairman of the Board of UBS Optimus Foundation – Chairman of the Fondazione Ermotti, Lugano – Member of the Board of the Swiss-American Chamber of Commerce – Member of the Board of the Global Apprenticeship Network – Member of the Institut International d’Etudes Bancaires – Member of the Saïd Business School Global Leadership Council, University of Oxford Christian Bluhm Group Chief Risk Officer Year of initial appointment UBS: 2016 Year of birth | Nationality 1969 | German Markus U. Diethelm Group General Counsel Year of initial appointment UBS: 2008 (UBS Group AG: 2014, UBS AG: 2008) Year of birth | Nationality 1957 | Swiss responsible 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 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 for Credit Risk Management in Switzerland and Private Banking worldwide. Mr. Bluhm was Head of Credit Portfolio Management until 2008 and then Head of Credit Risk Management Analytics & Instruments after the financial crisis in 2008. From 2001 to 2004, he worked for Hypovereinsbank in Munich in Group Credit Portfolio Management, heading a team that specialized in Structured Finance Analytics. Before starting his banking career with Deutsche Bank in Credit Risk Management in 1999, he worked as a postdoctoral fellow at Cornell University 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 from the same university in 1996. Professional history and education Markus U. Diethelm has been Group General Counsel of UBS Group AG since 2014, having held the same position at UBS AG since 2008, when he became a member of the GEB. He was a member of the Executive Board 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 that company’s Group Executive Board in 2007. Prior to that, 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 Uster District Court 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. He is a qualified attorney-at-law admitted to the bar in Zurich, Geneva and in New York State. Other activities and functions – – Member of the Board of UBS Switzerland AG Chairman of the Foundation Board – International Financial Risk Institute 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 Supervisory Board of the Fonds de Dotation LUMA / Arles – – – 225 Corporate governance and compensation Corporate governance and compensation Corporate governance Kirt Gardner Suni Harford Group Chief Financial Officer President Asset Management Year of initial appointment UBS: 2016 Year of birth | Nationality 1959 | American (US) Year of initial appointment UBS: 2019 Year of birth | Nationality 1962 | American (US) 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 2016. He was CFO Wealth Management from 2013 to 2015. Prior to that, 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 that, Mr. Gardner 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 at 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 – Member of the Board of UBS Business Solutions AG Professional history and education Suni Harford became a member of the GEB and was appointed President Asset Management of UBS Group AG and UBS AG in October 2019. She has been with UBS since 2017 and joined as Group Managing Director and Head Investments in the Asset Management business division. Before joining UBS, Ms. Harford worked for almost 25 years at Citigroup Inc. in various senior management positions: she was Regional Head of Markets for North America from 2008 to 2017, with responsibility for income, sales, trading, origination and research across all fixed currencies, commodities, equities and municipal businesses. She was also a member of Citi’s Pension Plan Investment Committee and a Director on the Board of Citibank Canada. From 2004 to 2008, Ms. Harford was Global Head of Fixed Income Research and, from 1995 to 2004, Co- Head Debt Capital Markets, Origination, Financial Institutions Group. She started her career as an investment banker at Merrill Lynch & Co in 1988. Ms. Harford holds an MBA from Tuck School of Business at Dartmouth and a bachelor’s degree in physics and mathematics from Denison University, Ohio. Other activities and functions – Chairman of the Board of Directors of UBS Asset Management AG – Member of the Leadership Council of the Bob Woodruff Foundation – Member of the Board of UBS Optimus Foundation 226 Robert Karofsky Co-President Investment Bank Year of initial appointment UBS: 2018 Year of birth | Nationality 1967 | American (US) Professional history and education Robert Karofsky is Co-President Investment Bank at 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 taking over as Co-Head of Global Equities from 2008 to 2010. Mr. Karofsky holds a bachelor’s degree 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 – – Member of the Board of UBS Securities LLC Trustee of the UBS Americas Inc. Political Action Committee Sabine Keller-Busse Group Chief Operating Officer and President UBS Europe, Middle East and Africa Year of initial appointment UBS: 2016 Year of birth | Nationality 1965 | Swiss and German 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 2018. In addition, she was appointed President UBS Europe, Middle East and Africa in October 2019. She was Group Head Human Resources from 2014 to 2017. Ms. Keller-Busse became a member of the GEB in 2016. Having joined UBS in 2010, she served as Chief Operating Officer UBS Switzerland until 2014. Prior to that, she led Credit Suisse’s Private Clients Region Zurich division for two years. From 1995 to 2008, she worked for McKinsey & Company, where she was a Partner from 2002. Ms. Keller-Busse holds a PhD and a master’s degree, both in business administration, from the University of St. Gallen. Other activities and functions – – – Member of the Supervisory Board of UBS Europe SE Member of the Board of UBS Business Solutions AG Vice-Chairman of the Board of Directors of SIX Group (Chairman of the nomination & compensation committee) Member of the Foundation Board of the UBS Pension Fund Member of the Board of the University Hospital Zurich Foundation – – 227 Corporate governance and compensation Corporate governance and compensation Corporate governance Iqbal Khan Edmund Koh Co-President Global Wealth Management President UBS Asia Pacific Year of initial appointment UBS: 2019 Year of birth | Nationality 1976 | Swiss Year of initial appointment UBS: 2019 Year of birth | Nationality 1960 | Singaporean Professional history and education Iqbal Khan became a member of the GEB and was appointed Co- President Global Wealth Management of UBS Group AG and UBS AG in October 2019. Mr. Khan joined UBS from Credit Suisse, where he was CEO International Wealth Management from 2015 to 2019 and CFO Private Banking & Wealth Management from 2013 to 2015. Prior to that, he worked for Ernst & Young (EY), Switzerland, which he joined in 2001. At EY he was Managing Partner Assurance and Advisory Services – Financial Services, as well as being a member of the Swiss management committee from 2011 to 2013. Before that, from 2009 to 2011, he held the position of Industry Lead Partner Banking and Capital Markets, Switzerland and EMEA Private Banking. Mr. Khan holds an Advanced Master of International Business Law degree (LLM) from the University of Zurich. In addition, he is a Certified International Investment Analyst, a Swiss Certified Public Accountant and a Swiss Certified Trustee. Professional history and education Edmund Koh became a member of the GEB and was appointed President UBS Asia Pacific at UBS Group AG and UBS AG in January 2019. He was Head Wealth Management Asia Pacific from 2016 to 2018 and 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. Other activities and functions – Member of the Board of Room to Read Switzerland Other activities and functions – Member of the Wealth Management Institute at Nanyang Technological University, Singapore – Member of the Singapore Ministry of Finance’s Committee on the Future Economy Sub-Committee – Member of the Financial Centre Advisory Panel – Member of the Board of Next50 Limited – Trustee of the Cultural Matching Fund – Member of the Board of Medico Suites (S) Pte Ltd – Member of the Board of Medico Republic (S) Pte Ltd – Council member of the Asian Bureau of Finance and Economic Research 228 Axel P. Lehmann Tom Naratil President Personal & Corporate Banking and President UBS Switzerland Co-President Global Wealth Management and President UBS Americas Year of initial appointment UBS: 2016 (UBS Group AG: 2016, UBS AG: 2016-2017) Year of initial appointment UBS: 2011 (UBS Group AG: 2014, UBS AG: 2011) Year of birth | Nationality 1959 | Swiss Year of birth | Nationality 1961 | American (US) Professional history and education Axel P. Lehmann was appointed President Personal & Corporate Banking at UBS Group AG and President UBS Switzerland in 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 2016. He was a member of the BoD of UBS AG from 2009 to 2015 and of UBS Group AG from 2014 to 2015. Mr. Lehmann became a member of the group executive committee of Zurich Insurance Group in 2002, holding various management positions, including CEO for the European and North America businesses. From 2008 to 2015, he was Chief Risk Officer with additional responsibilities for Group IT, Regional Chairman for Europe, Middle East and Africa as well as Chairman for Farmers Group Inc. In 2001, he was appointed CEO for Northern, Central and Eastern Europe and Zurich Group Germany, having served as a member of the company’s Group Management Board since 2000 with responsibility for group-wide business development functions. In 1996, he joined Zurich as a member of the Executive Committee Switzerland, and previously, he was Head of Corporate Planning and Controlling at SwissLife, Vice President of the Institute of Insurance Economics and a visiting professor at Bocconi University in Milan. Mr. Lehmann holds a PhD and a master’s degree in business administration and economics from the University of St. Gallen. He is also a graduate of the Advanced Management Program of the Wharton School. 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 Board and Board Committee, Zurich Chamber of Commerce Member of the Swiss-American Chamber of Commerce Chapter Doing Business in USA – – – – – – Professional history and education Tom Naratil became Co-President Global Wealth Management at UBS Group AG and UBS AG as well as CEO of UBS Americas Holding LLC in 2018. He was appointed President UBS Americas at UBS Group AG and UBS AG in 2016 and served as President Wealth Management Americas from 2016 to 2018. He became a member of the GEB in 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. Mr. Naratil 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. Mr. Naratil was named Global Head of Marketing, Segment & Client Development in 2007, Global Head of Market Strategy & Development in 2005, and Director of Banking and Transactional Solutions, Wealth Management USA, in 2002. During this time, he was a member of the Group Managing Board. He joined Paine Webber Incorporated in 1983 and after the merger with UBS became Director of the Investment Products Group. Mr. Naratil holds an MBA in economics from New York University and a bachelor’s degree in history from Yale University. Other activities and functions – – – Member of the Board of UBS Americas Holding LLC Member of the Board of the American Swiss Foundation Member of the Board of Consultors for the College of Nursing at Villanova University 229 Corporate governance and compensation Corporate governance and compensation Corporate governance Piero Novelli Markus Ronner Co-President Investment Bank Group Chief Compliance and Governance Officer Year of initial appointment UBS: 2018 Year of birth | Nationality 1965 | Italian Year of initial appointment UBS: 2018 Year of birth | Nationality 1965 | Swiss Professional history and education Piero Novelli is Co-President Investment Bank at 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 in 2016 became sole Global Head Advisory Services including Global Mergers and Acquisitions (M&A). Mr. Novelli rejoined UBS in 2013 as Chairman Global M&A and Group Managing Director. From 2011 to 2012, he 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. Professional history and education Markus Ronner is Group Chief Compliance and Governance Officer at UBS Group AG and UBS AG and became a member of the GEB in November 2018. In this role, he is responsible at the 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 38 years with UBS, Mr. 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. Other activities and functions None Other activities and functions None 230 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 Pursuant 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 (whether directly, indirectly or in concert with third parties), whether such rights 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 their tenure. 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.  Refer to the “Compensation” section of this report on page 236 for more information 231 Corporate governance and compensation 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 about 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 The Annual General Meeting (the AGM) in 2019 re-elected Ernst & Young Ltd (EY) 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. The EY lead partner in charge of the Group financial audit since 2015 has been Marie-Laure Delarue. Due to a five-year rotation requirement, she will be succeeded in 2020 by Bob Jacob. 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. Daniel Martin has been the co- signing partner for the FINMA audit since 2019, with an incumbency limit of seven years. During 2019, the Audit Committee held eight meetings and three calls 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 auditors for potential capital increases At the AGM on 3 May 2018, BDO AG was reappointed as special auditors for a three-year term of office. Special auditors provide audit opinions in connection with potential capital increases independently from other 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 30.2 million in 2019 (USD 30.3 million in 2018) 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 regulatory audits, attestation services and the review of documents to be filed with regulatory bodies. The additional services classified as audit in 2019 included several engagements for which EY was mandated at the request of FINMA. include statutory and 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 Total audit1 Non-audit Audit-related fees of which: assurance and attestation services of which: control and performance reports of which: consultation concerning financial accounting and reporting standards Tax fees 31.12.19 31.12.19 31.12.18 52,448 52,448 12,808 12,808 65,255 65,255 8,722 8,722 4,155 4,155 4,314 4,314 253 253 1,966 1,966 54,716 16,595 71,310 8,711 5,390 3,261 60 1,212 All other fees Total non-audit1 Total non-audit1 1 Total audit and non-audit fees amounted to USD 78,234 thousand for UBS Group AG consolidated as of 31 December 2019 (31 December 2018: USD 81,770 thousand), of which USD 51,926 thousand related to 1 UBS AG consolidated (31 December 2018: USD 56,493 thousand). 10,459 12,978 12,978 2,291 2,291 536 232 Audit-related work comprises assurance and related services that are traditionally performed by the auditor, such as attestation services related to financial reporting, internal control reviews and performance standard reviews, as well as 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. The Group Chief Financial Officer and the 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 an agreed 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 2019 operated with an average headcount of 539 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 To support the achievement of UBS’s objectives, GIA independently, objectively and systematically assesses the: (i) (ii) soundness of the Group’s risk and control culture; reliability and financial and operational information, including whether activities are properly, accurately and completely recorded, and the quality of underlying data and models; and integrity of (iii) design, operating effectiveness and sustainability of: – – – – – – including whether processes to define strategy and risk appetite, as well as the overall adherence to the approved strategy; governance processes; risk management, appropriately identified and managed; internal controls, commensurate with the risks taken; remediation activities; and processes requirements, internal policies, and constitutional documents and contracts. regulatory the Group's specifically whether to comply with legal and risks are they are Audit reports that include significant issues are provided to the Group CEO, relevant GEB members and other responsible management. The Chairman, the Audit Committee and the Risk Committee of the BoD are also regularly informed of such issues. In addition, GIA reviews whether issues with moderate to significant impact have been successfully remediated. This responsibility applies to issues identified by all sources: business management (first line of defense), control functions (second line of defense), GIA (third line of defense), external auditors and regulators. GIA also cooperates closely with risk control functions and legal advisors on investigations into major control issues. internal and external To maximize GIA’s independence from management, the Head 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, property and personnel, and must be provided with all information and data that it needs to fulfill its auditing responsibilities. GIA also conducts special audits at the request of the Audit Committee, or other BoD members, committees or the Group CEO in consultation with the Audit Committee. for Group GIA enhances the efficiency of its work through coordination and close cooperation with the external auditors. 233 Corporate governance and compensation 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 on the following dates: First quarter 2020 Second quarter 2020 Third quarter 2020 28 April 2020 21 July 2020 20 October 2020 The Annual General Meetings of shareholders of UBS Group AG will take place on the following dates: 2020 2021 29 April 2020 28 April 2021 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 that 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; and – best practice that leads to improved standards. Consistent with our financial reporting and disclosure principles, we continue to benchmark disclosures in our financial reports against recommendations issued by the 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 507 of this report for more information  Refer to “Corporate information” and “Contacts” in the introductory part of this report for more information 234 Financial reporting policies We report our Group’s results for each financial 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. The consolidated financial statements of UBS Group AG and UBS AG 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 on page 311 of this report for more information about 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 (the 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, of 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 the Group CFO concluded that our disclosure controls and procedures were effective as of 31 December 2019. 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 on page 300 of this report for more information 235 Corporate governance and compensation Compensation Julie G. Richardson Chair of the Compensation Committee of the Board of Directors Dear Shareholders, The Board of Directors and I wish to thank you for your support once again at last year’s Annual General Meeting (AGM) and for sharing your views on our compensation practices over the past year. Throughout 2019, the BoD Compensation Committee continued to oversee compensation and ensure that reward reflects the performance, appropriate alignment of employee interests with those of our shareholders. As the new Chair of the Compensation Committee, I am pleased to present our Compensation Report for 2019. risk-taking and supports Shareholder engagement including Over the course of 2019, we continued proactively engaging with shareholders and considered the feedback we received at the 2019 AGM. While shareholders value the consistency of our long delivery of our deferred approach compensation over five years, the feedback also highlighted opportunities to further evolve our approach. Our revised compensation framework supports us in achieving our ambitions for the Group and greater alignment with shareholders’ interests. the We conducted a holistic review of all elements of our compensation framework for our employees, most senior leaders including the Group Executive Board (the GEB), the Chairman and independent Board members. We heard feedback requesting stronger alignment and we have taken that feedback seriously. While we have maintained the most important elements of our compensation framework, our review has led to some significant changes, as summarized in the table below and further detailed throughout this report. Key changes to our compensation framework and related disclosures – – – – – – – – – Effective for the performance year 2019, we replaced the Equity Ownership Plan (the EOP) with the new equity-based Long-Term Incentive Plan (the LTIP) new equity-based Long-Term Incentive Plan (the LTIP) for our most senior leaders (i.e., Group Executive Board (GEB) members, Group Managing Directors (GMDs) and Group or Divisional Vice Chair role holders). This supports the alignment of compensation with the execution of our strategy, financial performance and long-term growth. The LTIP features an absolute and a relative performance condition based on reported return on CET1 capital (RoCET1) and relative total shareholder reported return on CET1 capital (RoCET1) and relative total shareholder return (rTSR) metrics, creating a strong sensitivity of realized compensation to UBS’s financial performance and share price, and supports alignment with return (rTSR) metrics shareholders. Achieving the maximum payout under the LTIP requires both a three-year average RoCET1 of 18% and, over a three-year period, for our TSR to outperform the peer index by 25 percentage points. The use of reported RoCET1 as a performance metric supports the focus on ensuring the cost of litigation matters has a direct impact on the compensation awarded and realized by our most senior leaders. For the Group CEO and certain other GEB members, the vesting of a portion (30%) of the 2019 LTIP award is, in addition to RoCET1 and rTSR performance conditions, directly linked to the final resolution of the French cross-border matter. This portion is entirely at risk and subject to forfeiture based on the final cost associated with the resolution of the matter. The same vesting condition also applies to a portion of the Chairman’s 2019 share award. directly linked to the final resolution of the French cross-border matter a portion (30%) of the 2019 LTIP This is consistent with our approach to align the interests of management with those of shareholders to resolve this matter in the best interests of all shareholders, even though the underlying issue is a legacy matter. align the interests of management with those of shareholders Reflecting our holistic review, we have made a number of adjustments that also contribute toward our cost reduction efforts; starting with the current period from the 2019 AGM to the 2020 AGM, the Chairman’s fixed compensation was reduced by 14%. the Chairman’s fixed compensation was reduced by 14% In the same spirit, and effective from the 2020 AGM onward, the BoD will reduce fees for all its members and eliminate the share price discount. . BoD will reduce fees for all its members The adjustments in Board fees reflect our commitment to sustainable results while maintaining competitive fee levels aligned with the demands on our Board members. commitment to sustainable results while maintaining competitive fee levels – We have enhanced the transparency of the major elements of the performance assessment for the Group CEO. enhanced the transparency – The disclosure brings further clarity on the overall achievement, weighting and the scale of the assessment. further clarity on the overall achievement, weighting and the scale of the assessment Introduction of the Introduction of the Long-Term Incentive Long-Term Incentive Plan Plan Additional vesting Additional vesting condition in connection condition in connection with the resolution of with the resolution of the French cross-border the French cross-border matter matter Rebalancing of fees for Rebalancing of fees for members of the Board members of the Board of Directors of Directors Enhanced disclosure for Enhanced disclosure for CEO performance CEO performance assessment assessment Cornerstones of our compensation framework Consistent approach to Consistent approach to key elements has been key elements has been maintained maintained – – – – – Strong alignment between compensation and rriisskk aaddjjuusstteedd ffiinnaanncciiaall ppeerrffoorrmmaannccee - - Consideration of bbeehhaavviioorrss aanndd ccoonndduucctt in performance assessment and compensation High mandatory deferral rates into UUBBSS sshhaarreess and UBS ccoonnttiinnggeenntt ccaappiittaall LLoonngg ddeeffeerrrraall ppeerriiooddss over five years FFoorrffeeiittuurree aanndd ccllaawwbbaacckk provisions 236 Advisory vote 2019 financial highlights and performance award pool 2019 compensation philosophy and framework In 2019, we delivered solid financial results in mixed market conditions, demonstrating the strength of our business model. Reported profit before tax was USD 5.6 billion, a decrease of 7% compared with 2018, while adjusted profit before tax decreased slightly to USD 6.0 billion. We maintained our strong capital position with a common equity tier 1 (CET1) capital ratio of 13.7% and a CET1 leverage ratio of 3.9% at year-end, both above our capital guidance. Reported return on CET1 capital was 12.4%. For 2019, the BoD intends to propose a dividend of USD 0.73 per share and we repurchased USD 806 million (CHF 800 million) of UBS shares over the course of the year. In 2019, interest rate headwinds intensified, global growth slowed and geopolitical concerns persisted, impacting the overall Group results and, consequently, the Group performance award pool. In determining the final pool and consistent with prior years, we have considered a range of factors. These include risk- adjusted profit, returns and capital strength, as well as relative performance, progress on ESG, regulatory and litigation matters, including the impact of the French cross-border matter on the firm and the resulting share price development. The year-on-year development of the performance award pool reflected a reduction beyond that implied by underlying performance. Based on these considerations, the performance award pool for the Group decreased 14% to USD 2.7 billion (compared with USD 3.1 billion in the prior year). This decrease demonstrates our disciplined approach in managing compensation over business cycles and alignment to shareholder interests, and we believe without significantly impacting our competitive pay position. The GEB performance award pool, which includes the Group CEO performance award and is part of the Group pool, was CHF 70.3 million, a reduction of 14% on a per capita basis and 4% overall. As a percentage of adjusted Group profit before tax, the GEB performance award pool was 1.2%, well below the cap of 2.5%. The overall pool also reflects the changes in the composition of the GEB, including new GEB members and the elevation of certain roles to the GEB that were previously not included, and therefore the adjustments do not reflect a meaningful change in the total cost to shareholders. These changes were made to optimize our governance structure and execute on our strategic priorities. Our compensation philosophy and framework support the alignment of employee interests with those of our shareholders and clients. The consistency of our approach reinforces our culture of sustainable performance, while also supporting our growth ambitions, sound governance, accountability and appropriate risk-taking. 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 was achieved, but also how those results 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. Variable compensation is earned over the performance year and many employees have a significant portion of their annual performance award deferred. 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. This long deferral period, in conjunction with our (DCCP) awards, has been a deferred contingent capital cornerstone of our compensation framework to support sustainability. Since 2012, our most senior leaders have received 50% of their performance award in equity, linking a significant portion of compensation to the UBS share price. We have enhanced this feature by adding a connection to rTSR in the new LTIP. Litigation and regulatory matters, and their resolution and remediation, are taken into consideration in the compensation decision-making process. Share price movements affect all employees receiving deferred equity-based awards. With respect to the performance conditions on LTIP awards, provisions for legal, regulatory and similar matters will directly affect the reported RoCET1 metric and thus also the final vesting amount. This metric accounts for 50% of the final payout under the 2019 LTIP. The use of reported RoCET1 as a performance metric supports the focus on ensuring the cost of litigation matters has a direct effect on the compensation awarded to and realized by our most senior leaders, including the GEB. 237 Advisory voteCorporate governance and compensation For 2019, to further enhance alignment with shareholders on the French cross-border matter, we have also introduced a new additional vesting condition for the Chairman, the Group CEO and certain other GEB members, which links a portion of their 2019 equity compensation to the final resolution of the French cross-border matter. This underlines their accountability for the successful resolution of the matter in the best interest of shareholders even though the underlying issue is a legacy matter. Board fees and Chairman compensation In our review of the remuneration framework for independent Board members, we concluded that our fundamental approach remains appropriate. However, effective from the 2020 AGM onward, a number of adjustments will be made to reduce the level of the Board’s compensation while still maintaining competitive fee levels. The Chairman’s fixed compensation has been reduced by CHF 0.8 million, or 14%, to CHF 4.9 million. This change is already effective for the current period from the 2019 AGM to the 2020 AGM. As noted above, a portion of the Chairman’s 2019 share award remains entirely at risk due to a new vesting condition linked to the final resolution of the French cross- border matter. This further demonstrates the Chairman’s alignment with this matter and his accountability to resolve this matter in the best interest of shareholders. shareholders on In the same spirit, the BoD will reduce their base fee and eliminate their share price discount, resulting in a total fee reduction of approximately 14% (depending on committee memberships) and a 10% reduction in our proposed maximum amount of compensation for the BoD. Environmental, Social and Governance (ESG) We are fully committed to ESG topics and reflect them in our compensation processes. ESG-related objectives have been in our Pillars and Principles since they were embedded established in 2011. Our contribution to supporting the planet, our workforce, our clients and society are important to our success. ESG matters are considered in the performance and compensation determination process in different aspects as described later in this report. UBS continued to make progress in 2019 toward meeting its ambitions to be a leader in sustainable finance, in philanthropy and in sustainable business practices, as well as being an employer of choice. We were recognized as the industry leader, for the fifth time in a row, in the Dow Jones Sustainability Indices (the DJSI), the most widely recognized sustainability ranking, and received other valuable recognition from MSCI, Sustainalytics and CDP. 238 Gender-related aspects in compensation UBS remains committed to hiring, retaining and promoting more women at all levels across the firm. With two female GEB members and four female independent Board members, we have a leading position with regard to this topic. The Compensation Committee systematically reviews any gender pay gap for equivalent roles across the workforce. Our policies and practices are impartial and support equal pay, and we are committed to ensuring that all employees are paid fairly. Pay equity is embedded into our compensation policies and practices and we conduct regular reviews to ensure that all employees are paid fairly. In 2019, an independent third party conducted an analysis across the globe that shows that the unexplained salary differential between female and male employees is less than 1% at UBS. We continue to review the root causes and address any issue that cannot be explained by business factors such as experience, role / job, responsibility, performance or location. Overall, we continue to make progress toward our aspiration of increasing the ratio of women in management roles to one- third, but progress takes time and we are committed to accelerating our efforts to progress women at all ranks. Compensation Committee membership In 2019, Dieter Wemmer and I welcomed Reto Francioni back to the committee and Fred Hu to the committee for the first time. 2020 Annual General Meeting At the 2020 AGM on 29 April, we will seek your support on the following compensation-related items: – the maximum aggregate amount of compensation for the BoD for the period from the 2020 AGM to the 2021 AGM; the maximum aggregate amount of fixed compensation for the GEB for 2021; the aggregate amount of variable compensation for the GEB for 2019; and shareholder endorsement Compensation Report. in an advisory vote for this – – – On behalf of the Compensation Committee and the BoD, I would like to thank you again for your feedback. The changes made have enhanced our compensation framework in the interests of shareholders, and we respectfully ask for your continued support at the upcoming AGM. Julie G. Richardson Chair of the Compensation Committee of the Board of Directors Advisory vote Performance and compensation at a glance Financial achievements and strategic highlights1 – – results financial We delivered solid in mixed market conditions, reflecting the strength of our business model. Profit before tax decreased 7% to USD 5.6 billion, as a 4% decrease in operating income was not fully offset by lower operating expenses. Adjusted profit before tax decreased slightly to USD 6.0 billion, as reduced adjusted operating expenses nearly offset lower adjusted operating income. Net profit attributable to shareholders decreased 5% to USD 4.3 billion. Return on common equity tier 1 (CET1) capital was 12.4%. Our reported cost / income ratio increased 62 basis points reflecting cost management measures that partly offset lower revenues, while our adjusted cost / income ratio saw a 51 basis point to 80.5%, – – improvement to 78.9%, reflecting 4% lower expenses and 3% lower revenues. Our capital position remained strong, with a CET1 capital ratio of 13.7% and a CET1 leverage ratio of 3.9%, both above our capital guidance of around 13% and 3.7%, respectively. We increased our total loss-absorbing capacity by USD 5.9 billion to USD 89.6 billion. For the financial year 2019, the Board of Directors intends to propose a dividend of USD 0.73 per share, an increase compared with 2018. During 2019, we repurchased USD 806 million (CHF 800 million) of UBS shares and our tangible book value per share increased 6% to USD 13.29.  Refer to the “Financial and operating performance” section of this report for further details about our Group and business division performance Adjusted Group proﬁt before tax1 Return on CET1 capital Adjusted cost / income ratio1 USD billion in % in % (0.5%) (76 bps) (51 bps) improvement 6.1 2018 6.0 2019 13.1 2018 12.4 2019 79.5 2018 78.9 2019 11 Adjusted results are alternative performance measures (APMs) and non-GAAP financial measures. Refer to “Group Performance” in the “Financial and operating performance” section of this report for further information and a reconciliation of adjusted results to reported results. Performance award pool year-on-year development Group performance award pool Group CEO performance award Per capita GEB performance award pool CHF billion CHF million CHF million (14%) (14%) (14%) 3.1 2018 2.7 2019 11.3 2018 9.7 2019 6.3 2018 5.4 2019 – – – The Group performance award pool for 2019 decreased 14% compared with the previous year. This significant decrease, which is a greater reduction than the change in underlying performance, demonstrates our disciplined approach in managing compensation over business cycles and alignment to shareholder interests, and we believe without significantly impacting our competitive pay position. It also considers the impact of the French cross-border matter on the firm and the resulting share price development. The Group CEO performance award for 2019 was CHF 9.7 million, a decrease of 14% compared with 2018. The award is comprised of 20% in cash (CHF 1.9 million) with the remaining 80% (CHF 7.8 million) deferred over three to five years. The GEB performance award pool, which includes the Group is part of the Group CEO performance award and performance award pool, was CHF 70.3 million, a decrease of 14% on a per capita basis and 4% overall. The overall pool also reflects the changes in the composition of the GEB, including new GEB members and the elevation of certain roles to the GEB that were previously not included, and therefore the adjustments do not reflect a meaningful change in the total cost to shareholders. These changes were made to optimize our governance structure and execute on our strategic priorities. The new Long-Term Incentive Plan introduced for 2019 performance awards increases the GEB’s exposure to the links future performance of compensation to relative total shareholder return. In addition, CHF 7.3 million of the GEB performance award pool is entirely at risk, contingent upon the final resolution of the French cross-border matter. the Group and directly – – 239 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Shareholder engagement and say on pay The feedback we seek from our shareholders on compensation- related matters is very important to us, as we are committed to maintaining a strong interests of our employees and those of our shareholders. link between the At the 2019 AGM, we committed to conducting a holistic review of all elements of the compensation framework for our employees, our most senior leaders including the Group Executive Board (the GEB), the Chairman and independent Board members. We heard feedback requesting stronger alignment with shareholder interests, which we implemented while maintaining the most important elements of our compensation framework. Below we provide responses to the questions we most frequently receive from stakeholders. Responses to frequent questions What has changed in the compensation framework for your most senior leaders? The most important elements of our compensation framework remain unchanged. In particular, performance awards continue to be based on the employee’s annual performance assessment and we are maintaining long-term nature of our the compensation framework through mandatory deferrals into equity and contingent capital instruments. For GEB members, shares are delivered in equal installments in years 3, 4 and 5 after the grant year, and contingent capital awards continue to vest in year 5. However, we have modified the delivery of the deferred equity portion for our most senior leaders (i.e., GEB members, GMDs and Group or Divisional Vice Chair role holders) with the new Long-Term Incentive Plan (the LTIP) replacing the Equity Ownership Plan (the EOP) to enhance focus on delivering on our return targets and increasing alignment with shareholders. How are share price developments reflected in compensation? Beyond the factors described elsewhere in this report, we consider rTSR as well as valuation relative to other banks. Our mandatory share-based deferral plans create a direct link with shareholder returns and therefore many employees are directly impacted by the share price. In addition, the new LTIP features rTSR as a performance condition, which further supports realized employee pay with shareholder returns. the alignment of While we are disappointed with our share price performance, we believe the share price movement in 2019 was significantly impacted by the outcome of the French cross-border matter and does not reflect the significant progress made during the year and our absolute financial performance. We continue to expect that the value of our business and the quality of our earnings will ultimately be positively reflected in our share price. The LTIP performance features absolute and relative performance conditions based on reported return on CET1 capital (RoCET1) and relative total shareholder return (rTSR) metrics, creating a strong sensitivity of realized compensation to UBS’s financial performance and share price. The final number of vesting shares is based on the achievements against these two equally- weighted three-year performance period. Achieving the maximum payout under the LTIP requires both a three-year average RoCET1 of 18% and, over a three-year period, for our TSR to outperform the peer index by 25 percentage points. The RoCET1 performance level required for a maximum payout is substantially above our stated long-term target, and we believe this further strengthens the alignment with our strategy and supports delivering sustainable, profitable growth to drive higher returns, creating long-term value for our shareholders. conditions after a At the same time, the linear vesting between minimum threshold and performance required for maximum payout does not encourage excessive risk-taking, which might be the case with a non-linear payout geared toward high performance levels. This approach balances the importance of sustainable performance with our ambitions to deliver higher returns and outperform our peers. 240 How is ESG considered in the compensation process? ESG is considered in the compensation determination process in different stages through the objective setting, performance award pool funding, performance assessment and compensation decision. In the performance award pool funding, ESG is reflected through the assessment of regulatory compliance, as well as legal, compliance, reputational and operational risks. In addition, ESG-related objectives have been embedded in our Pillars and Principles since they were established in 2011. Achievements versus ESG-related goals are taken into account in the qualitative performance assessment and affect the final compensation decision for each individual. ESG-related goals are reflected in governance and risk management, talent management and diversity, client satisfaction, and corporate responsibility, including goals for reducing our carbon footprint and corporate waste, and progressing our philanthropic efforts. Therefore, ESG is taken in consideration when the Compensation Committee applies its discretion to reflect not only what results were achieved, but also how they were achieved. Advisory vote How is litigation considered in the compensation process? Litigation and regulatory matters, and their resolution and remediation, are taken into consideration throughout the compensation decision-making process. The Compensation Committee distinguishes between current matters, where the underlying issues are within the responsibility of management, and legacy matters, where management is accountable for resolving them but not responsible for the underlying issue. Current matters have a direct impact on the performance award pool, individual performance assessments and resulting compensation decisions, as well as the payout of deferred awards. and For legacy matters, the Compensation Committee seeks to incentivize management to resolve these matters in the best interest of shareholders and we hold management accountable for the effective and efficient resolution thereof. Therefore the performance reflects compensation management’s responsibility for achieving a resolution without take creating an inappropriate risks on such matters. The use of reported RoCET1 supports the focus on ensuring the cost of litigation matters has a direct impact on the compensation awarded and realized by our most senior leaders including the GEB. inappropriately settle or assessment incentive to How is the French cross-border matter reflected in the 2019 compensation of the GEB? For the 2019 compensation decisions for the GEB, the Compensation Committee has considered the outcome of the French cross-border decision, reflecting alignment with shareholders on this matter. Additionally, the final outcome of the matter will impact the payout of the 2019 LTIP award through the RoCET1 metric. For GEB members active in March 2017, when the investigating judges issued the trial order, as an added measure the 2019 LTIP award will further be subject to the following considerations impacting their 2019 compensation. – Up to an additional CHF 7.9 million, or 30% of the 2019 LTIP awards at grant for relevant GEB members as well as the Chairman’s unvested share award, are at risk and directly linked to the final resolution of the French matter. The portion at risk is subject to forfeiture based on the final cost associated with the resolution of the matter. A new malus clause allows the Compensation Committee to assess any new information that becomes available in the future and to retrospectively reduce the 2019 LTIP award by up to the full amount if such new information would have impacted our compensation decision in 2019. – reviews regularly Why has UBS adjusted Board fees and compensation for the Chairman? The Compensation Committee the remuneration framework for independent Board members to confirm it remains competitive and appropriately reflects their work on the Board of UBS. In this review, the Compensation Committee considered the feedback from shareholders and other stakeholders. In our 2019 review, we concluded that our fundamental approach independent Board member compensation remains appropriate. However, effective from the 2020 AGM onward, a number of adjustments have been made to reduce the level of the Board compensation while still maintaining competitive fee levels. for We will reduce the fixed base fee by CHF 25,000 (i.e., approximately 8%) for each board member and will also reduce the additional fees for the Risk and Compensation Committee Chair roles. Furthermore, we will reduce the additional fee for the Senior Independent Director and Vice Chairman roles to CHF 150,000, a reduction of CHF 100,000. In case these two roles are allocated to one Board member, the fee will only be paid once. Moreover, independent Board members must continue to use a minimum of 50% of their fees to purchase UBS shares, which are blocked for four years, and we will eliminate the 15% discount for these purchases. The Chairman’s fixed compensation has been reduced by CHF 0.8 million, starting with the current period from the 2019 AGM to the 2020 AGM. In addition, to further demonstrate the Chairman’s alignment with shareholder interests, a portion of up to CHF 0.6 million of the share award is subject to the same new vesting condition linked to the resolution of the French cross- border matter that has been introduced for the Group CEO and certain other GEB members. How does the Compensation Committee use its discretion to determine the performance award pool? The performance award pool funding begins with a direct link to risk-adjusted profit. The Compensation Committee, based on a proposal from the Group CEO, then applies discretionary adjustments that reflect a range of factors, such as capital returns to investors, risk profile, strategic initiatives, and labor market position and trends. Consequently, the performance award pool balances consideration of financial performance with a range of qualitative factors, including discretion to consider the quality of earnings and year-on-year performance, as well as progress with regard to delivering on our ambitions. these Reflecting the Compensation considerations, Committee applied a negative discretionary adjustment for 2019 on the overall Group performance award pool and the GEB performance award pool, including the Group CEO performance award. Over the past seven years, the Compensation Committee applied discretionary adjustments to the performance award pool of between –6% and +2%, resulting in downward adjustments in all but one year. 241 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Say-on-pay votes at the AGM Audited | Approved fixed compensation In line with the Swiss Ordinance against Excessive Compensation in Listed Stock Corporations, we seek binding shareholder approval for the aggregate compensation awarded 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 At the 2018 AGM, shareholders approved a maximum aggregate fixed compensation amount of CHF 31.5 million for the members of the GEB for the performance year 2019. This includes base salaries, role-based allowances in response to Capital Requirements Directive standard contribution to retirement benefit plans, other benefits and a buffer. IV, estimated As a result of the changes in the GEB in 2019, the aggregate fixed compensation paid in 2019 to current and former GEB members exceeded the approved amount for 2019. As authorized by article 46 para. 5 of the Articles of Association, an amount of CHF 8.4 million was used to pay the amount of the fixed compensation of the new GEB members that exceeded the approved amount. This additional amount was used to fund the new appointments to the GEB: Iqbal Khan, as Co-President Global Wealth Management, was awarded CHF 8.2 million (including replacement awards), Suni Harford, as President Asset Management, was awarded CHF 0.1 million, and Edmund Koh, as President UBS Asia Pacific, was awarded CHF 0.1 million.   Refer to “2019 total compensation for the GEB members” in the “Compensation for the Group CEO and the other GEB members” section of this report  Refer to “Replacement awards for new GEB members and forfeitures of former GEB members” in the “Compensation philosophy and framework” section of this report Say on pay – compensation-related votes at the 2019 AGM -- 22001199 AAGGMM ssaayy oonn ppaayy vvoottiinngg sscchheemmeess -- 22001199 AAGGMM aaccttuuaall sshhaarreehhoollddeerr vvootteess BBiinnddiinngg vvoottee oonn GGEEBB vvaarriiaabbllee ccoommppeennssaattiioonn Shareholders approved CHF 73,300,000 for the financial year 20181, 2, 3 BBiinnddiinngg vvoottee oonn GGEEBB ffiixxeedd ccoommppeennssaattiioonn Shareholders approved CHF 33,000,000 for the financial year 20201, 2, 3 BBiinnddiinngg vvoottee oonn BBooDD ccoommppeennssaattiioonn Shareholders approved CHF 14,500,000 for the period from the 2019 AGM to the 2020 AGM1, 2, 4 ” ” “ VVoottee ffoorr “ 81.4% 86.7% 85.3% AAddvviissoorryy vvoottee oonn tthhee CCoommppeennssaattiioonn RReeppoorrtt 11 Local currencies are converted into Swiss francs at the exchange rates stated in “Note 37 Currency translation rates” in the “Consolidated financial statements” section of this report. 22 Excludes the portion related 33 Thirteen GEB members were in office on 31 December 2019 including three new GEB members, one appointed on 1 January 2019 and two on to the legally required employer’s social security contributions. 1 October 2019; three GEB members stepped down, one on 31 December 2018 and two on 30 September 2019. 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. 44 Twelve BoD members were in office on 31 December 2019. Shareholders approved the UBS Group AG Compensation Report 2018 in an advisory vote 79.4 % 242 Advisory vote Compensation-related proposals for 2020 valuation methodology. At the 2020 AGM, we will ask our shareholders to vote on the variable compensation for the GEB for 2019, the fixed compensation for the GEB for 2021 and the compensation for the BoD from the 2020 AGM to the 2021 AGM. The variable compensation for the GEB for 2019 includes the total amount of Long-Term Incentive Plan (LTIP) awards granted to GEB members at fair value, which is based on the methodology used to determine the expense to the organization under IFRS 2 standards. The value was independently calculated to support the robustness of the approach, which uses a well-established 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, including supporting rationales, that we intend to submit to the 2020 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 2020 AGM Item Item Proposal Proposal Rationale Rationale GEB variable GEB variable compensation compensation The Board of Directors proposes an aggregate amount of variable compensation of CHF 70,250,000 for the members of the GEB for the financial year 2019. GEB fixed GEB fixed compensation 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 2021. BoD compensation BoD compensation The Board of Directors proposes a maximum aggregate amount of compensation of CHF 13,000,000 for the members of the Board of Directors for the period from the 2020 AGM to the 2021 AGM. The proposed amount reflects the overall solid financial results in mixed market conditions, continued strong capital position and increased capital distributions to shareholders. Further, the BoD also considered other factors including the impact of the French cross-border matter on the firm and the resulting share price development. The proposed amount is a substantial reduction of 14% on a per capita basis compared to the previous year, and is equivalent to the 14% decrease in the overall Group performance award pool. The pool also reflects the changes in the composition of the GEB, including new GEB members and the elevation of certain roles to the GEB that were previously not included, and therefore the adjustments do not reflect a meaningful change in the total cost to shareholders. These changes were made to optimize our governance structure and execute on our strategic priorities. The proposed amount is unchanged from the previous year, reflecting stable base salaries for the Group CEO and other GEB members since 2011. As noted above, it further reflects the changes in the composition of the GEB, including new GEB members and the elevation of certain roles to the GEB that were previously not included, and therefore the adjustments do not reflect a meaningful change in the total cost to shareholders. These changes were made to optimize our governance structure and execute on our strategic priorities. The proposed amount hence reduces the reserve amount while still providing the necessary flexibility in light of evolving EU regulations, Brexit and competitive considerations for a potential additional role-based allowance. The proposed amount is a decrease of 10%, or CHF 1,500,000, compared with the previous year. The amount includes the Chairman’s compensation, which decreased by 14% effective from the 2019 AGM, as well as the reduced fees for independent Board members, which will be adjusted effective from the 2020 AGM. This includes a reduction of the fixed base fees for all independent Board members and other fee reductions. The adjustments in Board fees reflect our commitment to sustainable results while maintaining competitive fee levels aligned with the demands on our Board members. 243 Advisory voteCorporate governance and compensation 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 employees with those of our investors and clients, building on our three keys to success: our Pillars, Principles and Behaviors. Our Total Reward Principles establish a framework that balances sustainable performance as well as supporting growth ambitions 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 employees with those of our stakeholders and encourages our employees to focus on our clients, create sustainable value, deliver on our growth ambitions 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 client focus, excellence and sustainable performance in everything we do. Compensation for each employee is based on individual, team, business division and Group performance, within the context of the markets in which we operate. Total Reward Principles 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 Attract and retain a diverse, talented workforce We provide employees with pay that is fair, reflecting equal treatment of employees, appropriately balanced between fixed and variable elements, competitive in the market and delivered over an appropriate period. Foster effective individual performance management and Foster effective individual performance management and communication communication Thorough evaluation of individual performance and adherence to our Behaviors, combined with effective communication, aims to ensure there is a direct connection between achievement of business objectives and compensation across the firm. Align reward with sustainable performance as well as support Align reward with sustainable performance as well as support growth ambitions growth ambitions We embrace a culture of inclusiveness 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 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. Our commitment to pay fairness Pay fairness principles are embedded into our compensation policies and practices and we conduct regular reviews with the aim of ensuring that we appropriately evaluate and reward employees. From a pay equity perspective, if we uncover any gaps that cannot be explained by business factors, such as experience, role / job, responsibility, performance or location, we explore the root causes of those gaps and address them. In 2019, an independent third party conducted a pay analysis across the globe which showed less than 1% of unexplained differential in salaries between female and male employees across the firm. Pay equity is not the same as the gender pay gap, which looks at the average pay for all women versus all men. Our gender pay gap reflects a representation gap brought about by having unequal numbers of men and women at each level at UBS, with a greater proportion of men in more senior, higher- paying roles. The gender representation gap is being addressed through our global gender strategy to hire more, promote more and retain more women at all levels of the organization. Addressing gender representation is a priority we share with many other organizations, both within financial services and other sectors. To share best practices, learn from peers and receive feedback, we are actively involved with initiatives such as the Bloomberg Gender-Equality Index. 244 Advisory vote 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 as well as pension contributions and benefits. For total compensation employees whose exceeds USD / CHF 300,000, performance awards are delivered in a combination of cash and a deferral into contingent capital awards (the DCCP) and equity awards (the LTIP and the EOP). For our most senior i.e., GEB members, Group Managing Directors (GMDs) and Group or Divisional Vice Chair role holders, the equity awards are delivered under the LTIP. All other employees eligible for deferred equity awards receive these awards under our EOP. leaders, Our Total Reward approach is structured to support sustainable results and growth ambitions. 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. Total Reward Total compensation Performance award Deferred Contingent Capital Plan Deferred equity-based awards: • Long-Term Incentive Plan (GEB, GMDs, Group or Divisional Vice Chair role holders) • Equity Ownership Plan (all other employees, as applicable) Base salary / fixed compensation Cash Note: illustrative, not drawn to scale Pension and benefits m r e t - r e g n o L - r e t r o h S m r e t 245 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Performance award pool funding Our compensation philosophy focuses on balancing performance with appropriate 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, resulting in an increased proportion of profit before performance award being available for distribution to shareholders or growing the Group’s capital. In years where performance declines, the performance award pool will generally decrease; however, the funding percentage may increase. and business performance, Our performance award pool funding framework is based on Group including division achievement against a set of performance targets. We also consider performance relative to industry peers, general market competitiveness and progress against our strategic objectives, including returns, 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. Corporate Center funding is linked to overall Group performance and reflects headcount, workforce location and demographics. For each functional area, quantitative and qualitative assessments management and financial achievements. evaluate service quality, risk Before making its final recommendation to the BoD, the Compensation Committee considers the CEO’s proposals and can apply a positive or negative discretionary adjustment to the performance award pool, including recommending a zero award. The Compensation Committee decision balances consideration of financial performance with a range of qualitative factors and takes into account the quality of earnings, progress against our ambitions, impact of risk management, litigation, regulatory costs, the effect of changes in financial accounting and market capital competitiveness, as well as relative total shareholder return. standards, returns reflecting As described above, the aforementioned considerations, over the past seven years, the Compensation Committee based on the Group CEO proposal applied discretionary adjustments to the performance award pool of between –6% and +2%, resulting in downward adjustments in all but one year.  Refer to “Group performance” in the “Financial and operating performance” section of this report for more information about adjusted results Performance award pool funding process – illustrative overview Financial performance Risk adjustment 1 Adjusted business division financial performance 2 Risk-adjusted business division performance award pool Quantitative and qualitative adjustments 3 Business division measures Qualitative, risk and regulatory assessment Relative performance versus peers Market position and trends Consultation of Group CEO with the business division Presidents Compensation Committee / BoD governance and decision 4 5 Recommended business division performance award pools Final Group 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, liquidity 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, ESG factors), assessment of regulatory compliance and risk assessment (such as legal, compliance, reputational and operational risk) support alignment to our Total Reward Principles. Relative performance versus peers Market position and trends Performance is assessed relative to our peers, including financial performance, returns and relative total shareholder return. Market intelligence, based on external advisors, helps assess the competitiveness of our pay levels and compensation structure. It also provides a prospective view of market trends in terms of absolute compensation levels, compensation framework and industry practice. Recommended business division performance award pools The business division performance award pool determination process, based on quantitative and qualitative assessments, results in a recommendation from the Group CEO (after consultation with the GEB) to the Compensation Committee for consideration. Final Group performance award pool The Compensation Committee considers the recommendation in the context of the factors outlined above and verifies it is in line with our strategy and our Total Reward Principles to create sustainable shareholder value and support our growth ambitions. The Committee 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. 246 Advisory vote Environmental, Social and Governance (ESG) at UBS industry UBS made very good progress in 2019 toward enhancing its position as a leader in sustainable finance, and toward meeting its ambitions to be a recognized innovator and thought leader in in sustainable business philanthropy, an practices, and an employer of choice. We are pleased that our efforts and accomplishments continue to be recognized. We were recognized as the industry leader, for the fifth time in a row, in the Dow Jones Sustainability Indices (the DJSI), the most widely recognized sustainability ranking, and received other valuable recognition from MSCI, Sustainalytics and CDP. leader UBS continues to maintain an industry-leading position in developing sustainable finance products and services: we are a leader in sustainable investing,1 with a global footprint and a network of resources to deliver a wide range of research, advisory and product capabilities that continue to grow. An important part of our sustainable activities encompasses engagement in client philanthropy: for example through UBS Optimus Foundation we drive impactful philanthropy that delivers breakthrough solutions to pressing social needs. We are widely recognized as an employer of choice and received various top-employer honors in 2019. Our diverse 11 Euromoney Private Banking and Wealth Management Survey 2019: Global Results. 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 continue to make progress toward our stated aspiration to increase the representation of women in management roles to one-third. In addition to our global gender diversity ambitions, every year we sponsor numerous activities to promote greater diversity and inclusiveness. We measure our culture-building progress through regular employee surveys. We have an ongoing focus on inclusive leadership and, in 2019, our in-house UBS University further updated its curriculum to emphasize future-skills development and personal growth for all employees. The table below summarizes our key achievements and the following section the compensation explains how we consider ESG determination process. in  Refer to “Our focus on ESG,” “Employees” and “Society” in the “How we create value for our stakeholders” section of this report for more information  Refer to www.ubs.com/gri for more information about ESG-related topics OOuurr aacchhiieevveemmeennttss SSuussttaaiinnaabbllee ffiinnaannccee PPhhiillaanntthhrrooppyy SSuussttaaiinnaabbllee bbuussiinneessss pprraaccttiicceess EEmmppllooyyeerr ooff cchhooiiccee – – – – – – – – – – – – – – – – Achieved our goal one year early, reaching USD 488.5 billion in core SI assets, representing 13.5% of total invested assets USD 3.9 billion of client assets directed into Sustainable Development Goals (SDG)-related impact investments 38% of global workforce volunteered and 48% of volunteer hours were skills based 280,858 beneficiaries as a result of our community investments UBS Optimus Foundation: USD 89.5 million in donations raised; USD 109.5 million in grants approved Well-being of 3.3 million children globally improved with help of the work of UBS Optimus Foundation Industry leadership position maintained (Dow Jones Sustainability Indices / DJSI) AA rating maintained (MSCI ESG Research) Industry leader rank maintained (Sustainalytics) A-rating and included in Leadership band (CDP) First TCFD reporting introduced for financial year 2017, continuous improvements ever since Among the founding signatories of the Principles for Responsible Banking (September 2019) Included in Global Universum ranking of Top 50 World’s Most Attractive Employers Peer-leading position in human resources elements of DJSI Score above financial services norm in employee engagement and work environment (based on employee survey results) Included in the Bloomberg Gender-Equality Index ESG in the compensation determination process ESG is considered in the compensation determination process in different phases through objective setting, performance award pool funding, performance assessment and compensation decision. At the beginning of the year, objectives relative to Group, business divisions, Pillars, Principles and Behaviors are set. ESG- related objectives have been embedded in our Pillars and Principles since they were established in 2011. This long-term focus on ESG topics is reflected in the achievements outlined above. To maintain the focus on these important ESG topics, our Group CEO and other GEB members have specific ESG-aligned talent management and diversity, goals under Pillars and Principles, including governance and risk management, client satisfaction and corporate responsibility. These include goals for reducing our carbon footprint and corporate waste, and progressing our philanthropic efforts. In the performance award pool funding, ESG is reflected through the assessment of risks, such as legal, compliance, reputational and operational risks. Therefore ESG is taken into consideration when the Compensation Committee assesses not only what results were achieved, but also how they were achieved. The achievements versus the ESG-related goals are reflected in the qualitative performance assessment and affect the final compensation decision. 247 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Compensation framework for GEB members The chart below illustrates the compensation elements, pay mix and key features for GEB members. 2019 compensation framework for GEB members (illustrative example) With regard to annual performance awards, 20% is paid in the form of cash and 80% will be deferred over a period of five years,1 with 50% of the annual performance awards granted under the LTIP and 30% under the DCCP. GEB¹ DCCP 30% LTIP 50% three-year performance period ~17% ~17% Key features 30% ~17% – – – – – – – – – – – Notional additional tier 1 (AT1) instruments 30% of the performance award is granted under the DCCP Award vests in year 5 after grant year, subject to write-down if a trigger or viability event occurs Award is subject to 20% forfeiture for each financial year if UBS does not achieve a reported Group profit before tax, adjusted for disclosed items generally not representative of underlying business performance Notional interest payments (granted where applicable regulations permit) will be made annually, subject to review and confirmation by the firm Award is subject to continued employment and harmful acts provisions Notional shares 50% of the performance award is granted under the LTIP Award vests in equal installments in years 3, 4 and 5 after grant year, depending on the achievement of RoCET1 and rTSR measured over a three-year performance period2 Dividend equivalents (granted where applicable regulations permit) are subject to the same terms as the underlying LTIP award Award is subject to continued employment and harmful acts provisions – 20% of the performance award is paid out in cash3 Cash 20% 20% Base salary4 2019 2020 grant year year 1 year 2 year 3 year 4 year 5 11 Senior Management Functions Holders (SMFs) have extended deferral periods, with the deferred performance awards vesting no faster than pro rata between years 3 and 7. SMFs and Material Risk Takers (MRTs) 22 Due to regulatory requirements, LTIP awards granted to UK MRTs and SMFs will be subject to an additional non-financial conduct-related have an additional 12-month blocking period on their awards post vest. 33 SMFs and MRTs receive 50% in the form of immediately vested shares which are blocked for 12 months. 44 May include role-based metric with a downward adjustment of up to 100% of the entire award. allowances in line with market practice and regulatory requirements. Pay for performance safeguards for GEB members Cap on total GEB performance award pool (2.5% of adjusted profit before tax) Caps on individual performance awards (for the Group CEO capped at five times the fixed compensation and at seven times for the other GEB members) Cap of 20% of performance award in cash 80% of performance awards are at risk of forfeiture Long-term deferral over five years (or longer for certain regulated GEB members) Alignment with shareholders (through the LTIP) and bondholders (through the DCCP) Final payout of equity-based LTIP award (50% of performance award) subject to absolute and relative performance conditions (three-year performance period) For certain GEB members, a portion of their 2019 compensation is additionally at risk and directly linked to the final resolution of the French cross-border matter No severance terms Six-month notice period Share ownership requirements No hedging strategies allowed – – – – – – – – – – – – Performance award caps Delivery and deferral Contract terms Other safeguards 248 Advisory vote GEB share ownership requirements To align the interests of GEB members 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 2019, GEB members met their share ownership requirements, except for those appointed within the last four years, who need to build up and meet the required share ownership level within five years from appointment. Our GEB member holdings represent approximately USD 169 million in shareholder value. This ownership level demonstrates their commitment to our strategy and alignment with shareholders. Share ownership requirements 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 2019, the Group’s adjusted profit before tax was USD 6.0 billion and the total GEB performance award pool was USD 70.7 million. The GEB 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 granted performance award is capped at five times his fixed compensation. Granted 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 2019, performance awards granted to GEB members and the Group CEO were, on average, 2.5 times their fixed compensation (excluding one-time replacement awards, benefits and contributions to retirement benefit plans). the reviews respective When recommending performance awards for the Group CEO and the other GEB members, as one dimension to consider, the total Compensation Committee compensation for each role against a financial industry peer group. The peer group is selected based on comparability of their size, business mix, geographic presence and the extent to which they compete with us for talent. The Compensation Committee considers our peers’ strategies, practices and pay levels, as well as their regulatory environment; it also periodically refers to other firms’ pay levels or practices, including both financial and non-financial sector peers as applicable. The total compensation for a GEB member’s specific role considers the compensation paid by our peers for a comparable role and performance within the context of our organizational profile. The Compensation Committee periodically reviews and approves the peer group for executive compensation. The table below presents the composition of our peer group for 2019, which has been reviewed and approved by the Compensation Committee for the performance year 2019. GEB employment contracts and severance terms Bank of America Goldman Sachs The employment contracts of the GEB members do not include severance terms 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 included in the GEB performance award pool approved by shareholders. Such awards are subject to approval by the BoD, which may decide not to grant any awards, and ultimately by the shareholders at the AGM. Barclays BlackRock BNP Paribas Citigroup Credit Suisse HSBC JPMorgan Chase Julius Baer Morgan Stanley Standard Chartered Deutsche Bank State Street 249 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation How the French cross-border litigation matter affects our compensation decisions for 2019 In February 2019, the Paris Court of First Instance imposed fines of EUR 3.7 billion on UBS, and awarded the French state civil damages of EUR 800 million. This judgment was issued in connection with a litigation matter related to cross-border business activities with French residents between 2004 and 2011/2012. UBS has appealed the decision of the Court of First Instance, and it will still take time for this matter to be finally concluded. The BoD and the GEB continue to focus on progressing and resolving the French matter. Both of them are accountable for a resolution of this interest of shareholders. legacy matter in the best When determining the 2019 performance award pool, the impact of the French matter on the firm was taken into consideration. Additionally, this was also considered in individual performance assessments and compensation decisions as applicable.  Refer to “Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information about litigation, regulatory and similar matters Existing principles and approach for considering litigation in the performance and compensation process Litigation and regulatory matters, and their remediation and resolution, are taken into consideration in the compensation decision-making process. The Compensation Committee distinguishes between current matters, where the underlying issues are within the responsibility of management, and legacy matters, where management is accountable for resolving them but not responsible for the underlying issues. Current matters have a direct impact on the performance award pool, resulting the performance assessment and compensation decision, as well as the payout of deferred awards. For legacy matters, current management is incentivized to effectively and efficiently resolve these matters in the best interest of the shareholders. In this regard, it is important to distinguish between legacy matters, and financial and operating performance for the year. At the same time, we are mindful of the potential costs of such matters, the prudent management thereof, and the effect on our share price. Therefore the reflect compensation performance management’s impact on achieving an effective resolution without creating an incentive to inappropriately settle or take risks with regard to such matters. assessment and 250 Enhancements to our approach For 2019, the Compensation Committee has taken additional measures to demonstrate the accountability of management and their alignment with shareholders regarding the outcome of the French cross-border matter. to respect Share price movements affect all employees with deferred the performance equity-based awards. With conditions on the LTIP awards, provisions for legal, regulatory and similar matters will directly impact the reported RoCET1 metric and thus also the final vesting amount subject to this performance condition. This metric accounts for 50% of the final payout under the 2019 LTIP. The use of reported RoCET1 supports the focus on ensuring the cost of litigation matters has a direct impact on the compensation realized by our senior leaders including the GEB. For GEB members active in March 2017, when the investigating judges issued the trial order, as an added measure, the 2019 LTIP awards will be subject to the following considerations impacting their 2019 compensation. – Up to an additional CHF 7.9 million or 30% of the 2019 LTIP awards at grant for relevant GEB members as well as the Chairman’s unvested share award are at risk and directly linked to the final resolution of the French matter. The portion at risk is subject to forfeiture based on the final cost associated with the resolution of the matter. If the French matter is unresolved at the time the 2019 award is expected to vest, 30% of the LTIP shares will continue to be at risk, contingent upon the final resolution of this matter. – Finally, a new malus clause has been introduced, which provides the Compensation Committee with the opportunity to assess any new information that becomes available in the future. If the Compensation Committee determines that the new information would have impacted its 2019 performance award decisions had the information been known at the time, it can retrospectively reduce the 2019 LTIP grant by up to the full amount. Impact of litigation matters on the Long-Term Incentive Plan ) P I T L ( n a l P e v i t n e c n I m r e T - g n o L LTIP performance metric Reported RoCET1 directly impacted by litigation cost Fact-based adjustment Up to CHF 7.3 million of the 2019 LTIP award at grant is directly linked to the ﬁnal resolution of the French matter Malus adjustment 2019 LTIP award may be reduced based on new information that would have impacted the compensation for 2019 Advisory vote Compensation framework for employees other than GEB members Employees other than GEB members that receive performance awards with total compensation exceeding USD / CHF 300,000 are subject to a mandatory deferral framework, under which a significant portion of the performance award is deferred over a period of five years, or longer for certain regulated employees. The deferred amount increases at higher marginal rates in line with the value of the performance award. The effective deferral rate therefore depends on the amount of the performance award and the amount of total compensation. The deferred compensation is delivered through three plans, which are described in detail later in this section: the DCCP (notional additional tier 1 capital instruments), the LTIP and the EOP (notional shares). For Group Managing Directors (GMDs), 50% of the deferred performance award is granted under the LTIP and 50% under the DCCP. The LTIP award vests in year 3 after the grant year, while the DCCP award vests in year 5 after the grant year, the same as for GEB members. For below-GMD employees, 60% of the deferred performance award is granted under the EOP and 40% under the DCCP. The EOP award vests in equal installments in years 2 and 3 after the grant year, while the DCCP award vests in year 5 after the grant year. Asset Management (AM) GMDs and employees in investment areas have a different deferral and plan mix to align their compensation more closely with industry standards. Therefore AM GMDs receive 50% of their deferred performance awards in notional funds under the AM EOP, 25% under the LTIP and 25% under the DCCP. AM employees below GMD in investment areas continue to receive 75% of their deferred performance awards in notional funds under the AM EOP and 25% under the DCCP, while AM employees below GMD in non-investment areas continue to receive 50% of their deferral under the AM EOP plus 25% under the EOP and 25% under the DCCP. requirements Certain regulated employees, such as Senior Management Functions (SMFs) and Material Risk Takers (MRTs), are subject to (e.g., an additional non-financial additional conduct-related performance metric under the LTIP, more stringent deferral requirements, additional blocking periods). In addition, SMFs and MRTs receive 50% of their cash portion in the form of immediately vested shares which are blocked for 6 to 12 months. Benchmarking for employees other than GEB members 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. Considering available records on employee shareholdings including unvested deferred compensation, as of 31 December 2019, employees held at least USD 2.5 billion of UBS shares (of approximately USD 1.8 billion were unvested), which representing approximately 6% of our total shares issued. Our senior leaders (GEB members and GMDs) held approximately USD 410 million of UBS shares (of which approximately USD 272 million were unvested).  Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information Compensation for US financial advisors in Global Wealth Management 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, policies and/or applicable laws and regulations. 251 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Compensation elements for all employees 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 2019, we enhanced our framework by introducing the LTIP, the details of which are outlined in this section. We will continue to review our approach to salaries and performance awards light of market developments, our performance and our commitment to deliver sustainable returns to our shareholders. in At the AGM, 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 about MRTs and SMFs  Refer to the “Shareholder engagement and say on pay” section of this report for more information about the shareholders’ Base salary and role-based allowance vote on 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 their 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 2019 was CHF 2.5 million and has remained unchanged since his appointment in 2011. The other GEB members each 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, 2019 role-based allowances consisted of a cash portion and, where applicable, a blocked UBS share award. Two GEB members are considered Material Risk Takers (MRTs), including one UK Senior Management Function (SMF), for UK / EU entities due to their impact on those entities regardless of personal domicile. In addition to base salary, role- based allowances are part of their fixed compensation. Pensions and benefits We offer certain benefits for all employees, 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 individual performance, and business division, team and behavior, reflecting their overall contribution to the firm’s results. They are awarded local in employment conditions and at the discretion of the firm. line with applicable 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. 252 Advisory vote Our deferred compensation plans To reinforce our emphasis on sustainable performance, risk management and focus on achieving our growth ambitions, 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, transparent, and is best suited to implementing our compensation philosophy and delivering interests of our sustainable performance. This aligns the links shareholders employees compensation to longer-term sustainable performance. appropriately and and Deferred compensation is delivered through a combination of equity-based plans and a contingent capital plan. The equity- based plans are: (i) the Long-Term Incentive Plan (the LTIP), which is for the most senior leaders of our organization, i.e., GEB members, GMDs and Group or Divisional Vice Chair role holders, and supports delivering profitable growth to drive higher returns and create long-term value for our shareholders; and (ii) the Equity Ownership Plan (the EOP), which is for all other employees, and which primarily aligns employees’ interests with those of our shareholders. The Deferred Contingent Capital Plan (the DCCP) aligns employees’ interests with those of debt holders. 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, 4 years for GMDs and 3.5 years for employees below GEB / GMD 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, pursuant to performance and harmful acts provisions. Deferred awards granted to our most senior employees and to Highly Paid Employees (employees with a total compensation exceeding USD / CHF 2.5 million), Key Risk Takers (KRTs) and other selected employees are subject to 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 about 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 253 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Long-Term Incentive Plan The rTSR performance metric over the three-year period The Long-Term Incentive Plan (the LTIP) is a mandatory deferral plan for senior leaders of the Group (i.e., GEB members, GMDs and Group or Divisional Vice Chair role holders). For the performance year 2019, we granted LTIP awards to 119 employees at a fair value of 62.25% of maximum, which is based on the methodology used to determine the expense to the organization under IFRS 2 standards. The value was independently calculated to support the robustness of the approach, which uses a well-established valuation methodology. The performance metrics of the equity-based LTIP awards are average reported return on CET1 capital (RoCET1) and relative total shareholder return (rTSR) over a three-year performance period starting in the year of grant. Performance outcomes and actual payout levels will be disclosed at the end of the performance period. further aligns the interests of employees with shareholders: – selected because they are reflect companies with a the metric compares the TSR of UBS with the TSR of an index consisting of Global Systemically Important Banks (G-SIBs) as determined by the Financial Stability Board; the G-SIBs have been independently defined and comparable risk profile and impact on the global economy; the index, which includes publicly traded G-SIBs, is equal weighted, calculated in Swiss francs, and maintained by an independent index provider to increase transparency and ensure independence of the TSR calculation; and the payout interval of ±25 percentage points versus the index performance demonstrates our ambition to deliver attractive relative returns to our shareholders. The linear payout and the threshold level set below index performance further support sustainability of results and prudent risk-taking. – – – PPeerrffoorrmmaannccee mmeettrriicc WWeeiigghhtt TThhrreesshhoolldd MMaaxxiimmuumm GGlloobbaall SSyysstteemmiiccaallllyy IImmppoorrttaanntt BBaannkkss ((GG SSIIBBss)) lliisstteedd ccoommppaanniieess ppeeeerr ggrroouupp11 - - RoCET1 rTSR vs G-SIBs Index Payout level 50% 50% 6% –25 pps 33% 18% +25 pps 100% Note: Linear payout between threshold and maximum performance. SMFs and UK MRTs are subject to an additional non-financial metric based on a conduct assessment. The three-year average reported RoCET1 performance metric reflects our strategic return ambitions: – the required RoCET1 performance for a maximum payout is set at 18%, which represents a stretch objective relative to our communicated ambitions; the required performance threshold of 6% for the minimum payout supports our focus on delivering sustainable results and appropriate risk-taking; this approach significantly increases the level of RoCET1 performance required to achieve a payout that is equal to the award value relative to our legacy approach under the EOP; and the linear payout design between the threshold and the maximum level reflects our focus on sustainable performance while also supporting our growth ambitions. This design does not encourage excessive risk-taking, as might be the case with a non-linear payout geared toward high performance levels. – – – Agricultural Bank of China Goldman Sachs Santander Bank of America Groupe Crédit Agricole Société Générale Bank of China HSBC Standard Chartered Bank of New York Mellon ING Bank State Street Barclays BNP Paribas ICBC Sumitomo Mitsui FG JPMorgan Chase Toronto-Dominion China Construction Bank Mitsubishi UFJ FG UniCredit Citigroup Credit Suisse Mizuho FG Wells Fargo Morgan Stanley Deutsche Bank Royal Bank of Canada 11 As of November 2019. The LTIP award reflects the long-term focus of our compensation framework. The final number of shares as determined at the end of the three-year performance period will vest in three equal installments in each of the three years following the performance period for GEB members, and cliff- vest in the first year following the performance period for GMDs and Group or Divisional Vice Chair role holders. LTIP payout illustration – The final number of notional shares vesting will vary based on the achievement versus the performance metrics. – Vesting levels are a percentage of the maximum opportunity of the LTIP and cannot exceed 100%. Average reported RoCET1 Below threshold (<6%) Threshold (6%) up to maximum (18%) Maximum and above (≥18%) Maximum and above (+25 pps) Full vest – Full forfeiture for performance below the predefined threshold levels. rTSR Threshold (–25 pps) up to maximum ( +25 pps) Partial vest Below threshold (–25 pps) Full forfeiture 254 Advisory vote Equity Ownership Plan The Equity Ownership Plan (the EOP) is a mandatory deferral plan for all employees with total compensation greater than USD / CHF 300,000, other than GEB members, GMDs and Group or Divisional Vice Chair role holders. For the performance year 2019, we granted EOP awards to 3,558 employees. The plan includes provisions that allow the firm to reduce or fully forfeit the unvested deferred portion of a granted EOP award if an employee commits certain harmful acts, and in most cases trigger forfeiture where employment has been terminated. The award vests in equal installments in years 2 and 3 after grant year. For 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. The Group performance condition is based on the average reported return on CET1 capital (RoCET1) over the applicable performance period. The future Compensation Committee performance thresholds at levels to demonstrate that the long- term quality of the past year’s performance is sustainable. Once set, the thresholds remain in place for that particular award year. The Compensation Committee also determines whether the performance conditions have been met. the minimum sets The Group performance condition is based on the average reported RoCET1. If the outcome is equal to or above the threshold, the award will vest in full, or if it is between 0% and the threshold, it will vest on a linear basis at 0–100%. In both cases, vesting is contingent on the relevant business division performance condition also being met. If the outcome is 0% or negative, the installment will be fully forfeited regardless of any business division performance. Similarly, business division performance is measured on the basis of their average return on attributed equity (RoAE) adjusted for disclosed items generally not representative of underlying business performance. For Corporate Center employees, it is measured on the basis of the average operating businesses’ RoAE adjusted for disclosed items generally not representative of underlying business performance. If the threshold is met, the award will vest in line with the Group performance achievement. If the outcome is 0% or below, the respective awards are fully forfeited. If it is between 0% and the respective threshold, the awards are subject to forfeiture of up to 40%. Finally, the Compensation Committee retains discretion to adjust the award if the performance metric does not reflect a fair measure of performance. 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. Our EOP awards have no upward leverage, and 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 255 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Deferred Contingent Capital Plan The Deferred Contingent Capital Plan (the DCCP) is a mandatory deferral plan for all employees with total compensation greater than USD / CHF 300,000. For the performance year 2019, we granted DCCP awards to 3,654 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, i.e., 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 for GEB members if the Group’s common equity tier 1 (CET1) capital ratio falls below 10% and for all other employees if it falls below 7%. 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 2020 was 1.50% 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 3.90% in Swiss Over the last five years, USD 2.0 billion of DCCP awards were 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 contribution of the DCCP to our AT1 and tier 2 capital as well as to our TLAC ratio.  Refer to the “Supplemental information” section of this report for more information about performance award- and personnel-related expenses  Refer to the “Supplemental information” section of this report for more information about longer vesting and clawback periods for MRTs and SMFs Contribution of the Deferred Contingent Capital Plan to our loss-absorbing capacity1 USD million, except where indicated DDeeffeerrrreedd CCoonnttiinnggeenntt CCaappiittaall PPllaann ((DDCCCCPP)) 3311..1122..1199 11,,996622 11,,996622 31.12.18 31.12.17 2,005 2,005 2,160 1714 of which: high-trigger loss-absorbing additional tier 1 capital of which: high-trigger loss-absorbing tier 2 capital2 447 0.9 DCCP contribution to the total loss-absorbing capacity ratio (%) 11 Refer to “Bondholder information” at www.ubs.com/investors for more information about the capital instruments of UBS Group AG and UBS AG both on a consolidated and a standalone basis. 22 Relates to DCCP awards granted for the performance year 2013 – based on Swiss SRB framework including transitional arrangements (phase-in) as of 31 December 2017. As of 31 December 2019 these DCCP awards no longer met the grandfathering treatment under Swiss TBTF capital requirements. 00..88 0.8 256 Advisory vote Other variable compensation components To support hiring and retention, particularly at senior levels, we may offer certain other compensation components. These include: – replacement payments to compensate employees for deferred awards forfeited as a result of joining the firm – such payments are industry practice and are often necessary to attract senior candidates, who generally have a significant portion of their awards deferred at their current employer, where continued employment is required to avoid forfeiture; retention payments made to key employees to induce them to stay, particularly during critical periods for the firm, 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; and 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. No severance payments are made to members of the GEB. Below-GEB level 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. 257 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Replacement awards for new GEB members and forfeitures of former GEB members Our compensation framework and plans include provisions whereby the firm generally reduces or fully forfeits an employee’s unvested or deferred awards where employment has been terminated and in particular where they join another financial restrictive covenants, such as solicitation of clients or employees, in line with industry practice. services organization and/or violate Conversely, also consistent with industry practice to support talent acquisition, in particular at senior levels, we may offer certain other compensation components such as replacement payments to offset compensation being forfeited as a result of joining UBS. In making such replacement awards, we aim to match the terms and conditions of the awards granted by an employee’s previous employer that are forfeited upon the employee joining UBS. In 2019, Iqbal Khan joined UBS and was appointed to the GEB on 1 October 2019 as Co-President Global Wealth Management. He received awards as replacements for deferred compensation awarded by his previous employer that was forfeited as a result of him joining UBS. Mr. Khan’s replacement payment consists of deferred EOP share awards representing 712,342 UBS shares (denominated in Swiss francs) with a grant date total fair market value of USD 8.1 million. The award vests in various installments between 2020 and 2024. All of these awards are subject to the firm’s harmful acts provisions. This one-time replacement award to Mr. Khan is more than offset by the total 2019 forfeitures of USD 16.2 million by former GEB members, as shown in the table below. The total 2019 forfeitures of USD 173 million of previously awarded deferred total sign-on payments, the 2019 compensation offset replacement payments and guarantees of USD 114 million. Sign-on payments, replacement payments, guarantees and severance payments USD million, except where indicated TToottaall ssiiggnn oonn ppaayymmeennttss11 -- of which: Key Risk Takers2 TToottaall rreeppllaacceemmeenntt ppaayymmeennttss33 of which: Key Risk Takers2 TToottaall gguuaarraanntteeeess33 of which: Key Risk Takers2 TToottaall sseevveerraannccee ppaayymmeennttss11,,44 of which: Key Risk Takers2 TToottaall 22001199 ooff wwhhiicchh:: eexxppeennsseess rreeccooggnniizzeedd iinn 2200119955 of which: expenses to be recognized in 2020 and later5 TToottaall 22001188 NNuummbbeerr ooff bbeenneeffiicciiaarriieess 3311 99 5577 2222 2277 66 114444 1188 55 66 11 1144 22 11664466 13 5 51 21 12 3 0 30 7 72 19 48 12 165 22001199 664444 66 117788 1122 3322 33 11,,44444477 2018 178 6 299 11 54 5 1,5247 18 11 GEB members are not eligible for sign-on or severance payments. 22 Expenses for Key Risk Takers are full-year amounts for individuals in office on 31 December 2019. Key Risk Takers as defined by UBS, including all employees with a total compensation exceeding USD / CHF 2.5 million (Highly Paid Employees). 33 For 2019, includes a replacement payment to one GEB member. No GEB member received a guarantee for 2019, and no GEB member received replacement payments or guarantees for 2018. 44 Includes legally obligated and standard severance payments as well as payments in lieu of notice. 55 Expenses before post-vesting transfer restrictions. 66 Represents expense recognized in 2019 associated with payments made in 2019 as well as provisions for expected payments in 2020. 77 Relates only to payments expensed in the year. 1188 4 33 0 33 Forfeitures1 USD million, except where indicated TToottaall ffoorrffeeiittuurreess of which: former GEB members TToottaall 22001199 Total 2018 Population affected 117733 1166 179 0 22001199 665533 11 2018 661 0 of which: Key Risk Takers2 8 11 Forfeitures are calculated as units forfeited during the year, valued at the share price on 31 December 2019 (USD 12.58) for 2019. The 2018 data is valued using the share price on 31 December 2018 (USD 12.38). For the notional funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in 2019 and 2018. For the DCCP, the fair value at grant of the forfeited awards during the year is reflected. 22 Key Risk Takers as defined by UBS, including all employees with a total compensation exceeding USD / CHF 2.5 million (Highly Paid Employees) and excluding former GEB members who have forfeited awards in 2019 or 2018. 30 66 66 258 Advisory vote Compensation governance Board of Directors and Compensation Committee the compensation strategy proposed by The Board of Directors (the BoD) is ultimately responsible for approving the Compensation Committee, which determines compensation- related matters in line with the principles set forth in the Articles of Association. As determined in the Articles of Association and the firm’s Organization Regulations, the Compensation Committee supports the BoD in its duties to set guidelines on compensation and benefits, to approve certain compensation and to scrutinize executive compensation. It is responsible for the governance and oversight of our compensation process and practices, including considering the alignment between pay and performance and that our compensation system does not encourage inappropriate risk-taking. Our Compensation Committee consists of four independent BoD members, who are elected annually by shareholders at the Annual General Meeting (the AGM). Among other responsibilities, the Compensation Committee, on behalf of the BoD, annually: – – 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; – – – – – – – – / fee frameworks for external approves remuneration 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 public disclosures on compensation matters. The Compensation Committee meets at least four times a year. In 2019, the Compensation Committee held six meetings and two conference calls, with a participation rate of 97%. The Chairman of the BoD attended all meetings and calls, and the Group CEO all but one meeting. The Chairman of the BoD and the Group CEO were not present during discussions related to their own compensation or performance evaluations. The 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 2019, the members of the Compensation Committee were Julie G. Richardson, who chairs the committee, Reto Francioni, Fred Hu and Dieter Wemmer. External advisors The Compensation Committee may retain external advisors to support it in fulfilling its duties. In 2019, 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 regarding 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. 259 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation 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 2019 / 2020 key activities and timeline The table below provides an overview of the Compensation Committee’s key activities from the 2019 AGM to the 2020 AGM. SSttrraatteeggyy,, ppoolliiccyy aanndd ggoovveerrnnaannccee Total Reward Principles Three-year strategic plan on variable compensation Compensation disclosure and stakeholder communication matters AGM reward-related items Compensation Committee governance AAnnnnuuaall ccoommppeennssaattiioonn rreevviieeww 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 CCoommppeennssaattiioonn ffrraammeewwoorrkk Compensation framework and deferred compensation matters RRiisskk aanndd rreegguullaattoorryy Risk management in the compensation approach and joint meeting with BoD Risk Committee Regulatory activities impacting employees and engagement with regulators 11 The Compensation Committee held two meetings in December 2019. Compensation governance July Sept Oct Nov Dec¹ Jan Feb                                                The table below provides an overview of compensation governance by specific role. RReecciippiieennttss CCoommppeennssaattiioonn rreeccoommmmeennddaattiioonnss pprrooppoosseedd bbyy AApppprroovveedd bbyy CChhaaiirrmmaann ooff tthhee BBooDD Chairperson of the Compensation Committee Compensation Committee1 IInnddeeppeennddeenntt BBooDD mmeemmbbeerrss ((rreemmuunneerraattiioonn ssyysstteemm aanndd ffeeeess)) Compensation Committee and Chairman of the BoD GGrroouupp CCEEOO Compensation Committee and Chairman of the BoD OOtthheerr GGEEBB mmeemmbbeerrss Compensation Committee and Group CEO BoD1 BoD1 BoD1 KKeeyy RRiisskk TTaakkeerrss ((KKRRTTss)) // ((sseenniioorr)) eemmppllooyyeeeess Respective GEB member together with functional management team Individual compensation for KRTs and senior employees: Group CEO Performance award pool for all employees: BoD 11 Aggregate compensation for the GEB and aggregate remuneration for the BoD are subject to shareholder approval. 260 Advisory vote 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 outlined 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, such measures are based on both Group performance and the performance of the relevant business division and/or region; the those who performance of the Group and the function they oversee. functions are assessed on lead Group 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. We have adjusted the metric and goal weightings and enhanced the transparency of the respective disclosure. New for 2019, the financial measures account for 70% of the assessment while Pillars and Principles account for 15% and Behaviors account for the remaining 15%. 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 chart below shows how compensation for all GEB members is determined. The Compensation Committee is involved at all stages of the performance and total compensation decision-making process for the Group CEO and the other GEB members, for review and approval by the BoD. Objective setting Performance assessment Delivery and deferral Financial results are assessed quantitatively. Achievements relative to goals related to Pillars and Principles (including ESG-related goals) and Behaviors are assessed qualitatively, based on a five-point scale. When determining actual pay levels, the Compensation Committee factors in: • financial performance • performance assessment • relative performance versus peers • compensation market value and trends • other parameters deemed relevant Financial targets are based on Group, business division, regional and/or functional performance measures (depending on the role of the GEB member). Financial targets and goals related to Pillars, Principles (including ESG-related goals) and Behaviors reflect the strategic priorities determined by the Chairman and the BoD. Financial targets weight: 70% Pillars and Principles weight: 15% Behaviors weight: 15% s s e c o r p i g n k a m - n o i s i c e D e h t f o e o R l e e t t i m m o C n o i t a s n e p m o C • Together with the BoD Chairman establishes the objectives for the Group CEO. • Together with the Group CEO reviews objectives • Together with the BoD Chairman evaluates the performance of the Group CEO and determines the overall assessment. for the other GEB members. • Together with the Group CEO reviews the performance assessment for the other GEB members. Final compensation decisions for GEB members consider the Group CEO’s recommendation (the Group CEO makes no recommendation on his own awards). Proposes to the BoD: • together with the BoD Chairman, the total individual compensation for the Group CEO; and • together with the Group CEO, the total individual compensation for the other GEB members. The final decision on the aggregrate amount is subject to shareholder approval. 261 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation The performance assessment is the starting point for determining a GEB member’s annual performance award. Financial measures are assessed quantitatively based on full-year financial results versus predetermined targets and plan figures. The outcome for each financial measure is expressed as an achievement. Pillars, Principles and Behaviors are assessed qualitatively based on the five-point scale outlined below, which requires a “significantly exceeded expectations” goal rating to provide a 100% achievement score. The total of all weighted achievement scores across financial measures and qualitative goals cannot exceed 100%. Overview of the performance assessment measures The Compensation Committee can still 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 approval by 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. The table below presents the measures for the 2019 performance assessment of the Group CEO and GEB members. Group measures Group measures A range of financial measures including adjusted Group profit before tax, adjusted Group cost / income ratio, reported return on CET1 capital, CET1 ratios. Business division, regional and/or functional Business division, regional and/or functional measures (if applicable)1 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. Specific functional measures for Corporate Center GEB members. Pillars Pillars Capital strength Establishes and maintains capital. Generates efficiencies and deploys our capital more efficiently and effectively. 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 Principles Client focus Excellence Sustainable performance 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. 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. 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. BBeehhaavviioorrss Integrity Is responsible and accountable for what they say and do; cares about clients, investors, and colleagues; acts as a role model. Collaboration Places the interests of clients and the firm before their own and those of their business; works across the firm; respects and values diverse perspectives. Challenge Encourages self and others to constructively challenge the status quo; learns from mistakes and experiences. 11 Both regional and functional measures may include qualitative measures. Qualitative performance assessment scale The table below presents the five-point scale used for the qualitative assessment of the performance against goals related to Pillars, Principles and Behaviors. BBeellooww eexxppeeccttaattiioonnss MMeett mmoosstt eexxppeeccttaattiioonnss MMeett eexxppeeccttaattiioonnss EExxcceeeeddeedd eexxppeeccttaattiioonnss SSiiggnniiff.. eexxcceeeeddeedd eexxppeeccttaattiioonnss Performance failed to meet the standard expected, immediate improvement required Reasonable performance, but not consistently up to the standard expected, some improvement required Performance consistently met standard expected, may have exceeded a few goals Performance exceeded most expectations on a regular basis Consistently achieved truly exceptional results Achievement score: 0–30% Achievement score: 40% Achievement score: 60% Achievement score: 80% Achievement score: 100% 262 Advisory vote 2019 compensation for the Group Chief Executive Officer The performance award for the Group CEO, Sergio P. Ermotti, is based on the achievement of financial performance targets and qualitative goal achievements relative to Pillars, Principles and Behaviors, as described earlier in this section. These targets and goals were set to reflect the strategic priorities determined by judge the quality and the Chairman and the BoD. To sustainability of the Compensation Committee considers in the qualitative goal assessment a range of additional factors including relative performance and market conditions, as well as ESG-related aspects, such as client satisfaction, employee satisfaction, talent management, diversity and inclusion, sustainable business practice, sustainable finance, and philanthropy. financial results, the the presentation The table below illustrates the assessment criteria used to evaluate the achievements of Mr. Ermotti as Group CEO for 2019. We enhanced these disclosures by outlining the annual target, the results, the achievement and the weighted assessment. With respect to the non-financial targets, we have also aligned 100% with “significantly exceeded expectations.” As a result, a “met expectations” results in 60% versus 100% for “significantly exceeded expectations.” regarding  Refer to the “Compensation philosophy and framework” section of this report for more information Performance assessment for the Group CEO The BoD recognized Mr. Ermotti’s successful leadership in preparing and positioning the Group for the future while effectively navigating it through another challenging year marked by geopolitical and macro uncertainty as well as difficult external conditions including sustained negative interest rates and significant efforts to mitigate the impact of the French cross- border matter on the firm. Weight Performance measures 2019 Annual target 2019 Results Achieve- ment Weighted assess- ment 2019 Commentary 30% Return on CET1 capital 15% 12.4% 83% 25% 20% Adjusted Group profit before tax USD 6.9 billion USD 6.0 billion 88% 18% Financial perfor- mance 10% Adjusted cost / income ratio 77% 78.9% 81%2 8%2 10% Capital management CET1 capital ratio CET1 leverage ratio Post-stress CET1 capital ratio 13.0% 3.7% Above target 13.7% 3.9% Achieved 100% 100% 100% 10% – The Group achieved a reported return on CET1 capital of 12.4% (versus 13.1% in 2018). – The Group achieved an adjusted1 profit before tax of USD 6 billion, in line with 2018 results. – Despite additional regulatory cost pressure, costs were effectively managed down but did not completely offset revenue shortfalls, resulting in a cost / income ratio of 78.9% (versus 79.5% in 2018). – The capital position was successfully managed, allowing for increased capital distributions / buybacks to shareholders while maintaining a strong CET1 capital ratio of 13.7% and a CET1 leverage ratio of 3.9%. 11 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results. between actual and target affects the score by 10%. 22 For the assessment of the cost / income ratio, each 1% difference 263 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Performance assessment for the Group CEO (continued) - Perfor mance measures Achieve- ment Weighted assess- ment Weight 2019 Commentary – Under Mr. Ermotti’s leadership, capital distribution targets were deliv- ered upon while maintaining the firm’s balance sheet strength. While progress was achieved on a number of growth and synergy initia- tives across divisions, functions and regions, the Group did not fully deliver on growth and return targets, in particular in the Global Wealth Management and Investment Bank divisions. Mr. Ermotti further increased the focus on positioning UBS for the future through various efforts including entering into strategic partner- ships and executed on the defined technology strategy. Mr. Ermotti continued his dedication to and personal engagement with clients and ensured further progress was made throughout the firm in enhancing client centricity, providing high-quality, state-of- the-art products and services, leveraging new technologies and strengthening the digital offering. Mr. Ermotti led the organization in its continued focus on ESG topics, demonstrated by the Group’s recognition as industry leader in the Dow Jones Sustainability Indices for the fifth consecutive year, confirming the progress made toward achieving the ambitions in sus- tainable finance, philanthropy, sustainable business practices and being an employer of choice. Mr. Ermotti further enhanced the focus on improvements in the Group’s risk profile and progressed initiatives to meet regulatory require- ments. In 2019, Mr. Ermotti integrated new GEB members into his leadership team and made changes through internal promotion as well as attracting external talent. He also continued to drive talent development, succes- sion planning and internal mobility throughout the organization. – – – – – – – Mr. Ermotti set a clear and consistent tone from the top and role-modeled the UBS behaviors. He continued to encourage constructive challenge, displaying his strong commitment for continuous improvement, and drove the organization toward stronger collaboration in the interest of clients. He remained the most important ambassador to the Group’s culture and behavior program and continued to personally champion the behavior principles across the organization. 15% Pillars and Principles Met expecta- tions (60%) 9% Quali- tative goals 15% Behaviors Exceeded expecta- tions (80%) 12% Total weighted assessment (maximum 100%) 81% in 2019 and In addition to Mr. Ermotti’s achievements underlying performance, the BoD also considered other factors, including the impact of the French cross-border matter on the firm and the resulting share price development. The BoD approved the proposal by the Compensation Committee to grant Mr. Ermotti a performance award of CHF 9.7 million (down 14% from CHF 11.3 million in 2018), resulting in a total compensation for the year of CHF 12.2 million (excluding benefits and contributions to his retirement benefit plan). The performance award is subject to shareholder approval as part of the aggregate GEB 2019 variable compensation and will be delivered 20% (CHF 1.9 million) in cash and the remaining 80% (CHF 7.8 million) subject to deferral and forfeiture provisions, as well as meeting performance conditions over five years. Furthermore, CHF 1.5 million of the 2019 LTIP award for Mr. Ermotti is entirely at risk and subject to forfeiture based on the final cost associated with the resolution of the French cross- border matter, as noted in other sections of this report. 264 Advisory vote 2019 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 performance award pool for the GEB was CHF 70.3 million (USD 70.7 million) for 2019, a decrease of 14% compared with the prior year on a per capita basis. This decrease is in line with the decrease in the overall performance award pool of the firm. Group profit before tax decreased 7% to USD 5.6 billion while adjusted profit before tax decreased slightly to USD 6.0 billion. The Compensation Committee has confirmed that performance conditions for all GEB members’ awards due to vest in March 2020 have been satisfied, and thus the awards will vest in full. At the 2020 AGM, shareholders will vote on the aggregate 2019 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 “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, except where indicated USD (for reference)2 FFoorr tthhee yyeeaarr 22001199 Base salary 2,500,000 Contribution to retirement benefit plans3 244,353 Benefits4 65,048 TToottaall ffiixxeedd -- ccoommppeennssaa ttiioonn 22,,880099,,440011 Cash5 1,940,000 Performance award under LTIP6/ EOP7 4,850,000 Performance award under DCCP8 2,910,000 TToottaall vvaarriiaabbllee -- ccoommppeennssaa ttiioonn 99,,770000,,000000 TToottaall ffiixxeedd - aanndd vvaarrii - -- aabbllee ccoomm ppeennssaattiioonn99 1122,,550099,,440011 Total fixed compensa- tion 2,826,303 Total variable compensa- tion 9,758,356 Total fixed and vari- able com- pensation9 12,584,659 22001188 2,500,000 261,181 62,813 22,,882233,,999944 2,000,000 5,910,000 3,390,000 1111,,330000,,000000 1144,,112233,,999944 Aggregate of all GEB members10,11,12,13 CHF, except where indicated FFoorr tthhee yyeeaarr 22001199 Base salary14 28,169,646 Contribution to retirement benefit plans3 2,333,935 Benefits4 1,350,439 TToottaall ffiixxeedd -- ccoommppeennssaa ttiioonn Performance award under DCCP8 3311,,885544,,002200 14,050,000 35,125,000 21,075,000 Performance award under LTIP6/ EOP7 Cash5 USD (for reference)2 TToottaall vvaarriiaabbllee -- ccoommppeennssaa ttiioonn 7700,,225500,,000000 TToottaall ffiixxeedd - aanndd vvaarrii - -- aabbllee ccoomm ppeennssaattiioonn99 110022,,110044,,002200 Total fixed compensa- tion 32,045,656 Total variable compensa- tion Total fixed and vari- able com- pensation9 70,672,629 102,718,285 22001188 22,948,016 2,540,085 2,042,509 2277,,553300,,661100 14,269,889 37,040,111 21,990,000 7733,,330000,,000000 110000,,883300,,661100 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. 22 Swiss franc amounts have been translated into US dollars for reference at the 2019 performance award currency exchange rate of CHF / USD 1.006. 33 Includes the portion related to the employer’s contribution to the statutory pension scheme. 44 All benefits are valued at market price. 55 For GEB members who are also MRTs or SMFs, the cash portion includes blocked shares. 66 LTIP awards for performance year 2019 were awarded at a value of 62.25% of maximum which reflects our best estimate of the fair value of the award. The maximum number of shares is determined by dividing the awarded amount by the fair value of the award at the date of grant, divided by CHF 77 For EOP awards for the performance year 2018, the number of shares 12.919 or USD 13.141, the average closing price of UBS shares over the last ten trading days leading up to and including the grant date. was 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. 88 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 2019, the notional interest rate is set at 3.90% for awards denominated in US dollars and 1.50% for awards denominated in Swiss francs. For DCCP awards for the performance year 2018, the notional interest rate is set at 6.85% for awards denominated in US dollars and 99 Excludes the portion related to the legally required employer’s social security contributions for 2019 and 2018, which are estimated at grant at CHF 4,969,844 3.40% for awards denominated in Swiss francs. and CHF 5,175,418, respectively, of which CHF 797,938 and CHF 886,455, 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. 1100 Thirteen GEB members were in office on 31 December 2019 including three new GEB members, one appointed on 1 January 2019 and two on 1 October 2019; three GEB members stepped down, one on 31 December 2018 and two on 30 September 2019. 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. 1111 2019 includes compensation for three months paid under the employment contract during the notice period for one GEB member who stepped down on 30 September 2018 as well as compensation for two GEB members who stepped down on 30 September 2019 for nine months in office as GEB members plus for three months paid under the employment contract during the notice period. 2018 includes compensation for six months paid under the employment contract during the notice period for 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. 1122 2019 includes compensation for one newly appointed GEB member for 12 months in office as a GEB member and for two newly appointed GEB members for three months in office as GEB members. 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. 1133 For 2019, Iqbal Khan received a one-time replacement award of CHF 8,053,022. This replacement award is not included in the above table; including this, the 2019 total aggregate compensation of all GEB members is CHF 110,157,042. 1144 Includes role-based allowances in line with market practice in response to regulatory requirements.  265 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation 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 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 granted and approved by shareholders in previous years. 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 FFoorr tthhee yyeeaarr 22001199 22001188 22001177 22001166 22001155 22001144 22001133 22001122 11 Appointed on 24 September 2011 as Group CEO ad interim and confirmed on 15 November 2011. (discontinued in 2012). 33 Cash Balance Plan installments. For 2012, due to applicable UK FSA regulations, deferred cash includes blocked shares. installments paid out under the EOP, Senior Executive Equity Ownership Plan (SEEOP, discontinued in 2012) and Performance Equity Plan (PEP, discontinued in 2012). 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. AAwwaarrddeedd Total awarded fixed and variable compensation6 12,200,000 13,800,000 13,900,000 13,400,000 14,000,000 10,900,000 10,400,000 8,600,000 22 Paid out based on previous performance year. For 2012 this includes Cash Balance Plan installments 44 Excludes dividend / interest payments. 55 Includes all 66 Excludes contributions to retirement RReeaalliizzeedd TToottaall rreeaalliizzeedd ffiixxeedd aanndd vvaarriiaabbllee ccoommppeennssaattiioonn66 1111,,440033,,774411 11,926,563 6,451,043 5,167,128 3,518,440 4,410,658 3,273,245 3,606,400 Performance award under equity plans4,5 4,533,741 4,986,563 2,951,043 1,667,128 1,018,440 537,217 423,623 0 Performance award under DCCP4 2,370,000 2,440,000 0 0 0 0 0 0 Deferred cash award3,4 0 0 0 0 0 373,441 349,622 553,200 Cash award2 2,000,000 2,000,000 1,000,000 1,000,000 0 1,000,000 0 553,2003 Base salary 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 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 in the year indicated and for which year the respective component was initially 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. CHF million1 14.0 13.4 13.9 13.8 10.4 10.9 Deferred Deferred 8.6 Deferred 3.6 2011 Base salary 2012 3.3 2011 2011 2013 Cash Base salary Base salary 4.4 2011 2013 2011 2014 3.5 2011 2015 Cash Base salary Deferred Deferred Deferred Deferred 5.2 2012 2011 2015 Cash Cash 6.5 2013 2012 2011 2016 11.9 2012 2014 2013 2012 12.2 11.4 2013 Deferred 2015 2014 2013 Cash 2017 Cash 2018 Base salary 2016 Base salary 2017 Base salary 2018 Base salary 2019 Awarded Realized Awarded Realized Awarded Realized Awarded Realized Awarded Realized Awarded Realized Awarded Realized Awarded Realized 2012 2013 2014 2015 2016 2017 2018 2019 Base salary Cash2 Equity plans3 vesting from previous years DCCP vesting from previous years 11 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. 22 Paid out based on previous performance year. 2012, 2013 and 2014 include Cash Balance Plan installments. 33 Includes all installments paid out under respective EOP, SEEOP and PEP plans, excludes dividend payments. 266 Advisory vote Board of Directors compensation Chairman of the BoD Under the leadership of the Chairman, Axel A. Weber, the Board of Directors (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 clients, government officials, regulators and public organizations. This is in addition to establishing and maintaining a close working relationship with the Group CEO and other GEB members, and providing advice and support when appropriate, as well as continuing to strengthen and promote our culture through the three keys to success – our Pillars, Principles and Behaviors. The Chairman’s total compensation for the period from AGM to AGM is contractually fixed without any variable component. For the current period from the 2019 AGM to the 2020 AGM and in line with the reduction of the fees for independent Board members effective from the 2020 AGM, as explained later in this section, his total compensation has been reduced by 14% from CHF 5.7 million to CHF 4.9 million, excluding benefits and pension fund contributions. The Chairman’s total compensation for the current period consisted of a cash payment of CHF 3.5 million and a share component of CHF 1.4 million consisting of 108,367 UBS shares at CHF 12.919 per share. Accordingly, his total reward, including benefits and pension fund contributions for his service as Chairman for the current period, was CHF 5,235,143.  Refer to “Board of Directors” in the “Corporate governance” section of this report for more information about the responsibilities of the Chairman The share component aligns the Chairman’s pay with the Group’s long-term performance. While the size of the share award continues to be contractually fixed, the vesting of a portion of the share award for the current period is linked to the final resolution of the French cross-border matter. This portion is entirely at risk and subject to forfeiture based on the final cost associated with the resolution of the matter. If the French cross- border matter is unresolved at the time the 2019 award is expected to vest, this portion continues to be at risk, contingent upon the final resolution of this matter. This vesting condition is identical with the new vesting condition introduced for the Group CEO and certain other GEB members on a portion of their 2019 LTIP award. This further demonstrates the Chairman’s alignment with shareholders on this matter. The remaining share award is fully vested but blocked for four years. Contractually fixed total compensation of the Chairman Unvested share award CHF 0.6 million • Up to CHF 0.6 million: ﬁnal vesting amount is linked to ﬁnal resolution of the French cross-border matter • Entire portion is fully at risk and subject to forfeiture based on the ﬁnal cost associated with the resolution of the matter Blocked share award CHF 0.8 million • Fully vested but blocked for 4 years Cash payment CHF 3.5 million The Chairman’s employment agreement does not provide for severance terms or supplementary contributions to pension plans. Benefits for the Chairman are in line with local practices for UBS employees. The Chair of the Compensation Committee proposes and the Compensation Committee approves the Chairman’s compensation annually for the upcoming AGM to AGM period, taking into consideration fee or compensation levels for comparable roles based on our core financial industry peers as well as other relevant leading Swiss companies as included in the Swiss Market Index. Audited | Compensation details and additional information for non-independent BoD members CHF, except where indicated Name, function1 Axel A. Weber, Chairman FFoorr tthhee ppeerriioodd AAGGMM ttoo AAGGMM22 22001199//22002200 Base salary 3,500,000 Annual share award3 1,400,000 22001188//22001199 3,500,000 2,200,000 Contributions to retirement benefit plans5 244,353 255,572 Benefits4 90,790 69,230 TToottaall66 55,,223355,,114433 66,,002244,,880022 USD (for reference) Total6,7 5,266,638 11 Axel A. Weber was the only non-independent member in office on 31 December 2019 and 31 December 2018. 22 The change in reporting period from “financial year” to “AGM to AGM” results in a different total compensation for the period from the 2018 AGM to the 2019 AGM than previously reported for “financial year 2018”, which was CHF 6,033,422. The difference in the total compensation is due to varying benefits and contributions to retirement benefit plans. 33 These shares are blocked for four years. 44 Benefits are all valued at market price. For the period from the 2019 AGM to the 2020 AGM, benefits amount is an estimate. 55 Includes the portion related to UBS’s contribution to the statutory pension scheme. For the period from the 2019 AGM to the 2020 AGM, contribution to retirement benefit plans amount is an 66 Excludes the portion related to the legally required social security contributions paid by UBS, which for the period from the 2019 AGM to the 2020 AGM is estimated at grant at CHF 323,677 and for estimate. the period from the 2018 AGM to the 2019 AGM at CHF 369,772. The legally required social security contributions paid by the non-independent BoD members are included in the amounts shown in this table, as appropriate. 77 Swiss franc amounts have been translated into US dollars for reference at the 2019 performance award currency exchange rate of CHF / USD 1.006.  267 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Independent BoD members All BoD members except the Chairman are deemed independent directors and receive a fixed base fee and additional committee fees for their services on the firm’s various board committees as outlined in the below table. For the current period from the 2019 AGM to the 2020 AGM the remuneration framework remains unchanged. In the current period, the roles of Senior Independent Director and Vice Chairman are both held by one Board member, hence the additional payment for both roles is only paid once. 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 is calculated at a discount of 15% on 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. At each AGM, shareholders are invited to approve the aggregate amount of BoD remuneration in Swiss francs, including compensation of the Chairman, which applies until the next AGM. The tables on the following page provide details on the compensation for the independent BoD members in Swiss francs, and, for reference, the total amounts in US dollars. The remuneration framework for independent BoD members is 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. Remuneration framework for independent BoD members In our 2019 review of all elements of our compensation framework we also reflected on our BoD remuneration framework. We concluded that our overall approach for independent Board member compensation remains appropriate. However, a number of adjustments have been made to simplify and rebalance the fee structure while maintaining it at a competitive level. These changes led to a total fee reduction of approximately 14% (depending on allocation of committee membership). The below summarizes the adjustments which become effective for the period from the 2020 AGM to the 2021 AGM. – The fixed base fees, which had been broadly flat since 1998, have been reduced from CHF 325,000 to CHF 300,000. While the additional committee fees reflect the work required on these committees, the fees for the Chairs of the Risk and the Compensation Committees have been reduced by CHF 50,000 and CHF 100,000, respectively. We have substantially reduced the additional payment for the Senior Independent Director and Vice Chairman roles to CHF 150,000, a reduction of CHF 100,000. In case both roles are allocated to one Board member, the fee will only be paid once. Independent BoD members must still use a minimum of 50% of their fees to purchase UBS shares, which are blocked for four years, and they may continue to elect to use up to 100% of their fees to purchase blocked UBS shares. We have, however, eliminated the 15% discount at which independent Board members were previously entitled to purchase these shares. – – – CHF Fixed base fee Additional fees 2019 AGM to 2020 AGM1 325,000 2020 AGM to 2021 AGM2 300,000 Pay mix Delivery Senior Independent Director / Vice Chairman 250,000 150,000 Blocked shares At least 50% Additional committee fees Chair Member Chair Member Audit Committee Compensation Committee 300,000 200,000 300,000 200,000 300,000 100,000 200,000 100,000 Governance and Nominating Committee Corporate Culture and Responsibility Committee 100,000 50,000 100,000 50,000 Cash Risk Committee 400,000 200,000 350,000 200,000 AGM- to-AGM period Up to 50% grant year year 1 year 2 year 3 year 4 1 UBS shares (at least 50% of fees) are granted with a price discount of 15% and are blocked for four years. 2 The share price discount of 15% will be eliminated effective from the 2020 AGM onwards; the requirement to use at least 50% of the fees to purchase UBS shares blocked for four years remains unchanged. 268 Advisory vote Audited | Total payments to BoD members CHF, except where indicated Aggregate of all BoD members FFoorr tthhee ppeerriioodd AAGGMM ttoo AAGGMM11 TToottaall22 USD (for reference) Total2,3 22001199//22002200 1122,,551100,,114433 12,585,405 22001188//22001199 1133,,444499,,880022 11 The change in reporting period from “financial year” to “AGM to AGM” for the Chairman results in a different total compensation for the period from the 2018 AGM to the 2019 AGM than previously reported for “financial year 2018”, which was CHF 13,458,422. The difference in the total compensation is due to varying benefits and contributions to retirement benefit plans for the Chairman. 22 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 the period from the 2019 AGM to the 2020 AGM is estimated at grant at CHF 662,357 and for the period from the 2018 AGM to the 2019 AGM at CHF 831,552. 33 Swiss franc amounts have been translated into US dollars for reference at the 2019 performance award currency exchange rate of CHF / USD 1.006.  Audited | Remuneration details and additional information for independent BoD members CHF, except where indicated e e t t i m m o C y t i l i b i s n o p s e R d n a e r u t l u C e t a r o p r o C e e t t i m m o C t i d u A n o i t a s n e p m o C e e t t i m m o C M M M M M M M M C C M M M M M M M M C M C M M M e e t t i m m o C g n i t a n m o N i d n a e c n a n r e v o G M M M M M M M e e t t i m m o C k s i R C C M M M M M M M M Name, function1 Michel Demaré, former Vice Chairman David Sidwell, Vice Chairman and Senior Independent Director Jeremy Anderson, member William C. Dudley, member Reto Francioni, member Ann F. Godbehere, former member Fred Hu, member Julie G. Richardson, member Isabelle Romy, member Robert W. Scully, member Beatrice Weder di Mauro, member Dieter Wemmer, member Jeanette Wong, member Additional payments2 – 250,000 250,000 250,000 FFoorr tthhee ppeerriioodd AAGGMM ttoo AAGGMM 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 22001199//22002200 22001188//22001199 Base fee – 325,000 325,000 325,000 325,000 325,000 325,000 – 325,000 325,000 – 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 – Committee fee(s) – 400,000 500,000 500,000 450,000 350,000 250,000 – 300,000 250,000 – 500,000 100,000 – 600,000 300,000 300,000 300,000 200,000 200,000 250,000 250,000 300,000 300,000 200,000 – TToottaall 22001199//22002200 Total 2019/2020 in USD (for reference)7 TToottaall 22001188//22001199 Legend: C = Chairperson of the respective Committee, M Member of the respective Committee = Share percentage4 – 100 50 Number of shares5,6 – 86,010 48,948 50 50 50 50 – 50 50 – 50 100 50 50 50 50 50 50 50 50 50 50 50 100 – 50,097 35,288 31,456 26,181 – 28,458 26,796 – 38,447 27,283 15,145 42,118 29,126 28,458 29,126 23,904 24,466 26,181 26,796 28,458 29,126 33,722 – TToottaall33 – – 997755,,000000 11,,007755,,000000 11,,007755,,000000 777755,,000000 667755,,000000 557755,,000000 – – 662255,,000000 557755,,000000 – – 882255,,000000 442255,,000000 332255,,000000 992255,,000000 662255,,000000 662255,,000000 662255,,000000 552255,,000000 552255,,000000 557755,,000000 557755,,000000 662255,,000000 662255,,000000 552255,,000000 – – 77,,227755,,000000 7,318,766 77,,442255,,000000 11 Eleven independent BoD members were in office on 31 December 2019. At the 2019 AGM, William C. Dudley and Jeanette Wong were newly elected and Michel Demaré and Ann F. Godbehere did not stand for re-election. Eleven independent BoD members were in office on 31 December 2018. 22 These payments are associated with the Vice Chairman and/or the Senior Independent Director function. 33 Excludes UBS’s portion related to the legally required social security contributions, which for the period from the 2019 AGM to the 2020 AGM is estimated at grant at CHF 338,680 and which for the period from the 2018 AGM to the 2019 AGM was estimated at grant at CHF 461,780. The legally required social security contributions paid by the independent BoD members are included in the amounts shown in this table, as appropriate. 44 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. 55 For 2019, UBS shares, valued at CHF 12.919 (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 2018, UBS shares, valued at CHF 12.622 (average closing price of UBS shares at the SIX Swiss Exchange 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. 66 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. 77 Swiss franc amounts have been translated into US dollars for reference at the 2019 performance award currency exchange rate of CHF / USD 1.006.  269 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Supplemental information Fixed and variable compensation for GEB members Fixed and variable compensation for GEB members1,2,3 CHF million, except where indicated AAmmoouunntt %% AAmmoouunntt TToottaall ffoorr 22001199 NNoott ddeeffeerrrreedd TToottaall ccoommppeennssaattiioonn Amount5 Number of beneficiaries FFiixxeedd ccoommppeennssaattiioonn55,,66 Cash-based Equity-based VVaarriiaabbllee ccoommppeennssaattiioonn 9988 1166 2288 2244 44 7700 110000 2299 2255 44 7711 4422 2288 2244 44 1144 %% 4433 110000 2200 DDeeffeerrrreedd44 AAmmoouunntt 5566 00 00 00 5566 Total for 2018 Amount 96 15 23 21 2 73 %% 5577 00 8800 00 1144 1144 1144 3366 2211 3355 2211 Cash7 Long-Term Incentive Plan (LTIP) / Equity Ownership Plan (EOP)8 Deferred Contingent Capital Plan (DCCP)8 11 The figures relate to all GEB members in office during 2019. Thirteen GEB members were in office on 31 December 2019 including three new GEB members, one appointed on 1 January 2019 and two on 1 October 2019; three GEB members stepped down, one on 31 December 2018 and two on 30 September 2019. 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. 22 2019 includes compensation for three months paid under the employment contract during the notice period for one GEB member who stepped down on 30 September 2018 as well as compensation for two GEB members who stepped down on 30 September 2019 for nine months in office as GEB member plus for three months paid under the employment contract during the notice period. 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. 33 2019 includes compensation for one newly appointed GEB member for 12 months in office as a GEB member and for two newly appointed GEB members for three months in office as GEB members. 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. 44 Based on the specific plan vesting and reflecting the total award value at grant, which may differ from the accounting expenses. 55 Excludes benefits and employer’s contributions 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. For 2019, Iqbal Khan received a one-time replacement award of CHF 8 million. This replacement payment is not included in the above table; including this, the 2019 total compensation of GEB members is CHF 106 million. 66 Includes base salary and role-based allowances, rounded to the nearest million. 77 Includes allocation of vested but blocked shares, in line with the remuneration section of the UK Prudential Regulation Authority Rulebook. 88 For the GEB members who are also MRTs (or SMFs), the awards starting with performance year 2017 are no longer permitted to include dividend and interest payments. Accordingly, the amounts reflect for the LTIP / EOP the fair value of the non-dividend-bearing awards and for the DCCP the fair value of the granted non-interest-bearing awards. 37 22 3355 2211 00 00 14 270 Advisory vote 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 2019, in addition to GEB members, 661 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 a KRT’s 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 AAmmoouunntt %% AAmmoouunntt TToottaall ffoorr 22001199 NNoott ddeeffeerrrreedd TToottaall ccoommppeennssaattiioonn Amount Number of beneficiaries FFiixxeedd ccoommppeennssaattiioonn33,,44 Cash-based Equity-based VVaarriiaabbllee ccoommppeennssaattiioonn 11,,005566 110000 666611 338888 338833 66 666677 3377 3366 11 6633 667700 338888 338833 66 228822 %% 6644 110000 4422 DDeeffeerrrreedd22 AAmmoouunntt 338855 00 00 00 338855 Total for 2018 Amount 1,250 675 417 395 22 833 %% 3366 00 5588 228822 Cash5 Long-Term Incentive Plan (LTIP) / Equity Ownership Plan (EOP) 6 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 2019, except the new GEB member appointed during 2019, who is included for compensation received in their role as a KRT prior to being appointed to the GEB. 22 Based on the specific plan vesting and reflecting the total value at grant, which may differ from the accounting expenses. 33 Excludes benefits and employer's contributions 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. 44 Includes base salary and role-based allowances. 55 Includes allocation of vested but blocked shares, in line with regulatory requirements where applicable. 66 Starting with performance year 2017, KRTs who are also MRTs are no longer permitted to receive dividend and interest payments. Accordingly, the amounts for the EOP/LTIP reflect the fair value of the non-dividend-bearing awards and for the DCCP the fair value of the granted non-interest-bearing awards. 305 186 223300 115555 223300 115555 2222 1155 341 00 00 228822 2277 00 271 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Material Risk Takers UK Senior Managers and Certification Regime The Senior Managers and Certification Regime (the SMCR) of the UK Prudential Regulation Authority and Financial Conduct Authority requires that individuals with specified responsibilities, performing certain significant functions and/or those in certain other identified categories be designated as Senior Management Functions (SMFs). SMFs are subject to specific compensation requirements, including longer deferral, blocking and clawback periods. The deferral period for SMFs is seven years, with the deferred performance awards vesting no faster than pro rata from years 3 to 7. Additionally, these awards are subject to a 12-month blocking period post vesting. The clawback policy for SMFs permits clawback for up to 10 years from the date of performance award grants (applicable if an individual is subject to an investigation at the end of the initial UK 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. 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 2019, UBS identified 755 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 shareholder votes to increase the variable to fixed compensation ratio to 200%. Other applicable regulatory requirements for this population include a minimum deferral rate of 40–60% 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. Any notional shares granted to MRTs under the LTIP, EOP and notional DCCP awards for their performance in 2019 are subject to a six- or 12-month blocking period post vesting and do not pay out dividends or interest during the deferral period. Performance awards granted to MRTs are also subject to clawback provisions which allow the firm to 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. Due to UK regulatory requirements, LTIP awards granted to UK MRTs and SMFs will be subject to an additional non-financial conduct-related metric. 272 Advisory vote 2019 performance award pool and expenses Performance awards granted for the 2019 performance year The “Variable compensation” table below shows the amount of variable compensation awarded the the number of performance year 2019, together with to employees for beneficiaries for each type of award granted. In the case of deferred awards, the final amount paid to an employee depends on performance conditions and consideration of relevant forfeiture provisions. The deferred share award amount is based on the market value of these awards on the date of grant. Variable compensation1 USD million, except where indicated Non-deferred cash Deferred compensation awards of which: Equity Ownership Plan of which: Deferred Contingent Capital Plan of which: Long-Term Incentive Plan of which: Asset Management EOP Expenses recognized in the IFRS income statement 22001199 2018 11,,889944 2,089 229999 112222 111133 3399 2255 373 217 131 0 25 TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ppeerrffoorrmmaannccee aawwaarrdd ppooooll –– 22,,119933 2,461 Variable compensation – other2 115599 162 Expenses deferred to future periods4 22001199 2018 00 442299 220055 117733 2255 2266 442299 111177 0 585 325 238 0 22 585 180 Adjustments4 22001199 2018 Total 22001199 2018 Number of beneficiaries 2018 22001199 00 5511 3355 55 00 1166 55 00 5511 0 71 71 5 0 0 0 11,,889944 2,089 5544,,117799 51,809 777799 336622 228866 8800 5511 1,029 613 369 0 47 33,,557722 33,,222288 33,,555522 111199 330077 3,967 3,768 3,934 0 284 71 22,,667733 3,118 5544,,221100 51,819 ((5500))66 (96)6 222266 246 33,,226655 3,266 Financial advisor (FA) variable compensation3 TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn iinncclluuddiinngg FFAA vvaarriiaabbllee ccoommppeennssaattiioonn (25) 55,,661177 11 Expenses under “Variable compensation – other” and “Financial advisor variable compensation” are not part of UBS’s performance award pool. 22 Comprised of replacement payments, forfeiture credits, severance payments, retention plan payments and interest expense related to the Deferred Contingent Capital Plan. 33 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. 44 Estimates as of 31 December 2019 and 2018. Actual amounts to be 66 Included in expenses deferred to future expensed in future periods may vary, e.g., due to forfeiture of awards. periods is an amount of USD 50 million (2018: USD 96 million) in interest expense related to the Deferred Contingent Capital Plan. As the amount recognized as performance award represents the present value of the award at the date it is granted to the employee, this amount is excluded. 55 Represents estimated post-vesting transfer restriction and permanent forfeiture discounts. 3,750 5,889 1,250 7,114 6,850 66,,771111 11,,009933 33,,881133 66,,554499 484 554488 0 22 00 2019 performance award pool and expenses The performance award pool, which includes performance- based variable awards for 2019, was USD 2.7 billion, reflecting a decrease of 14% compared with 2018. Performance award expenses for 2019 decreased 8% to USD 2.8 billion, reflecting the reduction of the performance award pool for 2019. The “Performance award pool and expenses” table below compares the performance award pool with performance award expenses. Performance award pool and expenses USD million, except where indicated Performance award pool1 of which: expenses deferred to future periods and accounting adjustments 2,3 Performance award expenses accrued in the performance year 22001199 22,,667733 448800 22,,119933 2018 3,118 657 2,461 % change (14) (27) (11) Performance award expenses related to prior performance years TToottaall ppeerrffoorrmmaannccee aawwaarrdd eexxppeennsseess rreeccooggnniizzeedd ffoorr tthhee yyeeaarr44 11 Excluding employer-paid taxes and social security. 22 Estimate as of the end of the performance year. Actual amounts expensed in future periods may vary, e.g., due to forfeiture of awards. 33 Accounting 44 Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” adjustments represent estimated post-vesting transfer restriction and permanent forfeiture discounts. section of this report for more information. 2,995 22,,775555 534 (8) 556622 5 273 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation GEB and KRTs deferred compensation The “GEB and KRTs deferred compensation” table below 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 GEB and KRTs deferred compensation1,2,3 on the closing share price on 31 December 2019. For notional funds, it is determined using the latest available market price for the underlying funds at year-end 2019, and for deferred cash plans, it is determined based on the outstanding amount of cash owed to award recipients. USD million, except where indicated GGEEBB Deferred Contingent Capital Plan Equity Ownership Plan (including notional funds) Long-Term Incentive Plan KKRRTTss Deferred Contingent Capital Plan Equity Ownership Plan (including notional funds) Long-Term Incentive Plan RReellaattiinngg ttoo aawwaarrddss ffoorr 2200119944 Relating to awards for prior years5 of which: exposed to ex-post explicit and / or implicit adjustments Total Total deferred compensation year-end 2018 Total amount of deferred compensation paid out in 20196 2211 00 3355 115555 118822 4488 99 129 0 834 698 0 120 129 35 989 880 48 100% 100% 100% 100% 100% 100% 119 145 0 1,051 979 0 11 25 0 133 274 0 444422 TToottaall GGEEBB aanndd KKRRTTss 442 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. 22 Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of the Annual Report 2019 for more information. 33 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 for the EOP/LTIP reflect the fair value of the non-dividend-bearing awards and for the DCCP the fair value of the granted non-interest-bearing awards. 44 Where applicable, amounts are translated into US dollars at the performance award currency exchange rate. For GEB members who were appointed to the GEB during 2019, awards have been pro-rated between KRT and GEB entries accordingly. 55 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 2019, awards have been fully reflected in the GEB entries. Where applicable, amounts are translated from award currency into US dollars using FX rates as at 31 December 2019. 66 Valued at distribution price and FX rate for all awards distributed in 2019. For GEB members who were appointed to the GEB during 2019, value of the awards paid out according to their role at the time of distribution. 1,760 2,202 2,294 The “GEB and KRTs ex-post explicit and implicit adjustments to deferred compensation” table below shows the value of actual ex-post explicit and implicit adjustments to outstanding deferred compensation in the financial year 2019 for GEB members and KRTs. Ex-post adjustments occur after an award has been granted. Explicit adjustments occur when we adjust compensation by forfeiting deferred awards. Implicit adjustments are unrelated to any action taken by the firm and occur as a result of price movements that affect the value of an award. The total value of ex-post explicit adjustments made to UBS share awards in 2019, based on the approximately 7.0 million shares forfeited during 2019, is a reduction of USD 88.4 million. GEB and KRTs ex-post explicit and implicit adjustments to deferred compensation USD million GGEEBB Deferred Contingent Capital Plan Equity Ownership Plan (including notional funds, if applicable) KKRRTTss Deferred Contingent Capital Plan Equity Ownership Plan (including notional funds) -- EExx ppoosstt eexxpplliicciitt aaddjjuussttmmeennttss ttoo uunnvveesstteedd aawwaarrddss11 3311..1122..1199 31.12.18 -- EExx ppoosstt iimmpplliicciitt aaddjjuussttmmeennttss ttoo uunnvveesstteedd aawwaarrddss22 3311..1122..1199 31.12.18 00 00 ((33)) ((33)) 0 0 (17) (13) 00 ((1111)) 00 ((4444)) 0 (28) 0 (166) TToottaall GGEEBB aanndd KKRRTTss (194) 11 Ex-post explicit adjustments are calculated as units forfeited during the year, valued at the share price on 31 December 2019 (USD 12.58) for 2019. The 2018 data is valued using the share price on 31 December 2018 (USD 12.38). For the notional funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in 2019 and 2018. 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 2019, awards have been fully reflected in the GEB entries. 22 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 2019 and 2018. For GEB members who were appointed to the GEB during 2019, awards have been fully reflected in the GEB entries. (30) ((5555)) ((66)) 274 Advisory vote Total personnel expenses for 2019 We employed 68,601 personnel (full-time equivalents) as of 31 December 2019. The net increase of 1,713 compared with 31 December 2018 was largely driven by a 2,583 FTE increase in Corporate Center, mainly as a result of the ongoing insourcing of certain activities from third-party vendors to our Business Solutions Centers, resulting in a decrease of approximately 2,200 outsourced staff. This was partly offset by a 944 FTE decrease in Global Wealth Management, reflecting the effect of cost management initiatives and a review of advisor portfolios. The “Personnel expenses” table below shows our total personnel expenses for 2019. It includes salaries, pension expenses, social security contributions, variable compensation and other personnel costs. Variable compensation includes cash performance awards paid in 2020 for the 2019 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. reflects The performance award pool the value of Personnel expenses USD million SSaallaarriieess11 Non-deferred cash Deferred compensation awards of which: Equity Ownership Plan of which: Deferred Contingent Capital Plan of which: Long-Term Incentive Plan of which: Asset Management EOP of which: Other performance awards TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ppeerrffoorrmmaannccee aawwaarrddss22 – – of which: guarantees for new hires Replacement payments3 Forfeiture credits Severance payments4 Retention plan and other payments Deferred Contingent Capital Plan: interest expense TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ootthheerr22 – – CCoonnttrraaccttoorrss SSoocciiaall sseeccuurriittyy PPeennssiioonn aanndd ootthheerr ppoosstt eemmppllooyymmeenntt bbeenneeffiitt ppllaannss55 - - FFiinnaanncciiaall aaddvviissoorr vvaarriiaabbllee ccoommppeennssaattiioonn22,,66 OOtthheerr ppeerrssoonnnneell eexxppeennsseess TToottaall ppeerrssoonnnneell eexxppeennsseess performance awards granted relating to the 2019 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 future periods (amortization of unvested awards granted in 2020 for the performance year 2019) and accounting adjustments; and addition for the 2019 amortization of unvested deferred awards granted in prior years. for expenses deferred to – 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 2018 and 2019.  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 Expenses recognized in the IFRS income statement RReellaatteedd ttoo tthhee ppeerrffoorrmmaannccee yyeeaarr 22001199 66,,551188 RReellaatteedd ttoo pprriioorr ppeerrffoorrmmaannccee yyeeaarrss 00 TToottaall eexxppeennsseess rreeccooggnniizzeedd iinn 22001199 Total expenses recognized in 2018 66,,551188 11,,886688 888877 442222 337755 3399 5511 00 6,448 2,057 938 526 357 0 53 2 Total expenses recognized in 2017 6,154 2,062 1,088 583 444 0 57 4 22,,775555 2,995 3,151 2299 5566 ((8866)) 112255 5566 9944 224466 338811 779999 778877 43 72 (136) 123 66 119 243 489 791 457 36 72 (107) 113 63 111 252 460 814 723 4,064 581 16,199 777788 2277 11,,447700 44,,004433 555555 1166,,008844 4,054 654 16,132 ((2266)) 558888 330000 226622 00 2266 00 556622 1144 5511 ((8866)) 00 2288 9944 8888 00 1155 00 11,,889944 229999 112222 111133 3399 2255 00 22,,119933 1155 55 00 112255 2288 00 115599 338811 778833 778877 33,,226655 552288 1144,,661144 22 Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information. 33 Payments made to 11 Includes role-based allowances. 44 Includes legally obligated and standard severance payments. 55 Refer to “Note 29 Pension and other post-employment benefit compensate employees for deferred awards forfeited as a result of joining UBS. 66 Consists of formulaic compensation based directly on compensable revenues generated by financial advisors and plans” in the “Consolidated financial statements” section of this report for more information. 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. 275 Advisory voteCorporate governance and compensation 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 2020. Equity Ownership Plan (EOP) 2014 / 2015, EOP 2015 / 2016, Equity Ownership Plan (EOP) 2014 / 2015, EOP 2015 / 2016, EOP 2016 / 2017 and EOP 2017 / 2018 EOP 2016 / 2017 and EOP 2017 / 2018 Performance conditions Performance conditions Performance achieved Performance achieved Adjusted return on tangible equity1 and divisional return on attributed equity The Group and divisional performance conditions have been satisfied. For EOP 2014 / 2015, the third and final installment for the Group Executive Board (GEB) members vests in full. For EOP 2015 / 2016, the second installment for the GEB members vests in full. For EOP 2016 / 2017, the first installment for the GEB members and the second installment for all other employees covered under the plan vest in full. For EOP 2017 / 2018, the first installment for all other employees covered under the plan vests in full. % of installment vesting % 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. 1 Deferred Contingent Capital Plan (DCCP) 2014 / 2015 Deferred Contingent Capital Plan (DCCP) 2014 / 2015 Performance conditions Performance conditions Performance achieved Performance achieved % of installment vesting % 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. DCCP 2014 / 2015 vests in full. 100% Discontinued deferred compensation plans As of 31 December 2019, there were no discontinued compensation plans with outstanding balances. The firm has not granted any options since 2009.  Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information 276 Advisory vote List of tables Share and option ownership / entitlements of GEB members Total of all vested and unvested shares of GEB members Number of shares of BoD members Total of all blocked and unblocked shares of BoD members Loans granted to GEB members Loans granted to BoD members Compensation paid to former BoD and GEB members PPaaggee 227788 227788 227799 227799 228800 228800 228800 277 Advisory voteCorporate governance and compensation 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, former Co-President Global Wealth Management Christian Bluhm, Group Chief Risk Officer Markus U. Diethelm, Group General Counsel Kirt Gardner, Group Chief Financial Officer Suni Harford, President Asset Management Robert Karofsky, Co-President Investment Bank Sabine Keller-Busse, Group Chief Operating Officer and President UBS EMEA Iqbal Khan, Co-President Global Wealth Management Edmund Koh, President Asia Pacific Ulrich Körner, former 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 Markus Ronner, Group Chief Compliance and Governance Officer TToottaall oonn 3311 DDeecceemmbbeerr 22001199 Number of unvested shares / at risk2 1,862,480 Number of vested shares 2,150,003 TToottaall nnuummbbeerr ooff sshhaarreess 44,,001122,,448833 Potentially conferred voting rights in % 0.227 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 1,715,430 – 1,757,766 – 256,356 440,953 259,745 698,402 614,222 532,643 343,120 63,211 – 577,606 500,902 423,778 259,762 712,342 – 380,340 – – 910,951 522,202 307,090 1,307,554 1,132,938 599,156 471,049 214,850 161,152 0 0 0 458,426 317,516 129,807 107,472 0 – 492,476 254,119 315,922 263,362 0 – 183,104 – – 95,597 277,978 277,978 609,477 484,075 429,652 256,367 68,097 173 33,,447733,,119966 – – 225566,,335566 444400,,995533 225599,,774455 11,,115566,,882288 993311,,773388 666622,,445500 445500,,559922 6633,,221111 – – 11,,007700,,008822 775555,,002211 773399,,770000 552233,,112244 771122,,334422 – – 556633,,444444 – – – – 11,,000066,,554488 880000,,118800 558855,,006688 11,,991177,,003311 11,,661177,,001133 11,,002288,,880088 772277,,441166 228822,,994477 116611,,332255 8,335,517 5,114,942 1133,,445500,,445599 0.191 – 0.014 0.025 0.014 0.065 0.051 0.037 0.025 0.004 – 0.061 0.042 0.042 0.029 0.040 – 0.032 – – 0.055 0.045 0.032 0.108 0.089 0.058 0.040 0.016 0.009 0.761 0.591 11 Includes all vested and unvested shares of GEB members, including those held by related parties. No options were held in 2019 and 2018 by any GEB member or any of its related parties. Refer to “Note 30 Employee benefits: variable compensation” in the “Consolidated financial statements” section of the Annual Report 2019 for more information. 22 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 about the plans. 3,814,425 1100,,774477,,114422 6,932,717 22001188 Audited | Total of all vested and unvested shares of GEB members1,2 SShhaarreess oonn 3311 DDeecceemmbbeerr 22001199 1133,,445500,,445599 5,114,942 1,798,389 1,811,721 2,199,926 1,517,110 1,008,371 TToottaall of which: vested of which: vesting 2020 2021 2022 2023 2024 SShhaarreess oonn 3311 DDeecceemmbbeerr 22001188 1100,,774477,,114422 3,814,425 1,745,323 1,761,048 1,738,595 1,146,636 541,112 11 Includes shares held by related parties. terms of the plans. Refer to the “Compensation philosophy and framework” section of this report for more information. 22 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number of shares vesting in the future will be calculated under the 2019 2020 2021 2022 2023   278 Advisory vote Audited | Number of shares of BoD members1 Name, function Axel A. Weber, Chairman Michel Demaré, former Vice Chairman2 David Sidwell, Vice Chairman and Senior Independent Director Jeremy Anderson, member William C. Dudley, member2 Reto Francioni, member Ann F. Godbehere, former member2 Fred Hu, member Julie G. Richardson, member Isabelle Romy, member Robert W. Scully, member Beatrice Weder di Mauro, member Dieter Wemmer, member Jeanette Wong, member2 TToottaall oonn 3311 DDeecceemmbbeerr 22001199 NNuummbbeerr ooff sshhaarreess hheelldd 993388,,662277 Voting rights in % 0.053 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 776644,,332299 – – 332222,,555588 116677,,559955 118899,,880055 3311,,445566 00 00 – – 112255,,662288 9988,,883322 – – 225599,,222255 1155,,114455 00 4466,,228833 1177,,115577 114433,,992288 111144,,880022 7711,,554400 4477,,007744 117722,,339977 114455,,660011 6600,,228855 3311,,115599 00 – – 11,,777722,,888844 0.042 – 0.018 0.009 0.010 0.002 0.000 0.000 – 0.007 0.005 – 0.014 0.001 0.000 0.003 0.001 0.008 0.006 0.004 0.003 0.010 0.008 0.003 0.002 0.000 – 0.100 0.109 11 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2019 and 2018. 22 At the 2019 AGM, William C. Dudley and Jeanette Wong were newly elected and Michel Demaré and Ann F. Godbehere did not stand for re-election. 11,,999900,,554422 22001188 Audited | Total of all blocked and unblocked shares of BoD members1 TToottaall of which: unblocked of which: blocked until 2020 2021 2022 2023 SShhaarreess oonn 3311 DDeecceemmbbeerr 22001199 11,,777722,,888844 502,095 264,889 299,357 270,111 436,432 SShhaarreess oonn 3311 DDeecceemmbbeerr 22001188 11 Includes shares held by related parties. 11,,999900,,554422 636,397 323,051 335,587 366,570 328,937 2019 2020 2021 2022   279 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Audited | Loans granted to GEB members1 In line with article 38 of the Articles of Association of UBS Group AG, Group Executive Board (GEB) members may be granted loans. Such loans are made in the ordinary course of business on substantially the same terms as those granted to other employees, including interest rates and collateral, and neither 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. CHF, except where indicated2 Name, function Axel P. Lehmann, President Personal & Corporate Banking and President UBS Switzerland (highest loan in 2019) Ulrich Körner, former President Asset Management and President UBS EMEA (highest loan in 2018) Aggregate of all GEB members4 oonn 3311 DDeecceemmbbeerr 22001199 22001188 22001199 22001188 USD (for reference) Loans3 9,440,889 LLooaannss33 99,,114400,,000000 88,,224400,,000000 3300,,770000,,335544 31,711,010 3333,,220044,,000000 11 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 22 Swiss franc and US dollar amounts disclosed represent local currency amounts translated at the relevant year-end closing exchange rate. 33 All loans granted are secured loans. 44 No unused uncommitted credit facilities in 2019. Excludes unused uncommitted credit facilities of CHF 2,949,690 in 2018 that had been granted to one GEB member.  Audited | Loans granted to BoD members1 In line with article 33 of the Articles of Association of UBS Group AG, loans to independent 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 indicated2 Aggregate of all BoD members oonn 3311 DDeecceemmbbeerr 22001199 22001188 LLooaannss33,,44 889900,,443399 660000,,000000 USD (for reference) Loans3,4 919,752 11 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 22 Swiss franc and US dollar amounts disclosed represent local currency amounts translated at the relevant year-end closing exchange rate. 33 All loans granted are secured loans. 44 CHF 600,000 for Reto Francioni and CHF 290,439 for Dieter Wemmer in 2019 and CHF 600,000 for Reto Francioni in 2018. Audited | Compensation paid to former BoD and GEB members1 CHF, except where indicated2 Former BoD members Aggregate of all former GEB members3 Aggregate of all former BoD and GEB members FFoorr tthhee yyeeaarr Compensation Benefits 22001199 22001188 22001199 22001188 22001199 22001188 0 0 0 0 0 0 0 0 51,912 45,556 51,912 45,556  USD (for reference) Total 0 53,621 53,621 TToottaall 00 00 5511,,991122 4455,,555566 5511,,991122 4455,,555566 11 Compensation or remuneration that is related to the former members’ activity on the BoD or GEB or that is not at market conditions. 22 Swiss franc and US dollar amounts disclosed represent local currency amounts translated at the relevant year-end closing exchange rate. 33 Includes a payment in 2019 and 2018 to one former GEB member.  280 Advisory vote Provisions of the Articles of Association related to compensation Under the say-on-pay provisions in Switzerland, shareholders of companies listed in Switzerland 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 provisions of the Articles of Association 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 from 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. UBS Group AG 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’ interests. 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 UBS Group AG 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, UBS Group AG 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 281 Advisory voteCorporate governance and compensation Corporate governance and compensation Compensation Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of UBS Group AG, Zurich Basel, 27 February 2020 Report of the statutory auditor on the compensation report We have audited the compensation report dated 27 February 2020 of UBS Group AG for the year ended 31 December 2019. The audit was limited to the information according to articles 14 16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in the following tables labeled “audited” of the compensation report: Approved fixed compensation, Total compensation for GEB members, Compensation details and additional information for non-independent BoD members, Total payments to BoD members, Remuneration details and additional information for independent BoD members, Loans granted to GEB members, Loans granted to BoD members and Compensation paid to former BoD and GEB members. – Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the compensation report in accordance with Swiss law and the Ordinance. The Board of Directors is also responsible for designing the compensation system and defining individual compensation packages. Auditor’s responsibility Our responsibility is to express an opinion on the compensation report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the compensation report complies with Swiss law and articles 14 16 of the Ordinance. – An audit involves performing procedures to obtain audit evidence on the disclosures made in the compensation report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the compensation report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of compensation, as well as assessing the overall presentation of the compensation report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the compensation report for the year ended 31 December 2019 of UBS Group AG complies with Swiss law and articles 14 16 of the Ordinance. – Ernst & Young Ltd Marie-Laure Delarue Licensed audit expert (Auditor in charge) Bruno Patusi Licensed audit expert 282 Advisory vote Consolidated financial statements 284 Table of contents 286 Management’s report on internal control over financial reporting 287 Report of the independent registered public accounting firm on internal control over financial reporting 289 Report of the independent registered public accounting firm on the consolidated financial statements 294 Statutory auditor’s report on the audit of the consolidated financial statements 300 UBS Group AG consolidated financial statements Income statement 300 Primary financial statements 300 301 Statement of comprehensive income 303 Balance sheet 304 Statement of changes in equity 309 Statement of cash flows 311 Notes to the UBS Group AG consolidated financial statements 311 1 347 2 Summary of significant accounting policies Segment reporting 352 Income statement notes 352 3 353 4 353 5 354 6 354 7 355 8 359 9 Net interest income and other net income from financial instruments measured at fair value through profit or loss Net fee and commission income Other income Personnel expenses General and administrative expenses Income taxes Earnings per share (EPS) and shares outstanding 365 371 371 372 372 373 376 376 377 378 380 389 404 424 426 429 430 436 450 458 464 466 466 467 469 470 471 360 Balance sheet notes 360 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 15 16 Goodwill and intangible assets 17 Other assets 18 Amounts due to banks and customer deposits Debt issued designated at fair value Debt issued measured at amortized cost Provisions and contingent liabilities 21 22 Other liabilities 11 12 13 14 19 20 390 Additional information 390 23 Expected credit loss measurement Fair value measurement 24 25 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 Finance lease receivables 33 34 Guarantees, commitments and forward starting 29 30 31 32 35 36 transactions Related parties Invested assets and net new money Currency translation rates 37 38 Main differences between IFRS and Swiss GAAP 285 Financial statements Management’s assessment of internal control over financial reporting as of 31 December 2019 UBS management has assessed the effectiveness of UBS’s internal control over financial reporting as of 31 December 2019 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 2019, UBS’s internal control over financial reporting was effective. The effectiveness of UBS’s internal control over financial reporting as of 31 December 2019 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their report appearing on pages 287 to 288, which expresses an unqualified opinion on the effectiveness of UBS’s internal control over financial reporting as of 31 December 2019. 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 pages 289 to 293) and internal control over financial reporting (refer to pages 287 to 288) of UBS Group AG are included in our filing on 28 February 2020 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 294 to 299) of UBS Group AG, in addition to the aforementioned reports, is included in our Annual Report 2019 available on our website and filed on 28 February 2020 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 International Financial Reporting Standards the International Accounting Standards Board (IASB). issued by (IFRS), as 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. 286 Ernst & Young Ltd Aeschengraben 9 P.O. Box 4002 Basel Phone: +41 58 286 86 86 Fax: +41 58 286 86 00 www.ey.com/ch Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of UBS Group AG Opinion on Internal Control over Financial Reporting We have audited UBS Group AG and subsidiaries’ internal control over financial reporting as of 31 December 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, UBS Group AG and subsidiaries (“the Company”) maintained, in all material respects, effective internal control over financial reporting as of 31 December 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of 31 December 2019 and 2018, the related consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended 31 December 2019, and the related notes and our report dated 27 February 2020 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 287 Financial statements 2 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. Ernst & Young Ltd Basel, 27 February 2020 288 Ernst & Young Ltd Aeschengraben 9 P.O. Box 4002 Basel Phone: +41 58 286 86 86 Fax: +41 58 286 86 00 www.ey.com/ch Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of UBS Group AG Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of UBS Group AG and subsidiaries (“the Company”) as of 31 December 2019 and 2018, the related consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended 31 December 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at 31 December 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2019, in conformity with the International Financial Reporting Standards as issued by the International Accounting Standards Board. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of 31 December 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated 27 February 2020 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 289 Financial statements 2 Valuation of complex or illiquid instruments at fair value in accordance with IFRS 9 and IFRS 13 Description of the Matter At 31 December 2019, as explained in notes 1-3f and note 24 to the consolidated financial statements, the Company held financial instruments that did not trade in active markets. These instruments are reported within the following accounts: financial assets and liabilities at fair value held for trading, derivative financial instruments, financial assets and liabilities at fair value not held for trading, and debt issued designated at fair value. In determining the fair value of these financial instruments, the Company used valuation techniques, modelling assumptions, and estimates of unobservable market inputs which required complex and significant judgment. Auditing management’s judgments and assumptions used in the estimation of the fair value of complex or illiquid instruments was complex due to the highly judgmental nature of valuation techniques, modelling assumptions and significant unobservable inputs. Judgmental valuation techniques were comprised of discounted cash flow and earnings- based valuation techniques. Judgmental modelling assumptions result from a range of different models or model calibrations used by market participants. Judgmental valuation inputs include volatility, correlation, credit spreads and bond price equivalent inputs to the valuation of certain financial instruments where there is a limited degree of observability, and where there is judgmental extrapolation or interpolation and calibration of curves using limited data points, as well as judgmental use of proxy data points. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effective- ness of the controls over management’s financial instruments valuation processes, including controls over market data inputs into valuation models, model governance, and valuation adjustments. We tested the valuation techniques, models and methodologies, and the inputs used in those models, as outlined above, by performing an independent revaluation of certain complex or illiquid financial assets and liabilities with the support of a specialist, using independent models and inputs, and comparing inputs to available market data among other procedures. In addition, we evaluated the methodology and inputs used by management in determining funding and credit fair value adjustments on uncollateralized derivatives and fair value option liabilities. We also assessed management’s disclosures regarding fair value measurement (within notes 1-3f and 24 to the consolidated financial statements). Recognition of deferred tax assets Description of the Matter At 31 December 2019, the Company’s Deferred Tax Assets (“DTA”) were USD 9,537 million (see Note 8 to the Company’s consolidated financial statements). DTAs are recognized to the extent it is probable that taxable profits will be available, against which, the deductible temporary differences or the carryforward of unused tax losses within the loss carryforward period can be utilized. There is significant judgment exercised when estimating the future taxable income that is not based on the reversal of taxable temporary differences. Management’s estimate of future taxable profits is based on the legal entity strategic plans and is sensitive to the assumptions made in estimating future taxable 290 3 income. Additionally, management supports a portion of the net DTA position with tax planning strategies. Auditing management’s assessment of the realizability of the Company’s DTAs was complex due to the highly judgmental nature of estimating future taxable profits over the life of the underlying tax loss carryforwards. Estimating future profitability is inherently subjective and is sensitive to future economic, market and other conditions, which are difficult to predict. Specifically, some of the more subjective macro-economic assump- tions used included gross domestic product, equity market performance, and interest rates. Additionally, auditing tax planning strategies requires specific tax knowledge and understanding of the applicable tax laws, which are complex and require judgment in the interpretation of such laws and the related application. How We Addressed the Matter in Our Audit We evaluated the design and tested the operational effectiveness of management’s controls over DTA valuation, which included the assumptions used in developing the legal entity strategic plans, tax planning strategies and estimating future taxable income. We assessed the completeness and accuracy of the data used for the estimations of future taxable income. This included recalculating the outputs of the models applied to the recognition process for DTAs. We involved specialists to assist in assessing the key economic assumptions embedded in the legal entity strategic plans. We compared key inputs used to forecast future taxable income to externally available historical and prospective data and assumptions; and assessed the sensitivity of the outcomes using reasonably possible changes in assumptions. In addition, we assessed the appropriateness and impact of management’s tax planning strategies by evaluating whether these strategies were reasonable, available, feasible, and prudent. This evaluation was based on applicable tax laws and an assessment of management’s interpretations of such tax laws, our understanding of the Company’s business and industry, and the Company’s ability to implement the strategies. We also assessed management’s disclosure regarding recognized and unrecognized DTAs (within note 8 to the consolidated financial statements). Legal Provisions & Contingent Liabilities Description of the Matter At 31 December 2019, the Company’s provisions for litigation, regulatory and similar matters (legal provisions) were USD 2,475 million. As explained in note 21 to the consolidated financial statements, the Company operates in a legal and regulatory environment that is exposed to significant litigation and similar risks arising from disputes and regulatory proceedings. Such matters are subject to many uncertainties and the outcomes may be difficult to predict. These uncertainties inherently affect the amount and timing of potential outflows with respect to the legal provisions which have been established and contingent liabilities. 291 Financial statements 4 Auditing management’s assessment of legal provisions and contingent liabilities was complex and judgmental due to the significant estimation required to evaluate management’s estimate of the probability that an outflow of resources will be required for existing legal matters. In particular, these legal provisions are based on management’s estimation of the likelihood of the occurrence of certain scenarios and related impact on the Company’s financial position. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operational effective- ness of management’s controls over the legal provision and contingencies process. Our procedures included testing of management’s review of the accuracy of the inputs to the estimation of the likelihood of the occurrence of certain scenarios and related impact on the Company’s financial position. We assessed the methodologies on which the provision amounts were based with the involvement of specialists, recalculated the provisions, and tested the underlying information. We read the legal analyses of the matters supporting the judgmental aspects impacted by legal interpretations. We obtained correspondence directly from external legal counsel to assess the information provided by management and performed inquiries with external counsel as deemed necessary. We also assessed management’s disclosure regarding legal provisions and contingent liabilities (within note 21 to the consolidated financial statements). Expected Credit Losses Description of the Matter At 31 December 2019, the Company’s allowances and provisions for expected credit losses (“ECL”) was USD 1,029 million. As explained in note 1-3g, note 10 and note 23 to the consolidated financial statements, ECL is recognized for financial assets measured at amortized cost, financial assets measured at Fair Value Through Other Comprehensive Income, fee and lease receivables, financial guarantees and loan commitments. ECL are also recognized on the undrawn portion of revolving revocable credit lines, which include the Company’s credit card limits and master credit facilities. The allowance for ECL consists of exposures that are in default which are individually evaluated for impairment (stage 3), as well as losses inherent in the loan portfolio that are not specifically identified (stage 1 and stage 2). Management’s estimates for ECL represent the difference between contractual cash flows and those the Company expects to receive, discounted at the effective interest rate. The method used to calculate ECL is based on a combination of the following principal factors: probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). Auditing management’s estimate of the allowances and provisions for ECL was complex due to the highly judgmental nature of forward-looking economic scenarios, their probability weightings and the credit risk models used to estimate stage 1 and stage 2 ECL. 292 How We Addressed the Matter in Our Audit 5 Auditing the measurement of individual ECL for stage 3 was complex due to the high degree of judgment involved in management’s process for estimating ECL based on LGD assumptions. These LGD assumptions take 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. We obtained an understanding, evaluated the design and tested the operational effectiveness of management’s controls over the ECL estimate, including management’s choice of, and the probability weighting assigned to, the forward-looking economic scenarios used in measuring ECL. We evaluated management’s methodologies and governance controls for developing and monitoring the economic scenarios used and the probability weightings assigned to them. Supported by specialists, we assessed the key macroeconomic variables used in the forward-looking scenarios, such as gross domestic product, unemployment rate, interest rates and house price indexes. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls, over credit risk models used in the ECL estimate, including controls over the completeness and accuracy of input data for those models, the calculation logic of the models, and the model’s output data used in the overall ECL calculation. With the support of specialists, we performed an evaluation of management’s models and tested the model outcomes by inspecting model documentation and reperforming model calculations among other procedures. For the measurement of stage 3, we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process, including an evaluation of the assumptions used by management regarding the future cash flows from the debtors’ continuing operations and/or the liquidation of collateral. Additionally, we tested collateral valuation, cash flow assumptions and exit strategies, by performing inquiries of management, inspecting underlying documents, such as loan contracts, financial statements, covenants, budgets and business plans, and by re-performing discounted cash flow calculations among other procedures. We also assessed management’s disclosure regarding financial assets at amortized cost and other positions in scope of expected credit loss measurement (note 1-3g, note 10 and note 23 to the consolidated financial statements). Ernst & Young Ltd We have served as the Company’s auditor since 1998. Basel, 27 February 2020 293 Financial statements Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone: Fax: www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of UBS Group AG, Zurich Basel, 27 February 2020 Statutory auditor’s report on the audit of the consolidated financial statements Opinion We have audited the consolidated financial statements of UBS Group AG and its subsidiaries (the Group), which comprise the consolidated balance sheets as of 31 December 2019 and 31 December 2018, and the consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended 31 December 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies in note 1. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and 31 December 2018, and the consolidated financial performance and its consolidated cash flows for each of the three years in the period ended 31 December 2019 in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. 294 2 Valuation of complex or illiquid instruments at fair value in accordance with IFRS 9 and IFRS 13 Area of focus At 31 December 2019, as explained in notes 1-3f and note 24 to the consolidated financial statements, the Group held financial instruments that did not trade in active markets. These instruments are reported within the following accounts: financial assets and liabilities at fair value held for trading, derivative financial instruments, financial assets and liabilities at fair value not held for trading, and debt issued designated at fair value. In determining the fair value of these financial instruments, the Group used valuation techniques, modelling assumptions, and estimates of unobservable market inputs which required complex and significant judgment. Auditing management’s judgments and assumptions used in the estimation of the fair value of complex or illiquid instruments was complex due to the highly judgmental nature of valuation techniques, modelling assumptions and significant unobservable inputs. Judgmental valuation techniques were comprised of discounted cash flow and earnings-based valuation techniques. Judgmental modelling assumptions result from a range of different models or model calibrations used by market participants. Judgmental valuation inputs include volatility, correlation, credit spreads and bond price equivalent inputs to the valuation of certain financial instruments where there is a limited degree of observability, and where there is judgmental extrapolation or interpolation and calibra- tion of curves using limited data points, as well as judgmental use of proxy data points. Our audit response We obtained an understanding, evaluated the design and tested the operating effective- ness of the controls over management’s financial instruments valuation processes, including controls over market data inputs into valuation models, model governance, and valuation adjustments. We tested the valuation techniques, models and methodologies, and the inputs used in those models, as outlined above, by performing an independent revaluation of certain complex or illiquid financial assets and liabilities with the support of a specialist, using independent models and inputs, and comparing inputs to available market data among other procedures. In addition, we evaluated the methodology and inputs used by management in determining funding and credit fair value adjustments on uncollateralized derivatives and fair value option liabilities. We also assessed management’s disclosures regarding fair value measurement (within notes 1-3f and 24 to the consolidated financial statements). Recognition of deferred tax assets Area of focus At 31 December 2019, the Group’s Deferred Tax Assets (“DTA”) were USD 9,537 million (see Note 8 to the Group’s consolidated financial statements). DTAs are recognized to the extent it is probable that taxable profits will be available, against which, the deductible temporary differences or the carryforward of unused tax losses within the loss carryfor- ward period can be utilized. There is significant judgment exercised when estimating the future taxable income that is not based on the reversal of taxable temporary differences. Management’s estimate of future taxable profits is based on the legal entity strategic plans and is sensitive to the assumptions made in estimating future taxable income. Additionally, management supports a portion of the net DTA position with tax planning strategies. 295 Financial statements 3 Auditing management’s assessment of the realizability of the Group’s DTAs was complex due to the highly judgmental nature of estimating future taxable profits over the life of the underlying tax loss carryforwards. Estimating future profitability is inherently subjective and is sensitive to future economic, market and other conditions, which are difficult to predict. Specifically, some of the more subjective macro-economic assumptions used included gross domestic product, equity market performance, and interest rates. Additionally, auditing tax planning strategies requires specific tax knowledge and understanding of the applicable tax laws, which are complex and require judgment in the interpretation of such laws and the related application. Our audit response We evaluated the design and tested the operational effectiveness of management’s controls over DTA valuation, which included the assumptions used in developing the legal entity strategic plans, tax planning strategies and estimating future taxable income. We assessed the completeness and accuracy of the data used for the estimations of future taxable income. This included recalculating the outputs of the models applied to the recognition process for DTAs. We involved specialists to assist in assessing the key economic assumptions embedded in the legal entity strategic plans. We compared key inputs used to forecast future taxable income to externally available historical and prospective data and assumptions; and assessed the sensitivity of the outcomes using reasonably possible changes in assumptions. In addition, we assessed the appropriateness and impact of management’s tax planning strategies by evaluating whether these strategies were reasonable, available, feasible, and prudent. This evaluation was based on applicable tax laws and an assessment of management’s interpretations of such tax laws, our understanding of the Group’s business and industry, and the Group’s ability to implement the strategies. We also assessed management’s disclosure regarding recognized and unrecognized DTAs (within note 8 to the consolidated financial statements). Legal Provisions & Contingent Liabilities Area of focus At 31 December 2019, the Group’s provisions for litigation, regulatory and similar matters (legal provisions) were USD 2,475 million. As explained in note 21 to the consolidated financial statements, the Group operates in a legal and regulatory environment that is exposed to significant litigation and similar risks arising from disputes and regulatory proceedings. Such matters are subject to many uncertainties and the outcomes may be difficult to predict. These uncertainties inherently affect the amount and timing of potential outflows with respect to the legal provisions which have been established and contingent liabilities. Auditing management’s assessment of legal provisions and contingent liabilities was complex and judgmental due to the significant estimation required to evaluate management’s estimate of the probability that an outflow of resources will be required for existing legal matters. In particular, these legal provisions are based on management’s estimation of the likelihood of the occurrence of certain scenarios and related impact on the Group’s financial position. 296 4 Our audit response We obtained an understanding, evaluated the design and tested the operational effectiveness of management’s controls over the legal provision and contingencies process. Our procedures included testing of management’s review of the accuracy of the inputs to the estimation of the likelihood of the occurrence of certain scenarios and related impact on the Group’s financial position. We assessed the methodologies on which the provision amounts were based with the involvement of specialists, recalculated the provisions, and tested the underlying information. We read the legal analyses of the matters supporting the judgmental aspects impacted by legal interpretations. We obtained correspondence directly from external legal counsel to assess the information provided by management and performed inquiries with external counsel as deemed necessary. We also assessed management’s disclosure regarding legal provisions and contingent liabilities (within note 21 to the consolidated financial statements). Expected Credit Losses Area of focus Our audit response At 31 December 2019, the Group’s allowances and provisions for expected credit losses (“ECL”) was USD 1,029 million. As explained in note 1-3g, note 10 and note 23 to the consolidated financial statements, ECL is recognized for financial assets measured at amortized cost, financial assets measured at Fair Value Through Other Comprehensive Income, fee and lease receivables, financial guarantees and loan commitments. ECL are also recognized on the undrawn portion of revolving revocable credit lines, which include the Group’s credit card limits and master credit facilities. The allowances and provisions for ECL consists of exposures that are in default which are individually evaluated for impairment (stage 3), as well as losses inherent in the loan portfolio that are not specifically identified (stage 1 and stage 2). Management’s estimates for ECL represent the difference between contractual cash flows and those the Group expects to receive, discounted at the effective interest rate. The method used to calculate ECL is based on a combination of the following principal factors: probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). Auditing management’s estimate of the allowances and provisions for ECL was complex due to the highly judgmental nature of forward-looking economic scenarios, their prob- ability weightings and the credit risk models used to estimate stage 1 and stage 2 ECL. Auditing the measurement of individual ECL for stage 3 was complex due to the high degree of judgment involved in management’s process for estimating ECL based on LGD assumptions. These LGD assumptions take 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. We obtained an understanding, evaluated the design and tested the operational effec- tiveness of management’s controls over the ECL estimate, including management’s choice of, and the probability weighting assigned to, the forward-looking economic scenarios used in measuring ECL. We evaluated management’s methodologies and governance controls for developing and monitoring the economic scenarios used and the probability weightings assigned to them. Supported by specialists, we assessed the key macroeconomic variables used in the forward-looking scenarios, such as gross domestic product, unemployment rate, interest rates and house price indexes. 297 Financial statements 5 We obtained an understanding, evaluated the design and tested the operating effectiveness of controls, over credit risk models used in the ECL estimate, including controls over the completeness and accuracy of input data for those models, the calculation logic of the models, and the model’s output data used in the overall ECL calculation. With the support of specialists, we performed an evaluation of manage- ment’s models and tested the model outcomes by inspecting model documentation and reperforming model calculations among other procedures. For the measurement of stage 3, we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Group’s process, including an evaluation of the assumptions used by management regarding the future cash flows from the debtors’ continuing operations and/or the liquidation of collateral. Additionally, we tested collateral valuation, cash flow assumptions and exit strategies, by performing inquiries of management, inspecting underlying documents, such as loan contracts, financial statements, covenants, budgets and business plans, and by re-performing discounted cash flow calculations among other procedures. We also assessed management’s disclosure regarding financial assets at amortized cost and other positions in scope of expected credit loss measurement (note 1-3g, note 10 and note 23 to the consolidated financial statements). IT access and change management controls relevant to financial reporting Area of focus The Group is highly dependent on its IT systems for business processes and financial reporting. The Group continues to invest in its IT systems to meet client needs and business requirements including the effectiveness of its logical access and change management IT controls. Auditing management’s IT controls relevant to access and change management was complex as the Group is a multi-location organization and has a significant number of IT systems and applications relevant to financial reporting. Our audit response In assessing the reliability of electronic data processing, we included IT auditors as part of our audit team. Our audit procedures focused on the IT infrastructure and applications relevant to financial reporting included obtaining an understanding and evaluating the design and testing of the operating effectiveness of key IT access management, change management, IT operations, and IT automated controls. Our audit procedures related to logical access included tests of user access manage- ment, privileged user access, periodic access right recertifications, and user authentica- tion controls. Our audit procedures related to IT change management included tests of management’s program change test approach, approval of change requests, as well as segregation of duties. Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of UBS Group AG, the compensation report (pages 278-279), disclosures denoted with an “audited” signpost, and our auditor’s reports thereon. 298 6 Our opinions on the consolidated financial statements, the standalone financial statements of UBS Group AG and the compensation report do not cover the other information in the annual report and we do not express any form of assurance conclusion thereon other than the disclosures denoted with an audited “signpost”. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibility of the Board of Directors for the consolidated financial statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://www.expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report. Report on other legal and regulatory requirements In accordance with article 728a para. 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. Ernst & Young Ltd Marie-Laure Delarue Licensed audit expert (Auditor in charge) Ira S. Fitlin Certified Public Accountant (U.S.) 299 Financial statements 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 financial instruments measured at fair value through profit or loss 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 goodwill and intangible assets Total operating expenses 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 Net profit / (loss) attributable to shareholders Earnings per share (USD) Basic Diluted Note 31.12.19 31.12.19 31.12.18 31.12.17 For the year ended 3 3 3 3 3 3 23 4 4 4 5 6 7 15 16 8 9 9 10,684 10,684 (7,194) (7,194) 4,714 4,714 (3,703) (3,703) 4,501 4,501 6,842 6,842 (78) (78) 19,110 19,110 (1,696) (1,696) 17,413 17,413 212 212 28,889 28,889 16,084 16,084 5,288 5,288 1,765 1,765 175 175 23,312 23,312 5,577 5,577 1,267 1,267 4,310 4,310 6 6 4,304 4,304 10,100 (6,391) 4,660 (3,322) 5,048 6,960 (118) 19,598 (1,703) 17,895 428 30,213 16,132 6,797 1,228 65 24,222 5,991 1,468 4,522 7 4,516 10,422 (5,404) 2,281 (1,228) 6,070 5,637 (131) 19,362 (1,840) 17,522 524 29,622 16,199 6,949 1,053 71 24,272 5,351 4,305 1,046 77 969 1.17 1.17 1.14 1.14 1.21 1.18 0.26 0.25 300 Statement of comprehensive income USD million Comprehensive income attributable to shareholders NNeett pprrooffiitt // ((lloossss)) OOtthheerr ccoommpprreehheennssiivvee iinnccoommee tthhaatt mmaayy bbee rreeccllaassssiiffiieedd ttoo tthhee iinnccoommee ssttaatteemmeenntt FFoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn 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 FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee 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 CCaasshh ffllooww hheeddggeess ooff iinntteerreesstt rraattee rriisskk 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 TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee tthhaatt mmaayy bbee rreeccllaassssiiffiieedd ttoo tthhee iinnccoommee ssttaatteemmeenntt,, nneett ooff ttaaxx OOtthheerr ccoommpprreehheennssiivvee iinnccoommee tthhaatt wwiillll nnoott bbee rreeccllaassssiiffiieedd ttoo tthhee iinnccoommee ssttaatteemmeenntt DDeeffiinneedd bbeenneeffiitt ppllaannss Gains / (losses) on defined benefit plans, before tax Income tax relating to defined benefit plans Subtotal defined benefit plans, net of tax OOwwnn ccrreeddiitt oonn ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee 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 TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee tthhaatt wwiillll nnoott bbee rreeccllaassssiiffiieedd ttoo tthhee iinnccoommee ssttaatteemmeenntt,, nneett ooff ttaaxx TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee TToottaall ccoommpprreehheennssiivvee iinnccoommee aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss Table continues on the next page. For the year ended 3311..1122..1199 31.12.18 31.12.17 44,,330044 4,516 969 220000 ((113344)) 5522 ((1144)) 00 110044 118899 00 ((3333)) 22 ((4411)) 111177 11,,557711 ((117755)) ((225533)) 11,,114433 11,,336633 ((114466)) ((4411)) ((118866)) ((440000)) 88 ((339922)) ((557788)) (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) 778855 55,,008899 (290) 4,225 818 1,787 301 Financial statements 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) Net profit / (loss) Other comprehensive income that will not be reclassified to the income statement 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 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 attributable to non-controlling interests Total comprehensive income Net profit / (loss) Net profit / (loss) Other comprehensive income 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 Total comprehensive income For the year ended 31.12.19 31.12.19 31.12.18 31.12.17 6 6 (4) (4) 0 0 (4) (4) (4) (4) 2 2 7 (1) 0 (1) (1) 5 4,310 4,310 781 781 1,363 1,363 (582) (582) 5,091 5,091 4,522 (292) (855) 563 4,231 77 250 0 250 250 326 1,046 1,068 838 229 2,113 302 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee Investments in associates Property, equipment and software Goodwill and intangible assets Deferred tax assets Other non-financial assets TToottaall aasssseettss 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 TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss Provisions Other non-financial liabilities TToottaall lliiaabbiilliittiieess Equity Share capital Share premium Treasury shares Retained earnings Other comprehensive income recognized directly in equity, net of tax EEqquuiittyy aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss Equity attributable to non-controlling interests TToottaall eeqquuiittyy TToottaall lliiaabbiilliittiieess aanndd eeqquuiittyy Note 3311..1122..1199 31.12.18 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 110077,,006688 1122,,444477 8844,,224455 2233,,228899 332266,,778866 2222,,998800 557766,,881155 112277,,551144 4411,,228855 112211,,884411 1188,,000077 8833,,994444 335511,,330077 66,,334455 11,,005511 1122,,880044 66,,446699 99,,553377 77,,885566 997722,,118833 66,,557700 77,,777788 3311,,441155 444488,,228844 111100,,449977 99,,771122 661144,,225566 3300,,559911 112200,,888800 3377,,223333 6666,,880099 3355,,994400 229911,,445522 22,,997744 88,,779944 991177,,447766 333388 1188,,006644 ((33,,332266)) 3344,,115544 55,,330033 5544,,553333 117744 5544,,770077 997722,,118833 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 53,103 958,489 303 Financial statements Consolidated financial statements Statement of changes in equity USD million Balance as of 1 January 2017 Balance as of 1 January 2017 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 Balance as of 31 December 2017 Balance as of 31 December 2017 Effect of adoption of IFRS 9 Effect of adoption of IFRS 15 Balance as of 1 January 2018 after the adoption of IFRS 9 and IFRS 15 Balance 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 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 338 338 Share premium Treasury shares (2,362) (2,362) 25,958 25,958 Retained earnings 25,029 25,029 (908)3 994 663 (879) 1 19 735 21 (2,259)2 1 (46) 949 969 296 (317) 338 338 23,598 23,598 (2,210) (2,210) 25,932 25,932 (518) (25) 338 338 0 23,598 23,598 (2,210) (2,210) 25,389 25,389 (1,608)3 1,137 503 (1,009) 22 676 4 (2,440)2 (7) (21) 5,080 4,516 56 509 Balance as of 31 December 2018 Balance as of 31 December 2018 338 338 20,843 20,843 (2,631) (2,631) 30,448 30,448 304 Other comprehensive income recognized directly in equity, net of tax1 33,,995533 of which: foreign currency translation 22,,990011 of which: financial assets at fair value through other comprehensive income 9966 of which: cash flow hedges 995555 Total equity attributable to shareholders 5522,,991166 Non-controlling interests 667700 Total equity 5533,,558866 46 838 838 44,,883388 (74) 44,,776644 21 (855) (855) 1,564 1,564 44,,446666 44,,446666 (541) (541) 7 (91) (91) 1133 (74) ((6611)) 3 (45) (45) 39 (635) (635) 336600 336600 18 (269) (269) 33,,993300 33,,992244 ((110033)) 110099 0 (908) 115 67 19 735 21 (2,259) 0 0 1 1,787 969 838 296 (317) 0 5522,,449955 (591) (25) 5511,,887799 0 (1,608) 128 50 22 676 4 (2,440) 0 (7) 4,225 4,516 (855) 56 509 0 5522,,992288 (77) (878) 17 326 77 250 5599 5599 (10) 122 5 7 (1) 117766 0 (908) 115 67 19 735 21 (2,337) (878) 0 18 2,113 1,046 838 296 (317) 250 5522,,555544 (591) (25) 5511,,993388 0 (1,608) 128 50 22 676 4 (2,450) 0 115 4,231 4,522 (855) 56 509 (1) 5533,,110033 305 Financial statements Consolidated financial statements Statement of changes in equity (continued) USD million Balance as of 31 December 2018 Balance as of 31 December 2018 Effect of adoption of IFRIC 23 Balance as of 1 January 2019 after the adoption of IFRIC 23 Balance as of 1 January 2019 after the adoption of IFRIC 23 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 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 338 338 338 338 0 0 Share premium Treasury shares (2,631) (2,631) 20,843 20,843 Retained earnings 30,448 30,448 (11) 20,843 20,843 (2,631) (2,631) 30,437 30,437 (1,771)3 (1,771)3 983 983 943 943 (886) (886) (2) (2) 29 29 619 619 11 11 (2,544)2 (2,544)2 (6) (6) (9) (9) 3,726 3,726 4,304 4,304 (186) (186) (392) (392) Balance as of 31 December 2019 Balance as of 31 December 2019 338 338 18,064 18,064 (3,326) (3,326) 34,154 34,154 1 Excludes defined benefit plans and own credit that are recorded directly in Retained earnings. 1 bearing share out of the capital contribution reserve. derivatives, and to hedge certain issued structured debt instruments. These acquisitions and disposals are reported based on the sum of the net monthly movements. 2 Reflects the payment of an ordinary cash dividend of CHF 0.70 (2018: CHF 0.65; 2017: CHF 0.60) per dividend- 2 3 Includes treasury shares acquired and disposed of by the Investment Bank in its capacity as a market-maker with regard to UBS shares and related 3 306 Other comprehensive income recognized directly in equity, net of tax1 33,,993300 of which: foreign currency translation 33,,992244 of which: financial assets at fair value through other comprehensive income ((110033)) of which: cash flow hedges 110099 Total equity attributable to shareholders 5522,,992288 Non-controlling interests 117766 33,,993300 33,,992244 ((110033)) 110099 99 11,,336633 11,,336633 00 111177 111177 99 11,,114433 11,,114433 110044 110044 55,,330033 44,,002288 1144 11,,226600 (11) 5522,,991177 00 ((11,,777711)) 9977 9922 2299 661199 1111 ((22,,554444)) 00 ((66)) 55,,008899 44,,330044 11,,336633 ((118866)) ((339922)) 00 5544,,553333 117766 ((88)) 55 22 66 ((44)) 117744 Total equity 5533,,110033 (11) 5533,,009922 00 ((11,,777711)) 9977 9922 2299 661199 1111 ((22,,555522)) 00 ((11)) 55,,009911 44,,331100 11,,336633 ((118866)) ((339922)) ((44)) 5544,,770077 307 Financial statements 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 Balance at the end of the year Balance at the end of the year Treasury shares Balance at the beginning of the year Acquisitions Disposals Balance at the end of the year Balance at the end of the year 2019 2019 2018 3,855,634,749 3,855,634,749 3,420,646 3,420,646 3,859,055,395 3,859,055,395 3,853,096,603 2,538,146 3,855,634,749 166,467,802 166,467,802 146,876,692 146,876,692 (70,323,198) (70,323,198) 243,021,296 243,021,296 132,301,550 103,979,927 (69,813,675) 166,467,802 Conditional share capital Authorized share capital As of 31 December 2019, a maximum of CHF 12,170,583, represented by 121,705,830 fully paid registered shares with a par value of CHF 0.10 each, was available to be issued to fund UBS’s employee share option programs. Additional conditional capital up to 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, was available as of 31 December 2019 for conversion rights and warrants granted in connection with the issuance of bonds or similar financial instruments. UBS Group AG had no authorized capital available to issue on 31 December 2019. Share repurchase program 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 69 million shares totaling USD 806 million in 2019 (2018: 48 million shares totaling USD 762 million). 308 Statement of cash flows USD million Cash flow from / (used in) operating activities Net profit / (loss) NNoonn ccaasshh iitteemmss iinncclluuddeedd iinn nneett pprrooffiitt aanndd ootthheerr aaddjjuussttmmeennttss:: -- Depreciation and impairment of property, equipment and software Impairment of goodwill 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 NNeett cchhaannggee iinn ooppeerraattiinngg aasssseettss aanndd lliiaabbiilliittiieess:: 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 fair value 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 NNeett ccaasshh ffllooww ffrroomm // ((uusseedd iinn)) ooppeerraattiinngg aaccttiivviittiieess Cash flow from / (used in) investing activities Purchase of subsidiaries, associates and intangible assets Disposal of subsidiaries, associates and intangible assets1 Purchase of property, equipment and software Disposal of property, equipment and software Purchase of financial assets 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 NNeett ccaasshh ffllooww ffrroomm // ((uusseedd iinn)) iinnvveessttiinngg aaccttiivviittiieess Table continues on the next page. For the year ended 31.12.18 3311..1122..1199 31.12.17 44,,331100 4,522 1,046 1,228 1,053 11,,776655 111100 6655 7788 ((4455)) 447777 222200 66,,449933 885544 ((44,,333366)) 88,,667788 22,,883399 ((33,,112288)) 2233,,221177 ((1188,,882299)) ((22,,334477)) 3333 5555 ((880044)) 1199,,770055 ((2266)) 111144 ((11,,558844)) 1111 ((33,,442244)) 33,,991133 ((556622)) 0 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) ((11,,555588)) (6,132) 0 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) 5,186 309 Financial statements Consolidated financial statements Statement of cash flows (continued) 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 Repayment of lease liabilities2 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 Net cash flow from / (used in) financing activities Net cash flow from / (used in) financing activities Total cash flow Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the beginning of the year Net cash flow from / (used in) operating, investing and financing activities Effects of exchange rate differences on cash and cash equivalents Cash and cash equivalents at the end of the year3 Cash and cash equivalents at the end of the year3 of which: cash and balances at central banks 4 of which: loans and advances to banks of which: money market paper 5 For the year ended 31.12.18 31.12.19 31.12.19 31.12.17 (17,149) (17,149) (1,559) (1,559) (2,544) (2,544) (518) (518) 65,047 65,047 (68,883) (68,883) (8) (8) (25,614) (25,614) 126,079 126,079 (7,467) (7,467) 1,261 1,261 119,873 119,873 106,957 106,957 11,386 11,386 1,530 1,530 (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 Additional information Net cash flow from / (used in) operating activities includes: Interest received in cash6 Interest paid in cash6 Dividends on equity investments, investment funds and associates received in cash7 1,828 1 Includes dividends received from associates. 2 Upon adoption of IFRS 16 on 1 January 2019, cash payments for the principal portion of the lease liability previously classified within operating activities have been 1 reclassified to financing activities. 3 USD 3,192 million, USD 5,245 million and USD 2,497 million of cash and cash equivalents (mainly reflected in Loans and advances to banks) were restricted as of 31 December 2019, 31 December 2018 and 31 December 2017, respectively. Refer to “Note 26 Restricted and transferred financial assets” in the “Consolidated financial statements” section of the Annual Report 2019 for more 5 Money market paper is included in the balance sheet under Financial assets at fair value held for trading information. 5 (31 December 2019: USD 235 million; 31 December 2018: USD 366 million; 31 December 2017: USD 135 million), Financial assets measured at fair value through other comprehensive income (31 December 2019: USD 24 million; 31 December 2018: USD 8 million; 31 December 2017: USD 17 million), Financial assets at fair value not held for trading (31 December 2019: USD 920 million; 31 December 2018: USD 1,556 million; 31 December 2017: USD 1,941 million) and Other financial assets measured at amortized cost (31 December 2019: USD 351 million; 31 December 2018: USD 204 million; 31 December 2017: USD 0 million). 6 Interest received and paid in cash was restated to represent the total of interest on financial instruments measured at amortized cost / fair value through other comprehensive income (31 December 6 2018: USD 9,997 million interest received and USD 6,382 million interest paid and 31 December 2017: USD 10,455 million interest received and USD 5,425 million interest paid) and interest on financial instruments measured at fair value through profit or loss (31 December 2018: USD 4,648 million interest received and USD 2,823 million interest paid and 31 December 2017: USD 2,254 million interest received and USD 1,264 million interest paid). 7 Includes dividends received from associates reported within Net cash flow from / (used in) investing activities. 4 Includes only balances with an original maturity of three months or less. 4 12,708 14,645 10,769 10,769 15,315 15,315 6,689 2,322 9,206 3,145 3,145 2 3 7 Changes in liabilities arising from financing activities USD million Balance as of 1 January 2018 Balance as of 1 January 2018 Cash flows Non-cash changes of which: foreign currency translation of which: fair value changes of which: other Balance as of 31 December 2018 Balance as of 31 December 2018 Cash flows Non-cash changes of which: foreign currency translation of which: fair value changes of which: other Debt issued measured at amortized cost 143,160 (7,402) (3,488) (3,155) (332) 132,271 (22,704) 930 (476) of which: short-term 52,270 (12,245) (1,000) (1,000) 0 39,025 (17,149) (39) (39) of which: designated at fair long-term value 90,890 4,843 (2,487) (2,155) (332) 1 93,246 (5,555) 969 (438) Over-the- Debt issued counter (OTC) debt instruments2 4,428 (1,838) (140) (59) (82) 0 2,450 (425) (3) (6) 3 0 2,022 2,022 50,782 13,332 (7,083) 309 (7,392) 0 57,031 2,144 7,634 212 7,421 0 66,809 66,809 Total 198,371 4,092 (10,711) (2,905) (7,475) (332) 191,752 (20,985) 8,560 (270) 7,424 1,406 179,327 179,327 Balance as of 31 December 2019 Balance as of 31 December 2019 1 Includes the effect of fair value hedges on long-term debt. Refer to Note 1a item 3j and Note 20 for more information. 2 Included in balance sheet line Other financial liabilities designated at fair value. 1 2 1,406 110,497 110,497 0 21,837 21,837 1,406 1 88,660 88,660 310 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. 312 312 312 312 313 314 315 315 315 322 322 323 323 324 330 331 331 332 333 333 333 333 334 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 f. Fair value of financial instruments g. Allowances and provisions for expected credit losses h. Restructured and modified financial assets i. Offsetting j. Hedge accounting k. Embedded derivatives in financial liabilities l. Financial liabilities m. Own credit n. Loan commitments o. Financial guarantee contracts p. Other net income from financial instruments measured at fair value through profit or loss 334 336 336 336 337 338 338 339 339 340 341 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) Income taxes 9) Investments in associates 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 342 15) Leasing 343 b) Changes in accounting policies, comparability and other adjustments 346 c) International Financial Reporting Standards and Interpretations to be adopted in 2020 and later and other changes Accounting policies applicable to prior periods The accounting policies described in Note 1a have been applied consistently in 2019, 2018 and 2017 unless otherwise stated in Note 1b. Exceptions include IFRS 9, Financial Instruments (effective from 1 January 2018), IFRS 15, Revenue from Contracts with Customers (effective from 1 January 2018), and IFRS 16, Leases (effective from 1 January 2019). Within Note 1a, policies applied in 2018 and 2017, or only in 2017 that differ from those applied to the financial year ended 31 December 2019 are identified with a Comparative policy | signpost. A triangle symbol –  – indicates the end of these comparative policy sections. 311 Financial statements Consolidated financial statements 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 27 February 2020, 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, 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. in Note 1b. Exceptions The accounting policies described in this Note have been applied consistently in 2019, 2018 and 2017 unless otherwise IFRS 9, Financial stated Instruments (effective from 1 January 2018), IFRS 15, Revenue from Contracts with Customers (effective from 1 January 2018), and IFRS 16, Leases (effective from 1 January 2019). Within this Note, policies applied in 2018 and 2017 or only in 2017 that differ from those applied to the financial year ended 31 December 2019 are identified as “Comparative policy.” include Critical accounting estimates and judgments 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. Furthermore, 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 measurement (refer to item 3f in this Note and to Note 24); – – expected credit loss measurement (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); and – 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 for the year ended 31 December 2018 (refer to item 13 in this Note). 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. 312 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, i.e., 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 reviewing 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 the following: – 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 definition. All securitization entities are 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 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 313 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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 UBS’s operating segments and corresponding reportable segments, previously reported segment information has been restated. This change had no material effect on the former segments, including recognized goodwill.  Refer to item 11 in this Note and Note 16 for more information UBS’s internal Effective from 2019, UBS has operationally combined Group Treasury activities with Group Asset and Liability Management (Group ALM) and calls this combined unit Group Treasury. In addition, UBS provides results for total Corporate Center only and does not separately report Corporate Center – Services, Group Treasury and Non-core and Legacy Portfolio due to the substantial reduction in the size and resource consumption of these units. Prior-period information has been restated. policies, which accounting include management accounting policies and service level agreements, determine the revenues and expenses directly attributable to each reportable segment. Transactions between the reportable segments are carried out at internally agreed rates and are reflected in the operating results of the reportable segments. Revenue-sharing agreements are used to allocate external client revenues to reportable segments where several reportable segments are involved in the value creation chain. Commissions are credited to the reportable segments based on the corresponding client relationship. Total intersegment revenues for the Group are immaterial, as the majority of the revenues are allocated across the segments by means of revenue-sharing agreements. Interest income earned from managing UBS’s consolidated equity is allocated to the reportable segments based on average attributed tangible equity and currency composition. Assets and liabilities of the reportable segments are funded through and invested with Corporate Center, and the net interest margin is reflected in the results of each reportable segment. 2) Segment reporting UBS’s businesses are organized globally into four business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management and the Investment Bank. All four business divisions are supported by Corporate Center and qualify as reportable segments for the purpose of segment reporting. Together with Corporate Center, the four business divisions reflect the management structure of the Group. Financial information about the four business divisions and Corporate Center is presented separately in internal management reports to the Group Executive Board, which is considered the “chief operating decision maker” pursuant to IFRS 8, Operating Segments. Prior to 2018, UBS‘s businesses were organized globally into five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank, all of which were supported by Corporate Center. The five business divisions 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 was presented separately in internal management reports to the Group Executive Board. Effective from 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 integrated 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. Consequently, from 2018, Global Wealth Management qualifies as an operating and reportable segment for the purposes of segment reporting and 314 Note 1 Summary of significant accounting policies (continued) 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 may be allocated to other segments on a basis different the corresponding costs or revenues are allocated. For example, certain assets are reported on the balance sheet 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. that on which to 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 – 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 both of 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. 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 non-derivative 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 these items meet the definition of an asset and the recognition criteria are satisfied, such assets are not recognized on UBS’s balance sheet. Consequently, the related income is excluded from these Financial Statements. Client cash balances associated with derivatives clearing and execution services are not recognized on the balance sheet if, through contractual agreement, regulation or practice, the Group neither obtains benefits from nor controls the client cash balances. b. Classification, measurement and presentation All financial instruments are on initial recognition 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. 11 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. 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 of holding assets to collect contractual cash flows, and those 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. 315 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) Critical accounting estimates and judgments 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 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 flows of the financial instrument are consistent with payments 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. 316 Note 1 Summary of significant accounting policies (continued) Classification, measurement and presentation of financial assets from 1 January 2018 Financial assets Financial assets classification classification Measured at amortized cost Measured at amortized cost Significant items included Significant items included Measurement and presentation Measurement and presentation 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; and – debt securities held as high-quality liquid assets (HQLA). Measured at Measured at FVOCI FVOCI Debt instruments measured at FVOCI This classification primarily includes debt securities and certain asset- backed securities held as HQLA. 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; and – 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 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. 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; and 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. 317 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) Classification, measurement and presentation of financial assets from 1 January 2018 (continued) Financial assets Financial assets classification classification Significant items included Significant items included Measurement and presentation Measurement and presentation Measured at Measured at FVTPL FVTPL Held for trading Financial assets held for trading include: – all derivatives with a positive replacement value, except those that Measured at fair value with changes recognized in profit or loss. 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. Changes in fair value, initial transaction costs, dividends and gains and losses realized on disposal or redemption are recognized in Other net income from financial instruments measured at fair value through profit or loss, except interest income on instruments other than derivatives (refer to item 3c in this Note and Note 1b 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 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. 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. 318 Note 1 Summary of significant accounting policies (continued) Classification, measurement and presentation of financial liabilities Financial liabilities Financial liabilities classification classification Measured at amortized cost Measured at amortized cost Significant items included Significant items included Measurement and presentation Measurement and presentation 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 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. Measured at fair Measured at fair value through value through profit or loss 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 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. – 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); and – brokerage payables, which arise in conjunction with brokerage receivables and are measured at FVTPL to achieve measurement consistency (from 1 January 2018). 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 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). 319 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) substantially retained by IFRS 9 and are detailed in the Comparative policy | Policy applicable prior to 1 January 2018 Prior to 1 January 2018, on initial recognition, UBS classified, “Classification, measurement and presentation of financial measured and presented its financial assets and liabilities in instruments from 1 January 2018” table. The following table accordance with IAS 39, Financial Instruments: Recognition and sets out details of classification, measurement and presentation Measurement. Classification, measurement and presentation of financial assets prior to 1 January 2018. requirements in respect of financial liabilities have been Classification, measurement and presentation of financial assets prior to 1 January 2018 Financial assets Financial assets classification classification Held for trading Held for trading Significant items included Significant items included Measurement and presentation1 Measurement and presentation1 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. 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 financial instruments measured at fair value through profit or loss (prior to 1 January 2019: Other net income from fair value changes on financial instruments), 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. Designated at fair value Designated at fair value through profit or loss 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. 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. 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 Treasury 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. 1 320 Note 1 Summary of significant accounting policies (continued) Classification, measurement and presentation of financial assets prior to 1 January 2018 (continued) SSiiggnniiffiiccaanntt iitteemmss iinncclluuddeedd MMeeaassuurreemmeenntt aanndd pprreesseennttaattiioonn FFiinnaanncciiaall aasssseettss ccllaassssiiffiiccaattiioonn Loans and receivables Loans and receivables (amortized cost) (amortized cost) 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; 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 – certain securities held within Corporate Center – Non-core and Legacy advances to customers, Receivables from securities financing transactions Portfolio; and – trade and lease receivables. 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 offsetting (refer to items 3d and 3i in this Note) are presented within Cash collateral receivables on derivative instruments. Available for sale Available for sale Financial assets classified as available for sale are non-derivative financial Measured at fair value with unrealized gains and losses reported in Other 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 Treasury, certain asset-backed securities managed by Corporate Center – Group Treasury, investment fund holdings and strategic and commercial equity investments. 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. Held to maturity Held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities for which UBS has the positive intention and ability to hold to maturity. This classification mainly includes debt securities held as HQLA and managed by Corporate Center – Group Treasury. 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 about the treatment of foreign exchange translation gains and losses. Measured at amortized cost using the effective interest rate method less allowances for credit losses (refer to items 3c and 3g in this Note).  321 Financial statements Consolidated financial statements 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: the 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: the 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.  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 separately in Interest income (or Interest 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 when 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. 322 Note 1 Summary of significant accounting policies (continued) 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 option contracts cleared through central clearing counterparties and exchanges are considered to be settled on a daily basis through the daily margining process, as the payment or receipt of the variation margin represents legal or economic settlement of a derivative contract, which results in derecognition of the associated positive and negative replacement values.  Refer to item 3h of this Note and 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 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, 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. 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 offsetting 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. 323 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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 observed 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. Critical accounting estimates and judgments Critical accounting estimates and judgments The use of valuation techniques, modeling assumptions and estimates of unobservable market inputs in the fair valuation of financial instruments requires 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 inherently require a higher level of judgment 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 with the objective of ensuring 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 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. 1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. 1 324 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 amount of financial assets measured at amortized cost on the balance sheet. For financial assets measured at fair value through OCI, the carrying amount 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. 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. inherent credit proceedings liquidation enforced reflect the or if An instrument is classified as credit-impaired the counterparty is defaulted, and/or the instrument is identified as POCI. An instrument is POCI if it has been purchased at a deep 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. 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. 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 macroeconomic scenario-dependencies 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 prior periods into account. 325 Financial statements Consolidated financial statements 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. ECL-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 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 once a 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. 326 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 the proposals and Finance 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 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, an assessment is made as to 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. 327 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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. In general, 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 margining requirements that often require the delivery of collateral within a number of days. If margin calls are not satisfied, a position is closed out and classified as a stage 3 position. In exceptional cases, an individual adjustment and a transfer into stage 2 may be made to take account of specific facts. credit Credit risk officers are responsible for ensuring that the stage allocation of instruments reflects the identification of an SICR, which for accounting purposes is in some aspects different from internal credit risk management processes for loans with increased 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 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 IInntteerrnnaall rraattiinngg aatt oorriiggiinnaattiioonn ooff tthhee iinnssttrruummeenntt RRaattiinngg ddoowwnnggrraaddeess // SSIICCRR ttrriiggggeerr 0–3 4–8 9–13 3 2 1  Refer to the “Risk management and control” section of this report for more details about 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 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 and Global Wealth Management Region Switzerland 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. 328 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 thereon 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 measured 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 amount of a financial asset. For an off-balance sheet item, such as a commitment, a provision for credit losses is reported in Provisions. Changes to allowances and provisions for credit losses are recognized in Credit loss (expense) / recovery. Critical accounting estimates and judgments 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 amount of the financial asset over 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 amount of the loan. the estimated Critical accounting estimates and judgments 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 (the 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. 329 Financial statements Consolidated financial statements 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. 330 To the extent a financial asset classified as available for sale is determined to be impaired, the related cumulative net unrealized loss previously recognized in Other comprehensive income is reclassified to the income statement within Other income. For equity instruments, any further loss is recognized directly in the income statement, whereas for debt instruments, any further loss is recognized in the income statement only if there is additional objective evidence of impairment. After the recognition of an impairment on a financial asset classified as available for sale, increases in the fair value of equity instruments are reported 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.  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 the that supersede counterparty has recovered and the preferential conditions no longer exceed our risk tolerance. 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 tolerance, are not considered to be in forbearance. Modifications represent contractual amendments that result in an alteration of future contractual cash flows and that can occur within UBS’s normal risk tolerance 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 amount of a financial asset is recognized in profit or loss as a modification gain or loss. Furthermore, 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. Note 1 Summary of significant accounting policies (continued) i. Offsetting 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). 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 financial instruments measured at fair value through profit or loss (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 331 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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 financial instruments measured at fair value through profit or loss (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 k. Embedded derivatives in financial liabilities 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 instruments. An embedded derivative in a financial liability is generally required to be separated from the host contract and accounted for as a standalone derivative instrument at fair value through profit or loss if: (i) the host contract is not measured 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 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. 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 amount of is the hedged terminated for reasons other than the derecognition of the hedged item, the adjustment to the carrying amount 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. 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 332 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 a 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, the financial liability would be partially or fully derecognized, with the difference between the carrying amount 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 measured 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 about 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 amount) 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. 11 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 9. 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 have been 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 and those that can be canceled at any time if UBS is exposed to credit risk (refer to item 3g 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. through profit or loss, consistent with 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 commitments which are not measured at fair value through profit or loss. Consistent with item 3g above, claims under other loan commitments are 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). 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. 333 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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, the costs are expensed immediately as incurred. 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 3g 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.  p. Other net income from financial instruments measured at fair value through profit or loss The line item Other net income from financial instruments measured at fair value through profit or loss includes fair value gains and losses on financial instruments at fair value through profit or loss other than interest income and expense on non- derivatives (refer to item 3c in this Note). In addition, effective 1 January 2019, the line item includes dividends (prior to 1 January 2019, dividends were included within Net interest income), intermediation income arising from certain client-driven Global Wealth Management and Personal & Corporate Banking financial transactions, foreign currency translation effects and income and expenses from exposures to precious metals. 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 1 The accounting policy in this section applies from 1 January 2018, the effective date of IFRS 15. 1 334 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 about 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 should generally 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 directly attributable to the satisfaction of specific performance obligations associated with the generation of 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 invoicing. Where from fund assets or through separate 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. 335 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) Share-based compensation expense is measured by reference to the fair value of the equity instruments on the date of grant, taking into account the terms and conditions inherent in the award, including, where relevant, dividend rights, transfer restrictions in effect beyond the vesting date, market conditions, and non-vesting conditions. For equity-settled awards, the fair value is not remeasured unless the terms of the award are modified such that there is an incremental increase in value. No adjustments are made for modification that results in a decrease in value. 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 re-measured at each reporting date such that the cumulative expense recognized equals the cash distributed.  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 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 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.   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 specified 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 vesting conditions that require employees to complete a specified period of service and, for performance shares, to Share-based satisfy 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 of service or performance conditions. Where the vesting period is shortened, for example in the case of employees affected by restructuring programs or mutually agreed termination provisions, the expense is recognized on an accelerated basis to the termination date. performance conditions. the share-based compensation expense 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 is recognized immediately on, or prior to, the date of grant. Such awards may remain forfeitable. For equity-settled awards, forfeiture events resulting from a breach of a non-vesting condition (i.e., one that does not relate to a service or performance condition) do not result in an adjustment to the share-based compensation expense. 336 Note 1 Summary of significant accounting policies (continued) Defined benefit plans UBS offers defined benefit plans, such as pension and medical insurance benefit plans. 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 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. 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. liabilities are tax 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 Deferred 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. 337 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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 amount of the investment in the associate exceeds its recoverable amount.  Refer to Note 31 for more information 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 measured 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 – leased properties and leasehold improvements: the shorter of the lease term or the economic life of asset (typically ≤ 20 years). 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 at 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 for which acceptance by the relevant tax authority is not considered probable by adjusting current or deferred taxes, as applicable, using either the most likely amount or expected value methods, depending on which method is deemed a better predictor of the basis on which and extent to which the uncertainty will be resolved. Critical accounting estimates and judgments 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, generally 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 338 Note 1 Summary of significant accounting policies (continued) Property, equipment and software are generally tested for impairment at the appropriate cash-generating unit (CGU) level, alongside goodwill and intangible assets as described in item 11 of this Note. An impairment charge is however only recognized for such assets if both the asset’s fair value less costs of disposal and value in use (if determinable) is below its carrying amount. The fair value of such an asset, other than property which has a market price, is generally determined using a replacement cost approach that reflects the amount that would be currently required by a market participant to replace the service capacity of the asset. If such assets are no longer used, they are tested individually for impairment.  Refer to Note 15 for more information Intangible assets are comprised of separately identifiable intangible items arising from business combinations and certain purchased trademarks and similar items. Intangible assets are recognized at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Intangible assets with a finite useful life are amortized using the straight-line method over their estimated useful life, generally not exceeding 20 years. In rare cases, intangible assets can have an indefinite useful life, in which case they are not amortized. At each reporting date, intangible assets are reviewed for indications of impairment. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. 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. 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 Americas and Global Wealth Management ex Americas. The remaining goodwill balances are tested at the level of Asset Management and the Investment Bank, with each segment considered a separate cash-generating unit. 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. Critical accounting estimates and judgments 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 about 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 12) Provisions and contingent liabilities Provisions are liabilities of uncertain timing or amount, and are generally recognized in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, 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 Group recognizes IAS 37 provisions for litigation, regulatory and similar matters when, in the opinion of management after seeking legal advice, the requirements for recognition have been met. A provision may also 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. 339 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) IAS 37 provisions are measured considering the best estimate of the consideration required to settle the present obligation at the balance sheet date. Such estimates are based on all available information and are revised over time as more information becomes available. If the effect of the time value of money is material, provisions are discounted and measured at the present value of the expenditure expected to settle or discharge the obligation, using a rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. Provisions that are similar in nature are aggregated to form a class, while the remaining provisions, including those of less significant amounts, are disclosed under Other provisions. Provisions are presented separately on the balance sheet and, when they are no longer considered uncertain in timing or lines amount, are reclassified to their respective depending on their nature. liability 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. The majority of UBS’s provisions relate to litigation, regulatory and similar matters, restructuring, and employee benefits. Restructuring provisions are generally recognized as a consequence of management agreeing to materially change the scope of the business or the manner in which it is conducted, including changes in the management structure. Provisions for employee benefits relate mainly to service anniversaries and sabbatical in accordance with measurement principles set out in item 7 of this Note. In addition, UBS presents expected credit loss allowances within Provisions if they relate to a loan commitment, financial guarantee contract or a revolving revocable credit line. leave, and are recognized Critical accounting estimates and judgments 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. is sensitive to the assumptions used and there could be a wide range of possible outcomes for any particular matter. The amount of any provision recognized Statistical or other quantitative analytical tools are generally 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 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 financial instruments measured at fair value through profit or loss (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. 340 Note 1 Summary of significant accounting policies (continued) Upon consolidation, assets and liabilities of foreign operations (which from 1 October 2018 also include UBS’s Switzerland-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 the 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 Critical accounting estimates and judgments The determination of an entity’s functional currency and the trigger for a judgment and change requires management to apply significant 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, London Branch had changed from the Swiss franc to the US dollar 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 the Swiss franc to the US dollar 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 were disregarded, and foreign currency translation effects were first calculated from 1 January 2004 onward. 14) Equity, treasury shares and contracts on UBS Group AG shares Non-controlling interests Net profit is split into Net profit attributable to shareholders and Net profit attributable to non-controlling interests (including net profit attributable to preferred noteholders, if any). Similarly, Equity is split into Equity attributable to shareholders and Equity (including equity interests attributable attributable to preferred noteholders, if any). to non-controlling 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 equivalent to each option’s 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. 341 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) expected rental payments or costs of termination are included within the lease payments used to generate the lease liability. UBS does not typically enter into leases with purchase options or residual value guarantees. Where UBS acts as a lessor or sub-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 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 as repayments of the outstanding receivable. Interest income reflects a constant periodic rate of return on UBS’s net investment using the interest rate implicit in the lease (or, for sub-leases, the rate for the head lease). UBS reviews the estimated unguaranteed residual value annually, and if the estimated residual value to be realized is less than the amount assumed at lease inception, a loss is recognized for the expected shortfall. Where UBS acts as a lessor or sub-lessor in an operating lease, UBS recognizes the operating lease income on a straight-line basis over the lease term. receivables are determined Lease receivables are subject to impairment requirements as set out in item 3g of this Note. Expected credit losses (ECL) on lease the general impairment model within IFRS 9, Financial Instruments, without utilizing simplified approach of always measuring impairment at the amount of lifetime ECL. following the Comparative policy | Policy applicable prior to 1 January 2019 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. Lease contracts classified as operating leases where UBS is the lessee include non-cancelable long-term 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.  Refer to Note 15 and 33 for more information 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 financial instruments measured at fair value through profit or loss. 15) Leasing Policy applicable from 1 January 20191 UBS predominantly enters into lease contracts, or contracts that include lease components, as a lessee of real estate, including offices, retail branches and sales offices, with a small number of IT hardware leases. UBS identifies non-lease components of a contract and accounts lease components. separately them from for When UBS is a lessee in a lease arrangement, UBS recognizes a lease liability and corresponding right-of-use (RoU) asset at the commencement of the lease term when UBS acquires control of the physical use of the asset. Lease liabilities are presented within Other financial liabilities measured at amortized cost and RoU assets within Property, equipment and software. The lease liability is measured based on the present value of the lease payments over the lease term, discounted using UBS’s unsecured borrowing rate, given that the rate implicit in a lease is generally not observable to the lessee. Interest expense on the lease liability is presented within Interest expense from financial instruments measured at amortized cost. The RoU asset is recorded at an amount equal to the lease liability but is adjusted for rent prepayments, initial direct costs, any costs to refurbish the leased asset and/or is depreciated over the shorter of the lease term or the useful life of the underlying asset, with the depreciation presented within Depreciation and impairment of property, equipment and software. incentives received. The RoU asset lease Lease payments generally include fixed payments and variable payments that depend on an index (such as an inflation index). When a lease contains an extension or termination option that the Group considers reasonably certain to be exercised, the 1 The accounting policy in this section applies from 1 January 2019, the effective date of IFRS 16. 1 342 Note 1 Summary of significant accounting policies (continued) b) Changes in accounting policies, comparability and other adjustments New or amended accounting standards – interest risk-free Amendments to IAS 39, IFRS 9 and IFRS 7 (Interest Rate Benchmark Reform) In September 2019, the IASB issued Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7, enabling hedge accounting to continue during the period of uncertainty before existing interest rate benchmarks are replaced with alternative rates. The amendments are mandatorily effective from 1 January 2020, with early adoption permitted, and apply to hedge relationships that exist at the beginning of the reporting period or are designated thereafter, and to the gains or losses that exist in OCI on adoption. As permitted by the transitional provisions, UBS early adopted the revisions in 2019. Adopting these amendments allows UBS to maintain its existing hedge accounting relationships and to assume that the current benchmark rates will continue to exist, such that the hedge relationships are considered highly effective on a retrospective and prospective basis, with no consequential impact on the financial statements. Further, the amendments bring in additional disclosure requirements on the effects arising from the change in interest rate benchmarks, which are presented in Note 28. IFRS 16, Leases Effective from 1 January 2019, UBS adopted IFRS 16, Leases, which replaced IAS 17, Leases, and sets out the principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 introduces a single lessee accounting model and fundamentally changes how UBS accounts for operating leases when acting as a lessee, with a requirement to record a right-of- use (RoU) asset and lease liability on the balance sheet. UBS is a lessee in a number of leases, primarily of real estate, including offices, retail branches and sales offices, with a smaller number of IT hardware leases. As permitted by the transitional provisions of IFRS 16, UBS elected to apply the modified retrospective approach and has not restated comparative figures. Overall, adoption of IFRS 16 resulted in a USD 3.5 billion increase in both total assets and total liabilities in UBS’s consolidated financial statements. The newly recognized right-of-use assets and finance lease receivables were fully allocated to the business divisions. There was no effect on equity.  Refer to the tables below and on the following page, and Note 2 for more information UBS applied the following practical expedients that are permitted on transition to IFRS 16 where UBS is a lessee in a lease previously classified as an operating lease: – – to not reassess whether or not a contract contained a lease; to rely on previous assessments of whether such contracts were considered onerous; to rely on previous sale-and-leaseback assessments; to adjust lease terms with the benefit of hindsight with respect to whether extension or termination options are reasonably certain of being exercised; to discount lease liabilities using the Group’s incremental borrowing rate in each currency as of 1 January 2019; to initially measure the RoU asset at an amount equal to the lease liability for leases previously classified as operating leases, adjusted for existing lease balances, such as rent prepayments, rent accruals, lease incentives and onerous lease provisions, but excluding initial direct costs; and to not apply IFRS 16 to leases the remaining term of which will end within 12 months from the transition date. – – – – – The measurement of leases previously classified as finance leases where UBS acts as a lessee has not changed on transition to IFRS 16. Similarly, UBS has made no adjustments where UBS acts as a lessor, in either a finance or operating lease, of physical assets it owns. Where UBS acts as an intermediate lessor, i.e., where UBS enters into a head lease and sub-leases the asset to a third party, the sub-lease has been classified as either a finance or operating lease based primarily on whether the sub-lease term consumes the majority of the remaining useful life of the RoU asset arising from the head lease as of the transition date. The following table reconciles the obligations in respect of operating leases as of 31 December 2018 to the opening lease liabilities recognized on 1 January 2019. Reconciliation between operating lease commitments disclosed under IAS 17 and lease liabilities recognized under IFRS 16 USD million TToottaall uunnddiissccoouunntteedd ooppeerraattiinngg lleeaassee ccoommmmiittmmeennttss aass ooff 3311 DDeecceemmbbeerr 22001188 Leases with a remaining term of less than one year as of 1 January 2019 Excluded service components Reassessment of lease term for extension or termination options TToottaall uunnddiissccoouunntteedd lleeaassee ppaayymmeennttss Discounted at a weighted average incremental borrowing rate of 3.07% IIFFRRSS 1166 ttrraannssiittiioonn aaddjjuussttmmeenntt Finance lease liabilities as of 31 December 2018 CCaarrrryyiinngg aammoouunntt ooff ttoottaall lleeaassee lliiaabbiilliittiieess aass ooff 11 JJaannuuaarryy 22001199 44,,668888 ((1188)) ((229966)) 440033 44,,777777 ((774444)) 44,,003333 2244 44,,005577 343 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) The following table provides details about the determination of RoU assets on transition. Determination of RoU assets on transition USD million Recognition of gross RoU assets upon adoption of IFRS 16 (IFRS 16 transition adjustment) Recognition of gross RoU assets upon adoption of IFRS 16 (IFRS 16 transition adjustment) Offset by liabilities recognized as of 31 December 2018 of which: other non-financial liabilities (lease incentives) of which: other financial liabilities measured at amortized cost (rent accruals) of which: provisions (onerous lease provisions) Increase in total assets resulting from the adoption of IFRS 16 on 1 January 20191 Increase in total assets resulting from the adoption of IFRS 16 on 1 January 20191 Reclassification of assets recognized as of 31 December 2018 as an addition to RoU assets of which: other financial assets measured at amortized cost (finance lease assets recognized under IAS 17 as of 31 December 2018) of which: other non-financial assets (prepaid rent) Reclassification of finance lease receivables from sub-leases to other financial assets measured at amortized cost resulting in a reduction of RoU assets Carrying amount Carrying amount 4,033 4,033 (521) (521) (204) (204) (185) (185) (132) (132) 3,512 3,512 43 43 24 24 19 19 (176) (176) 3,378 3,378 Upon adoption of IFRIC 23 on 1 January 2019, UBS recognized a net tax expense of USD 11 million in retained earnings. Amendments to IAS 19, Employee Benefits Effective from 1 January 2019, UBS adopted 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 accounting requirements for a plan amendment, curtailment or settlement affect requirements. The amendments are effective prospectively for plan amendments, curtailments or settlements that occur on or after 1 January 2019. Adoption on 1 January 2019 had no effect on the Group’s financial statements. the asset ceiling from 1 Annual Improvements to IFRS Standards 2015–2017 Cycle Effective January 2019, UBS adopted 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. Adoption of these amendments on 1 January 2019 had no material effect on the Group’s financial statements. Total RoU assets as of 1 January 2019 presented within Property, equipment and software Total RoU assets as of 1 January 2019 presented within Property, equipment and software 1 Total liabilities increased by the same amount upon adoption of IFRS 16. 1 Lease liabilities are presented within Other financial liabilities measured at amortized cost and RoU assets within Property, equipment and software. Finance lease receivables are included within Other financial assets measured at amortized cost. Due to the practical expedients taken on transition, there was no effect on equity. The weighted average lease term on 1 January 2019 was approximately nine years. The 2019 depreciation expense for RoU assets, which is presented within Depreciation and impairment of property, equipment and software, was USD 487 million. The 2019 interest expense on lease liabilities, which is presented within instruments measured at Interest expense from financial amortized cost, was USD 122 million. Occupancy expenses, which are presented within General and administrative expenses, decreased by USD 533 million between 2018 and 2019, which primarily reflected the adoption of IFRS 16. The full year effect of the application of IFRS 16 was a net decrease in profit before tax of approximately USD 60 million. IFRIC 23, Uncertainty over Income Tax Treatments Effective from 1 January 2019, UBS adopted IFRIC Interpretation 23, 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. 344 Note 1 Summary of significant accounting policies (continued) Other changes to presentation or segment reporting Presentation of dividend income and expense from financial instruments measured at fair value through profit or loss Effective from 1 January 2019, UBS refined the presentation of dividend income and expense. This resulted in a reclassification of dividends from Interest income (expense) from financial instruments measured at fair value through profit or loss into Other net income from financial instruments measured at fair value through profit or loss (prior to 1 January 2019: Other net income from fair value changes on financial instruments). The change aligns the presentation of dividends with related fair value changes from equity instruments and economic hedges, removing volatility that has historically arisen within both Net interest income and Other net income from financial instruments measured at fair value through profit or loss. There is no effect on Total operating income or Net profit / (loss). Prior periods have been restated for this presentational change and the effect on the respective reporting lines is outlined in the table below. Changes to the presentation of dividend income and expense from financial instruments measured at fair value through profit or loss For the year ended 31.12.18 (2,308) 1,331 ((997766)) 997766 USD million 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 NNeett iinntteerreesstt iinnccoommee OOtthheerr nneett iinnccoommee ffrroomm ffiinnaanncciiaall iinnssttrruummeennttss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss 31.12.17 (1,762) 1,190 ((557722)) 557722 Changes to Corporate Center As of 1 January 2019, UBS has operationally combined Group Treasury activities with Group ALM and calls this combined unit Group Treasury. In order to further align Group and divisional performance, UBS adjusted the methodology for the allocation of Group Treasury and Corporate Center – Services funding costs and expenses to the business divisions. At the same time, UBS updated its funds transfer pricing framework to better reflect the sources and usage of funding. All of these changes became effective as of 1 January 2019 and prior-period segment information has been restated. Together, these changes decreased the operating results of the business divisions and thereby increased their adjusted cost / income ratios 1–2 percentage points, with an offsetting effect of USD 0.7 billion in Corporate Center’s operating profit / (loss) before tax. Corporate Center has retained 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 has increased the allocation of balance sheet resources from Corporate Center to the business divisions, resulting in USD 223 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. Further, due to the aforementioned changes to UBS’s methodology for allocating funding costs and expenses and a substantial reduction in the size and resource consumption of the various Corporate Center units, UBS provides results for total Corporate Center only and does not separately report Corporate Center – Services, Group Treasury and Non-core and Legacy Portfolio, in compliance with IFRS 8, Operating Segments. Prior- period information has been restated.  Refer to Note 2 for more information 345 Financial statements Consolidated financial statements Note 1 Summary of significant accounting policies (continued) c) International Financial Reporting Standards and Interpretations to be adopted in 2020 and later and other changes Adoption of hedge accounting requirements of IFRS 9, Financial Instruments Effective 1 January 2020, UBS will adopt the hedge accounting requirements of IFRS 9, Financial Instruments for most of its existing hedge accounting programs, including fair value hedges of interest rate risk related to debt instruments, cash flow hedges of forecast transactions and hedges of net investments in foreign operations. As permitted by IFRS 9, UBS will continue to account for its fair value hedges of portfolio interest rate risk related to loans under IAS 39, Financial Instruments: Recognition and Measurement. 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 and will be used by the IASB in developing IFRS standards. 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. The adoption of the Framework by UBS on 1 January 2020 will have no effect on the Group’s financial statements. 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 with an acquisition date on or after 1 January 2020. The adoption of these amendments on 1 January 2020 will have no effect on the Group’s financial statements. IFRS 17, Insurance Contracts In May 2017, the IASB issued IFRS 17, Insurance Contracts, which sets out the accounting requirements for contractual rights and obligations that arise from insurance contracts issued and reinsurance contracts held. IFRS 17 is effective from 1 January 2021; however, as part of the targeted amendments to IFRS 17, the IASB is considering delaying the mandatory implementation date by one year. UBS is assessing the standard, but does not expect it to have a material effect on the Group’s financial statements. items, including IFRS 9’s hedge accounting model further aligns accounting with risk management practices, amends hedge effectiveness requirements and prohibits voluntary de-designations. IFRS 9 permits certain additional hedged layer components, net positions, or aggregated exposures, such as a combination of a non-derivative and derivative, to be designated. IFRS 9 also introduces the concept of “cost of hedging,” under which the time value of options, the forward element of a forward contract or foreign currency basis spreads in a cross-currency swap can be deferred in other comprehensive income and, depending on the nature of the hedged transaction, released to the income statement either when the hedged item impacts the income statement or over the term of the hedged item. these The adoption of requirements will have no consequential financial impact on UBS’s financial statements. However, the adoption will allow UBS to designate more effective hedge accounting forward, including fair value hedges of foreign currency risk using cross- currency swaps, and reduce income statement volatility caused by foreign currency basis spreads. relationships going 346 Note 2a Segment reporting The operational structure of the Group as of 31 December 2019 was comprised of Corporate Center and four business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management and the Investment Bank.  Refer to “Segment reporting” in Note 1a for more information Global Wealth Management 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, investing, lending, 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. 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 Global Wealth Management, Investment Bank and Asset Management 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). the 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 advisory support to institutions, wholesale intermediaries and Global Wealth Management 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, as well as registered investment funds It covers the main asset management markets globally, and has a local presence in 22 markets, grouped in four regions: the Americas; Europe, Middle East and Africa; Switzerland; and Asia Pacific. jurisdictions. in various 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 services, 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 landscapes. The Investment Bank delivers solutions to 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 more than 30 countries and principal offices in the major financial hubs. Corporate Center Corporate Center consists of the Group Chief Operating Officer area (Group Technology, Group Corporate Services, Group Human Resources and Group Operations), Group Treasury, Group Finance, Group Legal, Group Risk Control, Group Communications & Branding, Group Compliance, Regulatory & Governance, UBS in society, and Non-core and Legacy Portfolio (NCL). Over recent years, UBS has progressively aligned its support functions with the business divisions. The majority of these functions are either fully aligned or shared among business divisions, where they have full management responsibility. Group Treasury 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 Treasury serves all business divisions through two main risk management areas, and its risk management is fully integrated into the Group’s risk governance framework. NCL manages legacy positions from businesses exited by the Investment Bank. 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. Beginning with the first quarter 2019 and in compliance with IFRS 8, Operating Segments, UBS provides results for total Corporate Center only and does not separately report Corporate Center – Services, Group Treasury and NCL. 347 Financial statements Consolidated financial statements Note 2a Segment reporting (continued) Changes in Corporate Center cost and resource allocation to business divisions In order to further align Group and divisional performance, UBS has adjusted its methodology for the allocation of Corporate Center funding costs and expenses to the business divisions. At the same time, it has updated its funds transfer pricing framework to better reflect the sources and usage of funding. Additionally, UBS has increased the allocation of balance sheet resources from Corporate Center to the business divisions. Prior periods have been restated and the effect on the respective reporting lines is outlined in the table below. These changes had no effect on the reported results or financial position of the Group. Upon adoption of IFRS 16, Leases, on 1 January 2019, UBS additionally allocated approximately USD 3.5 billion of newly recognized right-of-use assets and finance lease receivables to the business divisions.  Refer to Note 1b for more information Effects of changes in Corporate Center cost and resource allocation to business divisions on prior-period information USD million increase / (reduction) For the year ended 31 December 2018 For the year ended 31 December 2018 Operating profit / (loss) before tax Total assets For the year ended 31 December 2017 For the year ended 31 December 2017 Operating profit / (loss) before tax Total assets Segment reporting USD million For the year ended 31 December 20191 Net interest income2 Non-interest income2 Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets3 Total operating expenses Operating profit / (loss) before tax Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) Additional information Additional information Total assets Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center (374) 113,702 (351) 102,641 (116) 61,894 (133) 58,196 (25) 3,769 (24) 3,329 (163) 677 43,562 (222,927) (180) 689 41,628 (205,795) Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center 3,947 12,426 16,373 (20) 16,353 7,621 1,217 4,056 3,922 5 56 12,955 3,397 3,397 1,992 1,744 3,736 (21) 3,715 856 224 1,181 1,294 13 0 2,274 1,441 1,441 (25) 1,962 1,938 0 1,938 722 197 486 531 1 0 1,406 532 532 (669) 7,968 7,299 (30) 7,269 2,748 688 2,926 2,980 8 115 6,485 784 784 (744) 367 (378) (7) (385) 4,137 2,962 (8,648) (8,727) 1,738 4 192 (577) (577) UBS 0 0 0 0 UBS 4,501 24,467 28,967 (78) 28,889 16,084 5,288 0 0 1,765 175 23,312 5,577 5,577 1,267 4,310 4,310 309,766 209,405 34,565 315,855 102,592 972,183 Additions to non-current assets4 1 Comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework. Refer to further 1 2 Effective 1 January 2019, UBS refined the presentation of dividend income and expense, reclassifying dividends from financial instruments measured at fair value through discussion in this note and in Note 1b. 2 profit or loss from Net interest income to Non-interest income. Prior-period information was restated accordingly, with virtually all of the effect on the Group arising from the Investment Bank. Refer to Note 1b for 4 Upon adoption of IFRS 16 on 1 January 2019, UBS additionally allocated approximately USD 3.5 billion of newly recognized assets to the business more information. 4 divisions, of which USD 3.4 billion related to non-current assets. Refer to Note 1b for more information. 3 Refer to Note 16 for more information. 3 5,297 5,217 68 10 1 0 348 Note 2a Segment reporting (continued) USD million For the year ended 31 December 20181 Net interest income2 Non-interest income2 Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets3 Total operating expenses OOppeerraattiinngg pprrooffiitt // ((lloossss)) bbeeffoorree ttaaxx Tax expense / (benefit) NNeett pprrooffiitt // ((lloossss)) AAddddiittiioonnaall iinnffoorrmmaattiioonn Total assets Additions to non-current assets Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center UBS 4,101 12,700 16,800 (15) 16,785 7,683 1,724 4,070 3,936 4 50 13,531 33,,225544 2,049 2,168 4,217 (56) 4,161 803 285 1,263 1,367 14 0 2,365 11,,779966 (29) 1,881 1,852 0 1,852 703 202 518 563 2 1 1,426 442266 (459) 8,538 8,079 (38) 8,041 2,941 651 2,942 2,995 8 12 6,554 11,,448866 (613) (4) (617) (8) (626) 4,002 3,935 (8,793) (8,861) 1,199 2 346 ((997711)) 5,048 25,283 30,330 (118) 30,213 16,132 6,797 0 0 1,228 65 24,222 55,,999911 1,468 44,,552222 313,737 200,703 28,140 302,253 196 23 1 89 113,656 1,666 958,489 1,975 11 Comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework. Refer to further 22 Effective 1 January 2019, UBS refined the presentation of dividend income and expense, reclassifying dividends from financial instruments measured at fair value through discussion in this note and in Note 1b. profit or loss from Net interest income to Non-interest income. Prior-period information was restated accordingly, with virtually all of the effect on the Group arising from the Investment Bank. Refer to Note 1b for more information. 33 Refer to Note 16 for more information. 349 Financial statements Consolidated financial statements Note 2a Segment reporting (continued) USD million For the year ended 31 December 20171 Net interest income2 Non-interest income2 Income3 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from Corporate Center and other business divisions of which: services from Corporate Center Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and intangible assets4 Total operating expenses Operating profit / (loss) before tax Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) Additional information Additional information Total assets Additions to non-current assets Global Wealth Management Personal & Corporate Banking Asset Management Investment Bank Corporate Center UBS 3,880 12,265 16,144 (8) 16,136 7,674 1,263 3,926 3,803 4 49 12,917 3,219 3,219 2,044 1,814 3,859 (20) 3,839 852 296 1,203 1,321 13 0 2,364 1,475 1,475 (23) 2,100 2,077 0 2,077 731 235 543 582 1 3 1,514 563 563 234 7,508 7,742 (92) 7,650 3,006 675 2,860 2,894 10 12 6,563 1,087 1,087 (64) (4) (68) (11) (80) 3,935 4,479 (8,532) (8,601) 1,024 7 913 (993) (993) 6,070 23,683 29,754 (131) 29,622 16,199 6,949 0 0 1,053 71 24,272 5,351 5,351 4,305 1,046 1,046 297,631 197,258 17,968 311,359 120 15 1 3 115,064 1,607 939,279 1,746 1 Comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework. Refer to further 1 2 Effective 1 January 2019, UBS refined the presentation of dividend income and expense, reclassifying dividends from financial instruments measured at fair value through discussion in this note and in Note 1b. 2 profit or loss from Net interest income to Non-interest income. Prior-period information was restated accordingly, with virtually all of the effect on the Group arising from the Investment Bank. Refer to Note 1b for 3 Includes 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 more information. 3 December 2017 of USD 15 million, of which USD 12 million was recorded in Asset Management. 4 Refer to Note 16 for more information. 4 350 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 Non-core and Legacy Portfolio in Corporate Center, 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 2019 Americas of which: USA Asia Pacific Europe, Middle East and Africa (excluding Switzerland) Switzerland Global TToottaall For the year ended 31 December 20181 Americas of which: USA Asia Pacific Europe, Middle East and Africa (excluding Switzerland) Switzerland Global TToottaall For the year ended 31 December 20171 Americas of which: USA Asia Pacific Europe, Middle East and Africa (excluding Switzerland) Switzerland Global TToottaall TToottaall ooppeerraattiinngg iinnccoommee TToottaall nnoonn ccuurrrreenntt aasssseettss -- UUSSDD bbiilllliioonn SShhaarree %% UUSSDD bbiilllliioonn SShhaarree %% 1122..00 1100..99 44..77 55..88 66..77 ((00..44)) 2288..99 4422 3388 1166 2200 2233 ((11)) 110000 88..99 88..55 11..44 33..00 77..11 00..00 2200..33 4444 4422 77 1155 3355 00 110000 Total operating income Total non-current assets USD billion Share % USD billion Share % 12.6 11.5 4.9 6.2 7.2 (0.7) 3300..22 42 38 16 21 24 (2) 110000 7.4 7.0 0.9 2.0 6.8 0.0 1177..11 43 41 5 12 40 0 110000 Total operating income Total non-current assets USD billion Share % USD billion Share % 12.0 11.2 4.8 6.1 6.9 (0.2) 2299..66 41 38 16 21 23 (1) 110000 7.4 6.9 0.8 2.0 6.5 0.0 1166..77 44 41 5 12 40 0 110000 11 Comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework. Refer to further discussion in this note and in Note 1b. 351 Financial statements Consolidated financial statements Income statement notes Note 3 Net interest income and other net income from financial instruments measured at fair value through profit or loss 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 financial instruments measured at fair value through profit or loss Total Total 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 Bank Corporate Client Solutions Investor Client Services Corporate Center Net interest income2,3 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 amortized cost and fair value through other comprehensive income Interest income from loans and deposits4 Interest income from securities financing transactions5 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 Total interest income from financial instruments measured at amortized cost and fair value through other comprehensive income Interest expense on loans and deposits6 Interest expense on securities financing transactions7 Interest expense on debt issued Interest expense on lease liabilities8 Total interest expense from financial instruments measured at amortized cost 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 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 Net interest income from financial instruments measured at fair value through profit or loss Net interest income from financial instruments at fair value held for trading Net interest income from brokerage balances Interest income from financial instruments at fair value not held for trading Other interest income Interest expense on financial instruments designated at fair value Total net interest income 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 Total net interest income Total net interest income 31.12.19 31.12.19 3,490 3,490 1,011 1,011 6,842 6,842 11,343 11,343 4,913 4,913 3,947 3,947 966 966 2,436 2,436 1,992 1,992 443 443 (13) (13) 4,189 4,189 716 716 3,473 3,473 (182) (182) 8,008 8,008 2,005 2,005 364 364 120 120 188 188 10,684 10,684 2,634 2,634 1,152 1,152 3,285 3,285 122 122 7,194 7,194 3,490 3,490 1,214 1,214 339 339 2,274 2,274 185 185 (3,000) (3,000) 1,011 1,011 4,501 4,501 31.12.18 3,710 1,338 6,960 12,008 5,049 4,101 948 2,451 2,049 402 (35) 4,756 1,051 3,705 (214) 7,801 1,567 266 142 324 10,100 1,980 1,130 3,281 6,391 3,710 1,105 575 1,757 215 (2,314) 1,338 5,048 31.12.17 5,018 1,052 5,637 11,707 4,941 3,880 1,062 2,420 2,044 376 (34) 4,272 1,076 3,196 107 7,752 1,573 99 152 846 10,422 1,404 1,473 2,528 5,404 5,018 1,374 0 (322) 1,052 6,070 of which: net gains / (losses) from financial liabilities designated at fair value 9 Other net income from financial instruments measured at fair value through profit or loss Investment Bank Corporate Client Solutions Investment Bank Investor Client Services Other business divisions and Corporate Center Other net income from financial instruments measured at fair value through profit or loss Other net income from financial instruments measured at fair value through profit or loss 633 3,405 1,599 5,637 (3,979) 1 Mainly includes spread-related income in connection with client-driven transactions, foreign currency translation effects and income and expenses from precious metals, which are included in the income statement 1 line Other net income from financial instruments measured at fair value through profit or loss. 2 Effective 1 January 2018, UBS adopted IFRS 9, Financial Instruments, which resulted in a prospective change in the classification of certain financial instruments. Refer to “Note 1c Changes in accounting policies and comparability and transition effects from the adoption of IFRS 9 Financial Instruments” in the “Consolidated 3 Effective 1 January 2019, UBS refined the presentation of dividend income and expense, reclassifying dividends from Interest financial statements” section of the Annual Report 2018 for more information. 3 income (expense) from financial instruments measured at fair value through profit or loss to Other net income from financial instruments measured at fair value through profit or loss. Prior-year comparative information was restated accordingly. Refer to Note 1b for more information. 4 Consists of interest income from cash and balances at central banks, loans and advances to banks and customers, cash collateral 4 receivables on derivative instruments, and negative interest on amounts due to banks and customer deposits. 5 Includes interest income on receivables from securities financing transactions and negative interest, 6 Consists of interest expense on amounts due to banks, cash collateral payables on derivative instruments, customer deposits, and negative including fees, on payables from securities financing transactions. 6 7 Includes interest expense on payables from securities financing transactions and negative interest, including fees, on receivables interest on cash and balances at central banks, loans and advances to banks. 7 9 Excludes fair value changes of hedges 8 Relates to lease liabilities recognized upon adoption of IFRS 16 on 1 January 2019. Refer to Note 1b for more information. from securities financing transactions. 9 8 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 financial instruments measured at fair value through profit or loss. 2019 included a net loss of USD 1,830 million (2018: net gain of USD 2,152 million) related to financial liabilities related to unit-linked investment contracts, which are designated at fair value through profit or loss. This was offset by a net gain of USD 1,830 million (2018: net loss of USD 2,134 million) related to financial assets for unit-linked investment contracts that are mandatorily measured at fair value through profit or loss not held for trading. 229 229 4,630 4,630 1,984 1,984 6,842 6,842 (8,748) (8,748) 552 4,663 1,744 6,960 9,382 2 5 352 Note 4 Net fee and commission income1 USD million FFeeee aanndd ccoommmmiissssiioonn iinnccoommee 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 TToottaall ffeeee aanndd ccoommmmiissssiioonn iinnccoommee11 of which: recurring of which: transaction-based of which: performance-based FFeeee aanndd ccoommmmiissssiioonn eexxppeennssee Brokerage fees paid Distribution fees paid Other TToottaall ffeeee aanndd ccoommmmiissssiioonn eexxppeennssee NNeett ffeeee aanndd ccoommmmiissssiioonn iinnccoommee of which: net brokerage fees For the year ended 3311..1122..1199 31.12.18 31.12.17 774411 336600 338822 777744 33,,224488 44,,885588 77,,665566 11,,883322 1199,,111100 1122,,554444 66,,440022 116633 331100 559900 779977 11,,669966 1177,,441133 22,,993388 811 431 380 768 3,521 4,954 7,756 1,786 19,598 12,911 6,594 93 316 580 807 1,703 17,895 3,205 1,003 573 429 698 3,820 4,322 7,666 1,854 19,362 673 514 653 1,840 17,522 3,147 11 For the year ended 31 December 2019, reflects third-party fee and commission income of USD 11,694 million for Global Wealth Management, USD 3,355 million for the Investment Bank, USD 2,659 million for Asset Management, USD 1,307 million for Personal & Corporate Banking and USD 94 million for Corporate Center (for the year ended 31 December 2018: 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 AAssssoocciiaatteess,, jjooiinntt vveennttuurreess aanndd ssuubbssiiddiiaarriieess 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 TToottaall Net gains / (losses) from disposals of financial assets measured at fair value through other comprehensive income Impairment of financial assets measured at fair value through other comprehensive income Net gains / (losses) from disposals of financial assets measured at amortized cost Income from properties6 Net gains / (losses) from properties held for sale Other TToottaall ootthheerr iinnccoommee For the year ended 3311..1122..1199 31.12.18 31.12.17 ((3366)) 44 4466 ((11)) 1133 3311 00 00 2277 ((1199)) 116600 221122 (290)2,3 464 5295 0 284 0 0 0 24 40 80 428 32 0 76 (7) 101 195 (15) 14 24 0 204 524 11 Includes foreign exchange gains / (losses) reclassified from other comprehensive income related to the disposal or closure of foreign operations. 22 Includes a remeasurement loss of USD 270 million related to UBS Securities China. Refer to Note 32 for more information. 33 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 Widder Hotel. Refer to Note 32 for more information. 44 Reflects a net foreign currency translation gain related to UBS Securities China. Refer to Note 32 for more information. 55 Includes a USD 460 million valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline. 66 Includes rent received from third parties. 353 Financial statements 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 of which: Deferred Contingent Capital Plan – interest expense Financial advisor compensation2,5 Contractors Social security Pension and other post-employment benefit plans Other personnel expenses Total personnel expenses Total personnel expenses For the year ended 31.12.19 31.12.19 31.12.18 31.12.17 6,518 6,518 2,755 2,755 29 29 246 246 56 56 (86) (86) 125 125 56 56 94 94 6,448 2,995 43 243 72 (136) 123 66 119 6,154 3,151 36 252 72 (107) 113 63 111 4,043 4,043 4,054 4,064 381 381 799 799 787 787 555 555 489 791 4576 654 460 814 723 581 16,084 16,084 16,132 16,199 2 Refer to Note 30 for more information. 2 3 Replacement payments are payments made to compensate employees for deferred awards forfeited as a result of joining UBS. 1 Includes role-based allowances. 3 1 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and 4 Includes legally obligated and standard severance payments. 4 5 supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors 6 Changes to the pension fund of UBS in Switzerland in 2018 resulted in a reduction in the pension obligation recognized by UBS. entered into at the time of recruitment that are subject to vesting requirements. 6 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 Occupancy1 Rent and maintenance of IT and other equipment Communication and market data services Administration of which: UK and German bank levies 2 Marketing and public relations Travel and entertainment Professional fees Outsourcing of IT and other services Litigation, regulatory and similar matters3 Other Total general and administrative expenses Total general and administrative expenses For the year ended 31.12.19 31.12.19 31.12.18 31.12.17 381 381 718 718 627 627 551 551 41 41 317 317 378 378 882 882 1,158 1,158 165 165 111 111 5,288 5,288 914 654 638 590 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 2 The UK bank levy expenses of USD 30 million (USD 40 1 Occupancy expenses decreased following the application of IFRS 16, which was adopted on 1 January 2019. Refer to Note 1b for more information. 1 2 million for 2018 and USD 17 million for 2017) included a credit of USD 31 million (USD 45 million and USD 85 million, respectively) related to prior years. 3 Reflects the net increase in provisions for litigation, 3 regulatory and similar matters recognized in the income statement. Refer to Note 21 for more information. Also includes recoveries from third parties of USD 11 million, USD 29 million and USD 55 million for the years ended 31 December 2019, 31 December 2018 and 31 December 2017, respectively. 354 Note 8 Income taxes USD million Tax expense / (benefit) SSwwiissss Current Deferred TToottaall SSwwiissss - - NNoonn SSwwiissss Current Deferred TToottaall nnoonn SSwwiissss TToottaall iinnccoommee ttaaxx eexxppeennssee // ((bbeenneeffiitt)) rreeccooggnniizzeedd iinn tthhee iinnccoommee ssttaatteemmeenntt - - For the year ended 31.12.18 3311..1122..1199 31.12.17 336655 226655 663300 442266 221111 663377 11,,226677 469 2,377 22,,884466 575 (1,953) ((11,,337788)) 11,,446688 455 107 556622 435 3,308 33,,774433 44,,330055 Income tax recognized in the income statement Income tax expenses of USD 1,267 million were recognized for the Group in 2019, representing an effective tax rate of 22.7%. This included net Swiss tax expenses of USD 630 million and net non-Swiss tax expenses of USD 637 million. The Swiss tax expenses included current tax expenses of USD 365 million related to taxable profits earned by Swiss subsidiaries. In addition, they included deferred tax expenses of USD 265 million, which primarily reflect the amortization of deferred tax assets (DTAs) previously recognized in relation to deductible temporary differences. The non-Swiss tax expenses included current tax expenses of USD 426 million related to taxable profits earned by non-Swiss subsidiaries and branches. In addition, they included deferred tax expenses of USD 211 million. These included expenses of USD 471 million that primarily reflected the amortization of DTAs previously recognized in relation to tax losses carried forward and deductible temporary differences, including the amortization of US tax loss DTAs at the level of UBS Americas Inc. These were partly offset by a benefit of USD 260 million in respect of additional DTA recognition that resulted from the contribution of real estate assets by UBS AG to UBS Americas Inc. in the year. The additional DTA recognition related to the elections that were made in the fourth quarter of 2018 to capitalize certain historic real estate costs. USD million Operating profit / (loss) before tax of which: Swiss of which: non-Swiss Income taxes at Swiss tax rate of 20.5% for 2019 and 21% for 2018 and 2017 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 IInnccoommee ttaaxx eexxppeennssee // ((bbeenneeffiitt)) For the year ended 31.12.18 5,991 1,843 4,148 1,258 3311..1122..1199 55,,557777 22,,557711 33,,000066 11,,114433 8822 113311 ((226655)) ((335511)) 773322 ((55)) ((66)) ((229944)) ((99)) 110077 11,,226677 55 223 (25) (430) 905 114 26 (795) 0 137 1,468 31.12.17 5,351 2,093 3,258 1,124 217 173 (368) (309) 606 (13) 4 (165) 2,897 139 4,305 355 Financial statements Consolidated financial statements Note 8 Income taxes (continued) 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, an adjustment from the tax expense that would arise at the Swiss tax rate to the tax expense that would arise at the applicable local tax rate. Similarly, it reflects, for such losses, an adjustment from the tax benefit that would arise at the Swiss tax rate to the tax benefit that would arise at the applicable local 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 tax 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. 356 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. 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 movements 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 expense of USD 326 million recognized in other comprehensive income (OCI) (2018: net benefit of USD 345 million), which included a tax expense of USD 253 million related to cash flow hedges (2018: benefit of USD 67 million), a tax expense of USD 41 million related to financial assets recognized at fair value through OCI (2018: benefit of USD 12 million), a tax expense of zero related to foreign currency translation gains and losses (2018: expense of USD 2 million), a tax expense of USD 41 million related to defined benefit pension plans (2018: benefit of USD 276 million) and a tax benefit of USD 8 million related to own credit (2018: expense of USD 8 million); a net tax benefit of USD 11 million recognized in share premium (2018: benefit of USD 4 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 2019, USD 9.3 billion related to the US and USD 0.2 billion related to other locations (as of 31 December 2018, USD 9.5 billion related to the US and USD 0.6 billion related to other locations). The recognition of DTAs is supported by forecasts of taxable profits for the entities concerned. In addition, tax planning opportunities are available that would result in additional future taxable income and these would be utilized, if necessary. As of 31 December 2019, the Group has recognized DTAs of USD 75 million (31 December 2018: USD 53 million) in respect of entities that incurred losses in either the current or preceding year. 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 TToottaall ddeeffeerrrreedd ttaaxx aasssseettss Deferred tax liabilities Goodwill and intangible assets Cash flow hedges Other TToottaall ddeeffeerrrreedd ttaaxx lliiaabbiilliittiieess 11 Less deferred tax liabilities as applicable. 3311..1122..1199 VVaalluuaattiioonn aalllloowwaannccee ((88,,886611)) ((661133)) 00 ((117799)) ((55)) 00 ((442299)) ((99,,447744)) GGrroossss 1144,,882266 44,,118866 22,,221199 11,,008800 9999 66 778822 1199,,001111 RReeccooggnniizzeedd 55,,996655 33,,557722 22,,221199 990011 9933 66 335533 99,,553377 2299 115566 112266 331111 31.12.18 Valuation allowance (8,989) (565) (25) (192) (50) 0 (298) (9,554) Gross 15,088 4,571 2,159 1,150 390 202 670 19,659 Recognized 6,099 4,006 2,134 959 339 202 372 10,105 26 0 62 88 357 Financial statements Consolidated financial statements Note 8 Income taxes (continued) 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 Total As of 31 December 2019, USD 17.8 billion of the unrecognized tax losses carried forward related to the US, USD 14.9 billion related to the UK and USD 5.0 billion related to other locations (as of 31 December 2018, USD 20.0 billion related to the US, USD 14.2 billion related to the UK and USD 4.2 billion related to other locations). losses federal incurred prior In general, US to tax 31 December 2017 can be carried forward for 20 years, and US federal tax losses incurred after 31 December 2017 and UK tax losses can be carried forward indefinitely. 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. 31.12.19 31.12.19 13 13 609 609 14,712 14,712 4,030 4,030 18,364 18,364 37,728 37,728 31.12.18 0 464 16,297 4,457 17,210 38,428 in recognized liabilities are respect of tax 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 in the foreseeable future. However, as of 31 December 2019, this exception was not considered to apply to any taxable temporary differences. 358 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 3311..1122..1199 31.12.18 31.12.17 44,,330044 4,516 969 44,,330044 00 44,,330044 4,516 (2) 4,514 969 0 969 33,,666633,,227788,,223388 3,730,297,877 3,716,174,261 Effect of dilutive potential shares resulting from notional shares, in-the-money options and warrants outstanding 110033,,888811,,660000 111,271,269 120,540,272 Weighted average shares outstanding for diluted EPS 33,,776677,,115599,,883388 3,841,569,146 3,836,714,533 Earnings per share (USD) Basic Diluted Shares outstanding Shares issued Treasury shares Shares outstanding 11..1177 11..1144 1.21 1.18 0.26 0.25 33,,885599,,005555,,339955 3,855,634,749 3,853,096,603 224433,,002211,,229966 166,467,802 132,301,550 33,,661166,,003344,,009999 3,689,166,947 3,720,795,053 11 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 3311..1122..1199 31.12.18 31.12.17 Potentially dilutive instruments Employee share-based compensation awards1 Other equity derivative contracts TToottaall 11 The last remaining option awards and stock appreciation rights expired during 2019. 2211,,663322,,887799 2211,,663322,,887799 3,605,198 11,912,450 15,517,648 24,124,341 9,122,496 33,246,837 359 Financial statements 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 about on the same or similar rating methods applied. The key financial instruments and certain other credit lines that are subject to expected credit loss (ECL) requirements. UBS has established ECL disclosure segments or “ECL segments” to disaggregate portfolios based on shared risk characteristics and  Refer to Note 23 for more information about expected credit segments are presented in the table below. 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 – Investment Bank 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, 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, 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) – 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 Financial intermediaries and hedge funds Lending to financial institutions and pension funds, including exposures to broker-dealers and clearing houses Sensitive to GDP development, the interest rate environment, regulatory changes and political risk – Personal & Corporate Banking – Investment Bank – Corporate Center  Refer to Note 23g for more details regarding sensitivity 360 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 amount represents the maximum exposure to credit risk, taking into losses. Financial assets account the allowance for credit 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 amount of these financial assets. Rather, the carrying amount of financial assets measured at FVOCI represents the maximum exposure to credit risk. No purchased credit-impaired financial assets have been 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 the maximum contractual amounts. USD million 3311..1122..1199 FFiinnaanncciiaall iinnssttrruummeennttss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee TToottaall oonn bbaallaannccee sshheeeett ffiinnaanncciiaall aasssseettss iinn ssccooppee ooff EECCLL rreeqquuiirreemmeennttss - - - - OOffff bbaallaannccee sshheeeett ((iinn ssccooppee ooff EECCLL)) 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 CCaarrrryyiinngg aammoouunntt11 SSttaaggee 11 TToottaall 107,068 107,068 12,367 12,447 84,245 84,245 23,289 23,289 326,786 309,499 132,646 124,063 38,481 32,932 9,184 9,703 11,786 9,817 112,893 112,796 1,314 2,826 21,953 2,341 555588,,442200 66,,334455 556644,,776655 1,661 2,844 22,980 2,877 557766,,881155 66,,334455 558833,,115599 17,757 18,142 3,461 3,687 1,055 1,180 7,950 7,966 622 622 2,320 2,334 27,547 27,078 18,735 18,349 1,657 33,848 4,934 4,188 4,589 7,975 7,535 344 3,285 8833,,662266 1,657 35,092 5,242 4,274 4,787 7,976 7,890 344 3,289 8855,,772288 SSttaaggee 22 0 80 0 0 15,538 7,624 5,532 424 1,449 0 325 8 451 334 1166,,006699 00 1166,,006699 SSttaaggee 22 304 203 67 16 0 13 419 359 0 1,197 307 69 171 0 355 0 0 11,,992200 TToottaall eexxppoossuurree SSttaaggee 11 TToottaall SSttaaggee 33 0 0 0 0 1,749 959 17 94 521 98 22 10 576 202 22,,332266 00 22,,332266 SSttaaggee 33 82 24 58 0 0 0 50 27 0 46 0 17 27 1 0 0 4 118822 TToottaall 0 (6) (2) 0 (764) (110) (43) (117) (303) (22) (35) (81) (143) (109) ((991155)) 00 ((991155)) TToottaall (42) (10) (24) (5) (1) (1) (35) (27) 0 (34) (16) (1) (9) 0 (6) 0 (3) ((111144)) ((11,,002299)) EECCLL aalllloowwaanncceess SSttaaggee 11 0 (4) (2) 0 (82) (15) (5) (15) (17) (4) (8) (5) (35) (29) ((112244)) 00 ((112244)) SSttaaggee 22 0 (1) 0 0 (123) (55) (34) (4) (15) 0 (14) 0 (13) (11) ((113377)) 00 ((113377)) EECCLL pprroovviissiioonnss SSttaaggee 11 (8) (1) 0 (4) 0 (1) (30) (24) 0 (17) (3) (1) (8) 0 (4) 0 (3) ((5588)) ((118811)) SSttaaggee 22 (1) 0 0 0 0 0 (5) (3) 0 (17) (13) 0 (1) 0 (2) 0 0 ((2233)) ((116600)) SSttaaggee 33 0 (1) 0 0 (559) (41) (4) (98) (271) (18) (13) (77) (95) (70) ((665555)) 00 ((665555)) SSttaaggee 33 (33) (9) (23) 0 (1) 0 0 0 0 0 0 0 0 0 0 0 0 ((3333)) ((668888)) 361 - - Irrevocable committed prolongation of existing loans TToottaall ooffff bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss aanndd ootthheerr ccrreeddiitt lliinneess TToottaall aalllloowwaanncceess aanndd pprroovviissiioonnss 11 The carrying amount of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL allowances. Financial statements Consolidated financial statements Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement (continued) USD million 31.12.18 Financial instruments measured at amortized cost 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 Total financial assets measured at amortized cost Financial assets measured at fair value through other comprehensive income Financial assets measured at fair value through other comprehensive income Total on-balance sheet financial assets in scope of ECL requirements Total on-balance sheet financial assets in scope of ECL requirements Off-balance sheet (in scope of ECL) 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 3,104 564,096 564,096 6,667 6,667 570,763 570,763 1,529 3,260 22,563 3,291 587,104 587,104 6,667 6,667 593,770 593,770 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 86,830 937 36,634 2,562 4,260 4,505 7,402 7,343 3,467 3,339 90,268 90,268 Stage 2 0 202 0 0 20,357 9,859 7,858 457 1,263 0 297 445 223 62 20,782 20,782 0 0 20,782 20,782 Stage 2 611 136 164 67 0 236 568 519 0 1,420 401 91 285 0 309 254 456 3,055 3,055 Total exposure Stage 1 Total Stage 3 0 0 0 0 1,748 796 38 88 632 14 16 16 478 125 2,226 2,226 0 0 2,226 2,226 Stage 3 215 127 77 0 0 11 53 7 0 93 11 17 57 0 0 4 22 383 383 Total 0 (7) (2) 0 (772) (138) (59) (95) (281) (21) (30) (86) (155) (113) (937) (937) 0 0 (937) (937) Total (43) (8) (26) (4) 0 (1) (37) (31) 0 (36) (17) (2) (7) 0 (6) (2) (1) (116) (116) (1,054) (1,054) ECL allow Stage 1 0 (4) (2) 0 (69) (16) (3) (9) (13) (4) (6) (5) (43) (34) (117) (117) 0 0 (117) (117) ances Stage 2 0 (1) 0 0 (155) (83) (40) (4) (12) 0 (13) (3) (4) (2) (159) (159) 0 0 (159) (159) ECL provisions Stage 1 (7) (1) 0 (3) 0 (1) (32) (26) 0 (19) (4) (1) (6) (1) (4) (2) (1) (59) (59) (176) (176) Stage 2 (2) (1) 0 0 0 0 (5) (4) 0 (16) (12) 0 (1) 0 (2) 0 0 (23) (23) (183) (183) Stage 3 0 (3) 0 0 (549) (39) (16) (82) (256) (17) (11) (78) (109) (77) (660) (660) 0 0 (660) (660) Stage 3 (34) (6) (25) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (34) (34) (695) (695) Irrevocable committed prolongation of existing loans Total off-balance sheet financial instruments and other credit lines Total off-balance sheet financial instruments and other credit lines Total allowances and provisions Total allowances and provisions 1 The carrying amount of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL allowances. 1 362 Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement (continued) Coverage ratios are calculated by taking ECL allowances and provisions divided by the gross carrying amount of the exposures. These ratios have remained broadly unchanged in 2019 and are influenced by the following key factors: – significant asset balances are held with central banks as part of the requirement to hold high-quality liquid assets; Lombard loans are secured with marketable securities in portfolios which are in general highly diversified with strict lending policies that are intended to ensure that credit risk is minimal under most circumstances; mortgage loans to private clients and real estate financing are controlled by conservative eligibility criteria, including low loan-to-value ratios and strong debt service capabilities. The risk of rising interest rates has been taken into account in the scenario selection process; the amount of unsecured retail lending (including credit cards) in Switzerland is insignificant; contractual maturities in the loan portfolio, which are a factor in the calculation of ECLs, are generally short, with a large – – – – – part of the loan portfolio having contractual maturities of 12 month or less; for example, the carrying amount of Swiss residential mortgage loans would continue to be fully covered or 98% covered by real estate collateral, even if the value of that collateral decreased by 20% or 30%, respectively. Certain assets reported in stage 2 within the Private clients with mortgages and Real estate financing segments did not have a comparable rating on origination upon which to base the assessment of whether a significant increase in credit risk (SICR) IFRS 9 transition has occurred. requirements, a lifetime ECL has been recognized for these assets. In the medium term and based on the current economic outlook, UBS expects the proportion of these stage 2 assets to reduce to some extent. In accordance with the 3311..1122..1199 FFiinnaanncciiaall iinnssttrruummeennttss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee TToottaall oonn bbaallaannccee sshheeeett ffiinnaanncciiaall aasssseettss iinn ssccooppee ooff EECCLL rreeqquuiirreemmeennttss - - - - OOffff bbaallaannccee sshheeeett ((iinn ssccooppee ooff EECCLL)) Guarantees Irrevocable loan commitments Forward starting reverse repurchase and securities borrowing agreements Committed unconditionally revocable credit lines Irrevocable committed prolongation of existing loans TToottaall ooffff bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss aanndd ootthheerr ccrreeddiitt lliinneess TToottaall aalllloowwaanncceess aanndd pprroovviissiioonnss - - GGrroossss ccaarrrryyiinngg aammoouunntt ((UUSSDD mmiilllliioonn)) SSttaaggee 11 TToottaall 327,550 309,581 132,756 124,077 38,524 32,937 9,199 9,819 12,089 9,834 112,915 112,799 1,322 2,831 21,988 2,370 555588,,554444 66,,334455 556644,,888888 SSttaaggee 22 15,661 7,679 5,567 429 1,464 0 339 8 463 344 1166,,220066 00 1166,,220066 1,696 2,925 23,123 2,987 557777,,773300 66,,334455 558844,,007755 SSttaaggee 33 2,308 1,000 21 192 791 116 35 87 672 272 22,,998811 00 22,,998811 GGrroossss eexxppoossuurree ((UUSSDD mmiilllliioonn)) TToottaall 18,142 27,547 1,657 35,092 3,289 8855,,772288 SSttaaggee 11 17,757 27,078 1,657 33,848 3,285 8833,,662266 SSttaaggee 22 304 419 0 1,197 0 11,,992200 SSttaaggee 33 82 50 0 46 4 118822 EECCLL ccoovveerraaggee ((bbppss)) SSttaaggee 11 3 1 2 16 18 0 60 17 16 122 22 00 22 SSttaaggee 22 79 72 62 100 104 0 404 3 274 305 8844 00 8844 EECCLL ccoovveerraaggee ((bbppss)) SSttaaggee 11 4 11 0 5 8 77 99 SSttaaggee 22 30 120 0 143 0 112200 220044 TToottaall 23 8 11 119 251 2 205 278 62 366 1166 00 1166 TToottaall 23 13 0 10 8 1133 2299 SSttaaggee 33 2,420 406 1,765 5,088 3,420 1,566 3,718 8,844 1,420 2,570 22,,119988 00 22,,119988 SSttaaggee 33 4,032 0 0 0 0 11,,882222 44,,002200 363 Financial statements Consolidated financial statements Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement (continued) As explained in Note 1a, the assessment of an SICR considers rating analyses and economic outlook. a number of qualitative and quantitative factors to determine if Additionally, UBS considers counterparties that have moved to a a stage transfer between stage 1 and stage 2 is required. The credit watch list and those with payments that are 30 days past primary assessment considers changes in probability of default due. (PD) based on USD million Financial instruments measured at amortized cost Financial instruments measured at amortized cost Mortgages, business loans and related off-balance sheet commitments in the region Switzerland 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: Leasing of which: Credit cards of which: Other ECL allowances / provisions ECL allowances / provisions Total Total Stage 1 Stage 1 Stage 2 Stage 2 of which: of which: of which: ≥30 days PD layer watch list past due Stage 3 Stage 3 723 90 59 57 310 3 42 33 130 89 11 8 6 25 2 6 9 23 137 53 47 4 9 0 12 11 2 93 40 36 0 6 0 11 0 2 6 0 0 4 2 0 0 0 0 38 13 11 0 1 0 1 11 0 497 27 4 47 276 1 24 12 106 364 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. Under the final rules of the Basel Committee on Banking Supervision (BCBS) and the Board of the International Organization of Securities Commissions (IOSCO) promulgated in July 2019, the final phase-in of margin requirements for non-centrally cleared derivatives will be completed on 1 September 2021. 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 financial instruments measured at fair value through profit or loss, except for interest on derivatives designated as hedging instruments in effective hedge accounting relationships and forward points on certain short- and long-duration foreign exchange contracts, which are recorded in Net interest income.  Refer to Note 1a items 3j and 3k for more information  Refer to Note 25 for more information about derivative financial assets and liabilities after consideration of netting potential allowed under enforceable netting arrangements The Group uses various derivative instruments for both trading and hedging purposes. Derivative product types as well as 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 365 Financial statements Consolidated financial statements Note 11 Derivative instruments (continued) 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 about derivative financial assets and liabilities after consideration of netting potential allowed under enforceable netting arrangements 366 Note 11 Derivative instruments (continued) Derivative instruments¹,² USD billion IInntteerreesstt rraattee ccoonnttrraaccttss Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Options Agency transactions5 TToottaall CCrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss Over-the-counter (OTC) contracts Credit default swaps Total return swaps Options and warrants TToottaall FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss Over-the-counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts Futures Options Agency transactions5 TToottaall EEqquuiittyy // iinnddeexx ccoonnttrraaccttss Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Options Agency transactions5 TToottaall Table continues on the next page. NNoottiioonnaall vvaalluueess rreellaatteedd ttoo ddeerriivvaattiivvee ffiinnaanncciiaall aasssseettss33 3311..1122..1199 DDeerriivvaattiivvee ffiinnaanncciiaall lliiaabbiilliittiieess NNoottiioonnaall vvaalluueess rreellaatteedd ttoo ddeerriivvaattiivvee ffiinnaanncciiaall lliiaabbiilliittiieess33 DDeerriivvaattiivvee ffiinnaanncciiaall aasssseettss Notional values related to derivative financial assets3 31.12.18 Derivative financial liabilities Notional values related to derivative financial liabilities3 OOtthheerr nnoottiioonnaall vvaalluueess33,, 44 Derivative financial assets Other notional values3, 4 2,873.9 7,189.1 3.1 441.8 550.0 516.1 199.7 26.3 22..88 445544..77 446644..88 8844..44 00..00 3344..33 88..11 00..00 00..11 4422..66 11,,000066..66 6655..00 22..00 33..33 7700..22 993355..33 11,,557733..22 666600..99 44..00 11..77 00..33 00..00 22..00 2222..44 2222..88 77..33 00..00 00..00 00..33 2266..22 1100..00 00..00 00..11 3366..66 22..22 00..88 00..00 33..00 2233..44 2233..88 66..88 00..00 00..00 55..11 440022..99 448866..11 6666..66 33,,113366..88 88,,008866..00 554466..99 222299..55 1.4 459.8 562.2 27.7 0.0 29.5 7.6 0.0 0.0 0.1 23.5 9.0 0.0 0.1 996600..77 1111,,999999..22 37.1 1,051.1 32.7 1,021.3 10,778.8 6666..00 33..33 00..66 6699..99 996666..66 11,,441188..55 660044..99 33..88 1.7 0.2 0.0 1.9 20.3 24.8 8.3 0.0 0.0 11..22 68.8 3.0 2.7 74.5 2.1 0.6 0.0 2.7 73.2 3.7 1.4 78.3 708.7 1,299.7 613.8 20.9 24.6 7.8 731.2 1,203.5 577.4 3.6 0.0 0.1 5.3 0.4 5522..55 33,,117733..44 5544..00 22,,999933..88 11..22 53.5 2,625.7 53.4 2,517.3 0.4 00..00 44..00 55..00 77..22 66..66 2222..88 00..00 8811..33 8888..66 225500..44 442200..33 00..00 55..55 66..88 77..88 55..44 2255..55 00..00 9966..33 114444..11 229944..11 8844..99 3377..22 553344..55 112222..11 0.0 4.7 5.5 10.1 11.2 31.4 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 34.1 488.8 105.9 367 Financial statements Consolidated financial statements Note 11 Derivative instruments (continued) Derivative instruments (continued)¹,² Table continued from the previous page. USD billion Commodity contracts Commodity contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Forward contracts Options Agency transactions5 Derivative Derivative financial financial assets assets 0.1 0.1 0.4 0.4 1.0 1.0 0.0 0.0 0.1 0.1 0.3 0.3 1.8 1.8 Notional Notional values values related to related to derivative derivative financial financial assets3 assets3 31.12.19 31.12.19 Derivative Derivative financial financial liabilities liabilities Notional Notional values values related to related to derivative derivative financial financial liabilities3 liabilities3 Notional values related to derivative financial assets3 31.12.18 Derivative financial liabilities Notional values related to derivative financial liabilities3 Other notional values3, 4 Other Derivative Other notional financial notional values3, 4 values3, 4 assets 4.2 4.2 13.8 13.8 27.4 27.4 5.9 5.9 4.8 4.8 0.2 0.2 0.6 0.6 0.4 0.4 0.0 0.0 0.1 0.1 0.5 0.5 1.7 1.7 5.7 5.7 15.1 15.1 23.6 23.6 4.9 4.9 10.7 10.7 12.0 12.0 0.6 0.6 3.2 15.2 18.6 6.6 2.9 0.1 0.7 0.4 0.0 0.1 0.4 1.8 0.1 0.4 0.3 0.0 0.0 0.7 1.5 3.4 9.9 16.1 5.4 3.7 8.5 0.1 6.9 6.9 0.1 0.1 0.1 0.1 0.1 0.1 12.6 12.6 16.6 16.6 15.4 15.4 46.4 60.0 60.0 56.1 56.1 Total Total Unsettled purchases of non-derivative Unsettled purchases of non-derivative financial instruments6 financial instruments6 Unsettled sales of non-derivative Unsettled sales of non-derivative financial instruments6 financial instruments6 Total derivative instruments, based on Total derivative instruments, based on IFRS netting7 IFRS netting7 10,893.6 1 Derivative financial liabilities as of 31 December 2019 include USD 17 million related to derivative loan commitments (31 December 2018: USD 17 million). No notional amounts related to these commitments are 1 2 Includes certain forward starting repurchase and reverse repurchase agreements that are classified as measured at fair value included in this table, but they are disclosed in Note 34 under Loan commitments. 2 through profit or loss and are recognized within derivative instruments. The fair value of these derivative instruments was not material as of 31 December 2019 or 31 December 2018. No notional amounts related to these instruments are included in this table, but they are disclosed in Note 34 under Forward starting transactions. 3 In cases where derivative financial instruments are presented on a net basis on the balance 3 4 Other notional values relate to derivatives that are cleared through either a central sheet, the respective notional values of the netted derivative financial instruments are still presented on a gross basis. 4 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 5 Notional values of exchange-traded agency transactions and OTC-cleared transactions entered into on behalf of collateral payables on derivative instruments and was not material for all periods presented. 5 6 Changes in the fair value of purchased and sold non-derivative financial instruments between trade date and settlement date are clients are not disclosed as they have a significantly different risk profile. 6 7 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, recognized as derivative financial instruments. 7 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. 12,135.1 12,135.1 4,758.6 4,758.6 4,635.4 4,635.4 4,238.6 4,163.4 120.9 120.9 121.8 121.8 126.2 125.7 13.2 38.5 17.0 15.1 6.0 8.6 0.2 0.1 0.1 0.4 0.1 0.2 9.7 9.7 The notional amount of a derivative is generally the quantity of the underlying instrument on which the derivative contract is based and is the reference against which changes in the value of the derivative are measured. Notional values in themselves are generally not a direct indication of the values that are exchanged between parties, and are therefore not a direct measure of risk or financial exposure but are viewed as an indication of the scale of the different types of derivatives entered into by the Group. On a notional value basis, approximately 54% of OTC interest rate contracts held as of 31 December 2019 (31 December 2018: 56%) mature within one year, 28% (31 December 2018: 28%) within one to five years and 18% (31 December 2018: 16%) 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. 368 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 about 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 27% of credit protection bought and sold as of 31 December 2019 matures within one year (31 December 2018: 14%), approximately 63% within one to five years (31 December 2018: 74%) and approximately 10% after five years (31 December 2018: 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 TToottaall 3311 DDeecceemmbbeerr 22001199 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 TToottaall 3311 DDeecceemmbbeerr 22001188 of which: credit derivatives related to economic hedges of which: credit derivatives related to market-making DDeerriivvaattiivvee ffiinnaanncciiaall aasssseettss 00..33 PPrrootteeccttiioonn bboouugghhtt DDeerriivvaattiivvee ffiinnaanncciiaall lliiaabbiilliittiieess 00..77 NNoottiioonnaall vvaalluueess 3377..55 DDeerriivvaattiivvee ffiinnaanncciiaall aasssseettss 00..88 PPrrootteeccttiioonn ssoolldd DDeerriivvaattiivvee ffiinnaanncciiaall lliiaabbiilliittiieess 00..77 NNoottiioonnaall vvaalluueess 3388..66 00..11 00..00 00..22 00..00 00..77 00..66 00..11 00..88 00..00 00..66 00..00 22..11 11..77 00..44 2299..33 00..44 33..77 33..88 7744..66 5566..11 1188..66 00..55 00..00 00..11 00..00 11..33 00..99 00..55 00..11 00..00 00..22 00..00 00..99 00..88 00..11 2244..99 00..33 11..66 00..11 6655..44 4455..77 1199..77 Derivative financial assets 0.6 Protection bought Derivative financial liabilities 0.6 Notional values 43.3 Derivative financial assets 0.5 Protection sold Derivative financial liabilities 1.0 Notional values 44.9 0.3 0.0 0.2 0.0 1.1 0.9 0.2 0.3 0.0 0.7 0.0 1.6 1.3 0.4 29.1 0.1 4.7 4.1 81.3 59.2 22.1 0.3 0.0 0.0 0.0 0.8 0.5 0.3 0.2 0.0 0.0 0.0 1.2 1.1 0.2 24.4 0.1 2.0 0.1 71.4 48.9 22.6 369 Financial statements Consolidated financial statements Note 11 Derivative instruments (continued) Credit derivatives by counterparty USD billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2019 Total 31 December 2019 USD billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2018 Total 31 December 2018 Derivative Derivative financial financial assets assets 0.1 0.1 Protection bought Protection bought Derivative Derivative financial financial liabilities liabilities 0.2 0.2 0.2 0.2 0.1 0.1 0.3 0.3 0.7 0.7 0.4 0.4 0.9 0.9 0.7 0.7 2.1 2.1 Derivative financial assets 0.2 Protection bought Derivative financial liabilities 0.1 0.4 0.2 0.3 1.1 0.4 0.4 0.7 1.6 Notional values Notional values 10.5 10.5 23.6 23.6 34.7 34.7 5.8 5.8 74.6 74.6 Notional values 13.0 29.2 31.9 7.2 81.3 Derivative Derivative financial financial assets assets 0.2 0.2 Protection sold Protection sold Derivative Derivative financial financial liabilities liabilities 0.1 0.1 0.4 0.4 0.7 0.7 0.1 0.1 1.3 1.3 0.3 0.3 0.2 0.2 0.3 0.3 0.9 0.9 Derivative financial assets 0.1 Protection sold Derivative financial liabilities 0.2 0.3 0.4 0.0 0.8 0.5 0.3 0.3 1.2 Notional values Notional values 99..44 2211..55 3311..66 22..99 6655..44 Notional values 11.5 25.6 30.8 3.5 71.4 UBS’s CDS trades are documented using industry standard forms of documentation or equivalent terms documented in a bespoke agreement. The agreements that govern CDS generally do not contain recourse provisions that would enable UBS to recover from third parties any amounts paid out by UBS. The types of credit events that would require UBS to perform under a CDS contract are subject to agreement between the parties at the time of the transaction. However, nearly all transactions are traded with reference to credit events that are applicable under certain market conventions based on the type of reference entity to which the transaction relates. Applicable credit events according include 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 2019, USD 0.0 billion, USD 0.3 billion and USD 0.8 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. 370 Note 12 Financial assets and liabilities at fair value held for trading USD million FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg11 Equity instruments Government bills / bonds Investment fund units Corporate and municipal bonds Loans Asset-backed securities TToottaall ffiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg FFiinnaanncciiaall lliiaabbiilliittiieess aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg11 Equity instruments Corporate and municipal bonds Government bills / bonds Investment fund units Other TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg 11 Refer to Note 24c for more information on product type and fair value hierarchy categorization. Note 13 Financial assets at fair value not held for trading USD million FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee nnoott hheelldd ffoorr ttrraaddiinngg11 Financial assets for unit-linked investment contracts Corporate and municipal bonds Government bills / bonds Loans Securities financing transactions Auction rate securities Investment fund units Equity instruments Other TToottaall ffiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee nnoott hheelldd ffoorr ttrraaddiinngg 11 Refer to Note 24c for more information on product type and fair value hierarchy categorization. 3311..1122..1199 31.12.18 9966,,778877 1111,,446644 88,,886677 77,,991144 11,,997711 551122 72,768 11,161 9,716 6,768 3,566 392 112277,,551144 104,370 2222,,773344 33,,666611 33,,446666 669988 3322 21,886 3,530 2,839 689 0 3300,,559911 28,943 3311..1122..1199 31.12.18 2277,,668866 1199,,338855 1155,,779900 1111,,443388 66,,229944 11,,553366 774400 555599 551155 8833,,994444 21,446 17,236 22,493 8,132 9,937 1,664 710 702 369 82,690 371 Financial statements Consolidated financial statements Note 14 Financial assets measured at fair value through other comprehensive income USD million Financial assets measured at fair value through other comprehensive income1 Financial assets measured at fair value through other comprehensive income1 Debt instruments Debt instruments Government and government agencies of which: USA Banks Corporates and other Total financial assets measured at fair value through other comprehensive income Total financial assets measured at fair value through other comprehensive income Unrealized gains – before tax Unrealized (losses) – before tax Net unrealized gains / (losses) – before tax Net unrealized gains / (losses) – before tax 31.12.19 31.12.19 31.12.18 6,162 6,162 5,814 5,814 178 178 4 4 6,345 6,345 41 41 (25) (25) 16 16 6,463 6,101 149 54 6,667 4 (146) (143) (104) 15 Net unrealized gains / (losses) – after tax 15 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. 1 Note 15 Property, equipment and software At historical cost less accumulated depreciation USD million Historical cost Historical cost Balance at the end of the previous year Adjustment from adoption of IFRS 16 Balance at the beginning of the year Additions Disposals / write-offs1 Reclassifications Foreign currency translation Balance at the end of the year Accumulated depreciation Accumulated depreciation Balance at the end of the previous year Adjustment from adoption of IFRS 16 Balance at the beginning of the year Depreciation Impairment2 Disposals / write-offs1 Reclassifications Foreign currency translation Balance at the end of the year Owned properties Leased properties5 Leasehold IT hardware and communication improve- equipment ments Internally generated Purchased software software Other machines and equipment 7,679 (20) 7,659 15 (15) (130) 122 7,650 4,500 (1) 4,499 161 1 (15) (256) 75 4,466 3,407 3,407 345 (22) 0 14 3,745 29 29 487 2 (2) 0 4 519 3,122 3,122 21 (314) 164 10 3,004 1,873 1,873 194 1 (312) 2 9 1,768 1,568 (32) 1,535 178 (170) 0 16 1,559 1,077 (28) 1,049 165 0 (169) 0 9 1,053 5,173 469 5,173 73 (28) 943 15 6,176 469 30 (20) 2 4 485 2,291 316 2,291 603 30 (28) 0 9 2,906 316 56 3 (20) 0 3 358 799 0 799 23 (68) 41 4 799 561 0 561 62 0 (68) 0 3 559 Projects in progress 2019 2019 2018 1,157 1,157 1,246 0 (1,418) 28 1,014 19,966 19,966 3,354 3,354 23,321 23,321 1,931 1,931 (636) (636) (398)4 (398)4 213 213 24,431 24,431 19,522 19,522 1,702 (849) (195) (213) 19,966 10,619 10,619 10,465 0 0 0 0 0 0 0 10,619 10,619 1,728 1,728 37 37 (614) (614) (254)4 (254)4 112 112 11,628 11,628 10,465 1,153 75 (840) (124) (111) 10,619 3,179 Net book value Net book value Net book value at the end of the previous year Net book value at the beginning of the 2,882 year 9,057 3,270 Net book value at the end of the year 9,348 3,270 Net book value at the end of the year 2 Impairment charges recorded in 2019 generally relate to assets that are no longer used for which the recoverable amount based on a fair value approach was 1 Includes write-offs of fully depreciated assets. 2 1 4 Reflects determined to be zero. 4 5 Represents right-of-use assets recognized by UBS as lessee. Includes immaterial leased IT equipment. The total cash outflow for leases during the year was USD 641 reclassifications to Properties held for sale. 5 million. Interest expense on lease liabilities is included within Interest expense from financial instruments measured at amortized cost and Lease liabilities are included within Other financial liabilities measured at amortized cost. Refer to Notes 3 and 22a, respectively. Also refer to Note 1 for more information about the nature of UBS’s leasing activities. 3 Consists of USD 787 million related to Internally generated software, USD 126 million related to Owned properties and USD 100 million related to Leasehold improvements. 3 1,157 1,0143 1,0143 12,702 12,702 12,804 12,804 1,249 1,236 1,236 3,378 3,226 3,226 3,160 3,184 3,184 486 506 506 153 126 126 238 241 241 1,157 9,057 1,249 2,882 9,348 9,348 491 153 238 0 372 Note 16 Goodwill and intangible assets Introduction Methodology for goodwill impairment testing UBS performs an impairment test on its goodwill assets on an annual basis or when indicators of impairment exist. UBS considers Asset Management and the Investment Bank, as they are reported in Note 2a, as separate cash-generating units, as that is the level at which the performance of investments (and the related goodwill) is reviewed and assessed by management. The goodwill for Global Wealth Management is separately monitored, and therefore separately considered for impairment, at the level of the two former business divisions Wealth Management and Wealth Management Americas. These business divisions were integrated in 2018 and are referred to in this Note as Global Wealth Management Americas and Global Wealth Management ex Americas. 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 2019, total goodwill recognized on the balance sheet was USD 6.3 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 and USD 1.4 billion was carried by Asset Management. Based on the impairment testing methodology described below, UBS concluded that the goodwill balances as of 31 December 2019 allocated to these cash-generating units are not impaired. Impairment of the Investment Bank goodwill UBS is continuing to realign its Investment Bank and execute on a number of strategic initiatives to drive profitable growth. As a consequence, IAS 36, Impairment of Assets, requires UBS to give consideration to the range of possible forecast cash flows and uncertainties in macroeconomic factors that currently exist when determining the recoverability of goodwill in the Investment Bank. Following this, UBS estimated a recoverable amount for the Investment Bank cash-generating unit of USD 11.7 billion. As this was lower than the carrying amount of the Investment Bank cash-generating unit of USD 12.1 billion (actual attributed equity as of 31 December 2019), UBS wrote down the goodwill previously recognized by the Investment Bank (USD 110 million) and recognized that charge in the income statement within Amortization and impairment of goodwill and intangible assets. UBS also reviewed intangible assets, property, equipment and software assets, allocated to the Investment Bank. Overall, UBS confirmed that no further impairment charges were required, with the fair value of such assets (generally determined using a cost replacement approach) being equal to or higher than their respective carrying amounts. 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. The carrying amount for each cash-generating unit is determined by reference to the Group’s equity attribution framework. Within this framework, which is described in the “Capital management” section of this report, UBS attributes 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 Treasury manages centrally on behalf of the business divisions. The framework is primarily used for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equals the capital that a cash-generating unit requires to conduct its business and is currently considered a reasonable approximation of the carrying amount 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.  Refer to the “Capital management” section of this report for more information about 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. 373 Financial statements Consolidated financial statements Note 16 Goodwill and intangible assets (continued) In addition, they 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 the region. 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 balances reported by Global Wealth Management Americas, Global Wealth Management ex Americas and Asset Management. If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of goodwill attributable to Global Wealth Management Americas, Global Wealth Management ex Americas and Asset Management 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 31.12.19 31.12.19 9.5 9.5 8.5 8.5 9.0 9.0 11.0 11.0 31.12.18 9.5 8.5 9.0 11.0 31.12.19 31.12.19 4.2 4.2 3.4 3.4 3.0 3.0 4.0 4.0 31.12.18 3.2 3.0 2.7 3.5 Goodwill Intangible assets Customer relationships, contractual rights and other 760 Infrastructure1 Total Total 2019 2019 2018 6,392 0 (1) 0 (9) 6,382 USD million Historical cost 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 Accumulated amortization and impairment 1,325 Balance at the beginning of the year Amortization 62 Impairment2 4 Disposals (1) Write-offs (7) Foreign currency translation (12) 1,371 Balance at the end of the year Net book value at the end of the year 6,647 Net book value at the end of the year 2 Impairment charges recorded in 2019 and 2018 relate to assets for which the 1 Consists of the branch network intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. 1 2 recoverable amount was determined considering their value-in-use (recoverable amount of the impaired intangible assets in 2018 was USD 18 million, recoverable amount for the Investment Bank cash-generating unit in 2019 was USD 11.7 billion). 1,371 65 0 (8) (75) (2) 1,351 197 1,371 1,371 65 65 110 110 (8) (8) (75) (75) (2) (2) 1,461 1,461 6,469 6,469 7,888 270 (45) (7) (88) 8,018 1,625 11 (10) (75) (3) 1,548 679 27 0 (8) (75) (2) 621 167 8,018 8,018 11 11 (11) (11) (75) (75) (12) (12) 7,930 7,930 865 11 (10) (75) (3) 788 110 6,272 730 30 691 38 760 110 374 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 2019. USD million GGooooddwwiillll Balance at the beginning of the year Additions Disposals Impairment Foreign currency translation BBaallaannccee aatt tthhee eenndd ooff tthhee yyeeaarr IInnttaannggiibbllee aasssseettss Balance at the beginning of the year Additions / transfers Disposals Amortization Impairment Foreign currency translation BBaallaannccee aatt tthhee eenndd ooff tthhee yyeeaarr Global Wealth Management Americas Global Wealth Management ex Americas Asset Management Investment Bank Corporate Center Total 3,721 1,206 1,354 112 (1) (6) 11,,119988 104 (2) (12) 0 1 9922 (2) 33,,771199 138 1 (45) (1) 9922 1 11,,335544 0 0 00 (110) (2) 00 11 0 0 (5) 0 0 55 0 0 00 1 10 (4) 0 77 6,392 0 (1) (110) (9) 66,,227722 254 11 (2) (65) 0 (1) 119977 The table below presents estimated aggregated amortization expenses for intangible assets. USD million EEssttiimmaatteedd,, aaggggrreeggaatteedd aammoorrttiizzaattiioonn eexxppeennsseess ffoorr:: 2020 2021 2022 2023 2024 Thereafter Not amortized due to indefinite useful life TToottaall Intangible assets 53 22 18 17 13 70 2 197 375 Financial statements Consolidated financial statements Note 17 Other assets a) Other financial assets measured at amortized cost USD million Debt securities of which: government bills / bonds Loans to financial advisors1 Fee- and commission-related receivables Finance lease receivables2 Settlement and clearing accounts Accrued interest income Other Total other financial assets measured at amortized cost Total other financial assets measured at amortized cost 31.12.19 31.12.19 14,141 14,141 8,492 8,492 2,877 2,877 1,521 1,521 1,444 1,444 587 587 742 742 1,669 1,669 22,980 22,980 31.12.18 13,562 8,778 3,291 1,643 1,091 1,050 694 1,233 22,563 1 Related to financial advisors in the US and Canada. 2 Upon adoption of IFRS 16 on 1 January 2019, Finance lease receivables increased by USD 176 million. Refer to Note 1 for more information. 1 2 31.12.19 31.12.19 31.12.18 4,597 4,597 1,293 1,293 927 927 493 493 199 199 346 346 4,298 1,312 990 334 82 395 7,856 7,856 7,410 31.12.19 31.12.19 6,570 6,570 448,284 448,284 176,010 176,010 168,581 168,581 62,315 62,315 41,378 41,378 454,854 454,854 31.12.18 10,962 419,838 181,869 165,790 53,624 18,556 430,801 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 Total other non-financial assets 1 Refer to item 1 in Note 21b for more information. 1 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 Total amounts due to banks and customer deposits 376 Note 19 Debt issued designated at fair value USD million IIssssuueedd ddeebbtt iinnssttrruummeennttss Equity-linked1 Rates-linked Credit-linked Fixed-rate Commodity-linked Other of which: debt that contributes to total loss-absorbing capacity TToottaall ddeebbtt iissssuueedd ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee of which: issued by UBS AG with original maturity greater than one year 2 3311..1122..1199 31.12.18 4411,,772222 1166,,331188 11,,991166 44,,663366 11,,556677 664499 221177 6666,,880099 5511,,003311 34,392 12,073 3,282 5,099 1,785 401 0 57,031 40,289 of which: life-to-date own credit (gain) / loss 11 Includes investment fund unit-linked instruments issued. balance as of 31 December 2019 was unsecured (31 December 2018: more than 99% of the balance was unsecured). (270) 22 Issued by the legal entity UBS AG. Based on original contractual maturity without considering any early redemption features. More than 99% of the 9922 As of 31 December 2019 and 31 December 2018, the contractual redemption amount at maturity of debt issued designated at fair value through profit or loss was not materially different from the carrying amount. The table below shows the residual contractual maturity of the carrying amount 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 amount USD million UUBBSS GGrroouupp AAGG11 Non-subordinated debt Fixed-rate UUBBSS AAGG22 Non-subordinated debt Fixed-rate Floating-rate Subtotal OOtthheerr ssuubbssiiddiiaarriieess33 Non-subordinated debt Fixed-rate Floating-rate Subtotal TToottaall 2020 2021 2022 2023 2024 2025–2029 Thereafter TToottaall 3311..1122..1199 Total 31.12.18 0 0 0 0 0 0 217 221177 0 3,648 21,547 25,195 1,778 10,748 12,526 755 3,435 4,190 288 2,608 2,897 334 3,290 3,624 48 102 150 92 43 134 6 197 203 0 27 27 0 0 0 386 8,109 8,495 345 0 345 3,178 5,562 8,740 1100,,336688 5555,,229999 6655,,666688 11,807 43,562 55,370 29 35 64 552200 440044 992244 1,230 431 1,662 25,345 12,661 4,394 2,924 3,624 8,840 9,021 6666,,880099 57,031 11 Comprises instruments issued by the legal entity UBS Group AG. 22 Comprises instruments issued by the legal entity UBS AG. 33 Comprises instruments issued by subsidiaries of UBS AG. 377 Financial statements Consolidated financial statements Note 20 Debt issued measured at amortized cost USD million Certificates of deposit Commercial paper Other short-term debt Short-term debt1 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 Long-term debt3 31.12.19 31.12.19 31.12.18 5,190 5,190 14,413 14,413 2,235 2,235 21,837 21,837 30,105 30,105 25,569 25,569 22,349 22,349 2,633 2,633 21,775 21,775 11,931 11,931 2,414 2,414 6,892 6,892 540 540 8,574 8,574 4 4 0 0 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 88,660 88,660 93,246 Total debt issued measured at amortized cost4 Total debt issued measured at amortized cost4 1 Debt with an original contractual 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 1 3 Debt with an original maturity greater than or equal to one year. The classification of debt issued into 2019, 100% of the balance was unsecured (31 December 2018: 100% of the balance was unsecured). 3 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. 132,271 110,497 110,497 4 2 The Group uses interest rate and foreign exchange derivatives to to-date adjustment to the carrying amount of debt issued was manage the risks inherent in certain debt instruments held at an increase of USD 1,099 million as of 31 December 2019 and a amortized cost. In certain cases, the Group applies hedge decrease of USD 298 million as of 31 December 2018, reflecting accounting for interest rate risk as discussed in Note 1a item 3j and Note 28. As a result of applying hedge accounting, the life- changes in fair value due to interest rate movements. 378 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 2019 pay a fixed rate of interest. issuing entity. All of The table below shows the residual contractual maturity of the carrying amount 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 amount USD million UUBBSS GGrroouupp AAGG11 Non-subordinated debt Fixed-rate Floating-rate Subordinated debt Fixed-rate Subtotal UUBBSS AAGG22 Non-subordinated debt Fixed-rate Floating-rate Subordinated debt Fixed-rate Subtotal OOtthheerr ssuubbssiiddiiaarriieess33 Non-subordinated debt Fixed-rate Floating-rate Subordinated debt Fixed-rate Subtotal TToottaall 2020 2021 2022 2023 2024 2025–2029 Thereafter TToottaall 3311..1122..1199 Total 31.12.18 1,442 299 1,943 1,001 3,720 2,462 4,008 2,249 0 0 0 0 3,890 10,832 0 0 0 0 1,741 2,944 6,182 6,257 3,890 10,832 24,334 10,819 3,978 1,932 0 0 35,153 5,910 2,618 0 2,007 4,626 1,621 368 0 1,989 0 0 0 0 2,597 2,597 2,827 2,827 1,471 0 14,344 15,815 1,145 0 0 1,145 2277,,33006644 66,,00112244 1144,,33444444 4477,,666622 3333,,669966 1133,,111199 77,,443311 5544,,224477 758 1,029 851 951 1,013 3,327 660 88,,558888 0 0 0 0 0 0 0 0 0 0 0 0 758 37,651 1,029 9,883 851 11,659 951 9,197 1,013 7,500 3,327 16,987 0 0 00 00 660 88,,558888 0 0 0 0 40,108 35,035 7,511 82,654 33,5294 5,9334 10,1544 49,616 17,620 111100,,449977 132,271 11 Comprises debt issued by the legal entity UBS Group AG. of UBS AG. 44 TLAC and additional tier 1 capital instruments were originally issued by UBS Group Funding (Switzerland) AG, the issuer was replaced by UBS Group AG in 2019. 22 Comprises debt issued by the legal entity UBS AG. 33 Comprises debt issued by other direct subsidiaries of UBS Group AG and by subsidiaries 379 Financial statements Consolidated financial statements Note 21 Provisions and contingent liabilities a) Provisions The table below presents an overview of total provisions. USD million Provisions other than provisions for expected credit losses Provisions for expected credit losses Total provisions Total provisions 31.12.19 31.12.19 2,861 2,861 114 114 2,974 2,974 31.12.18 3,377 116 3,494 The following table presents additional information for provisions other than provisions for expected credit losses. Litigation, regulatory and similar Real estate Total 2018 USD million Balance at the end of the previous year 3,180 131 Balance at the end of the previous year Adjustment from adoption of IFRS 161 0 (29) 3,180 102 Balance at the beginning of the year Balance at the beginning of the year 0 Additions from acquired companies 2 4 Increase in provisions recognized in the income statement 1,155 0 Release of provisions recognized in the income statement (311) (7) Provisions used in conformity with designated purpose (628) 1 Capitalized reinstatement costs 1 1 Foreign currency translation / unwind of discount (21) 1005 1005 Balance at the end of the year 3,377 Balance at the end of the year 3 Comprises provisions for losses resulting from legal, liability and 1 Refer to Note 1 for more information. 1 3 4 Primarily consists of personnel-related restructuring provisions of USD 40 million as of 31 December 2019 (31 December 2018: USD 50 million) and provisions for onerous contracts of USD 61 compliance risks. 4 5 Consists of reinstatement costs for leasehold improvements of USD 89 million as of 31 December 2019 (31 December 2018: USD 89 million as of 31 December 2019 (31 December 2018: USD 170 million). 5 million) and provisions for onerous contracts of USD 11 million as of 31 December 2019 (31 December 2018: USD 42 million). 6 Includes provisions for sabbatical and anniversary awards. matters3 Restructuring 2,827 0 2,827 0 258 (81) (518) 0 (12) 2,475 2,475 Total 2019 Total 2019 3,377 (132) 3,245 0 0 404 404 (123) (123) (659) (659) 1 1 (8) (8) 2,861 2,861 Other 78 0 78 0 16 (12) (18) 0 1 66 66 224 (103) 121 0 105 (22) (99) 0 1 1064 1064 2 Comprises provisions for losses resulting from security risks and transaction processing risks. 2 6 Operational risks2 46 0 46 0 15 0 (16) 0 (1) 44 44 Employee benefits6 70 0 70 0 6 (7) 0 0 1 70 70 Restructuring provisions primarily relate to onerous contracts and severance payments. Onerous contracts for property are recognized when UBS is committed to pay for non-lease components, such as utilities, when a property is vacated or not fully recovered from sub-tenants. Severance-related provisions are used within a short time period, usually within six months, associated with the other classes of provisions. but potential changes in amount may be triggered when natural Information about 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 staff attrition reduces the number of people affected by a restructuring event and therefore the estimated costs. 380 Note 21 Provisions and contingent liabilities (continued) b) Litigation, regulatory and similar matters The Group operates in a legal and regulatory environment that exposes it to significant litigation and similar risks arising from disputes and regulatory proceedings. As a result, UBS (which for purposes of this Note may refer to UBS Group AG and/or one or more of its subsidiaries, as applicable) is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. reputational Such matters are subject to many uncertainties, and the outcome and the timing of resolution are often difficult to predict, particularly in the earlier stages of a case. There are also situations where the Group may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or implications of continuing to contest liability, even for those matters for which the Group believes it should be exonerated. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities. The Group makes provisions for such matters brought against it when, in the opinion of management after seeking legal advice, it is more likely than not that the Group has a present legal or 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. 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. 381 Financial statements Consolidated financial statements Note 21 Provisions and contingent liabilities (continued) to confidentiality obligations In the case of certain matters below, we state that we have established a provision, and for the other matters, we make no such statement. When we make this statement and we expect disclosure of the amount of a provision to prejudice seriously our position with other parties in the matter because it would reveal what UBS believes to be the probable and reliably estimable outflow, we do not disclose that amount. In some cases we are that preclude such subject disclosure. With respect to the matters for which we do not state whether we have established a provision, either (a) we have not established a provision, in which case the matter is treated as a contingent liability under the applicable accounting standard; or (b) we have established a provision but expect disclosure of that fact to prejudice seriously our position with other parties in the matter because it would reveal the fact that UBS believes an outflow of resources to be probable and reliably estimable. With respect to certain litigation, regulatory and similar matters for which we have established provisions, we are able to estimate the expected timing of outflows. However, the aggregate amount of the expected outflows for those matters for which we are able to estimate expected timing is immaterial relative to our current and expected levels of liquidity over the relevant time periods. The aggregate amount provisioned for litigation, regulatory and similar matters as a class is disclosed in the “Provisions” table in Note 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 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 was subject to probation, which ended in early 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 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 in Corporate Center1 USD million Balance at the beginning of the year Balance at the beginning of the year Increase in provisions recognized in the income statement Release of provisions recognized in the income statement Provisions used in conformity with designated purpose Foreign currency translation / unwind of discount Balance at the end of the year Balance at the end of the year Global Wealth Manage- ment 1,003 188 (49) (350) (10) 782 782 Personal & Corporate Banking 117 1 Asset Manage- ment 0 0 Investment Bank 269 60 Corporate Center 1,438 10 Total 2019 Total 2019 2,827 2,827 258 258 Total 2018 2,508 905 0 (4) (1) 113 113 0 0 0 0 0 (6) (66) (2) 255 255 (27) (97) 0 (81) (81) (518) (518) (12) (12) (220) (350) (16) 1,325 1,325 2,475 2,475 2,827 1 Provisions, if any, for the matters described in this Note are recorded in Global Wealth Management (items 3, item 4 and item 7) and Corporate Center (item 2). Provisions, if any, for the matters described in 1 items 1 and 6 of this disclosure are allocated between Global Wealth Management and Personal & Corporate Banking, and provisions, if any, for the matters described in this disclosure in item 5 are allocated between the Investment Bank and Corporate Center. 382 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. On 26 July 2019, the Supreme Court reversed the decision of the Federal Administrative Court. In December 2019, the court released its written decision. The decision requires the FTA to obtain confirmation from the French authorities that transmitted data will be used only for the purposes stated in their request before transmitting any data. The stated purpose of the original request was to obtain information relating to taxes owed by account holders. Accordingly, any information transferred to the French authorities must not be passed to criminal authorities or used in connection with the ongoing case against UBS discussed in this item. Since 2013, UBS (France) S.A., UBS AG and certain former employees have been under investigation in France for alleged complicity in unlawful solicitation of clients on French territory, regarding the laundering of proceeds of tax fraud, and 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. A trial in the court of first instance took place from 8 October 2018 until 15 November 2018. On 20 February 2019, the court announced a verdict finding UBS AG guilty of unlawful solicitation of clients on French territory and aggravated laundering of 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 trial in the Court of Appeal is scheduled for June 2020. 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 exceed 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 2019 reflected provisions with respect to this matter in an amount of EUR 450 million (USD 505 million at 31 December 2019). 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 2019 reflects our best estimate of possible financial is reasonably possible that actual penalties and civil damages could exceed the provision amount. implications, although it 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. In June 2019, UBS entered into a settlement agreement with the Italian tax authorities under which it paid EUR 101 million to resolve the claims asserted by the authority related to UBS AG’s potential permanent establishment in Italy. In October 2019, the Judge of Preliminary Investigations of the Milan Court approved an agreement with the Milan prosecutor under Article 63 of Italian Administrative Law 231 under which UBS AG, UBS Switzerland AG and UBS Monaco have paid an aggregate of EUR 10.3 million to resolve claims premised on the alleged inadequacy of historical internal controls. No admission of wrongdoing was required in connection with this resolution. 383 Financial statements Consolidated financial statements Note 21 Provisions and contingent liabilities (continued) Our balance sheet at 31 December 2019 reflected provisions with respect to matters described in this item 1 in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 2. Claims related to sales of residential mortgage-backed securities and mortgages From 2002 through 2007, prior to the crisis in the US residential loan market, UBS was a substantial issuer and underwriter of US residential mortgage-backed securities (RMBS) and was a purchaser and seller of US residential mortgages. A subsidiary of UBS, UBS Real Estate Securities Inc. (UBS RESI), acquired pools of residential mortgage loans from originators and (through an affiliate) deposited them into securitization trusts. In this manner, from 2004 through 2007, UBS RESI sponsored approximately USD 80 billion in RMBS, based on the original principal balances of the securities issued. UBS RESI also sold pools of loans acquired from originators to third-party purchasers. These whole loan sales during the period 2004 through 2007 totaled approximately USD 19 billion in original principal balance. UBS was not a significant originator of US residential loans. A branch of UBS originated approximately USD 1.5 billion in US residential mortgage loans during the period in which it was active from 2006 to 2008 and securitized less than half of these loans. 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. In January 2020, the settlement was approved by the court. Proceedings to determine how the settlement funds will be distributed to RMBS holders are 384 ongoing. 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 UBS’s issuance, underwriting and sale of 40 RMBS transactions in 2006 and 2007. UBS moved to dismiss the civil complaint on 6 February 2019. On 10 December 2019, the district court denied UBS’s motion to dismiss. Our balance sheet at 31 December 2019 reflected a provision with respect to matters described in this item 2 in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of this matter cannot be determined with certainty based on currently available information and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 3. Madoff In relation to the Bernard L. Madoff Investment Securities LLC (BMIS) investment fraud, UBS AG, UBS (Luxembourg) S.A. (now UBS Europe SE, Luxembourg branch) and certain other UBS subsidiaries have been subject to inquiries by a number of regulators, including the Swiss Financial Market Supervisory (FINMA) and the Luxembourg Commission de Authority Surveillance du Secteur Financier. Those inquiries concerned two third-party law, established under 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). Note 21 Provisions and contingent liabilities (continued) A large number of alleged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses relating to the Madoff fraud. The majority of these cases have been filed in Luxembourg, where decisions that the claims in eight test cases were inadmissible have been affirmed by the Luxembourg Court of Appeal, and the Luxembourg Supreme Court has dismissed a further appeal in one of the test cases. In the US, the BMIS Trustee filed claims against UBS entities, among others, in relation to the two Luxembourg funds and one of the offshore funds. The total amount claimed against all defendants in these actions was not less than USD 2 billion. In 2014, the US Supreme Court rejected the BMIS Trustee’s motion for leave to appeal decisions dismissing all claims except those for the recovery of approximately USD 125 million of payments alleged to be fraudulent conveyances and preference payments. In 2016, the bankruptcy court dismissed these claims against the UBS entities. In February 2019, the Court of Appeals reversed the dismissal of the BMIS Trustee’s remaining claims. In August 2019, the defendants, including UBS, filed a petition to the US Supreme Court requesting that it review the Court of Appeals’ decision. The bankruptcy proceedings have been stayed pending a decision with respect to the defendants’ petition. 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 3.4 billion, of which claims with aggregate claimed damages of USD 2.4 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. 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. (SEC) and the Financial 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 certain 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 or any further legislative action to create a legal means of restructuring Commonwealth obligations or to impose additional oversight on the Commonwealth’s finances, or any restructuring of the Commonwealth’s obligations, may increase the number of claims against UBS concerning Puerto Rico securities, as well as potential damages sought. In May 2019, the oversight board filed complaints in Puerto Rico federal district court bringing claims against financial, legal and accounting firms that had participated in Puerto Rico municipal bond offerings, including UBS, seeking a return of underwriting and swap fees paid in connection with those offerings. UBS estimates that it received approximately USD 125 million in fees in the relevant offerings. In August 2019 and February 2020, three US insurance companies that insured issues of Puerto Rico municipal bonds sued UBS and seven other underwriters of Puerto Rico municipal bonds. The two actions seek recovery of an aggregate of USD 955 million in damages from the defendants. The plaintiffs in these cases claim reasonably investigate financial statements in the offering materials for the insured Puerto Rico bonds issued between 2002 and 2007, which plaintiffs argue they relied upon in agreeing to insure the bonds notwithstanding that they had no contractual relationship with the underwriters. that defendants failed to 385 Financial statements Consolidated financial statements Note 21 Provisions and contingent liabilities (continued) Our balance sheet at 31 December 2019 reflected provisions with respect to matters described in this item 4 in amounts that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that we have recognized. 5. Foreign exchange, LIBOR and benchmark rates, and other trading practices Foreign exchange-related regulatory matters: 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-prosecution agreement with UBS AG related to UBS’s submissions of benchmark interest rates, and UBS AG pleaded guilty to one count of wire fraud, paid a fine and was subject to probation, which ended in early January 2020. In 2019 the European Commission announced two decisions with respect to foreign exchange trading. UBS was granted immunity by the European Commission in these matters and therefore was not fined. 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 matters by certain authorities remain ongoing notwithstanding these resolutions. Foreign exchange-related civil litigation: Putative class actions have been filed since 2013 in US federal courts and in other jurisdictions against UBS and other banks on behalf of putative classes of persons who engaged in foreign currency transactions with any of the defendant banks. UBS has resolved 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 under a 386 settlement agreement that provides for UBS to 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. 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 2017, two putative class actions were 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, 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. In January 2020, UBS and 11 other banks agreed in principle with the plaintiffs to settle the class action for a total of USD 10 million. The settlement is subject to final documentation and court approval. 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 investigations regarding potential improper attempts by UBS, among others, to manipulate LIBOR and other benchmark rates at certain times. UBS reached settlements or otherwise concluded investigations relating to benchmark interest rates with the investigating authorities. UBS has ongoing obligations to cooperate with the authorities with whom we have reached resolutions and to undertake certain to benchmark interest rate submissions. UBS has been granted conditional leniency or conditional immunity from authorities in certain jurisdictions, including the Antitrust Division of the DOJ and the Swiss Competition Commission (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. remediation measures with respect Note 21 Provisions and contingent liabilities (continued) LIBOR and other benchmark-related civil litigation: A number of putative class actions and other actions are pending in the federal courts in New York against UBS and numerous other banks on behalf of parties who transacted in certain interest rate 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 rate LIBOR and other benchmarks, mortgages, preferred and debt securities, bonds pledged as collateral, loans, depository accounts, investments and other interest-bearing allege manipulation, through various means, of certain benchmark interest rates, including USD LIBOR, Euroyen TIBOR, Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR, SGD SIBOR and SOR and Australian BBSW, and seek unspecified compensatory and other damages under varying legal theories. including adjustable instruments. complaints The 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 and certain of these actions are now proceeding. 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 December 2019, UBS entered into an agreement with representatives of the class of USD lenders to settle their USD LIBOR class action. The agreement has received preliminary court approval and remains subject to final approval. 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, since 1 February 2014, directly transacted with a defendant bank in USD LIBOR instruments. The complaint asserts antitrust claims. The defendants moved to dismiss the complaint in August 2019. Other benchmark class actions in the US: In 2014, the court in one of the Euroyen TIBOR lawsuits dismissed certain of the plaintiffs’ claims, including a federal antitrust claim, for lack of standing. In 2015, this court dismissed the plaintiffs’ federal racketeering claims on the same basis and affirmed its previous dismissal of the plaintiffs’ 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 court in the EURIBOR lawsuit dismissed the case as to UBS and certain other foreign defendants for lack of personal jurisdiction. Plaintiffs in the other Yen LIBOR, Euroyen TIBOR and the EURIBOR actions have appealed the dismissals. 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 filed amended complaints following the dismissals, and the courts granted renewed motions to dismiss in July 2019 (SIBOR / SOR) and in September 2019 (CHF LIBOR). Plaintiffs in both actions have appealed. 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 filed an amended complaint in April 2019, which UBS and other defendants named in the amended complaint have moved to dismiss. In February 2020, the court in the BBSW action granted in part and denied in part defendants’ motions to dismiss the amended complaint. The court dismissed the GBP LIBOR action in August 2019, and plaintiffs appealed the dismissal in September 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. Similar class actions have been filed concerning European government bonds and other government bonds. UBS and reportedly other banks are to information from various investigations and requests for authorities regarding government bond trading practices. As a result of its review to date, UBS has taken appropriate action. responding Government sponsored entities (GSE) bonds: Starting in February 2019, class action complaints were filed in the US District Court for the Southern District of New York against UBS and other banks on behalf of plaintiffs who traded GSE bonds. A consolidated complaint was filed alleging collusion in GSE bond trading between 1 January 2009 and 1 January 2016. In December 2019, UBS and eleven other defendants agreed to settle the class action for a total of USD 250 million. The settlement is subject to court approval. 387 Financial statements Consolidated financial statements Note 21 Provisions and contingent liabilities (continued) With respect to additional matters and jurisdictions not encompassed by the settlements and orders referred to above, our balance sheet at 31 December 2019 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 information and certainty based on currently available accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 6. Swiss retrocessions The Federal Supreme Court of Switzerland ruled in 2012, in a test case against UBS, that distribution fees paid to a firm for distributing third-party and intra-group investment funds and structured products must be disclosed and surrendered to clients who have entered into a discretionary mandate agreement with the firm, absent a valid waiver. FINMA has issued a supervisory note to all Swiss banks in response to the Supreme Court decision. UBS has met the FINMA requirements and has notified all potentially affected clients. The Supreme Court decision has resulted, and may continue to result, in a number of client requests for UBS to disclose and potentially surrender retrocessions. Client requests are assessed on a case-by-case basis. Considerations taken into account when assessing these cases include, among other things, the existence of a discretionary mandate and whether or not the client documentation contained a valid waiver with respect to distribution fees. Our balance sheet at 31 December 2019 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. Securities transaction pricing and disclosure UBS identified and reported to the relevant authorities instances in which some Global Wealth Management clients booked in Hong Kong and Singapore may have been charged inappropriate spreads on debt securities transactions between 2008 and 2015. In November 2019, UBS AG entered into a settlement with the Hong Kong Securities and Futures Commission (SFC) under which it was reprimanded and fined HKD 400 million (USD 51 million) and a settlement with the Monetary Authority of Singapore (MAS) under which it was fined SGD 11 million (USD 8.3 million). In addition, UBS has commenced reimbursing affected customers an aggregate amount equivalent to USD 47 million, including interest. Our balance sheet at 31 December 2019 reflected a provision with respect to the matter described in this item 7 in an amount that UBS believes to be appropriate under the applicable accounting standard. 388 Note 22 Other liabilities a) Other financial liabilities measured at amortized cost USD million Other accrued expenses Accrued interest expenses Settlement and clearing accounts Lease liabilities1 Other TToottaall ootthheerr ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 11 Relates to the adoption of IFRS 16 on 1 January 2019. Refer to Note 1 for more information. b) Other financial liabilities designated at fair value USD million Financial liabilities related to unit-linked investment contracts Securities financing transactions Over-the-counter debt instruments of which: life-to-date own credit (gain) / loss Other 3311..1122..1199 31.12.18 11,,992288 11,,556622 11,,337799 33,,994433 990000 99,,771122 2,192 1,544 1,486 1,663 6,885 3311..1122..1199 2288,,114455 55,,774422 22,,002222 ((44)) 3311 31.12.18 21,679 9,461 2,450 (51) 5 TToottaall ootthheerr ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee11 11 As of 31 December 2019 and 31 December 2018, 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 amount. 33,594 3355,,994400 c) Other non-financial liabilities USD million Compensation-related liabilities of which: Deferred Contingent Capital Plan of which: financial advisor compensation plans of which: other compensation plans of which: net defined benefit pension and post-employment liabilities of which: other compensation-related liabilities 1 Current and deferred tax liabilities VAT and other tax payables Deferred income Other TToottaall ootthheerr nnoonn ffiinnaanncciiaall lliiaabbiilliittiieess -- 11 Includes liabilities for payroll taxes and untaken vacation. 3311..1122..1199 31.12.18 66,,881122 11,,885555 11,,446633 22,,331100 663333 555522 11,,116633 447755 114411 220022 7,278 1,983 1,458 2,480 775 581 1,002 431 215 98 88,,779944 9,022 389 Financial statements Consolidated financial statements Additional information Note 23 Expected credit loss measurement a) Expected credit losses in the period Total net credit loss expenses were USD 78 million in 2019, reflecting net credit loss expenses of USD 100 million related to credit-impaired (stage 3) positions, partly offset by USD 22 million of net releases in expected credit loss expense allowances from stage 1 and 2 positions. In the Investment Bank, increased stage 1 and 2 ECL allowances and provisions recognized over the year primarily related to loans and credit facilities originated during 2019 and to changes in credit quality of existing assets, partly offset by a change in the applied credit risk models. In Personal & Corporate Banking and Global Wealth Management, ECL allowances and provisions slightly decreased over the year, primarily attributable to a minor improvement in book quality following continued positive developments of selected economic input data. Stage 3 net losses of USD 100 million were recognized across a number of defaulted positions, mainly in Personal & Corporate Banking (USD 44 million) and, to a lesser extent, in the Investment Bank (USD 26 million) and Global Wealth Management (USD 23 million). 390 Note 23 Expected credit loss measurement (continued) b) Changes to ECL models, scenarios, scenario weights and key inputs Refer to Note 1a for information about the principles governing ECL models, scenarios, scenario weights and key inputs applied. In addition to the quarterly updates of market and behavioral data, which are relevant input factors to the credit rating methodology and the estimation of the probability of default (PD) and the loss given default (LGD), one significant change was applied to the models used to calculate ECLs for large corporate clients in the Investment Bank. During 2019, the data set was refreshed and aligned with the process applied to regulatory stress testing in the US, which resulted in a net release in expected credit loss expense allowances and provisions from stage 1 and 2 positions of USD 20 million. For portfolios where internal default data is insufficient for modeling purposes, UBS relies on external data providers. three hypothetical Four scenarios and the related macroeconomic factors were reviewed in the fourth quarter of 2019 in light of the economic and political conditions prevailing at year-end. The selection of the essentially unchanged, although the narrative of the severe downside scenario was updated to include additional risks. The key aspects of the narrative for the scenarios are summarized below. – remained scenarios The baseline scenario assumes continued growth in all key markets, albeit at a slower rate than in 2019. As a consequence, unemployment rates are not expected to fall noticeably, except in the US. Interest rates remain at low levels in line with the central bank policies pursued in the eurozone, Switzerland and in the US. The upside scenario assumes continued accommodative central bank policies in developed economies and a gradual decline of geopolitical and economic uncertainty. Underlying macroeconomic conditions improve, and asset values increase substantially. The mild downside scenario is based on a monetary policy tightening assumption, implemented by major central banks to deflate a potential asset price bubble, thus causing a mild recession. The narrative for the severe downside scenario, which during 2019 focused primarily on developments in the eurozone, has been broadened to cover a severe recessionary phase affecting all major economies. A wide-ranging slowdown is mainly caused by global trade tensions and debt sustainability concerns in Europe. Trade and business confidence are affected, being particularly felt in the key export markets for Swiss industry. – – – 31 December 2019 are summarized in the table on the following page. The determination of scenario weights is subject to the process and governance outlined in Note 1a item 3g. An econometric model is used to provide input into the scenario weight assessment process. The model output gives a first estimate of the probability that the GDP assumptions used for each scenario materialize, according to the historically observed deviations of GDP growth from trend growth. Since the probability estimates produced by the model 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 determining the final scenario weights. The reviews during 2019 reflected the increasing probability of a weakening economy in key markets, after a long spell of substantial expansion, and the uncertainties about the influence that several political developments with unforeseeable outcomes may have on future growth. At year-end 2019, management reflected these developments by giving more weight to the severe downside scenario compared with 31 December 2018. 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 therefore reflects a significant rise in 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 also based on management’s assessment of the geopolitical risks that might affect all of our key markets and portfolios. EECCLL sscceennaarriioo AAssssiiggnneedd wweeiigghhttss iinn %% 31.12.19 31.12.18 In each quarter the bases to which scenario-specific forecasts are applied, and the baseline forecast itself, were updated using the most recently available information (key macroeconomic data and relevant market indicators). The key forward-looking macroeconomic variables applied to the four scenarios as of Upside Baseline Mild downside Severe downside 7.5 42.5 35.0 15.0 10.0 45.0 35.0 10.0 391 Financial statements Consolidated financial statements Note 23 Expected credit loss measurement (continued) Key parameters Key parameters Real GDP growth (% change) Real GDP growth (% change) United States Eurozone Switzerland Consumer price index (% change) Consumer price index (% change) United States Eurozone Switzerland Unemployment rate (change, percentage points) Unemployment rate (change, percentage points) United States Eurozone Switzerland Fixed income: 10-year government bonds (change in yields, basis points) Fixed income: 10-year government bonds (change in yields, basis points) USD EUR CHF Equity indices (% change) Equity indices (% change) S&P 500 EuroStoxx 50 SPI Swiss real estate (% change) Swiss real estate (% change) Single-Family Homes Other real estate (% change) Other real estate (% change) United States (S&P/Case-Shiller) Eurozone (House Price Index) One year One year Upside Upside Severe Mild Severe Mild Baseline downside downside Baseline downside downside Three years cumulative Three years cumulative Mild Mild Severe Severe Baseline downside downside Baseline downside downside Upside Upside 4.3 3.6 4.2 3.1 2.1 1.5 (0.9) (1.4) (0.3) 61.0 65.0 73.0 14.8 17.0 13.9 4.5 6.2 4.9 1.9 1.0 1.5 1.8 1.3 0.8 (0.4) (0.1) 0.1 0.2 8.4 9.5 3.5 0.5 1.4 0.1 4.0 1.2 (0.5) (0.3) (0.8) 4.9 2.8 1.8 0.3 0.6 0.5 (6.4) (9.1) (7.0) (1.2) (1.3) (1.8) 5.7 5.6 2.6 187.5 112.5 187.5 (20.3) (15.5) (19.0) (100.0) (30.0) (70.0) (53.0) (60.0) (56.2) 10.9 9.5 10.4 8.6 6.7 5.5 (0.9) (1.9) (0.8) 274.1 221.7 283.0 42.7 44.3 42.2 6.4 2.8 4.8 6.2 4.3 2.7 (0.5) (0.2) 0.3 10.1 28.2 30.0 9.5 4.4 5.3 0.0 0.7 (0.1) (4.3) (10.8) (6.2) 11.1 6.2 4.2 0.7 1.0 1.2 262.5 225.0 262.5 (23.5) (14.7) (24.0) 0.4 (1.7) (1.6) 5.6 7.9 3.6 (75.0) (20.0) (35.0) (42.9) (52.9) (46.8) (7.3) (15.2) 14.1 2.3 (15.8) (27.0) (4.0) (1.2) (13.3) (23.0) 17.7 15.4 16.7 2.2 (11.9) (6.8) (23.4) (33.2) 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 ECLs on an instrument for the remaining lifetime reduces (all other factors remaining the same); – movements from a “maximum 12-month ECL” to the recognition of “lifetime ECLs” (and vice versa) following transfers between stages 1 and 2; – movements from stages 1 and 2 to stage 3 (credit-impaired status) when default has become certain and probability of default (PD) increases to 100% (or vice versa); – discount unwind within ECLs as it is measured on a present – changes in credit risk and/or economic forecasting models or value basis; – derecognition of instruments in the period; – change in individual asset quality of instruments; – portfolio effect of updating forward-looking scenarios and the respective weights; updates to model parameters; and – foreign exchange translations for assets denominated in foreign currencies and other movements. 392 Note 23 Expected credit loss measurement (continued) The following table explains the changes in the ECL allowances and provisions for on- and off-balance sheet financial instruments and other credit lines in scope of ECL requirements between the beginning and the end of the period due to the factors listed on the previous page. of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients USD million BBaallaannccee aass ooff 3311 DDeecceemmbbeerr 22001188 EECCLL mmoovveemmeennttss dduuee ttoo ssttaaggee ttrraannssffeerr11 NNeett mmoovveemmeenntt ffrroomm nneeww aanndd ddeerreeccooggnniizzeedd ttrraannssaaccttiioonnss22 of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients BBooookk qquuaalliittyy mmoovveemmeennttss RReemmeeaassuurreemmeennttss dduuee ttoo ssttaaggee ttrraannssffeerrss33 SSttaaggee 33 SSttaaggee 11 ((669955)) ((117766)) ((88)) ((9966)) 33 ((6666)) 0 (4) 0 (5) 0 (14) 0 (14) ((9966)) 114411 ((9977)) 111100 (1) 70 0 21 (35) 1 (53) 6 11 3311 (9) 2 1 0 (14) (10) 17 9 MMooddeell aanndd mmeetthhooddoollooggyy cchhaannggeess55 00 1177 TToottaall EECCLL mmoovveemmeennttss wwiitthh pprrooffiitt oorr lloossss iimmppaacctt66 ((110000)) ((44)) 110088 ((11)) OOtthheerr aalllloowwaannccee aanndd pprroovviissiioonn mmoovveemmeennttss Write-offs / recoveries7 130 0 Reclassifications8 0 0 Foreign exchange movements9 (4) (1) (18) 0 Other BBaallaannccee aass ooff 3311 DDeecceemmbbeerr 22001199 ((668888)) ((118811)) 11 Represents ECL allowances and provisions prior to ECL remeasurement due to stage transfer. 22 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. 33 Represents the remeasurement between 12- month and lifetime ECL due to stage transfers. 44 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. 55 Represents the change in the allowances and provisions related to changes in models and methodologies. Refer to Note 23b for more information. 66 Includes ECL movements due to stage transfers, ECL movements from new and derecognized transactions, book quality changes and model and methodology changes. 77 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. 88 Represents reclassifications to Other assets measured at amortized cost. 99 Represents the change in allowances and provisions related to movements in foreign exchange rates. DDeevveellooppmmeenntt ooff EECCLL aalllloowwaanncceess aanndd pprroovviissiioonnss SSttaaggee 22 ((118833)) 110033 1100 3 2 8 (2) ((9977)) ((113388)) (74) (16) (11) (17) 4411 30 0 0 10 99 2255 ((22)) 0 0 (2) 0 ((116600)) TToottaall ((11,,005544)) 00 ((5533)) (1) (3) (6) (16) ((5522)) ((112255)) (5) 5 (45) (64) 7733 22 1 (24) 35 2266 ((7788)) 110055 130 0 (8) (19) ((11,,002299)) RReemmeeaassuurreemmeennttss wwiitthhoouutt ssttaaggee ttrraannssffeerrss44 of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients 393 Financial statements Consolidated financial statements 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. of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients USD million Balance as of 1 January 2018 Balance as of 1 January 2018 ECL movements due to stage transfer1 ECL movements due to stage transfer1 Net movement from new and derecognized transactions2 Net movement from new and derecognized transactions2 of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients Book quality movements Book quality movements Remeasurements due to stage transfers3 Remeasurements due to stage transfers3 Stage 3 Stage 1 (783) (141) (783) (141) 2 2 (97) (97) 19 19 (44) (44) 0 (6) 0 (8) 8 (6) 0 (14) (114) (114) 112 112 (7) (7) 95 95 (1) 54 0 24 1 0 0 7 (106) (106) 17 17 (7) 2 (8) 4 (48) (2) (70) 9 Model and methodology changes5 Model and methodology changes5 0 0 (2) (2) Subtotal ECL movements with profit or loss impact6 Subtotal ECL movements with profit or loss impact6 (86) (86) (30) (30) Other allowance and provision movements 216 10 Other allowance and provision movements 216 10 Write-offs / recoveries7 199 1 Reclassifications8 15 7 Foreign exchange movements9 8 0 Other (6) 2 Balance as of 31 December 2018 Balance as of 31 December 2018 (661) (661) (162) (162) 1 Represents ECL allowances and provisions prior to ECL remeasurement due to stage transfer. 2 Represents the increase and decrease in allowances and provisions resulting from financial instruments (including 1 2 3 Represents the remeasurement between 12- 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. 3 4 Represents the change in allowances and provisions related to changes in model inputs or assumptions, including changes in forward-looking macroeconomic month and lifetime ECL due to stage transfers. 4 5 Represents the change in the allowances and provisions related to changes in models and methodologies. conditions, changes in the exposure profile, PD and LGD changes, and unwinding of the time value. 5 6 UBS has restated ECL movements with profit or loss (P&L) impact to include ECL movements due to stage transfer. This aligns with a change in approach adopted in 2019 to allow for the total ECL P&L impacts by 6 stage to be disclosed, including ECL movements due to stage transfers, ECL movements from new and derecognized transactions, book quality changes, model and methodology changes and foreign exchange rates. 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. 7 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. 8 Development of ECL allowances and provisions Stage 2 (193) (193) 95 95 15 15 4 5 1 4 (87) (87) (103) (103) (63) (19) (3) (7) 16 16 (3) 12 (6) 6 (11) (11) 11 11 1 1 0 3 0 (1) (180) (180) Total (1,117) (1,117) 0 0 (10) (10) (3) (3) 2 (10) (89) (89) (16) (16) (11) 5 (1) 1 (73) (73) (9) 8 (56) (55) (13) (13) (104) (104) 227 227 200 25 8 (6) (1,002) (1,002) Remeasurements without stage transfers4 Remeasurements without stage transfers4 of which: Private clients with mortgages of which: Real estate financing of which: Large corporate clients of which: SME clients 9 394 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 requirements 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 FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt oonn tthhee bbaallaannccee sshheeeett 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 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee ddeebbtt TToottaall mmaaxxiimmuumm eexxppoossuurree ttoo ccrreeddiitt rriisskk rreefflleecctteedd oonn tthhee bbaallaannccee sshheeeett iinn ssccooppee ooff EECCLL Guarantees6 –– Loan commitments6 Forward starting transactions, reverse repurchase and securities borrowing agreements Committed unconditionally revocable credit lines TToottaall mmaaxxiimmuumm eexxppoossuurree ttoo ccrreeddiitt rriisskk nnoott rreefflleecctteedd oonn tthhee bbaallaannccee sshheeeett,, iinn ssccooppee ooff EECCLL 3311..1122..1199 CCoollllaatteerraall CCrreeddiitt eennhhaanncceemmeennttss MMaaxxiimmuumm eexxppoossuurree ttoo ccrreeddiitt rriisskk CCaasshh ccoollllaatteerraall rreecceeiivveedd CCoollllaatteerraalliizzeedd bbyy sseeccuurriittiieess SSeeccuurreedd bbyy rreeaall eessttaattee OOtthheerr ccoollllaatteerraall11 NNeettttiinngg CCrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss GGuuaarraanntteeeess EExxppoossuurree ttoo ccrreeddiitt rriisskk aafftteerr ccoollllaatteerraall aanndd ccrreeddiitt eennhhaanncceemmeennttss 110077..11 1122..44 8844..22 2233..33 332266..88 2233..00 557766..88 66..33 558833..22 1188..11 2277..55 11..77 3355..11 8822..33 00..00 7777..66 110011..44 00..44 117799..44 117799..44 33..00 11..99 11..77 88..33 1144..99 117744..77 00..00 117744..77 117744..77 00..11 11..33 44..99 66..33 1188..44 00..11 1188..66 1188..66 11..00 00..22 00..33 11..55 1144..44 1144..44 00..00 1144..44 00..00 00..22 55..88 1177..11 11..33 2244..33 2244..33 11..77 55..88 33..66 1111..00 00..00 00..22 11..11 11..11 11..11 22..55 00..22 00..00 22..88 110077..11 1122..44 00..88 88..99 1144..00 2211..11 116644..44 66..33 117700..77 99..88 1188..00 00..00 1177..99 4455..77 395 Financial statements Consolidated financial statements Note 23 Expected credit loss measurement (continued) Maximum exposure to credit risk (continued) 31.12.18 Collateral USD billion Financial assets measured at amortized cost on the Financial assets measured at amortized cost on the balance sheet 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 Total financial assets measured at amortized cost Financial assets measured at fair value through other Financial assets measured at fair value through other comprehensive income – debt comprehensive income – debt Total maximum exposure to credit risk reflected on the Total maximum exposure to credit risk reflected on the balance sheet in scope of ECL balance sheet in scope of ECL Guarantees6 Maximum exposure to credit risk Cash collateral Collateralized Secured by real estate by securities received Other collateral1 Netting Credit enhancements Exposure to credit risk after collateral Credit derivative and credit contracts Guarantees enhancements 108.4 16.9 95.3 23.6 320.4 22.6 587.1 587.1 6.7 6.7 593.8 593.8 18.1 0.1 92.5 104.4 0.4 197.4 197.4 2.5 16.2 1.1 19.9 19.9 167.1 0.0 167.2 167.2 17.0 0.1 17.2 17.2 14.5 0.0 1.2 14.5 14.5 0.0 0.0 1.2 1.2 17.2 17.2 1.3 197.4 197.4 2.5 167.2 167.2 0.1 19.9 19.9 1.2 14.5 14.5 0.0 0.0 1.2 1.2 2.7 108.4 16.8 0.3 9.1 14.3 20.9 169.8 169.8 6.7 6.7 176.5 176.5 10.2 0.4 2.8 31.2 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 Total maximum exposure to credit risk not reflected on 51.0 12.7 the balance sheet, in scope of ECL 51.0 12.7 the balance sheet, in scope of ECL 2 Loans and advances to banks include amounts held with third-party banks on behalf of clients. 1 Includes but is not limited to life insurance contracts, inventory, mortgage loans, gold and other commodities. 2 1 3 Included within Cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. The credit risk associated with these balances may be borne by those clients. 3 4 The amount shown in the “Netting” column represents the netting potential not recognized Some of these margin balances reflect amounts transferred on behalf of clients who retain the associated credit risk. 4 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. 0.0 21.0 0.9 36.6 0.9 6.5 19.8 10.8 10.8 86.8 86.8 0.7 3.4 3.4 5.8 5.8 2.8 2.8 0.2 0.2 0.0 0.0 3.9 1.1 5.7 4.2 1.5 0.2 6 5 396 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 assessment of individual counterparties, prior to substitutions. The amounts presented are gross of impairment allowances. the probability of default of  Refer to the “Risk management and control” section of this report for more details regarding the Group’s internal grading system Financial assets subject to credit risk by rating category USD million 3311..1122..1199 Rating category1 FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt CCaasshh aanndd bbaallaanncceess aatt cceennttrraall bbaannkkss of which: stage 1 LLooaannss aanndd aaddvvaanncceess ttoo bbaannkkss of which: stage 1 of which: stage 2 of which: stage 3 – 00 11 – – 22 33 – – 44 55 – – 66 88 – – 99 1133 – 110055,,119955 11,,887733 105,195 1,873 00 0 330099 99,,883322 11,,332266 309 9,832 1,326 0 0 0 0 0 0 00 0 668877 677 10 0 00 0 229988 228 71 0 RReecceeiivvaabblleess ffrroomm sseeccuurriittiieess ffiinnaanncciinngg ttrraannssaaccttiioonnss 2211,,008899 1166,,888899 1144,,336666 2288,,881155 33,,008888 of which: stage 1 21,089 16,889 14,366 28,815 3,088 CCaasshh ccoollllaatteerraall rreecceeiivvaabblleess oonn ddeerriivvaattiivvee iinnssttrruummeennttss 44,,889999 1100,,555533 55,,003333 22,,776655 of which: stage 1 LLooaannss aanndd aaddvvaanncceess ttoo ccuussttoommeerrss of which: stage 1 of which: stage 2 of which: stage 3 4,899 10,553 5,033 2,765 11,,774444 117744,,998822 5599,,224400 7700,,552288 1188,,774488 22,,330088 332277,,555500 1,744 174,328 56,957 62,435 14,117 655 2,283 8,093 4,631 0 0 0 0 339900 0 77,,115588 OOtthheerr ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 1133,,003311 11,,556600 of which: stage 1 of which: stage 2 of which: stage 3 13,031 1,549 381 6,747 0 0 11 0 9 0 412 0 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 114466,,226677 221155,,669900 8800,,335544 110099,,995522 2222,,448855 22,,998811 557777,,773300 OOnn bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss - - FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt FFVVOOCCII ddeebbtt iinnssttrruummeennttss – – 55,,885544 445500 00 4411 00 00 66,,334455 TToottaall oonn bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss - - 115522,,112200 221166,,113399 8800,,335544 110099,,999944 2222,,448855 22,,998811 558844,,007755 11 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. - - CCrreeddiitt iimmppaaiirreedd ((ddeeffaauulltteedd)) TToottaall ggrroossss ccaarrrryyiinngg aammoouunntt EECCLL aalllloowwaanncceess 00 110077,,006688 0 107,068 11 1122,,445544 0 12,371 0 1 00 81 1 8844,,224466 0 84,246 00 2233,,228899 0 23,289 0 309,581 0 15,661 2,308 667722 2,308 2233,,112233 0 21,988 0 672 463 672 3399 39 0 331122 280 32 0 00 0 ((66)) (4) (1) (1) ((22)) (2) 00 0 ((776644)) (82) (123) (559) ((114433)) (35) (13) (95) ((991155)) 00 ((991155)) NNeett ccaarrrryyiinngg aammoouunntt ((mmaaxxiimmuumm eexxppoossuurree ttoo ccrreeddiitt rriisskk)) 110077,,006688 107,068 1122,,444477 12,367 80 0 8844,,224455 84,245 2233,,228899 23,289 332266,,778866 309,499 15,538 1,749 2222,,998800 21,953 451 576 557766,,881155 66,,334455 558833,,115599 397 Financial statements Consolidated financial statements Note 23 Expected credit loss measurement (continued) Off-balance sheet positions subject to expected credit loss by rating category USD million 31.12.19 31.12.19 Rating category1 Off-balance sheet financial instruments Off-balance sheet financial instruments Guarantees Guarantees of which: stage 1 of which: stage 2 of which: stage 3 Irrevocable loan commitments Irrevocable loan commitments of which: stage 1 of which: stage 2 of which: stage 3 Forward starting reverse repurchase and securities borrowing agreements Forward starting reverse repurchase and securities borrowing agreements 0–1 0–1 2–3 2–3 4–5 4–5 6–8 6–8 9–13 9–13 857 857 4,932 4,932 6,060 6,060 5,450 5,450 857 4,931 6,048 5,218 0 0 1 0 12 0 233 0 761 761 704 57 0 2,548 2,548 10,068 10,068 4,862 4,862 5,859 5,859 4,160 4,160 2,548 10,068 4,862 5,722 3,878 0 0 0 0 0 0 672 672 0 0 50 50 137 0 936 936 282 0 0 0 Total off-balance sheet financial instruments Total off-balance sheet financial instruments 3,405 3,405 15,672 15,672 10,972 10,972 12,245 12,245 4,922 4,922 Other credit lines Other credit lines Committed unconditionally revocable 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 Irrevocable committed prolongation of existing loans of which: stage 1 of which: stage 2 of which: stage 3 Total other credit lines Total other credit lines 632 632 12,459 12,459 6,231 6,231 7,169 7,169 8,554 8,554 628 12,422 6,120 6,789 7,889 4 0 25 25 37 0 1,399 1,399 25 1,399 0 0 0 0 111 0 870 870 870 0 0 380 0 633 633 633 0 0 665 0 359 359 359 0 0 657 657 13,858 13,858 7,101 7,101 7,801 7,801 8,913 8,913 Total carrying Total carrying amount amount (maximum (maximum exposure to exposure to credit risk) ECL provision ECL provision credit risk) Credit- Credit- impaired impaired (defaulted) (defaulted) 82 82 0 0 82 50 50 0 0 50 0 0 132 132 46 46 0 0 46 4 4 0 0 4 50 50 18,142 18,142 17,757 304 82 27,547 27,547 27,078 419 50 1,657 1,657 47,347 47,347 35,092 35,092 33,848 1,197 46 3,289 3,289 3,285 0 4 38,381 38,381 (42) (42) (8) (1) (33) (35) (35) (30) (5) 0 0 0 (77) (77) (34) (34) (17) (17) 0 (3) (3) (3) 0 0 (37) (37) 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. 1 398 Note 23 Expected credit loss measurement (continued) Financial assets subject to credit risk by rating category USD million 31.12.18 0–1 2–3 4–5 6–8 9–13 Credit- impaired (defaulted) Total gross carrying amount ECL allowances Rating category1 FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt CCaasshh aanndd bbaallaanncceess aatt cceennttrraall bbaannkkss of which: stage 1 LLooaannss aanndd aaddvvaanncceess ttoo bbaannkkss of which: stage 1 of which: stage 2 of which: stage 3 110033,,663355 103,635 882299 44,,773355 4,735 1133,,446622 829 13,462 0 0 0 0 00 0 11,,334477 1,347 0 0 00 0 992277 763 164 0 RReecceeiivvaabblleess ffrroomm sseeccuurriittiieess ffiinnaanncciinngg ttrraannssaaccttiioonnss 2299,,006655 2244,,665533 1133,,660022 2266,,886655 of which: stage 1 29,065 24,653 13,602 26,865 CCaasshh ccoollllaatteerraall rreecceeiivvaabblleess oonn ddeerriivvaattiivvee iinnssttrruummeennttss 55,,113366 1100,,004422 of which: stage 1 LLooaannss aanndd aaddvvaanncceess ttoo ccuussttoommeerrss 5,136 10,042 33,,664422 117722,,774422 55,,228822 5,282 5522,,556666 33,,004400 3,040 7733,,886633 00 0 330077 268 39 0 11,,116655 1,165 110011 101 00 110088,,337700 0 108,370 33 1166,,887755 0 16,669 0 3 00 203 3 9955,,335500 0 95,350 00 2233,,660011 0 23,601 1166,,001144 22,,229977 332211,,112244 of which: stage 1 of which: stage 2 of which: stage 3 OOtthheerr ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt of which: stage 1 of which: stage 2 of which: stage 3 3,621 172,002 49,277 62,305 11,111 20 0 1133,,440099 13,409 0 0 740 3,289 11,558 4,903 0 667766 676 0 0 0 331133 313 0 0 0 77,,446600 7,235 225 0 0 227744 272 2 0 0 298,316 0 20,510 2,297 558866 2,297 2222,,771188 0 21,905 0 586 227 586 TToottaall ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 115555,,771166 222266,,331100 7733,,111100 111122,,115555 1177,,886611 22,,888866 558888,,003399 OOnn bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss - - FFiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt FFVVOOCCII ddeebbtt iinnssttrruummeennttss – – 33,,888899 22,,770022 00 7766 00 00 66,,666677 TToottaall oonn bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss - - 115599,,660055 222299,,001122 7733,,111100 111122,,223311 1177,,886611 22,,888866 559944,,770066 11 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. 00 0 ((77)) (4) (1) (3) ((22)) (2) 00 0 ((777722)) (69) (155) (549) ((115555)) (43) (4) (109) ((993377)) 00 ((993377)) Net carrying amount (maximum exposure to credit risk) 110088,,337700 108,370 1166,,886688 16,666 202 9955,,334499 95,349 2233,,660022 23,602 332200,,335522 298,248 20,357 1,748 2222,,556633 21,862 223 478 558877,,110044 66,,666677 559933,,777711 399 Financial statements Consolidated financial statements 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) ECL provision Credit- impaired (defaulted) Rating category1 Off-balance sheet financial instruments Off-balance sheet financial instruments Guarantees Guarantees of which: stage 1 of which: stage 2 of which: stage 3 Irrevocable loan commitments Irrevocable loan commitments of which: stage 1 of which: stage 2 of which: stage 3 Forward starting reverse repurchase and securities borrowing agreements Forward starting reverse repurchase and securities borrowing agreements 979 979 6,673 6,673 3,859 3,859 5,415 5,415 1,006 1,006 215 215 978 6,670 3,849 5,012 3 0 10 0 402 0 0 811 195 2,088 2,088 11,667 11,667 6,519 6,519 6,479 6,479 4,404 4,404 2,088 11,667 6,519 6,296 4,019 0 0 25 25 0 0 0 0 510 510 150 150 183 0 251 251 385 0 0 Total off-balance sheet financial instruments Total off-balance sheet financial instruments 3,092 3,092 18,850 18,850 10,528 10,528 12,145 12,145 5,410 5,410 Other credit lines Other credit lines Committed unconditionally revocable 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 Irrevocable committed prolongation of existing loans of which: stage 1 of which: stage 2 of which: stage 3 Total other credit lines Total other credit lines 8 0 27 27 776 776 10,899 10,899 5,282 5,282 11,499 11,499 8,084 8,084 768 10,871 5,152 10,727 7,603 28 130 772 1,346 1,346 27 1,315 0 0 31 0 902 902 701 200 889 889 680 209 0 803 803 12,245 12,245 6,171 6,171 12,401 12,401 8,238 8,238 481 0 154 154 137 17 18,147 18,147 17,320 610 215 31,212 31,212 30,590 568 53 936 936 50,295 50,295 36,633 36,633 35,121 1,419 93 3,339 3,339 2,860 457 21 39,972 39,972 (43) (43) (7) (2) (34) (37) (37) (32) (5) 0 0 0 (80) (80) (35) (35) (19) (16) (1) (1) (1) 0 0 (36) (36) 0 215 55 55 1 0 53 0 0 270 270 93 93 0 93 21 21 0 0 21 114 114 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. 1 400 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 credit-impaired loan exposures (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 2019 and 2018 amounted to USD 86 million and USD 60 million, respectively. The firm 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 TToottaall ccrreeddiitt iimmppaaiirreedd ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt - - GGrroossss ccaarrrryyiinngg aammoouunntt 11 22,,330088 11,,000000 2211 119922 779911 111166 667722 22,,99881111 3311..1122..1199 AAlllloowwaannccee ffoorr eexxppeecctteedd ccrreeddiitt lloosssseess NNeett ccaarrrryyiinngg aammoouunntt 00 11,,774499 995599 1177 9944 552211 9988 557766 22,,332266 ((11)) ((555599)) ((4411)) ((44)) ((9988)) ((227711)) ((1188)) ((9955)) ((665555))11 CCoollllaatteerraall // ccrreeddiitt eennhhaanncceemmeennttss 00 11,,669988 995599 1133 7777 446611 8899 2222 11,,772200 Guarantees of which: Large corporate clients of which: SME clients 1100 88 22 1122 Loan commitments 55 Committed unconditionally revocable credit lines 00 Irrevocable committed prolongation of existing loans TToottaall ooffff bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss aanndd ootthheerr ccrreeddiitt lliinneess 2277 11 Under IFRS 9, adopted on 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). ((3333)) ((99)) ((2233)) 00 00 00 ((3333))11 8822 2244 5588 5500 4466 44 11882211 - - 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 TToottaall ccrreeddiitt iimmppaaiirreedd ffiinnaanncciiaall aasssseettss mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt - - Gross carrying amount 3 2,297 836 54 170 888 31 586 22,,88886611 31.12.18 Allowance for expected credit losses Net carrying amount (3) (549) (39) (16) (82) (256) (17) (109) ((666600))11 0 1,748 796 38 88 632 14 478 22,,222266 Collateral / credit enhancements 0 1,654 796 30 79 561 14 12 11,,666666 Guarantees of which: Large corporate clients of which: SME clients 84 79 5 8 Loan commitments 9 Committed unconditionally revocable credit lines 0 Irrevocable committed prolongation of existing loans TToottaall ooffff bbaallaannccee sshheeeett ffiinnaanncciiaall iinnssttrruummeennttss aanndd ootthheerr ccrreeddiitt lliinneess 110022 11 Under IFRS 9, adopted on 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). 215 127 77 53 93 22 33883311 (34) (6) (25) 0 0 0 ((3344))11 - - 401 Financial statements Consolidated financial statements Note 23 Expected credit loss measurement (continued) g) Sensitivity information 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 probability of default (PD) and loss given default (LGD) rely on market and statistical data, which have been found to correlate well with historically observed defaults in sufficiently homogeneous segments. The risk sensitivities for each of the IFRS 9 reporting segments to such factors have been summarized in Note 10. Emerging new systematic risk factors may not be sufficiently taken into account by existing models and may affect the responsiveness thereof to a changing environment. This risk is deemed to be immaterial and is monitored through regular model review processes. It is deemed to be of less importance in particular 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, the use of 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 have been accurately predicted – as the actual amount of loss depends on the exposure of the position that defaulted. This observation is less relevant for retail-type portfolios with smaller individual exposures from mortgage loans or financing of small and medium-sized corporate clients (SME), but may become important for the large corporate client portfolios in the Investment Bank and Personal & Corporate Banking. 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 reflect the key risk drivers of a credit portfolio. As forecasting models are complex, due to the combination of multiple factors, simple what-if analyses involving a change of individual parameters do not necessarily provide realistic information on the exposure of segments to changes in the macroeconomy. Portfolio-specific analyses based on their key risk factors would also not be meaningful, as potential compensatory effects in other segments would be ignored. The table below indicates some sensitivities to ECLs if a key macroeconomic variable for the forecasting period is amended across all scenarios with all other factors remaining unchanged. Potential effect on stage 1 and stage 2 positions from changing key parameters as at 31 December 2019 USD million Change in key parameters Change in key parameters Fixed income: 10-year government bonds (absolute change) Fixed income: 10-year government bonds (absolute change) –1.00% –0.25% +0.25% +1.00% Unemployment rate (absolute change) Unemployment rate (absolute change) –1.00% –0.25% +0.25% +1.00% Real GDP growth (relative change) Real GDP growth (relative change) –1.00% +1.00% House Price Index (relative change) House Price Index (relative change) –5.00% –1.00% +1.00% +5.00% 402 Baseline Baseline Upside Upside Mild downside Mild downside Severe downside Weighted average Severe downside Weighted average 0.34 0.06 (0.02) 3.34 (6.72) (2.00) 2.26 8.56 2.50 (2.79) 1.00 0.21 (0.16) (0.25) (0.52) (0.31) 0.47 4.03 (4.79) (1.45) 1.65 5.93 2.42 (1.47) 0.59 0.13 (0.09) (0.42) (25.25) (7.72) 7.75 36.65 (26.41) (7.79) 8.74 36.27 2.42 (2.47) 4.67 0.85 (0.90) (4.66) (0.21) (0.11) 0.12 0.11 (54.97) (16.20) 17.31 73.04 1.01 (1.01) 9.50 1.89 (2.16) (8.51) (7.69) (2.31) 2.18 13.35 (18.02) (5.43) 5.99 24.36 2.19 (2.37) 3.06 0.56 (0.54) (2.52) Note 23 Expected credit loss measurement (continued) Sensitivities at a Group level can be more meaningfully assessed in the context of coherent scenarios with consistently developed macroeconomic factors. The table on the previous page outlines favorable and unfavorable effects based on reasonably possible alternative changes to the economic conditions on ECL for stage 1 and stage 2 positions by disclosing for each scenario (see item b in this Note) 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, while high unemployment rates combined with a marked correction of house prices contribute to high expected losses in the severe downside scenario. 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 ECLs: 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 proportion of loans, including mortgages in Switzerland, have maturities that are 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 bottom of this page, the ECL for stage 1 and stage 2 positions would have been USD 234 million (31 December 2018: USD 237 million) instead of USD 341 million (31 December 2018: USD 359 million) if ECL had been determined solely on the baseline scenario. The weighted average ECL therefore amounts to 149% (31 December 2018: 152%) of the baseline value. Stage allocation and SICR The determination of what constitutes a significant increase in credit risk (SICR) is based on management judgment as explained in Note 1a. Changing the SICR trigger will have a direct effect on ECLs, as more or fewer positions would be subject to lifetime ECLs under any scenario. The relevance of the SICR trigger on overall ECL is demonstrated in the table below with the indication that the ECL for stage 1 and stage 2 positions would have been USD 713 million if all non-impaired positions across the portfolio had been measured for lifetime ECLs irrespective of their actual SICR status. 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 ECLs. A significant portion of our lending to SMEs 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 a maximum of 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 require either continuous monitoring of key indicators and behavioral patterns for smaller positions or an annual formal review for any other limit. The ECLs for these products is sensitive to shortening or extending the maturity assumption. review policies, which Potential effect on stage 1 and stage 2 positions from changing scenario weights or moving to a ECL lifetime calculation as at 31 December 2019 Scenarios USD million, except where indicated SSeeggmmeennttaattiioonn Private clients with mortgages Real estate financing Large corporate clients SME clients Other segments TToottaall Actual ECL allowances and provisions (as per Note 10) WWeeiigghhtteedd aavveerraaggee in % of baseline 248 169 151 112 127 114499 ECL 7733 5555 4488 5511 111133 334411 Pro forma ECL allowances and provisions, assuming application of 100% weighting BBaasseelliinnee Mild downside Upside Severe downside in % of baseline 100 100 100 100 100 110000 ECL 3322 3355 3322 4455 9900 223344 in % of baseline 84 81 87 93 87 8877 ECL 27 28 28 42 78 220033 in % of baseline 336 175 120 121 140 116666 ECL 107 61 39 55 126 338877 in % of baseline 562 368 329 147 185 227766 ECL 179 128 106 67 166 664466 Pro forma ECL allowances and provisions, assuming all positions being subject to lifetime ECL WWeeiigghhtteedd aavveerraaggee in % of baseline 646 251 296 205 283 331122 ECL 119911 8822 9955 9933 225522 771133 403 Financial statements Consolidated financial statements 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) Level 3 instruments: valuation techniques and inputs g) Level 3 instruments: sensitivity to changes in unobservable input assumptions h) Level 3 instruments: movements during the period i) Maximum exposure to credit risk for financial instruments measured at fair value j) Financial instruments not measured at fair value a) Valuation principles Fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability in an orderly 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 accordance with IFRS. The fair value hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement. In certain cases, the inputs used to measure fair value may fall within different levels of the fair value hierarchy. For disclosure purposes, the level in the hierarchy within which the instrument is classified in its entirety is based on the lowest level input that is significant to the position’s fair value measurement: – Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities; – Level 2 – valuation techniques for which all significant inputs are, or are based on, observable market data; or – Level 3 – valuation techniques for which significant inputs are not based on observable market data. 404 Note 24 Fair value measurement (continued) Fair values are determined using quoted prices in active markets for identical assets or liabilities, where available. 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 valuation technique, but which would nevertheless be considered by market participants when establishing a price. The limitations inherent in a particular valuation technique are considered in the determination of an asset or liability’s classification within the fair value hierarchy. Many cash instruments and over-the-counter (OTC) derivative contracts have bid and offer prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is 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 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 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 405 Financial statements Consolidated financial statements 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 hierarchy. 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 Determination of fair values from quoted market prices or valuation techniques1 USD million Financial assets measured at fair value on a recurring basis Financial assets measured at fair value on a recurring basis 31.12.19 31.12.19 31.12.18 Level 1 Level 1 Level 2 Level 2 Level 3 Level 3 Total Total Level 1 Level 2 Level 3 Total Financial assets at fair value held for trading 113,634 113,634 12,068 12,068 1,812 1,812 127,514 127,514 88,452 13,956 1,962 104,370 of which: Equity instruments Government bills / bonds Investment fund units Corporate and municipal bonds Loans Asset-backed securities Derivative financial instruments of which: Foreign exchange contracts Interest rate contracts Equity / index contracts Credit derivative contracts Commodity contracts Brokerage receivables 96,161 96,161 9,630 9,630 7,088 7,088 755 755 0 0 0 0 400 400 1,770 1,770 1,729 1,729 6,617 6,617 1,180 1,180 372 372 226 226 96,787 72,266 96,787 64 11,464 11,464 64 8,867 50 8,867 50 7,914 542 7,914 542 1,971 791 1,971 791 512 140 512 140 455 9,554 1,607 6,074 3,200 558 5,559 0 2,886 248 0 46 72,768 0 11,161 442 9,716 651 6,768 680 3,566 392 144 356 356 120,222 120,222 1,264 1,264 121,841 121,841 753 124,033 1,424 126,210 52,227 240 52,227 240 6 6 42,288 42,288 22,220 7 7 22,220 1,612 0 1,612 0 1,820 0 1,820 0 8 52,474 8 52,474 263 263 42,558 42,558 22,825 597 597 22,825 2,007 394 2,007 394 1,821 0 1,821 0 311 53,148 0 36,658 3 30,905 0 1,444 0 1,768 30 53,489 418 37,076 496 31,404 476 1,920 2 1,769 0 0 18,007 18,007 0 0 18,007 18,007 0 16,840 0 16,840 Financial assets at fair value not held for trading 40,608 40,608 39,373 39,373 3,963 3,963 83,944 83,944 40,204 38,073 4,413 82,690 of which: Financial assets for unit-linked investment contracts2 Corporate and municipal bonds Government bills / bonds Loans Securities financing transactions Auction rate securities Investment fund units Equity instruments Other 118 118 27,568 27,568 18,732 653 653 18,732 3,700 12,089 3,700 12,089 10,206 0 0 10,206 6,148 0 6,148 0 0 0 0 0 448 194 448 194 4 103 4 103 16 0 16 0 5 0 0 27,686 21,440 27,686 0 19,385 781 16,455 0 19,385 15,790 0 0 15,790 17,687 4,806 1,231 11,438 1,231 11,438 6,294 147 6,294 147 1,536 1,536 1,536 1,536 740 98 740 98 559 452 559 452 515 499 515 499 0 21,446 0 17,236 0 22,493 0 6,380 1,752 8,132 39 9,937 0 9,899 0 1,664 1,664 0 710 173 702 123 369 0 428 62 38 109 517 331 Financial assets measured at fair value through other comprehensive income on a recurring basis Financial assets measured at fair value through other comprehensive income on a recurring basis Financial assets measured at fair value through other comprehensive income 1,906 1,906 4,439 4,439 of which: Asset-backed securities Government bills / bonds Corporate and municipal bonds Non-financial assets measured at fair value on a recurring basis Non-financial assets measured at fair value on a recurring basis Precious metals and other physical commodities Non-financial assets measured at fair value on a non-recurring basis Non-financial assets measured at fair value on a non-recurring basis Other non-financial assets3 0 0 1,859 1,859 47 47 3,955 3,955 16 16 468 468 4,597 4,597 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,345 6,345 2,319 4,347 0 6,667 3,955 3,955 1,875 1,875 515 515 0 3,931 69 348 2,171 149 0 3,931 0 2,239 497 0 0 0 4,597 4,597 4,298 0 0 4,298 199 199 199 199 0 82 0 82 Total assets measured at fair value Total assets measured at fair value 161,101 161,101 194,110 194,110 7,237 7,237 362,448 362,448 136,026 197,331 7,800 341,156 406 Note 24 Fair value measurement (continued) Determination of fair values from quoted market prices or valuation techniques (continued)1 USD million FFiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee oonn aa rreeccuurrrriinngg bbaassiiss 3311..1122..1199 31.12.18 LLeevveell 11 LLeevveell 22 LLeevveell 33 TToottaall Level 1 Level 2 Level 3 Total Financial liabilities at fair value held for trading 2255,,779911 44,,772266 7755 3300,,559911 24,406 4,468 69 28,943 of which: Equity instruments Corporate and municipal bonds Government bills / bonds Investment fund units Derivative financial instruments of which: Foreign exchange contracts Interest rate contracts Equity / index contracts Credit derivative contracts Commodity contracts FFiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee oonn aa rreeccuurrrriinngg bbaassiiss Brokerage payables designated at fair value Debt issued designated at fair value Other financial liabilities designated at fair value of which: Financial liabilities related to unit-linked investment contracts Securities financing transactions Over-the-counter debt instruments 2222,,552266 4400 22,,882200 440044 114499 33,,660066 664466 229944 5599 2222,,773344 33,,666611 1166 33,,446666 00 669988 00 21,306 537 126 3,377 416 137 2,423 551 42 21,886 27 3,530 0 2,839 689 0 338855 111188,,449988 11,,999966 112200,,888800 580 122,933 2,210 125,723 224488 5533,,770055 77 3366,,443344 33 2244,,117711 00 22,,444488 00 11,,770077 6600 5544,,001133 113300 3366,,557711 11,,229933 2255,,446688 22,,996600 11,,770077 551122 00 86 53,372 322 52,964 7 32,511 226 32,743 1 33,669 1,371 35,041 519 2,722 0 2,203 0 1,487 0 1,487 00 00 00 3377,,223333 00 3377,,223333 5566,,994433 99,,886666 6666,,880099 3355,,111199 882222 3355,,994400 0 0 0 38,420 0 38,420 46,074 10,957 57,031 32,569 1,025 33,594 00 2288,,114455 00 55,,774422 00 11,,223311 00 2288,,114455 55,,774422 00 22,,002222 779911 0 21,679 0 21,679 0 9,461 0 9,461 0 1,427 1,023 2,450 TToottaall lliiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee 14,260 283,711 11 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. 22 Fair value hierarchy information for Financial assets for unit-linked investment contracts in the comparative period has been restated, resulting in an increase in Level 1 assets of USD 4,746 million as 33 Other non-financial assets primarily consist of properties and other non-current assets held for sale, which are measured at the lower of of 31 December 2018, with a corresponding decrease in Level 2 assets. their net carrying amount or fair value less costs to sell. 24,986 244,465 225522,,551188 229911,,445522 2266,,117766 1122,,775599 407 Financial statements Consolidated financial statements Note 24 Fair value measurement (continued) Valuation techniques Valuation techniques are used to value positions for which a market price is not available from active 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, 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 408 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 and Level 3. 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. 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 (NAVs), 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 NAVs 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. Fair value hierarchy: 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: auction rate securities (ARS) are debt or preferred equity securities that have interest rates that are reset through a periodic auction and, in the event of a failed auction, to a maximum rate as defined by each deal’s prospectus. ARS are generally structured as bonds with long-term maturities (20– 30 years) or preferred shares (issued by 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. 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 NAVs, taking into account any restrictions imposed upon redemption. readily and Fair value hierarchy: the majority of equity securities are actively traded on public stock exchanges where quoted prices are in Level 1 classification. Units held in hedge funds are classified as Level 2, except for positions for which published NAVs 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. regularly available, resulting 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. 409 Financial statements Consolidated financial statements 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 unobservable and these positions are classified as Level 3. curve may be funding the 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 contracts. Fair value hierarchy: observability is closely aligned with the equivalent derivatives business and the underlying risk.  Refer to Notes 19 and 22 for information about debt issued designated at fair value and other financial liabilities designated at fair value  Refer to Note 24d for more information about 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. 410 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. 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 (CDSs) 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 valuation technique similar to that of 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. 411 Financial statements Consolidated financial statements 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 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. 412 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 about derivative instruments 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, where any such difference initially recognized in the income statement. These day-1 profit or loss reflected, where appropriate, as valuation reserves are adjustments. is deferred and not Deferred day-1 profit or loss is generally released into Other net income from financial instruments measured at fair value through profit or loss when pricing of equivalent products or the underlying parameters become observable or when the transaction is closed out. The table on the next page summarizes the changes in deferred day-1 profit or loss reserves during the respective period. Note 24 Fair value measurement (continued) Deferred day-1 profit or loss reserves USD million RReesseerrvvee bbaallaannccee aatt tthhee bbeeggiinnnniinngg ooff tthhee yyeeaarr Profit / (loss) deferred on new transactions (Profit) / loss recognized in the income statement Foreign currency translation RReesseerrvvee bbaallaannccee aatt tthhee eenndd ooff tthhee yyeeaarr Own credit The valuation of financial liabilities designated at fair value requires consideration of 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 adjustments on financial liabilities designated at fair value USD million RReeccooggnniizzeedd dduurriinngg tthhee yyeeaarr:: Realized gain / (loss) Unrealized gain / (loss) TToottaall ggaaiinn // ((lloossss)),, bbeeffoorree ttaaxx USD million RReeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett aass ooff tthhee eenndd ooff tthhee yyeeaarr:: Unrealized life-to-date gain / (loss) 22001199 225555 117711 ((227788)) ((22)) 114466 2018 338 341 (417) (6) 255 2017 365 247 (279) 6 338 Own credit is estimated using an Own Credit Adjustment (OCA) curve, which incorporates observable market data, including market-observed secondary prices for UBS senior debt, UBS credit default swap (CDS) spreads and senior debt curves of peers. The table below summarizes the effects of own credit adjustments related to financial liabilities designated at fair value. The change in unrealized own credit consists of changes in fair value that are attributable to the change in UBS’s credit spreads, as well as the effect of changes in fair values attributable to factors other than credit spreads, such as redemptions, effects from time decay and changes in interest and other market rates. Realized own credit is recognized when an instrument with an associated unrealized own credit adjustment is repurchased prior to the contractual maturity date. Life-to-date amounts reflect the cumulative unrealized change since initial recognition.  Refer to Note 19 for more information about debt issued designated at fair value For the year ended Included in Other comprehensive income 3311..1122..1199 31.12.18 31.12.17 88 ((440088)) ((440000)) (3) 519 517 As of 22 (337) (315) 3311..1122..1199 31.12.18 31.12.17 ((8888)) 320 (200) 413 Financial statements Consolidated financial statements 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 (CVAs) 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, funding spreads and other contractual factors. in these Funding valuation adjustments Funding valuation adjustments (FVAs) 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 including the probability of using the CVA framework, counterparty default. 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 Valuation adjustments on financial instruments Life-to-date gain / (loss), USD million Credit valuation adjustments1 Credit valuation adjustments1 Funding valuation adjustments Funding valuation adjustments Debit valuation adjustments Debit valuation adjustments Other valuation adjustments Other valuation adjustments of which: liquidity of which: model uncertainty 1 Amounts do not include reserves against defaulted counterparties. e) Transfers between Level 1 and Level 2 counterparty, considering all exposures with that counterparty and taking into account collateral netting agreements, expected future mark-to-market movements and UBS’s credit default spreads. Other valuation adjustments Instruments that are measured as part of a portfolio of combined long and short positions are valued at mid-market levels to ensure consistent valuation of the long- and short- component risks. A liquidity valuation adjustment is then made to the overall net long or short exposure to move the fair value to bid or offer as appropriate, reflecting current levels of market liquidity. The bid–offer spreads used in the calculation of this valuation adjustment are obtained from market transactions and other relevant sources and are updated periodically. Uncertainties associated with the use of model-based valuations are incorporated into the measurement of fair value through the use of model reserves. These reserves reflect the amounts that the Group estimates should be deducted from valuations produced directly by models incorporate uncertainties in the relevant modeling assumptions, in the model and market inputs used, or in the calibration of the model output to adjust for known model deficiencies. In arriving at these estimates, the Group considers a range of market practices, including how it believes market participants would assess these uncertainties. Model reserves are reassessed periodically in light of data from market transactions, consensus pricing services and other relevant sources. to As of 31.12.19 31.12.19 31.12.18 (48) (48) (50) (50) 1 1 (566) (566) (300) (300) (266) (266) (90) (85) 1 (716) (388) (327) The amounts disclosed in this section reflect transfers between Assets and liabilities transferred from Level 2 to Level 1 during Level 1 and Level 2 for instruments that were held for the entire 2019 were not material. Assets and liabilities transferred from reporting period. Level 1 to Level 2 during 2019 were also not material. 414 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 2019. 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 or an assessment of the reasonableness of the Group’s estimates and assumptions, but rather the different underlying characteristics of the relevant assets and liabilities held by the Group. 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. Furthermore, 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 FFaaiirr vvaalluuee AAsssseettss LLiiaabbiilliittiieess VVaalluuaattiioonn tteecchhnniiqquuee((ss)) SSiiggnniiffiiccaanntt uunnoobbsseerrvvaabbllee iinnppuutt((ss))11 3311..1122..1199 31.12.18 3311..1122..1199 31.12.18 USD billion FFiinnaanncciiaall aasssseettss aanndd lliiaabbiilliittiieess aatt ffaaiirr vvaalluuee hheelldd ffoorr ttrraaddiinngg aanndd FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee nnoott hheelldd ffoorr ttrraaddiinngg Corporate and municipal bonds Traded loans, loans designated at fair value, loan commitments and guarantees Relative value to market comparable 0.7 2.7 0.0 0.0 22..44 00..55 00..00 00..00 Bond price equivalent RRaannggee ooff iinnppuuttss 3311..1122..1199 31.12.18 llooww hhiigghh wweeiigghhtteedd aavveerraaggee22 low high weighted average2 unit1 00 114433 110011 0 134 89 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 Loan price equivalent 00 110011 9999 0 100 99 Credit spread 222255 553300 301 513 Discount margin 00 Bond price equivalent 7799 1144 9988 22 8888 1 14 2 % 79 99 89 points Net asset value Price Auction rate securities 11..55 1.7 Investment fund units 3 00..11 0.6 00..00 0.0 Equity instruments 3 DDeebbtt iissssuueedd ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee44 OOtthheerr ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee44 DDeerriivvaattiivvee ffiinnaanncciiaall iinnssttrruummeennttss 00..77 0.6 00..11 0.0 99..99 11.0 00..88 1.0 Interest rate contracts 00..33 0.4 00..11 0.2 Option model Credit derivative contracts 00..44 0.5 00..55 0.5 Discounted expected cash flows Equity / index contracts 00..66 0.5 11..33 1.4 Option model Volatility of interest rates 1155 6633 50 81 Credit spreads Bond price equivalent Equity dividend yields Volatility of equity stocks, equity and other indices Equity-to-FX correlation Equity-to-equity correlation 11 00 00 770000 110000 1144 4 3 0 545 99 12 44 110055 4 93 ((4455)) 7711 (39) 67 % 11 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). 22 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. 33 The range of inputs is not disclosed as there is a dispersion of values given the diverse nature of the investments. 44 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. (50) ((1177)) 97 9988 points basis points basis points basis points points % % % 415 Financial statements Consolidated financial statements 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, which 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. 416 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 that 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. 417 Financial statements 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 shown below presents an estimation of valuation uncertainty based on reasonably possible alternative values for Level 3 inputs at the balance sheet date and does 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. Furthermore, direct interrelationships between the Level 3 parameters discussed below are not a significant element of the valuation uncertainty. Sensitivity data is estimated using a number of techniques, including the estimation of price dispersion among different market participants, variation in modeling approaches and Sensitivity data is 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 between sensitivities of 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 31.12.19 31.12.19 31.12.18 Favorable Favorable changes changes 46 46 Unfavorable Unfavorable changes changes (21) (21) Favorable changes 99 Unfavorable changes (44) 11 11 87 87 35 35 140 140 8 8 31 31 12 12 183 183 47 47 600 600 (11) (11) (87) (87) (40) (40) (80) (80) (17) (17) (35) (35) (8) (8) (197) (197) (51) (51) (547) (547) 17 81 27 155 8 33 10 213 19 661 (11) (81) (23) (94) (39) (37) (5) (225) (19) (578) 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 securities 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 Total 418 Note 24 Fair value measurement (continued) h) Level 3 instruments: movements during the period The table on the following pages presents additional information about material 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, 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. the 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. Certain assets were also reclassified from Financial assets measured at fair value through other comprehensive income to Financial assets at fair value not held for trading. Assets transferred into and out of Level 3 totaled USD 1.1 billion and USD 1.9 billion, respectively. Transfers into Level 3 mainly consisted of loans, investment fund units and equity / index contracts, reflecting decreased observability of the relevant valuation inputs. Transfers out of Level 3 mainly consisted of loans, reflecting increased observability of the relevant valuation inputs. Liabilities transferred into and out of Level 3 totaled USD 1.4 billion and USD 3.4 billion, respectively. Transfers into and out of Level 3 mainly consisted of debt issued designated at fair value, to issued debt primarily equity-linked decreased or increased observability, respectively, of the embedded derivative inputs. instruments, due 419 Financial statements Consolidated financial statements Note 24 Fair value measurement (continued) Movements of Level 3 instruments Total gains / losses included in comprehensive income Balance Balance Reclassifi- Reclassifi- cations and cations and remeasure- remeasure- as of ments upon as of ments upon 31 December adoption of 31 December adoption of IFRS 9 IFRS 9 2017 2017 of which: related to Level 3 instruments Balance Net gains / held at the Balance as of losses end of the as of 1 January included in reporting 1 January 2018 2018 income1 period Purchases Sales Issuances Settlements Transfers into Level 3 Foreign Transfers out of currency Level 3 translation 2.0 2.0 0.4 0.4 2.4 2.4 (0.2) (0.2) (0.2) (0.2) 2.1 2.1 (7.1) (7.1) 4.2 4.2 0.0 0.0 0.7 0.7 (0.2) (0.2) 00..00 0.6 0.6 0.5 0.4 1.6 1.6 0.1 0.7 0.6 0.2 0.4 0.6 0.6 0.9 0.4 1.6 1.6 0.1 0.7 0.6 0.2 (0.1) (0.1) 0.2 (0.3) 0.0 0.0 0.1 (0.1) 0.0 0.0 0.1 (0.1) 0.0 0.0 (0.1) 0.6 0.9 0.4 (0.9) (5.6) (0.4) 0.0 4.2 0.0 0.0 0.0 0.0 0.5 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 (1.5) (1.5) 0.5 0.5 (0.1) (0.1) 0.0 0.0 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 0.8 0.3 0.0 (0.1) (1.0) (0.4) 0.0 0.3 0.1 0.0 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 1.5 1.5 3.0 3.0 4.4 4.4 0.0 0.0 0.0 0.0 1.7 1.7 (1.9) (1.9) 0.0 0.0 0.0 0.0 0.1 0.1 (0.1) (0.1) 00..11 0.8 0.7 0.6 1.9 0.4 0.1 1.4 1.9 0.4 0.8 (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 0.1 0.0 0.0 0.5 0.5 (0.5) (0.5) 2.9 2.9 0.0 0.0 2.9 2.9 (0.3) (0.3) (0.2) (0.2) 0.0 0.0 0.0 0.0 1.3 1.3 (1.5) (1.5) 0.3 0.3 (0.5) (0.5) 00..00 2.0 0.6 0.3 11.2 11.2 2.0 0.6 0.3 0.0 (0.3) (0.2) 0.0 0.0 1.2 (1.2) 0.3 (0.5) 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.0 (0.2) (0.1) 0.1 0.0 0.0 0.0 0.0 0.0 11.2 11.2 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 5.8 5.8 (4.3) (4.3) 2.2 2.2 (4.3) (4.3) (0.2) (0.2) USD billion Financial assets at fair Financial assets at fair value held for trading value held for trading of which: Investment fund units Corporate and municipal bonds Loans Other Derivative financial Derivative financial instruments – assets instruments – assets of which: Interest rate contracts Equity / index contracts Credit derivative contracts Other Financial assets at fair Financial assets at fair value not held for trading value not held for trading of which: Loans Auction rate securities Equity instruments Other Financial assets measured Financial assets measured at fair value through other at fair value through other comprehensive income comprehensive income Derivative financial Derivative financial instruments – liabilities instruments – liabilities of which: Equity / index contracts Credit derivative contracts Other Debt issued designated at Debt issued designated at fair value fair value Other financial liabilities Other financial liabilities 0.0 0.0 designated at fair value designated at fair value 2 Total 1 Net gains / losses included in comprehensive income are comprised of Net interest income, Other net income from financial instruments measured at fair value through profit or loss and Other income. 1 2 Level 3 assets as of 31 December 2019 were USD 7.2 billion (31 December 2018: USD 7.8 billion). Total Level 3 liabilities as of 31 December 2019 were USD 12.8 billion (31 December 2018: USD 14.3 billion). (2.0) (2.0) 0.0 0.0 0.0 0.0 2.0 2.0 2.0 2.0 1.1 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 420 Note 24 Fair value measurement (continued) Total gains / losses included in comprehensive income of which: related to Level 3 instruments held at the end of the reporting period BBaallaannccee aass ooff 3311 DDeecceemmbbeerr 2200118822 Net gains / losses included in income1 22..00 ((00..22)) 00..00 0.4 0.0 0.0 0.7 0.7 0.2 0.0 (0.1) 0.0 0.0 0.0 (0.1) 11..44 ((00..33)) 00..00 0.4 0.5 0.5 0.0 (0.1) (0.1) (0.1) 0.0 0.0 0.1 (0.1) 0.0 44..44 00..00 00..00 1.8 1.7 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 22..22 00..00 00..00 1.4 0.3 0.2 0.5 0.3 (0.1) (0.1) (0.1) 0.0 1111..00 11..11 00..77 11..00 00..22 00..11 Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency translation BBaallaannccee aass ooff 3311 DDeecceemmbbeerr 2200119922 11..22 0.0 0.6 0.2 0.3 00..00 0.0 0.0 0.0 0.0 11..22 0.7 0.0 0.1 0.5 00..00 0.0 0.0 0.0 00..00 00..00 ((55..77)) (0.4) (0.6) (4.4) (0.3) 00..00 0.0 0.0 0.0 0.0 ((00..88)) (0.2) (0.1) (0.2) (0.2) 00..00 0.0 0.0 0.0 00..00 00..00 44..44 0.0 0.0 4.4 0.0 11..00 0.1 0.6 0.2 0.0 00..00 0.0 0.0 0.0 0.0 00..88 0.6 0.2 0.1 77..22 00..33 00..00 0.0 0.0 0.0 0.0 ((00..88)) 0.0 (0.5) (0.2) 0.0 00..00 0.0 0.0 0.0 0.0 ((11..00)) (0.9) (0.1) 0.0 ((77..33)) ((00..88)) 00..66 0.2 0.1 0.1 0.2 00..22 0.0 0.1 0.1 0.0 00..33 0.3 0.0 0.0 0.0 00..33 0.2 0.1 0.0 11..00 00..11 ((00..44)) (0.2) (0.2) 0.0 0.0 ((00..33)) (0.2) (0.1) (0.1) 0.0 ((11..22)) (1.2) 0.0 0.0 0.0 ((00..33)) (0.2) (0.1) (0.1) ((33..11)) 00..00 00..00 0.0 0.0 0.0 0.0 00..00 0.0 0.0 0.0 0.0 00..00 0.0 0.0 0.0 0.0 00..00 0.0 0.0 0.0 00..00 00..00 11..88 0.0 0.5 0.8 0.4 11..33 0.3 0.6 0.4 0.0 44..00 1.2 1.5 0.5 0.7 22..00 1.3 0.5 0.2 99..99 00..88 421 Financial statements 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 Financial assets measured at fair value on the balance sheet 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 instruments5 Total financial assets measured at fair value Total financial assets measured at fair value Guarantees6 Loan commitments6 Forward starting transactions, reverse repurchase and securities borrowing agreements Total maximum exposure to credit risk not reflected on Total maximum exposure to credit risk not reflected on the balance sheet the balance sheet 31.12.19 31.12.19 Collateral Collateral Maximum Maximum exposure to exposure to credit risk credit risk Cash Cash collateral collateral received received Collateral- Collateral- ized by Secured by Secured by ized by real estate securities real estate securities Other Other collateral1 collateral1 Netting Netting Credit enhancements Credit enhancements Exposure to Exposure to credit risk credit risk after collateral Credit after collateral Credit and credit derivative derivative and credit contracts Guarantees enhancements contracts Guarantees enhancements 21.9 21.9 121.8 121.8 18.0 18.0 55.0 55.0 216.7 216.7 1.0 1.0 6.3 6.3 20.3 20.3 27.6 27.6 3.3 3.3 17.8 17.8 16.3 16.3 37.4 37.4 20.3 20.3 20.3 20.3 0.1 0.1 0.1 0.1 0.0 0.0 107.4 107.4 107.4 107.4 0.0 0.0 0.1 0.1 0.1 0.1 3.0 3.0 0.0 0.0 0.1 0.1 0.0 0.0 0.3 0.3 0.9 0.9 0.0 0.0 3.0 3.0 0.0 0.0 0.1 0.1 1.2 1.2 21.9 21.9 11.1 11.1 0.2 0.2 38.6 38.6 71.7 71.7 0.7 0.7 2.3 2.3 0.0 0.0 3.0 3.0 Maximum exposure to credit risk Cash collateral received 31.12.18 Collateral Collateral- ized by Secured by real estate Other collateral1 Credit enhancements Exposure to credit risk after collateral Credit derivative and credit contracts Guarantees enhancements Netting securities 21.9 126.2 16.8 USD billion Financial assets measured at fair value on the balance Financial assets measured at fair value on the balance sheet 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 instruments5 Total financial assets measured at fair value Total financial assets measured at fair value Guarantees6 Loan commitments6 Forward starting transactions, reverse repurchase and securities borrowing agreements Total maximum exposure to credit risk not reflected on Total maximum exposure to credit risk not reflected on the balance sheet 2.1 8.1 2.1 the balance sheet 8.1 1 Includes but is not limited to life insurance contracts, inventory, mortgage loans, gold and other commodities. 2 These positions are generally managed under the market risk framework. For the purpose of this 2 1 4 The amount shown in the “Netting” column represents the netting potential not recognized on disclosure, collateral and credit enhancements were not considered. 4 5 Financial assets at fair value not held for trading collateralized by securities consisted of structured loans and reverse repurchase and securities the balance sheet. Refer to Note 25 for more information. 5 borrowing agreements. 6 The amount shown in the “Guarantees” column largely relates to sub-participations. Refer to Note 34 for more information. 59.8 224.8 224.8 1.6 3.5 3 Does not include investment fund units. 3 43.1 76.6 76.6 1.4 0.7 21.9 11.4 0.3 0.0 0.0 0.2 0.1 16.7 37.3 37.3 4.1 16.5 0.1 0.1 0.1 110.8 110.8 110.8 13.3 13.3 0.0 0.4 0.4 0.0 0.0 0.0 0.0 0.0 0.0 2.4 2.4 0.0 0.0 0.2 0.2 0.0 0.0 0.0 0.0 8.1 2.4 0.0 0.2 8.1 6 422 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 value1 CCaarrrryyiinngg aammoouunntt 3311..1122..1199 FFaaiirr vvaalluuee Carrying amount 31.12.18 Fair value USD billion AAsssseettss33 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 LLiiaabbiilliittiieess Amounts due to banks Payables from securities financing transactions Cash collateral payables on derivative instruments Customer deposits TToottaall 110077..11 1122..44 8844..22 2233..33 332266..88 2233..00 66..66 77..88 3311..44 444488..33 CCaarrrryyiinngg aammoouunntt aapppprrooxxiimmaatteess ffaaiirr vvaalluuee22 LLeevveell 11 LLeevveell 22 LLeevveell 33 TToottaall Total Carrying amount approximates fair value2 Level 1 Level 2 Level 3 Total 110077..00 1111..88 7744..00 2233..33 115511..66 00..11 00..00 00..00 00..00 00..00 00..00 00..55 00..00 00..22 110077..11 1122..44 108.4 16.9 88..66 11..66 8844..22 95.3 00..00 2255..44 00..00 115522..22 2233..33 332299..11 23.6 320.4 108.3 16.2 85.0 23.6 153.4 0.1 0.0 0.0 0.0 0.0 0.0 0.6 0.0 0.0 108.4 16.9 6.9 3.4 95.4 0.0 18.0 0.0 149.5 23.6 320.9 55..77 88..44 66..44 22..88 2233..22 22.6 5.9 8.4 5.2 2.9 22.4 55..66 00..00 00..99 00..00 77..55 3311..44 443399..11 00..00 00..00 00..00 00..33 00..00 99..33 00..00 00..00 00..00 66..66 77..88 3311..44 444488..44 11.0 10.3 28.9 419.8 8.8 0.0 1.9 0.2 11.0 10.0 28.9 409.5 0.0 0.0 0.0 0.3 0.0 10.3 0.0 10.3 0.0 0.1 28.9 419.9 88..77 111100..55 Debt issued measured at amortized cost Other financial liabilities measured at amortized cost4 6.9 11 In line with IFRS 7 Financial Instruments: Disclosures, effective 2019, UBS no longer discloses a fair value hierarchy level for financial instruments where the carrying amount approximates fair value. Prior periods have been restated for this change. 22 Includes certain financial instruments where the carrying amount is a reasonable approximation of the fair value due to the instruments’ short-term nature (instruments that are receivable or payable on demand, or with a remaining maturity (excluding the effects of callable features) of three months or less). 33 As of 31 December 2019, USD 0 billion of Loans and advances to banks, USD 1 billion of Receivables from securities financing transactions, USD 140 billion of Loans and advances to customers and USD 16 billion of Other financial assets measured at amortized cost are expected to be recovered or settled after 12 months. 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 were expected to be recovered or settled after 12 months. 44 Excludes lease liabilities. 135.0 110044..99 130.7 132.3 111133..66 55..77 55..88 2.8 1.4 0.0 00..00 00..00 0.0 00..00 00..00 00..00 6.9 6.8 0.0 0.1 55..77 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 credit loss allowances, is generally considered a reasonable estimate of fair value. 423 Financial statements Consolidated financial statements 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 counterparties to the transaction are unable to fulfill their 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, as well as other out- of-scope items. Furthermore, 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 Assets subject to netting arrangements Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Gross assets Netting with before netting gross liabilities2 Net assets Net assets recognized recognized on the on the balance balance sheet sheet Assets after Assets after consideration consideration of of netting netting potential potential Financial Collateral received liabilities Assets not Assets not subject to netting subject to netting arrangements4 arrangements4 Assets Assets recognized recognized on the on the balance balance sheet sheet Total assets Total assets Total assets Total assets after after consideration consideration of netting of netting potential potential Total assets Total assets recognized recognized on the on the balance balance sheet sheet 83.2 120.2 26.4 83.1 83.0 313.0 313.0 88.5 124.3 24.6 85.4 85.3 322.9 322.9 (14.0) (3.4) 69.2 69.2 116.8 116.8 (1.2) (89.3) (68.0) (21.4) (4.0) 22.4 22.4 (13.3) (1.1) (77.5) 5.6 5.6 0.0 (5.6) 0.0 0.0 6.1 6.1 8.0 8.0 0.0 0.0 (77.5) (98.9) (98.9) 5.4 5.4 214.0 214.0 0.0 (103.8) (103.8) (5.4) (96.1) (96.1) 0.0 0.0 14.1 14.1 (13.0) (4.3) 75.5 75.5 120.0 120.0 (4.4) (90.8) (71.2) (24.0) (2.3) 22.3 22.3 (13.5) (1.0) (77.5) 7.8 7.8 (1.4) (6.4) 0.0 0.0 5.2 5.2 7.8 7.8 0.0 0.0 15.0 15.0 5.0 5.0 0.9 0.9 78.3 78.3 0.9 0.9 99.3 99.3 19.8 19.8 6.2 6.2 1.3 1.3 74.9 74.9 15.0 15.0 11.1 11.1 8.9 8.9 78.3 78.3 0.9 0.9 113.4 113.4 19.8 19.8 11.4 11.4 9.1 9.1 74.9 74.9 (77.5) (97.2) (97.2) 7.8 7.8 225.7 225.7 (1.4) (110.0) (110.0) (6.4) (102.6) (102.6) 0.0 0.0 13.0 13.0 2.1 2.1 102.2 102.2 2.1 2.1 115.2 115.2 84.2 84.2 121.8 121.8 23.3 23.3 83.9 83.9 6.3 6.3 313.3 313.3 95.3 95.3 126.2 126.2 23.6 23.6 82.7 82.7 9.9 9.9 327.9 327.9 As of 31.12.19, USD billion Receivables from securities financing transactions Derivative financial instruments Cash collateral receivables on derivative instruments1 Financial assets at fair value not held for trading of which: reverse repurchase agreements Total assets Total assets As of 31.12.18, USD billion Receivables from securities financing transactions Derivative financial instruments Cash collateral receivables on derivative instruments1 Financial assets at fair value not held for trading of which: reverse repurchase agreements Total assets Total assets 1 The net amount of Cash collateral receivables on derivative instruments recognized on the balance sheet includes certain OTC derivatives that are net settled on a daily basis either legally or in substance under 1 2 The logic of the table results in amounts presented in the “Netting with gross liabilities” column corresponding IAS 32 principles and exchange-traded derivatives that are economically settled on a daily basis. 2 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 3 For the purpose of this disclosure, the amounts of from securities financing transactions” and “Other financial liabilities designated at fair value” lines in the liabilities table presented on the following page. 3 financial instruments and cash collateral presented have been capped so as not to exceed the net amount of financial assets presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes assets not subject to enforceable netting arrangements and other out-of-scope items. 4 424 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. Furthermore, 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 LLiiaabbiilliittiieess ssuubbjjeecctt ttoo nneettttiinngg aarrrraannggeemmeennttss Netting recognized on the balance sheet NNeett lliiaabbiilliittiieess rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett Gross liabilities before netting Netting with gross assets2 Netting potential not recognized on the balance sheet3 LLiiaabbiilliittiieess aafftteerr ccoonnssiiddeerraattiioonn ooff nneettttiinngg ppootteennttiiaall Financial assets Collateral pledged LLiiaabbiilliittiieess nnoott ssuubbjjeecctt ttoo nneettttiinngg aarrrraannggeemmeennttss44 LLiiaabbiilliittiieess rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett TToottaall lliiaabbiilliittiieess TToottaall lliiaabbiilliittiieess aafftteerr ccoonnssiiddeerraattiioonn ooff nneettttiinngg ppootteennttiiaall TToottaall lliiaabbiilliittiieess rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett 19.8 118.1 (14.0) (3.4) 55..88 111144..88 (0.8) (89.3) (5.0) (16.8) 34.2 (4.0) 3300..11 (16.5) (1.7) 83.5 83.1 225555..66 (77.6) (77.6) ((9988..99)) 55..99 55..55 115566..66 (0.4) (0.4) ((110077..00)) (5.6) (5.2) ((2299..00)) 20.6 124.1 (12.4) (4.3) 88..33 111199..88 (3.6) (90.8) (4.7) (20.9) 29.0 (2.3) 2266..77 (14.2) (1.2) 86.6 86.1 226600..44 (78.2) (78.2) ((9977..22)) 88..44 77..99 116633..22 (2.1) (2.1) ((111100..77)) (5.9) (5.9) ((3322..66)) 00..00 88..66 1122..00 00..00 00..00 2200..66 00..00 88..11 1111..33 00..44 00..00 1199..88 22..00 66..11 11..33 3300..00 00..22 3399..44 22..00 55..99 22..22 2255..22 11..66 3355..44 22..00 1144..88 1133..33 3300..00 00..22 6600..00 22..00 1144..00 1133..55 2255..66 11..66 5555..22 77..88 112200..99 3311..44 3355..99 55..77 119966..00 1100..33 112255..77 2288..99 3333..66 99..55 119988..55 As of 31.12.19, USD billion Payables from securities financing transactions Derivative financial instruments Cash collateral payables on derivative instruments1 Other financial liabilities designated at fair value of which: repurchase agreements TToottaall lliiaabbiilliittiieess As of 31.12.18, USD billion Payables from securities financing transactions Derivative financial instruments Cash collateral payables on derivative instruments1 Other financial liabilities designated at fair value of which: repurchase agreements TToottaall lliiaabbiilliittiieess 11 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. 22 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. 33 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped 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. 44 Includes liabilities not subject to enforceable netting arrangements and other out-of-scope items. 425 Financial statements Consolidated financial statements Note 26 Restricted and transferred financial assets This Note provides information about 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 11,206 million as of 31 December 2019 (31 December 2018: USD 12,516 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 amount of the liabilities associated with these other restricted financial assets is generally equal to the carrying amount 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 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 Debt securities classified as Other financial assets measured at amortized cost of which: assets pledged as collateral that may be sold or repledged by counterparties Total financial assets pledged as collateral2 Total financial assets pledged as collateral2 31.12.19 31.12.19 31.12.18 56,415 56,415 41,285 41,285 18,399 18,399 188 188 1,212 1,212 1,212 1,212 76,215 76,215 43,292 32,121 18,804 0 0 0 62,096 Other restricted financial assets Other restricted financial assets 5,140 Loans and advances to banks Financial assets at fair value held for trading 3,589 Cash collateral receivables on derivative instruments 3,205 Loans and advances to customers 935 Financial assets at fair value not held for trading 23,514 Financial assets measured at fair value through other comprehensive income 171 Other 203 Total other restricted financial assets 36,758 Total other restricted financial assets Total financial assets pledged and other restricted financial assets 98,854 Total financial assets pledged and other restricted financial assets 1 All related to mortgage loans that serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately 1 USD 6.3 billion for 31 December 2019 (31 December 2018: approximately USD 3.2 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 2019: USD 0.6 billion; 31 December 2018: 2 USD 0.3 billion). 3,131 3,131 242 242 2,986 2,986 620 620 29,676 29,676 176 176 379 379 37,210 37,210 113,425 113,425 In addition to restrictions on financial assets, UBS Group AG leverage ratios on a stressed basis, such as the Federal Reserve and its subsidiaries are, in certain cases, subject to regulatory Board’s Comprehensive Capital Analysis and Review (CCAR) requirements that affect the transfer of dividends and capital process, which may limit the relevant subsidiaries’ ability to within the Group, as well as intercompany lending. Supervisory make distributions of capital based on the results of those tests. authorities also may require entities to measure capital and 426 Note 26 Restricted and transferred financial assets (continued) 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 about 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 3311..1122..1199 31.12.18 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 TToottaall ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd 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 about repurchase and securities lending agreements As of 31 December 2019, approximately 40% 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 amount below the carrying amount of the transferred assets. The counterparties to the associated liabilities presented in the table above have full recourse to UBS. securities lending and For CCaarrrryyiinngg aammoouunntt ooff ttrraannssffeerrrreedd aasssseettss 4411,,228855 CCaarrrryyiinngg aammoouunntt ooff aassssoocciiaatteedd lliiaabbiilliittiieess rreeccooggnniizzeedd oonn bbaallaannccee sshheeeett 1166,,667711 Carrying amount of transferred assets 32,121 Carrying amount of associated liabilities recognized on balance sheet 4,674 1166,,994455 2244,,008822 225588 118888 4411,,447733 1166,,667711 00 00 118877 1166,,885588 4,726 26,234 1,161 0 32,121 4,674 0 0 0 4,674 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 amount 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 2019 and as of 31 December 2018. that are not subject 427 Financial statements Consolidated financial statements 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 2019, 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 351 million as of 31 December 2019, and UBS recognized gains of in 2019 related to these positions. As of USD 0 million 31 December 2019, life-to-date losses of USD 1,198 million were recorded related to the positions held as of 31 December 2019. As of 31 December 2018, the fair value and carrying amount of UBS’s continuing involvement related to purchased and retained interests in securitization vehicles was USD 6 million, and UBS recognized gains of USD 3 million in 2018 related to these positions. As of 31 December 2018, life-to-date losses of USD 1,198 million were recorded related to the positions held as of 31 December 2018. The maximum exposure to loss related to purchased and retained interests in securitization structures was USD 8 million as of 31 December 2019, compared with USD 10 million as of 31 December 2018. Undiscounted cash outflows of USD 3 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 and 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 31.12.19 31.12.19 475,726 475,726 31.12.18 483,688 466,045 466,045 473,302 9,681 9,681 10,385 350,477 350,477 356,745 305,362 305,362 315,402 30,591 30,591 14,524 14,524 28,943 12,400 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. 1 2 Does not include off-balance sheet securities (31 December 2019: USD 19.6 billion; 31 December 2018: USD 24.5 billion) placed with central banks related to undrawn credit lines and for payment, clearing and 2 settlement purposes for which there are no associated liabilities or contingent liabilities. 428 Note 27 Maturity analysis of financial liabilities The contractual maturities for non-derivative and non-trading financial liabilities as of 31 December 2019 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 2018. 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 FFiinnaanncciiaall lliiaabbiilliittiieess rreeccooggnniizzeedd oonn bbaallaannccee sshheeeett11 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 of which: lease liabilities TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt 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 TToottaall ffiinnaanncciiaall lliiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss TToottaall GGuuaarraanntteeeess,, ccoommmmiittmmeennttss aanndd ffoorrwwaarrdd ssttaarrttiinngg ttrraannssaaccttiioonnss66 LLooaann ccoommmmiittmmeennttss77 GGuuaarraanntteeeess77 FFoorrwwaarrdd ssttaarrttiinngg ttrraannssaaccttiioonnss Reverse repurchase agreements7 Securities borrowing agreements TToottaall 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 3311..1122..1199 5.4 7.4 31.4 423.0 4.5 4.5 0.1 476.1 30.6 120.9 37.2 21.3 34.0 244.0 772200..11 33.1 19.1 21.9 7744..11 0.3 0.1 16.1 5.3 0.1 0.1 22.0 17.4 0.4 17.8 3399..99 0.5 00..55 0.4 0.3 7.3 30.5 0.5 0.5 38.9 9.5 0.5 9.9 4488..88 0.3 0.0 00..33 0.0 0.0 0.0 36.0 2.0 2.0 38.1 7.6 0.9 8.5 4466..66 0.5 2.5 46.3 2.0 2.0 51.3 12.7 0.4 13.1 6644..55 0.0 00..00 00..00 Total 6.6 7.8 31.4 448.9 122.7 9.0 4.6 626.4 30.6 120.9 37.2 68.5 36.1 293.3 991199..88 33.9 19.1 21.9 0.0 7744..99 429 Financial statements Consolidated financial statements Note 27 Maturity analysis of financial liabilities (continued) USD billion Financial liabilities recognized on balance sheet1 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 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 financial liabilities measured at fair value through profit or loss Total 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 30.0 238.8 691.2 691.2 1.0 0.6 13.1 6.3 21.0 18.1 0.4 18.5 39.5 39.5 1.6 0.3 7.0 39.9 48.8 10.2 1.1 11.3 60.1 60.1 0.5 4.4 57.6 62.6 7.4 1.2 8.6 71.2 71.2 0.0 0.0 0.0 37.8 37.8 8.0 1.0 9.0 46.8 46.8 Total 11.0 10.4 28.9 420.4 146.2 5.6 622.6 28.9 125.7 38.4 59.4 33.7 286.2 908.8 908.8 34.1 19.8 Guarantees, commitments and forward starting transactions6 Guarantees, commitments and forward starting transactions6 Loan commitments7 Loan commitments7 Guarantees7 Guarantees7 Forward starting transactions Forward starting transactions Reverse repurchase agreements7 9.0 9.0 0.0 0.0 Securities borrowing agreements 63.6 62.9 Total Total 63.6 62.9 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 1 3 Carrying amount is fair value. Management believes that this best represents the cash payments. 3 4 Contractual 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 maturities of financial liabilities at fair value held for trading are: USD 30 billion due within 1 month (2018: USD 28.3 billion), USD 0.6 billion due between 1 month and 1 year (2018: USD 0.6 billion) and USD 0 billion due between 1 and 5 years (2018: USD 0 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 6 Comprises the maximum irrevocable amount of guarantees, commitments and forward starting principal payments that are variable are determined by reference to the conditions existing at the reporting date. 6 7 Loan commitments measured at fair value of USD 6.3 billion (2018: USD 3.5 billion), guarantees measured at fair value of USD 1.0 billion (2018: USD 1.6 billion) and forward starting reverse transactions. 7 repurchase agreements measured at fair value of USD 20.3 billion (2018: USD 8.1 billion) are under the time bucket Due within 1 month. 2 The time bucket Due after 5 years includes perpetual loss-absorbing additional tier 1 capital instruments. 2 34.7 19.8 0.4 0.4 0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 5 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. 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. 430 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. Hedging instruments and hedged items USD million HHeeddggiinngg iinnssttrruummeennttss:: iinntteerreesstt rraattee sswwaappss Nominal amount Carrying amount Derivative financial assets Derivative financial liabilities HHeeddggeedd iitteemmss:: ddeebbtt iissssuueedd mmeeaassuurreedd aatt aammoorrttiizzeedd ccoosstt Carrying amount of which: accumulated amount of fair value hedge adjustment Hedge ineffectiveness USD million Changes in fair value of hedging instruments Changes in fair value of hedged items 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. 3311..1122..1199 31.12.18 6655,,225577 63,816 3333 6677,,337799 11,,009999 27 1 63,785 (298) For the year ended 3311..1122..1199 31.12.18 31.12.17 11,,442277 ((11,,440088)) 1199 (341) 329 (11) NNeett ggaaiinnss // ((lloosssseess)) rreellaatteedd ttoo hheeddggee iinneeffffeeccttiivveenneessss rreeccooggnniizzeedd iinn OOtthheerr nneett iinnccoommee ffrroomm ffiinnaanncciiaall iinnssttrruummeennttss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss Profile of the timing of the nominal amount of the hedging instrument USD billion Interest rate swaps USD billion Interest rate swaps 3311..1122..1199 DDuuee wwiitthhiinn 11 mmoonntthh DDuuee bbeettwweeeenn 11 aanndd 33 mmoonntthhss DDuuee bbeettwweeeenn 33 aanndd 1122 mmoonntthhss DDuuee bbeettwweeeenn 11 aanndd 55 yyeeaarrss 3 9 40 Due within 1 month Due between 1 and 3 months 31.12.18 Due between 3 and 12 months Due between 1 and 5 years 4 43 DDuuee aafftteerr 55 yyeeaarrss 14 Due after 5 years 17 (16) (4) (20) TToottaall 65 Total 64 431 Financial statements 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. 31.12.19 31.12.19 31.12.18 4,493 4,493 10,318 14 14 4,494 4,494 117 117 172 172 0 31 10,299 200 89 For the year ended 31.12.18 31.12.17 (22) 16 (6) (10) 3 (7) Hedging instruments and hedged items USD million Hedging instruments: interest rate swaps Hedging instruments: interest rate swaps Nominal amount Carrying amount Derivative financial assets Derivative financial liabilities Hedged items: loans and advances to customers Hedged items: loans and advances to customers Carrying amount of which: accumulated amount of fair value hedge adjustment on the portfolio that was subject to hedge accounting 1 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 1 1 Amounts presented within Other financial assets measured at amortized cost and Other financial liabilities measured at amortized cost. 1 Hedge ineffectiveness USD million Changes in fair value of hedging instruments1 31.12.19 31.12.19 (38) (38) Changes in fair value of hedged items1 Net gains / (losses) related to hedge ineffectiveness recognized in Other net income from financial instruments Net gains / (losses) related to hedge ineffectiveness recognized in Other net income from financial instruments measured at fair value through profit or loss measured at fair value through profit or loss 1 For the year ended 31 December 2017, the amounts included offsetting accrued interest, which had no effect on net gains / (losses) related to hedge ineffectiveness. 1 (6) (6) 32 32 432 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 HHeeddggiinngg iinnssttrruummeennttss:: iinntteerreesstt rraattee sswwaappss Nominal amount Carrying amount Derivative financial assets Derivative financial liabilities Hedge ineffectiveness USD million Changes in fair value of hedging instruments1 Changes in fair value of hedged items1 EEffffeeccttiivvee ppoorrttiioonn ooff cchhaannggeess iinn ffaaiirr vvaalluuee ooff hheeddggiinngg iinnssttrruummeennttss rreeccooggnniizzeedd aass OOtthheerr ccoommpprreehheennssiivvee iinnccoommee IInneeffffeeccttiivveenneessss rreeccooggnniizzeedd aass OOtthheerr nneett iinnccoommee ffrroomm ffiinnaanncciiaall iinnssttrruummeennttss mmeeaassuurreedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss 11 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 BBaallaannccee aatt tthhee bbeeggiinnnniinngg ooff tthhee yyeeaarr Effective portion of changes in fair value of hedging instruments recognized in OCI Amount reclassified to Net interest income when the hedged item affected profit / (loss), for the year ended 31 December 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 BBaallaannccee aatt tthhee eenndd ooff tthhee yyeeaarr 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 11 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively. 22 Amounts are disclosed on a pre-tax basis. 3311..1122..1199 31.12.18 6699,,444433 70,149 1166 24 1 For the year ended 3311..1122..1199 31.12.18 31.12.17 11,,663399 ((11,,557711)) 11,,557711 6688 22001199 110099 11,,557711 ((117755)) ((117755)) 00 99 ((225533)) 11,,226600 11,,559966 ((4433)) 97 (73) (42) 25 2018 360 (42) (294) (293) (1) 18 67 109 74 73 45 8 2017 955 45 (843) 39 163 360 433 Financial statements 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. Hedging instruments USD million Hedging instruments: derivative financial instruments Hedging instruments: derivative financial instruments Nominal amount Carrying amount Derivative financial assets Derivative financial liabilities Hedging instruments: non-derivative foreign currency assets and liabilities Hedging instruments: non-derivative foreign currency assets and liabilities Nominal amount Carrying amount Receivables from securities financing transactions Payables from securities financing transactions Hedge ineffectiveness USD million Changes in fair value of hedging instruments Changes in fair value of hedged items Effective portion of changes in fair value of hedging instruments recognized in Foreign currency translation OCI Effective portion of changes in fair value of hedging instruments recognized in Foreign currency translation OCI Ineffectiveness recognized as Other net income from financial instruments measured at fair value through profit or loss Ineffectiveness recognized as Other net income from financial instruments measured at fair value through profit or loss 434 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 accumulation of FCT movements 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 31.12.19 31.12.19 31.12.18 11,992 11,992 11,537 9 9 171 171 217 217 109 109 109 109 56 48 229 115 115 For the year ended 31.12.19 31.12.19 31.12.18 (142) (142) 134 134 (134) (134) (8) (8) 205 (205) 181 24 Note 28 Hedge accounting (continued) Foreign currency translation reserve USD million FFoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn rreesseerrvvee of which: effective portion of changes in fair value of hedging instruments related to investment in subsidiaries 1 of which: for which hedge accounting continues to be applied 1 of which: for which hedge accounting is no longer applied 1 EEffffeeccttiivvee ppoorrttiioonn ooff cchhaannggeess iinn ffaaiirr vvaalluuee ooff hheeddggiinngg iinnssttrruummeennttss rreeccllaassssiiffiieedd ttoo OOtthheerr iinnccoommee uuppoonn ddiissppoossaall ooff iinnvveessttmmeenntt ffoorr tthhee yyeeaarr eennddeedd11 11 This Note addresses the requirement of IFRS 7 effective from 1 January 2018, for which data is provided prospectively. Undiscounted cash flows 31.12.17 4,466 3311..1122..1199 44,,002288 664433 338866 225577 ((1144)) 31.12.18 3,924 777 521 255 2 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 IInntteerreesstt rraattee sswwaappss11 FFXX sswwaappss // ffoorrwwaarrddss Cash inflows Cash outflows NNeett ccaasshh fflloowwss OOnn ddeemmaanndd DDuuee wwiitthhiinn 11 mmoonntthh DDuuee bbeettwweeeenn 11 aanndd 33 mmoonntthhss 22001199 DDuuee bbeettwweeeenn 33 aanndd 1122 mmoonntthhss DDuuee bbeettwweeeenn 11 aanndd 55 yyeeaarrss DDuuee aafftteerr 55 yyeeaarrss 6 6 00 5 5 00 0 0 00 Due within 1 month Due between 1 and 3 months 2018 Due between 3 and 12 months Due between 1 and 5 years Due after 5 years On demand USD billion IInntteerreesstt rraattee sswwaappss11 FFXX sswwaappss // ffoorrwwaarrddss Cash inflows Cash outflows NNeett ccaasshh fflloowwss 11 Undiscounted cash inflows and cash outflows of interest rate swaps were not material as the majority of interest rate swaps designated in hedge accounting relationships are legally settled on a daily basis. 2 2 0 9 9 0 TToottaall 11 11 00 Total 11 11 0 Interest rate benchmark reform As of 1 October 2019, the Group early adopted the amendments to IAS 39 and IFRS 7 related to interest rate benchmark reform published by the IASB in September 2019. As all fair value hedges are directly affected by the interest rate benchmark reform, the relief is applied to all of the disclosed fair value hedges in this Note. The significant interest rate benchmarks to which the Group’s hedging relationships are exposed are stated in the “Interest rate risk hedge accounting” section of this Note. The Group established a cross-divisional, cross-regional governance structure and change program to address the scale and complexity of the transition to alternative reference rates (ARRs). Hedges of net investments in foreign operations are not affected by the amendments. UBS also applies the amendments to those cash flow hedge relationships where the hedged risk is LIBOR. The following table provides details on the nominal amount and carrying amount of in those hedging relationships. the hedging instruments Cash flow hedges of forecast transactions referencing LIBOR USD million HHeeddggiinngg iinnssttrruummeennttss:: iinntteerreesstt rraattee sswwaappss Nominal amount Carrying amount Derivative financial assets Derivative financial liabilities 3311..1122..1199 1166,,446622 00 00 435 Financial statements 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: 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 Total pension and other post-employment benefit plan expenses6 Total pension and other post-employment benefit plan expenses6 1 Refer to Note 29a for more information. 1 changes. Note 6. 3 Refer to Note 29b for more information. 3 31.12.19 31.12.19 31.12.18 31.12.17 461 461 440 440 417 417 3 3 21 21 2 2 18 18 326 326 82 82 173 173 71 71 787 787 188 186 153 11 22 (11) 13 268 80 127 61 457 481 460 414 15 31 3 17 243 72 110 61 723 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 2 6 Refer to 6 4 Other expenses include differences between actual and estimated performance award accruals. 4 5 Refer to Note 29c for more information. 5 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 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 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.” 1 2 3 31.12.19 31.12.19 31.12.18 31.12.17 (135) (135) (22) (22) (78) (78) (35) (35) (3) (3) (8) (8) (146) (146) (41) (41) (186) (186) (230) (352) 130 (8) 7 3 (220) 276 56 253 (79) 304 28 1 31 286 11 296 436 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 2019 and 31 December 2018, 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 2019 and 31 December 2018, no net defined benefit pension asset was recognized on the balance sheet. The table below provides a breakdown of the assets and liabilities recognized on the balance sheet within Other non-financial assets and Other non-financial liabilities related to defined benefit plans. Balance sheet – net defined benefit pension and post-employment asset USD million Major pension plans1 of which: Swiss plan of which: UK plan of which: US and German plans TToottaall nneett ddeeffiinneedd bbeenneeffiitt ppeennssiioonn aanndd ppoosstt eemmppllooyymmeenntt aasssseett22 11 Refer to Note 29a for more information. 22 Refer to Note 17. - - 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 Remaining plans 3311..1122..1199 31.12.18 99 00 44 55 99 0 0 0 0 0 3311..1122..1199 31.12.18 552277 00 00 552277 6622 4444 671 0 160 511 62 42 TToottaall nneett ddeeffiinneedd bbeenneeffiitt ppeennssiioonn aanndd ppoosstt eemmppllooyymmeenntt lliiaabbiilliittyy44 11 Refer to Note 29a for more information. 22 Of the total liability recognized as of 31 December 2019, USD 111 million related to US plans and USD 416 million related to German plans (31 December 2018: USD 137 million and USD 374 million, respectively). 33 Refer to Note 29b for more information. 44 Refer to Note 22. 775 663333 - - 437 Financial statements 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 in accordance with local regulations and practices. The major plans are located in Switzerland, the UK, the US and Germany. The plans’ benefits include retirement, disability and survivor benefits. The level of benefits provided depends on the specific plan rules and the level of employee compensation. 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, is intended to ensure 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 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. is determined by 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 achieve 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. UBS’s general principle is to ensure that the plans are adequately funded on the basis of actuarial valuations. Local pension regulations are the primary drivers for determining when contributions are required. 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 2.5% 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 2.8% and 9% of risk contributory variable compensation. UBS also pays contributions that are used to finance benefits paid out in the event of death and disability. The plan benefits include retirement, disability and survivor benefits. The pension plan offers to members at the normal retirement age of 65 a choice between a lifetime pension with or without full restitution and a partial or full lump sum payment. Participants can choose to continue employment and correspondingly remain active members in the pension plan until the age of 70 at the latest or 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 such 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 2019, the Swiss pension plan had a technical funding ratio under Swiss pension law of 127.1% (31 December 2018: 124.2%). 438 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 2019, 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 3,724 million (31 December 2018: surplus of USD 3,274 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 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 2019 and 31 December 2018, the estimated future economic benefit was zero and hence no net defined benefit asset was recognized on the balance sheet. As of 31 December 2019, the difference between the pension plan surplus and the estimated i.e., the asset ceiling effect, was future economic benefit, USD 3,724 million (31 December 2018: USD 3,274 million). In the fourth quarter of 2019, UBS established an enhanced methodology for measuring the estimated future economic benefits available under the Swiss pension plan, which limits the amount of any surplus recognized in accordance with IFRS, i.e., the asset ceiling calculation. Under the revised approach, which will come into effect in the first quarter of 2020, future service cost is measured individually for each future year, considering the individually applicable discount rate. In addition, an enhanced discount curve methodology will be adopted, utilizing the FINMA-published ultimate forward rate, which represents the average long-term historical real rate plus expected inflation over the long-dated periods where discount rates are unobservable. Application of this approach is expected to reduce the sensitivity in the quarterly asset ceiling calculation to short-term interest rates, resulting in lower variability in the calculation and accordingly the resulting recognition / derecognition of the Swiss pension plan surplus in Other comprehensive income. No changes have been made to the methodology for measuring the defined benefit obligation. Changes to the Swiss pension plan As a result of the effects of continuing low and in some cases return rates, diminished negative investment interest 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 from 64 to 65, employee contributions were increased from a range of 1% and 13.5% of the contributory base salary to a range of 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 746 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 payments in 2020, 2021 and 2022, adjusted for expected forfeitures, are expected to reduce total equity by USD 641 million, with no effect on the income statement. The first installment and the regular employer contributions expected to be made to the Swiss pension plan in 2020 are estimated to be USD 234 million and USD 466 million, respectively. 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 2019, UBS made deficit funding contributions of USD 242 million to the UK plan. In 2018, UBS did not make any deficit funding contributions. 439 Financial statements Consolidated financial statements Note 29 Pension and other post-employment benefit plans (continued) 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 2019, the contributions made by UBS were USD 29 million (2018: USD 42 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 be employed to manage volatility. liability-driven The employer contributions expected to be made to the US defined benefit pension plans in 2020 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 related to variable compensation. 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 2020 are estimated at USD 10 million. Financial information by plan The tables on the following pages provide an analysis of the movement in the net asset / liability recognized on the balance sheet for defined benefit pension plans, as well as an analysis of amounts recognized in net profit and in Other comprehensive income. 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 2019, the UK plan was in a surplus situation on an IFRS measurement basis as the fair value of plan assets exceeded the DBO by USD 4 million (31 December 2018: deficit of USD 160 million). Total contributions expected to be made to the UK defined benefit pension plan in 2020 are estimated at USD 13 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. The value of the collateral pool as of 31 December 2019 was USD 364 million and includes corporate bonds and government-related debt instruments. The Pension Trustee Board and UBS may agree adjustments 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. the collateral pool the to in 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. 440 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 Foreign currency translation DDeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn aatt tthhee eenndd ooff tthhee yyeeaarr 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 FFaaiirr vvaalluuee ooff ppllaann aasssseettss aatt tthhee eenndd ooff tthhee yyeeaarr 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 AAsssseett cceeiilliinngg eeffffeecctt aatt tthhee eenndd ooff tthhee yyeeaarr NNeett ddeeffiinneedd bbeenneeffiitt aasssseett // ((lliiaabbiilliittyy)) MMoovveemmeenntt iinn tthhee nneett aasssseett // ((lliiaabbiilliittyy)) rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett NNeett aasssseett // ((lliiaabbiilliittyy)) rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett aatt tthhee bbeeggiinnnniinngg ooff tthhee yyeeaarr Net periodic expenses recognized in net profit Gains / (losses) recognized in other comprehensive income Employer contributions Foreign currency translation NNeett aasssseett // ((lliiaabbiilliittyy)) rreeccooggnniizzeedd oonn tthhee bbaallaannccee sshheeeett aatt tthhee eenndd ooff tthhee yyeeaarr FFuunnddeedd aanndd uunnffuunnddeedd ppllaannss Defined benefit obligation from funded plans Defined benefit obligation from unfunded plans Plan assets SSuurrpplluuss // ((ddeeffiicciitt)) AAsssseett cceeiilliinngg eeffffeecctt Swiss plan UK plan 22001199 2222,,556666 440099 220000 224400 11,,772288 2018 23,419 405 151 218 (242) 00 0 ((119966)) (639) 11,,664411 397 228844 (241) 00 (20) 00 (954) ((11,,004466)) (170) 339999 2244,,449966 22,566 1111,,557777 10,452 0 1122,,991188 12,114 26,656 2255,,883399 22,,005599 (523) 177 223333 505 445522 218 224400 (954) ((11,,004466)) ((1111)) (11) (228) 445533 25,839 2288,,221199 3,237 33,,227744 23 3300 335533 6677 33,,772244 00 71 (58) 3,274 0 00 ((441177)) ((2222)) 445522 ((1133)) 00 0 (153) (352) 505 0 0 22001199 33,,119922 00 9922 00 336611 2018 3,744 0 93 0 (266) ((2266)) 442211 ((3344)) 00 00 ((113355)) 114444 33,,665544 116644 (18) (257) 8 4 0 (202) (181) 3,192 146 11,,555599 1,434 11,,993311 1,612 3,469 33,,003322 (136) 228844 86 8899 0 224422 00 0 (202) ((113355)) 00 0 (185) 114466 3,032 33,,665588 0 00 0 00 00 00 00 44 ((116600)) ((33)) ((7788)) 224422 22 44 0 0 0 (160) (275) (11) 130 0 (4) (160) US and German plans 2018 1,816 7 55 0 (69) 22001199 11,,667799 66 5599 00 118855 33 117799 44 00 00 ((110022)) ((88)) 11,,882200 223355 667755 991111 11,,116688 115500 4477 3388 00 ((110022)) ((22)) 00 11,,229999 00 00 00 00 00 ((552211)) ((551111)) ((2211)) ((3355)) 3388 88 ((552211)) (5) (69) 5 0 0 (112) (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 18 (511) Total 22001199 2277,,443377 441155 335511 224400 22,,227755 2018 28,978 413 299 218 (577) (23) ((222200)) (964) 22,,224411 410 225544 (237) 00 (20) 00 (1,268) ((11,,228833)) (369) 553355 2299,,997700 27,437 1111,,997766 10,823 22,,223333 2,040 1155,,776600 14,574 31,390 3300,,003399 (736) 22,,449922 306 336699 556 773322 218 224400 (1,268) ((11,,228833)) (14) ((1133)) (412) 559999 30,039 3333,,117766 3,237 33,,227744 23 3300 335533 6677 33,,772244 ((551188)) 71 (58) 3,274 (671) ((667711)) ((444400)) ((113355)) 773322 ((33)) ((551188)) (825) (186) (230) 556 14 (671) 2244,,449966 22,566 33,,665544 3,192 00 0 2288,,221199 33,,772244 25,839 3,274 33,,772244 3,274 00 33,,665588 44 00 0 3,032 (160) 0 11,,331199 550011 11,,229999 ((552211)) 00 1,219 2299,,446699 26,976 460 1,168 (511) 0 550011 3333,,117766 33,,220066 33,,772244 460 30,039 2,603 3,274 NNeett ddeeffiinneedd bbeenneeffiitt aasssseett // ((lliiaabbiilliittyy)) (671) 11 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. (160) (511) ((552211)) ((551188)) 0 00 44 441 Financial statements Consolidated financial statements Note 29 Pension and other post-employment benefit plans (continued) Analysis of amounts recognized in net profit 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 Net periodic expenses recognized in net profit Swiss plan 31.12.19 31.12.18 31.12.19 405 409 409 UK plan 31.12.19 31.12.18 31.12.19 0 0 0 US and German plans 31.12.19 31.12.18 31.12.19 7 6 6 Total 31.12.19 31.12.18 31.12.19 413 415 415 200 200 (233) (233) 30 30 11 11 0 0 0 0 417 417 151 (177) 23 11 (241) (20) 153 92 92 (89) (89) 0 0 0 0 0 0 0 0 3 3 93 (86) 0 0 4 0 11 59 59 (47) (47) 0 0 2 2 0 0 0 0 21 21 55 (44) 0 3 0 0 22 351 351 (369) (369) 30 30 13 13 0 0 0 0 440 440 299 (306) 23 14 (237) (20) 186 Analysis of amounts recognized in other comprehensive income (OCI) 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 Total gains / (losses) recognized in other comprehensive income, before tax Swiss plan 31.12.19 31.12.18 31.12.19 242 (1,728) (1,728) UK plan 31.12.19 31.12.18 31.12.19 266 (361) (361) US and German plans 31.12.19 31.12.18 31.12.19 69 (185) (185) Total 31.12.19 31.12.18 31.12.19 577 (2,275) (2,275) 2,059 2,059 (523) 284 284 (136) 150 150 (77) 2,492 2,492 (736) (353) (353) (22) (22) (71) (352) 0 0 (78) (78) 0 130 0 0 (35) (35) 0 (8) (353) (353) (135) (135) (71) (230) The table below provides information about the duration of the DBO and the timing for expected benefit payments. Duration of the defined benefit obligation (in years) Duration of the defined benefit obligation (in years) Maturity analysis of benefits expected to be paid 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. 1 Swiss plan UK plan US and German plans1 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 14.9 14.9 14.5 20.2 20.2 19.5 10.1 10.1 9.8 1,232 1,232 2,483 2,483 3,670 3,670 5,761 5,761 5,070 5,070 1,153 2,356 3,554 5,643 5,142 93 93 209 209 384 384 748 748 807 807 82 187 345 701 770 15,517 15,517 16,792 3,913 3,913 3,927 121 121 228 228 346 346 548 548 455 455 721 721 108 216 336 566 494 798 442 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 2019, a loss of USD 1,728 million was recognized in Other comprehensive income (OCI) related to the remeasurement of the DBO. This was primarily due to a market-driven decrease in the discount rate, which resulted in an OCI loss of USD 1,887 million and an experience loss of USD 284 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred. These losses were partly offset by gains of USD 243 million resulting from a decrease in the expected rate of interest credit on retirement savings, USD 103 million due to an update in the disability assumption and USD 94 million due to an update in the turnover assumption. In 2018, a net gain of USD 242 million was recognized in 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 losses of USD 397 million, partially offset by experience reflecting differences between 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. the previous UK pension plan In 2019, a loss of USD 361 million was recognized in OCI related to the remeasurement of the DBO for the UK plan. This was primarily due to a market-driven decrease in the discount rate, which resulted in an OCI loss of USD 552 million. This loss was partially offset by a gain of USD 132 million due to a decrease in the expected rate of pension increase, experience gains of USD 34 million which reflect differences between the previous actuarial assumptions and what actually occurred, and a gain of USD 21 million due to an update of the mortality improvement assumption. 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. US and German pension plans In 2019, a loss of USD 185 million was recognized in OCI related to the remeasurement of the DBO for the US and German plans, compared with a net gain of USD 69 million in 2018. OCI gains and losses in both years were primarily driven by market-driven movements in discount rates. 443 Financial statements Consolidated financial statements 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 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. 1 Mortality tables and life expectancies for major plans Country Country Switzerland UK USA Mortality table Mortality table BVG 2015 G with CMI 2016 projections S2PA with CMI 2018 projections1 RP2014 WCHA with MP2019 projection scale2 Germany Dr. K. Heubeck 2018 G Country Country Switzerland UK USA Mortality table Mortality table BVG 2015 G with CMI 2016 projections S2PA with CMI 2018 projections1 RP2014 WCHA with MP2019 projection scale2 Germany Dr. K. Heubeck 2018 G Swiss plan UK plan US and German plans1 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 0.29 0.29 1.50 1.50 0.00 0.00 0.49 0.49 0.92 1.50 0.00 0.92 2.07 2.07 0.00 0.00 2.92 2.92 0.00 0.00 2.90 0.00 3.10 0.00 2.58 2.58 2.37 2.37 1.80 1.80 2.57 2.57 3.69 2.81 1.50 3.70 Life expectancy at age 65 for a male member currently aged 65 aged 45 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 21.6 21.6 23.3 23.3 22.8 22.8 20.7 20.7 21.6 23.4 22.8 20.5 23.1 23.1 24.5 24.5 24.3 24.3 23.5 23.5 23.1 24.6 24.3 23.3 Life expectancy at age 65 for a female member currently aged 65 aged 45 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 23.6 23.6 25.1 25.1 24.4 24.4 24.2 24.2 23.5 25.2 24.4 24.1 25.1 25.1 26.4 26.4 25.9 25.9 26.4 26.4 25.0 26.5 26.0 26.3 1 In 2018, the mortality table S2PA with CMI 2017 projections was used. 2 In 2018, the mortality table RP2014 WCHA with MP2018 projection scale was used. 2 Sensitivity analysis of significant actuarial assumptions circumstances may arise, which could result in variations that are The table below presents a sensitivity analysis for each significant outside the range of alternatives deemed reasonably possible. actuarial assumption, showing how the DBO would have been Caution should be used in extrapolating the sensitivities below affected by changes in the relevant actuarial assumption that on the DBO as the sensitivities may not be linear. were reasonably possible at the balance sheet date. Unforeseen Sensitivity analysis of significant actuarial assumptions1 Increase / (decrease) in defined benefit obligation USD million Discount rate Discount rate Increase by 50 basis points Decrease by 50 basis points Rate of salary increase Rate of salary increase Increase by 50 basis points Decrease by 50 basis points Rate of pension increase Rate of pension increase Increase by 50 basis points Decrease by 50 basis points Rate of interest credit on retirement savings Rate of interest credit on retirement savings Increase by 50 basis points Decrease by 50 basis points Life expectancy Life expectancy Swiss plan UK plan 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 US and German plans 31.12.19 31.12.19 31.12.18 (1,505) (1,505) 1,710 1,710 76 76 (73) (73) 1,221 1,221 –3 –3 175 175 (102)5 (102)5 (1,327) 1,503 68 (65) 1,090 –3 231 (219) (346) (346) 395 395 –2 –2 –2 –2 331 331 (299) (299) –4 –4 –4 –4 (292) 333 –2 –2 260 (262) –4 –4 (86) (86) 93 93 1 1 (1) (1) 7 7 (7) (7) 9 9 (9) (9) (77) 84 1 (1) 6 (6) 9 (9) Increase in longevity by one additional year 51 42 51 2 As the plan is closed for 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 1 3 As the assumed rate of pension increase was 0% as of 31 December 2019 and as of 31 December 2018, a downward change in assumption is future service, a change in assumption is not applicable. 3 not applicable. 4 As the UK plan does not provide interest credits on retirement savings, a change in assumption is not applicable. 5 As of 31 December 2019, 21% of retirement savings were subject to a legal minimum rate of 1.00%. 751 122 886 886 154 154 4 5 444 Note 29 Pension and other post-employment benefit plans (continued) Fair value of plan assets The tables below provide information about 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 3311..1122..1199 31.12.18 FFaaiirr vvaalluuee PPllaann aasssseett aallllooccaattiioonn %% Fair value Plan asset allocation % USD million CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss RReeaall eessttaattee // pprrooppeerrttyy Domestic Foreign IInnvveessttmmeenntt ffuunnddss Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Foreign Other OOtthheerr iinnvveessttmmeennttss TToottaall ffaaiirr vvaalluuee ooff ppllaann aasssseettss TToottaall ffaaiirr vvaalluuee ooff ppllaann aasssseettss of which:2 Bank accounts at UBS UBS debt instruments UBS shares Securities lent to UBS3 Property occupied by UBS Derivative financial instruments, counterparty UBS3 11 1111 11 22 2277 1111 2211 44 00 2200 33 110000 QQuuootteedd iinn aann aaccttiivvee mmaarrkkeett 115599 OOtthheerr 00 TToottaall 115599 00 00 33,,005500 116600 33,,005500 116600 770011 00 66,,009911 11,,665533 33,,223388 55,,888800 999999 00 00 00 00 00 11,,660044 33,,995566 553355 119944 770011 77,,774433 33,,223388 55,,888800 999999 00 55,,556600 772299 1199,,220066 99,,001144 2288,,221199 3311..1122..1199 2288,,221199 115599 77 2211 11,,332288 8888 1100 Other 0 Total 137 2,963 2,963 Quoted in an active market 137 0 0 628 0 0 5,721 1,515 2,570 6,194 892 0 0 0 0 518 531 11 4,142 18 0 628 7,237 2,570 6,194 892 11 4,659 549 17,190 8,649 25,839 31.12.18 25,839 132 13 25 1,567 88 34 1 11 0 2 28 10 24 3 0 18 2 100 11 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. 22 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. 33 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 2019 and 31 December 2018. Net of collateral, derivative financial instruments amounted to USD 6 million as of 31 December 2019 (31 December 2018: USD 10 million). 445 Financial statements Consolidated financial statements Note 29 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) UK plan USD million Cash and cash equivalents Cash and cash equivalents Bonds1 Bonds1 Domestic, AAA to BBB– Investment funds Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Foreign Insurance contracts Insurance contracts Derivatives Derivatives Asset-backed securities Asset-backed securities Other investments2 Other investments2 Total fair value of plan assets Total fair value of plan assets 31.12.19 31.12.19 31.12.18 Fair value Fair value Plan asset Plan asset allocation % allocation % Fair value Plan asset allocation % Quoted Quoted in an active in an active market market 141 141 Other Other 0 0 Total Total 141 141 1,810 1,810 0 0 1,810 1,810 33 33 916 916 610 610 22 22 310 310 108 108 103 103 0 0 0 0 3 3 0 0 (572) (572) 3,483 3,483 0 0 0 0 117 117 0 0 0 0 0 0 18 18 19 19 7 7 0 0 6 6 7 7 33 33 916 916 727 727 22 22 310 310 108 108 122 122 19 19 7 7 3 3 6 6 (565) (565) 175 175 3,658 3,658 Quoted in an active market 143 Other 0 Total 143 1,604 0 1,604 26 658 587 15 258 51 102 0 0 0 21 (565) 0 0 93 0 0 0 28 0 0 0 2 9 26 658 680 15 258 51 131 0 0 0 22 (556) 2,900 132 3,032 4 4 49 49 1 1 25 25 20 20 1 1 8 8 3 3 3 3 1 1 0 0 0 0 0 0 (15) (15) 100 100 5 53 1 22 22 0 9 2 4 0 0 0 1 (18) 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 1 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. 2 446 Note 29 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) US plans 3311..1122..1199 31.12.18 FFaaiirr vvaalluuee PPllaann aasssseett aallllooccaattiioonn %% Fair value Plan asset allocation % QQuuootteedd iinn aann aaccttiivvee mmaarrkkeett 2277 OOtthheerr 00 TToottaall 2277 Quoted in an active market 27 Other 0 Total 27 USD million CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss BBoonnddss11 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– IInnvveessttmmeenntt ffuunnddss Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Other IInnssuurraannccee ccoonnttrraaccttss TToottaall ffaaiirr vvaalluuee ooff ppllaann aasssseettss 447755 22 9999 33 220088 116611 117766 2288 1177 33 00 6699 00 11,,226688 00 00 00 00 00 00 00 00 00 00 1133 00 1188 3311 447755 22 9999 33 220088 116611 117766 2288 1177 33 1133 6699 1188 22 3377 00 88 00 1166 1122 1144 22 11 00 11 55 11 462 2 92 3 143 157 104 23 56 6 0 64 0 462 2 92 3 143 157 104 23 56 6 13 64 17 0 0 0 0 0 0 0 0 0 0 13 0 17 29 2 40 0 8 0 12 13 9 2 5 1 1 5 1 11,,229999 110000 1,139 1,168 100 11 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. 447 Financial statements Consolidated financial statements 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 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. c) Defined contribution plans As of 31 December 2019, the net liability recognized for post- employment medical insurance plans was USD 62 million (31 December 2018: USD 62 million). An expense of USD 2 million was recognized in the income statement in 2019 (2018: gain of USD 11 million; 2017: expense of USD 3 million) and a loss of USD 3 million in Other comprehensive income in 2019 (2018: gain of USD 7 million; 2017: gain of USD 1 million). The benefits expected to be paid to participants in 2020 are estimated at USD 5 million. The measurement of each medical insurance plan’s post- employment benefit obligation considers different actuarial assumptions. Reasonably possible in actuarial assumptions would not lead to material movements in the net liability recognized as of 31 December 2019 and as of December 2018. changes UBS sponsors a number of defined contribution plans in other contributions from UBS. Employer contributions to defined locations outside Switzerland. The locations with significant contribution plans are recognized as an expense, which, for defined contribution plans are the US and the UK. Certain plans 2019, 2018 and 2017, amounted to USD 326 million, USD 268 allow employees to make contributions and earn matching or million and USD 243 million, respectively. 448 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 2019, the minimum commitment toward the Swiss pension fund under the related leases was approximately USD 14 million (31 December 2018: USD 17 million).  Refer to the “Composition and fair value of plan assets” table in Note 29a for more information about 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 RReecceeiivveedd bbyy UUBBSS Fees PPaaiidd bbyy UUBBSS Rent Dividends, capital repayments and interest For the year ended 3311..1122..1199 31.12.18 31.12.17 3344 44 1111 35 4 10 36 5 10 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 FFiinnaanncciiaall iinnssttrruummeennttss bboouugghhtt bbyy ppeennssiioonn ffuunnddss UBS shares (in thousands of shares) UBS debt instruments (par values, USD million) FFiinnaanncciiaall iinnssttrruummeennttss ssoolldd bbyy ppeennssiioonn ffuunnddss oorr mmaattuurreedd 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 3311..1122..1199 31.12.18 996677 22 11,,997777 88 889 13 547 3 3311..1122..1199 1155,,770011 119988 31.12.18 16,712 207 449 Financial statements Consolidated financial statements 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 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. Starting with performance year 2019, GEB members, Group Managing Directors (GMDs) and Vice Chairs receive Long-Term Incentive Plan (LTIP) awards instead of EOP. EOP awards granted to GEB members and GMDs in 2019 and prior years, as well as EOP awards granted to certain other employees, will only vest if both Group and business division performance conditions are met. For awards granted in 2019 and 2020, related to the performance years 2018 and 2019, respectively, the Group performance condition is based on the average reported return on common equity tier 1 capital (RoCET1). For awards granted in 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. 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. Awards granted generally 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 in 2018 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 variable compensation. 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. instruments awarded as deferred 450 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 the granting of such awards. Awards granted to GEB members in 2019 and prior years generally vest after three, four and five years. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with UBS. Long-Term Incentive Plan The LTIP is a mandatory deferred share-based compensation plan for senior leaders of the Group (i.e., GEB members, GMDs and Vice Chairs). LTIP awards are granted for the first time in 2020 as part of the performance award pool for 2019. (rTSR), which measures UBS's The final number of notional shares delivered at vesting depends on two equally weighted performance metrics: average reported return on CET1 capital (RoCET1) and relative total shareholder total return index consisting of global shareholder return against an systemically important banks as determined by the Financial Stability Board. These performance metrics are separately valued as of the date of grant and (re-)assessed over a three-year performance period starting in the year of grant. For both metrics there is a threshold level, which would result in a 33% payout, and a maximum level, which would result in a 100% payout. Any performance between the threshold and the maximum level would result in a linear payout between 33% and 100%. in each of The final number of shares as determined at the end of the three equal three-year performance period will vest installments the performance period for GEB members, and cliff-vest in the first year following the performance period for GMDs and Vice Chairs. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with UBS. three years following the in In general, the form of the equity awards (notional shares), the entitlement to dividend equivalents and the settlement method is the same as for EOP awards. Deferred Contingent Capital Plan (DCCP) The DCCP is a mandatory deferred compensation plan for all employees with than USD / CHF 300,000. total annual compensation greater DCCP awards take 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. Note 30 Employee benefits: variable compensation (continued) Awards are forfeited if a viability event occurs, i.e., 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 also 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. Interest payments on DCCP awards are paid at the discretion of UBS. 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. Asset Management EOP In order to align deferred compensation of certain Asset Management employees with the investment funds they manage, awards are granted to such employees in the form of cash-settled notional investment funds. The amount delivered depends on the value of the underlying investment funds at the time of vesting. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with UBS. 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. 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. Employees are entitled to receive a dividend equivalent which may be paid in notional shares and/or cash. Role-based allowances (RBA) 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. RBA 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. 451 Financial statements Consolidated financial statements Note 30 Employee benefits: variable compensation (continued) Discontinued deferred compensation plans The following plans have been discontinued. 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. SARs gave employees the right to receive a number of UBS shares equal to the increase in market price of the UBS share between the grant date and the exercise date. One option entitled the holder to acquire one registered UBS share at the option’s strike price. SARs and options were settled by delivering UBS shares, except in jurisdictions where this was not permitted for legal reasons. All unexercised options and stock appreciation rights under these awards expired in 2019. PartnerPlus Through performance year 2016, financial advisor 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. 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 contributions, along contributions Company and with vested 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. GrowthPlus GrowthPlus is a compensation plan for selected financial advisors whose revenue production and length of service exceeded defined thresholds from 2010 to 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. Share delivery obligations Share delivery obligations related to employee share-based compensation awards were 156 million shares as of 31 December 2019 (31 December 2018: 146 million shares). Share delivery obligations are calculated on the basis of undistributed notional share awards, options and stock appreciation rights, taking applicable performance conditions into account. As of 31 December 2019, UBS held 125 million treasury shares (31 December 2018: 118 million) that were available to satisfy share delivery obligations. Treasury shares held are delivered to employees at exercise or vesting. 452 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 about compensation expenses related to total variable compensation, including financial advisor variable compensation, that were recognized in the financial year ended 31 December 2019, as well as expenses that were deferred and will be recognized in the income statement for 2020 and later. The majority of expenses deferred to 2020 and later that are related to the performance year 2019 relates to awards granted in February 2020. The total unamortized compensation expense for unvested share-based awards granted up to 31 December 2019 will be recognized in future periods over a weighted average period of 2.4 years. Variable compensation including financial advisor variable compensation EExxppeennsseess rreeccooggnniizzeedd iinn 22001199 EExxppeennsseess ddeeffeerrrreedd ttoo 22002200 aanndd llaatteerr11 USD million Non-deferred cash Deferred compensation awards of which: Equity Ownership Plan of which: Deferred Contingent Capital Plan of which: Long-Term Incentive Plan of which: Asset Management EOP TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ppeerrffoorrmmaannccee aawwaarrddss – – Replacement payments Forfeiture credits Severance payments Retention plan and other payments Deferred Contingent Capital Plan: interest expense TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ootthheerr – – 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 advisors2 TToottaall ffiinnaanncciiaall aaddvviissoorr vvaarriiaabbllee ccoommppeennssaattiioonn TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn iinncclluuddiinngg FFAA vvaarriiaabbllee ccoommppeennssaattiioonn RReellaatteedd ttoo tthhee ppeerrffoorrmmaannccee yyeeaarr 22001199 1,894 RReellaatteedd ttoo pprriioorr ppeerrffoorrmmaannccee yyeeaarrss (26) 299 122 113 39 25 22,,119933 5 0 125 28 0 115599 3,233 3,064 57 112 32 33,,226655 55,,661177 588 300 262 0 26 556622 51 (86) 0 28 94 8888 268 0 48 219 510 777788 11,,442288 RReellaatteedd ttoo tthhee ppeerrffoorrmmaannccee yyeeaarr 22001199 0 429 205 173 25 26 442299 44 0 0 23 50 111177 197 0 54 144 350 554488 11,,009933 TToottaall 1,868 887 422 375 39 51 22,,775555 56 (86) 125 56 94 224466 3,501 3,064 106 331 542 44,,004433 77,,00445533 RReellaatteedd ttoo pprriioorr ppeerrffoorrmmaannccee yyeeaarrss 0 608 219 365 0 23 660088 30 0 0 29 172 223322 710 0 130 580 1,617 22,,332277 33,,116666 TToottaall 0 1,036 424 538 25 49 11,,003366 75 0 0 52 222 334499 907 0 183 724 1,967 22,,887744 44,,225599 11 Estimate as of 31 December 2019. Actual amounts to be expensed in future periods may vary, e.g., due to forfeiture of awards. 22 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. 33 Includes USD 610 million in expenses related to share-based compensation (performance awards: USD 461 million; other variable compensation: USD 43 million; financial advisor compensation: USD 106 million). A further USD 61 million in expenses related to share-based compensation was recognized within other expense categories included in Note 6 (salaries: USD 10 million, related to role-based allowances; social security: USD 25 million; other personnel expenses: USD 27 million related to the Equity Plus Plan). Total personnel expense related to share-based equity-settled compensation excluding social security was USD 619 million. 453 Financial statements Consolidated financial statements Note 30 Employee benefits: variable compensation (continued) Variable compensation including financial advisor variable compensation (continued) Expenses recognized in 2018 Expenses deferred to 2019 and later1 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 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 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 advisors2 Total financial advisor variable compensation Total financial advisor variable compensation Total variable compensation including FA variable compensation Total variable compensation including FA variable compensation Related to the Related to prior performance years (32) performance year 2018 2,089 373 217 131 25 0 2,461 2,461 7 0 123 33 0 162 162 3,233 3,089 51 93 33 3,266 3,266 5,889 5,889 565 309 226 28 2 534 534 64 (136) 0 33 119 80 80 237 0 44 193 551 789 789 1,403 1,403 Total 2,057 938 526 357 53 2 2,995 2,995 72 (136) 123 66 119 243 243 3,470 3,089 95 286 584 4,054 4,054 7,2923 7,2923 Related to the Related to prior performance years 0 performance year 2018 0 585 325 238 22 0 585 585 60 0 0 24 96 180 180 128 0 52 76 357 484 484 1,250 1,250 653 244 382 26 1 653 653 41 0 0 33 195 269 269 639 0 131 507 1,883 2,522 2,522 3,444 3,444 Total 0 1,238 570 620 48 1 1,238 1,238 102 0 0 57 291 450 450 767 0 183 584 2,240 3,006 3,006 4,694 4,694 2 Reflects expenses related to compensation commitments with financial advisors entered into at the 1 Estimate as of 31 December 2018. Actual amounts expensed may vary, e.g., due to forfeiture of awards. 2 1 3 Includes USD 634 million in 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. 3 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 expense categories included in Note 6 (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 expense related to share-based equity-settled compensation excluding social security was USD 676 million. 454 Note 30 Employee benefits: variable compensation (continued) Variable compensation including financial advisor variable compensation (continued) Expenses recognized in 2017 Expenses deferred to 2018 and later1 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 TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ppeerrffoorrmmaannccee aawwaarrddss – – Replacement payments Forfeiture credits Severance payments Retention plan and other payments Deferred Contingent Capital Plan: interest expense TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn ootthheerr – – 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 advisors2 TToottaall ffiinnaanncciiaall aaddvviissoorr vvaarriiaabbllee ccoommppeennssaattiioonn TToottaall vvaarriiaabbllee ccoommppeennssaattiioonn iinncclluuddiinngg FFAA vvaarriiaabbllee ccoommppeennssaattiioonn Related to the performance year 2017 2,088 Related to prior performance years (25) 399 239 135 25 0 22,,448877 13 0 113 25 0 115511 3,050 2,891 54 104 31 33,,008800 55,,771188 689 344 310 32 4 666644 59 (107) 0 38 111 110011 260 0 48 212 723 998844 11,,774499 Related to the performance year 2017 0 594 329 238 27 0 559944 86 0 0 30 80 119966 156 0 70 86 369 552266 11,,331166 Total 2,062 1,088 583 444 57 4 33,,115511 72 (107) 113 63 111 225522 3,310 2,891 102 316 754 44,,006644 77,,44667733 Related to prior performance years 0 697 291 376 27 3 669977 44 0 0 33 222 229988 795 0 121 674 2,058 22,,885533 33,,884488 Total 0 1,291 620 614 54 3 11,,229911 130 0 0 63 301 449944 951 0 191 760 2,428 33,,337799 55,,116644 11 Estimate as of 31 December 2017. Actual amounts expensed may vary, e.g., due to forfeiture of awards. 22 Reflects expenses related to compensation commitments with financial advisors entered into at the 33 Includes USD 711 million in 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. 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 expense categories included in Note 6 (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 expense related to share-based equity-settled compensation excluding social security was USD 735 million. 455 Financial statements Consolidated financial statements 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 2019 and 2018 are provided in the table below. Movements in outstanding share-based compensation awards Outstanding, at the beginning of the year Awarded during the year Distributed during the year Forfeited during the year Outstanding, at the end of the year of which: shares vested for accounting purposes Number of shares Number of shares 2019 2019 146,845,027 146,845,027 77,641,909 77,641,909 (61,152,200) (61,152,200) (7,269,974) (7,269,974) 156,064,763 156,064,763 79,486,447 79,486,447 Weighted average Weighted average grant date fair value grant date fair value (USD) (USD) 16 16 Weighted average Number of shares grant date fair value (USD) 15 162,835,713 2018 11 11 13 13 14 14 14 14 58,329,398 (67,696,099) (6,623,984) 146,845,027 66,850,562 17 15 16 16 The total carrying amount of the liability related to cash-settled share-based awards as of 31 December 2019 and 31 December 2018 was USD 34 million and USD 39 million, respectively. Option awards No option awards have been granted since 2009. All remaining options expired in the year 2019. The table below provides information about movements in outstanding option awards during 2019 and 2018. 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 Number of options 2019 2019 6,567,592 6,567,592 Weighted average Weighted average exercise price (CHF) exercise price (CHF) 14 14 (2,818,070) (2,818,070) (512) (512) (3,749,010) (3,749,010) 0 0 0 0 10 10 16 16 16 16 n/a n/a n/a n/a Number of options 2018 32,583,168 (1,813,583) (19,752) (24,182,241) 6,567,592 6,567,592 Weighted average exercise price (CHF) 25 12 23 29 14 14 1 The weighted average share price upon option exercise was CHF 12.69 in 2019 (2018: CHF 16.22), resulting in an intrinsic value of CHF 7 million of options exercised during 2019 (2018: CHF 7 million). 1 456 Note 30 Employee benefits: variable compensation (continued) SAR awards No SAR awards have been granted since 2009. All remaining SARs expired in the year 2019. The table below provides information about movements in outstanding SAR awards during 2019 and 2018. 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 NNuummbbeerr ooff SSAARRss 22001199 55,,996655,,776699 ((55,,338811,,225599)) 00 ((558844,,551100)) 00 00 WWeeiigghhtteedd aavveerraaggee eexxeerrcciissee pprriiccee ((CCHHFF)) Number of SARs 2018 1122 1111 00 1166 nn//aa nn//aa 8,513,415 (2,490,146) (11,000) (46,500) 5,965,769 5,965,769 Weighted average exercise price (CHF) 12 11 13 12 12 12 11 The weighted average share price upon exercise of SARs was CHF 12.71 in 2019 (2018: CHF 16.15), resulting in an intrinsic value of CHF 7 million of SARs exercised during 2019 (2018: CHF 12 million). d) Valuation UBS share awards UBS measures compensation expense based on the average market price of the UBS share on the grant date as quoted on the SIX Swiss Exchange, taking into consideration post-vesting sale and hedge restrictions, non-vesting conditions and market conditions, where applicable. The fair value of the share awards subject to post-vesting sale and hedge restrictions is discounted on the basis of the duration of the post-vesting restriction and is referenced to the cost of purchasing an at-the-money European put option for the term of the transfer restriction. The weighted average discount for share and performance share awards granted during 2019 was approximately 22.6% (2018: 18.0%) 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. 457 Financial statements Consolidated financial statements 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 2019. Unless otherwise stated, the subsidiaries listed below have share capital consisting solely of ordinary shares that are held entirely 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, the 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. Individually significant subsidiaries of UBS Group AG as of 31 December 2019 Company UBS AG Registered office Zurich and Basel, Switzerland UBS Business Solutions AG1 1 UBS Business Solutions AG holds subsidiaries in Poland, China and India. 1 Zurich, Switzerland Share capital in million Equity interest accumulated in % CHF CHF 385.8 1.0 100.0 100.0 Individually significant subsidiaries of UBS AG as of 31 December 20191 Company Registered office UBS Americas Holding LLC Wilmington, Delaware, USA UBS Americas Inc. Wilmington, Delaware, USA UBS Asset Management AG Zurich, Switzerland Primary business Corporate Center 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 Securities LLC UBS Switzerland AG Wilmington, Delaware, USA Investment Bank Zurich, Switzerland Personal & Corporate Banking Share capital in million 3,150.02 USD USD CHF USD EUR USD USD CHF 0.0 43.2 0.0 446.0 0.0 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 3,150,000,000. 3 Comprised of common share capital of 1 USD 100,000 and non-voting preferred share capital of USD 1,283,000,000. 3 2 458 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 2019 Company UBS Asset Management (Hong Kong) Limited Registered office Hong Kong, Hong Kong UBS Asset Management (Japan) Ltd Tokyo, Japan UBS Asset Management Life Ltd London, United Kingdom UBS Asset Management Switzerland AG Zurich, Switzerland Primary business Asset Management Asset Management 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 Asset Management UBS Fund Management (Switzerland) AG Basel, Switzerland 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 11 Includes a nominal amount relating to redeemable preference shares. Share capital in million 254.0 HKD Equity interest accumulated in % 100.0 JPY GBP CHF USD USD EUR USD EUR CHF EUR USD THB AUD JPY SGD 2,200.0 15.0 0.5 0.0 0.0 133.0 0.0 13.0 1.0 49.2 9.0 500.0 0.31 32,100.0 420.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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 2019 and 2018, 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. 459 Financial statements Consolidated financial statements Note 31 Interests in subsidiaries and other entities (continued) b) Interests in associates and joint ventures As of 31 December 2019 and 2018, no associate or joint venture was individually material to the Group. In addition, there were no significant restrictions on the ability of associates or joint ventures to transfer funds to UBS Group AG or its subsidiaries in the form of cash dividends or to repay loans or advances made. There were no quoted market prices for any associates or joint ventures of the Group. Investments in associates and joint ventures 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 Carrying amount at the end of the year of which: associates of which: SIX Group AG, Zurich 5 of which: other associates of which: joint ventures 2019 2019 1,099 1,099 0 0 0 0 25 25 46 46 (21) (21) (83) (83) (1) (1) 11 11 1,051 1,051 1,010 1,010 887 887 123 123 41 41 2018 1,045 3 (431) (21) 529 529 1 (42) 16 1,099 1,066 952 114 33 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 1 3 For 2019, consists of control, UBS derecognized its former investment in associate. Refer to Note 32 for more information. 3 USD 28 million from associates and USD 18 million from joint ventures. For 2018, consists of USD 511 million from associates, of which USD 460 million reflected a valuation gain on the equity ownership in SIX 4 For 2019, consists of negative USD 22 million from associates and USD 1 million from joint ventures. For 2018, related to the sale of SIX Payment Services to Worldline, and USD 18 million from joint ventures. 4 the total of USD 1 million is from associates. 5 In 2019, UBS AG’s equity interest amounts to 17.31%. UBS AG is represented on the Board of Directors. 2 Reflects reclassifications to Properties and other non-current assets held for sale. 2 5 460 Note 31 Interests in subsidiaries and other entities (continued) c) Interests in unconsolidated structured entities During 2019, 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 2019 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 amount 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 TToottaall aasssseettss Derivative financial instruments TToottaall lliiaabbiilliittiieess AAsssseettss hheelldd bbyy tthhee uunnccoonnssoolliiddaatteedd ssttrruuccttuurreedd eennttiittiieess iinn wwhhiicchh UUBBSS hhaadd aann iinntteerreesstt ((UUSSDD bbiilllliioonn)) 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 TToottaall aasssseettss Derivative financial instruments SSeeccuurriittiizzaattiioonn vveehhiicclleess 446622 99 8811 333355 88888833 2244 22 555555 Securitization vehicles 420 8 87 312 8263 34 CClliieenntt vveehhiicclleess 113300 99 8822 33,,995555 116622 44,,111188 222255 222255 3311..1122..1199 IInnvveessttmmeenntt ffuunnddss 55,,887744 3366 117744 115577 66,,224422 332244 332244 773366 44113377 Client vehicles 174 35 482 3,931 252 4,212 123 31.12.18 Investment funds 7,297 1 179 166 7,643 32 TToottaall 66,,446666 5555 117744 224455 33,,995555 335511 1111,,224477 555522 555522 Total 7,890 44 179 302 3,931 337 12,682 158 MMaaxxiimmuumm eexxppoossuurree ttoo lloossss11 66,,446666 5533 117744 999977 33,,995555 11,,337722 11 Maximum exposure to loss1 7,890 44 179 1,878 3,931 1,423 3 TToottaall lliiaabbiilliittiieess AAsssseettss hheelldd bbyy tthhee uunnccoonnssoolliiddaatteedd ssttrruuccttuurreedd eennttiittiieess iinn wwhhiicchh UUBBSS hhaadd aann iinntteerreesstt 3857 ((UUSSDD bbiilllliioonn)) 22 Represents the carrying amount of loan 11 For the purpose of this disclosure, maximum exposure to loss amounts do not consider the risk-reducing effects of collateral or other credit enhancements. commitments. The maximum exposure to loss for these instruments is equal to the notional amount. 33 As of 31 December 2019, USD 0.6 billion of the USD 0.9 billion (31 December 2018: USD 0.6 billion of the USD 0.8 billion) was held in Corporate Center – Non-core and Legacy Portfolio. 44 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 amount and the notional amount. For other swap liabilities, no maximum exposure to loss is reported. 55 Represents the principal amount outstanding. 66 Represents the market value of total assets. 77 Represents the net asset value of the investment funds sponsored by UBS and the carrying amount of UBS’s interests in the investment funds not sponsored by UBS. 158 635 696 123 32 3 461 Financial statements Consolidated financial statements Note 31 Interests in subsidiaries and other entities (continued) 31 December 2019 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors, for the following reasons: (i) exclusion 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 amount 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 about the Group’s accounting policies regarding consolidation and sponsorship of securitization vehicles and other structured entities  Refer to the 31 December 2019 Pillar 3 report under “Pillar 3 disclosures” at www.ubs.com/investors for more information Interests in client vehicles As of 31 December 2019 and 31 December 2018, 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 structured product offerings. interests disclosed in the table on the previous page, the Group manages the assets of various pooled investment funds and receives fees that are based, in whole or part, on the net asset value of the fund and/or the performance of the fund. The specific fee structure is determined on the basis of various market factors and considers the nature of the fund 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 2019 or as of 31 December 2018. 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 amount 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 2019 and 2018, 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 2019 and 2018, income and expenses from interests in unconsolidated SEs primarily resulted from mark-to-market movements recognized in Other net income from financial instruments measured at fair value through profit of loss, 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 2019 and 31 December 2018, the Group in various held 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. The numbers outlined in the table on the previous page may differ from the securitization positions presented in the 462 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. The Group also recorded other net income from financial instruments measured at fair value through profit or loss from mark-to-market movements arising primarily from derivatives, such as interest rate and currency swaps as well as credit derivatives, through which the Group purchases protection, and financial liabilities designated at fair value, which do not qualify as interests because the Group does not absorb variability from the performance of the entity. Total income reported does not reflect economic hedges or other mitigating effects from the Group’s risk management activities. During 2019, UBS and third parties transferred assets of USD 1 billion and USD 1 billion, respectively, into sponsored securitization vehicles created in the year (2018: USD 1 billion and USD 1 billion, respectively). UBS and third parties also transferred assets of USD 0 billion and USD 1 billion, respectively, into sponsored client vehicles created in the year (2018: USD 2 billion and USD 0 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 42 billion (31 December 2018: USD 18 billion). Sponsored unconsolidated structured entities in which UBS did not have an interest at year-end USD million, except where indicated Net interest income Net fee and commission income Other net income from financial instruments measured at fair value through profit or loss TToottaall iinnccoommee AAsssseett iinnffoorrmmaattiioonn ((UUSSDD bbiilllliioonn)) USD million, except where indicated Net interest income Net fee and commission income Other net income from financial instruments measured at fair value through profit or loss TToottaall iinnccoommee AAsssseett iinnffoorrmmaattiioonn ((UUSSDD bbiilllliioonn)) As of or for the year ended 3311..1122..1199 CClliieenntt vveehhiicclleess 00 1133 ((1188)) ((55)) 1122 IInnvveessttmmeenntt ffuunnddss ((11)) 5500 99 5588 442233 As of or for the year ended 31.12.18 Client vehicles (6) 16 8 18 22 Investment funds 1 39 20 60 183 SSeeccuurriittiizzaattiioonn vveehhiicclleess ((11)) 1199 1199 2211 Securitization vehicles 0 0 1 21 TToottaall ((22)) 6633 1111 7722 Total (5) 54 29 78 11 Represents the amount of assets transferred to the respective securitization vehicles. 22 Represents the amount of assets transferred to the respective client vehicles. 33 Represents the total net asset value of the respective investment funds. 463 Financial statements Consolidated financial statements Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses Changes in Group structure and organization UK business transfer and cross-border merger of UBS Limited into UBS Europe SE 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 transferred businesses that occurred on or after the transfer date were recorded in UBS AG, London Branch. On 1 March 2019, UBS completed its combined UK business transfer and cross-border merger of UBS Limited into UBS Europe SE, its Germany-headquartered European subsidiary. UBS Asset Management AG In 2016, UBS transferred the majority of the operating subsidiaries of Asset Management to UBS Asset Management AG. Effective 1 April 2019, as part of UBS’s efforts to improve the resolvability of the Group, the portion of the Asset Management business in Switzerland conducted by UBS AG was transferred from UBS AG to its indirect subsidiary, UBS Asset Management Switzerland AG. With this transfer, UBS has completed the transfer of its Swiss Asset Management business and all Asset Management subsidiaries outside the US into a separate Asset Management sub-group structure. 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 were guaranteed by UBS Group AG. In line with regulatory requirements in Switzerland and following a change in Swiss tax law as of 1 January 2019 that applies to holding companies of systemically relevant banks issuing loss-absorbing AT1 or TLAC-eligible senior unsecured debt instruments, UBS has migrated such existing instruments to UBS Group AG from UBS Group Funding (Switzerland) AG in October 2019. 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 and 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. Acquisitions 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. Sales and disposals of subsidiaries and businesses In 2019, 2018 and 2017, 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 fund administration servicing units in Luxembourg and Switzerland to Northern Trust, resulting in a pre-tax gain on sale of USD 153 million. 464 Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses (continued) Strategic partnership with Sumitomo Mitsui Trust Holdings In June 2019, UBS entered into a strategic wealth management partnership in Japan with Sumitomo Mitsui Trust Holdings, Inc. (SuMi Trust Holdings). In January 2020, the first phase was launched, with operations commencing in the newly established joint venture, UBS SuMi TRUST Wealth Advisory, which is owned equally by UBS Securities Japan and SuMi Trust Holdings and is accounted for as an investment in a joint venture by UBS. UBS and SuMi Trust Holdings have also started offering each other’s products and services to their respective current clients. The second phase of the partnership is expected to launch in 2021 with the establishment of a new entity which will be 51% owned and controlled by UBS, requiring UBS to consolidate this entity. UBS does not expect a material effect on shareholders’ equity of the Group upon closing. Strategic partnership with Banco do Brasil In November 2019, UBS signed a binding agreement with Banco do Brasil to establish a strategic investment banking partnership that will provide investment banking services and institutional securities brokerage in Brazil and selected countries in South America. The partnership is expected to be established through a combination of assets from both stakeholders. UBS intends to contribute its operational investment banking platform in Brazil and Argentina, as well as its institutional brokerage business in Brazil. Banco do Brasil intends to contribute the exclusive access rights to its corporate clients. UBS will hold a controlling interest of 50.01% in the entity, requiring UBS to consolidate this entity. Closing of the transaction is subject to regulatory approvals and is currently expected in the first half of 2020. UBS does not expect a material effect on shareholders’ equity of the Group upon closing. Sale of majority stake in UBS Fondcenter it may sell retain a minority In January 2020, UBS has agreed to sell a majority stake in UBS Fondcenter to Clearstream, Deutsche Börse Group’s post-trade services provider. UBS will (48.8%) shareholding in the business and will enter into an agreement its remaining shareholding to under which Clearstream at a later date. As part of the transaction, UBS and Clearstream will enter into long-term commercial cooperation arrangements for the provision of services to Global Wealth Management, Asset Management and the Corporate & Institutional Clients unit of Personal & Corporate Banking. The transaction is subject to customary closing conditions and is expected to close in the second half of 2020. UBS expects to record a post-tax gain of around USD 600 million upon closing of the transaction. UBS will deconsolidate UBS Fondcenter and account for its minority interest as an investment in an associate. 465 Financial statements Consolidated financial statements Note 33 Finance lease receivables UBS acts as a lessor and 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 payments cover the cost of the assets less their residual value as well as financing costs. lease payments As of 31 December 2019, unguaranteed residual values of USD 246 million (31 December 2018: USD 156 million) had been accrued and the ECL stage 3 allowance for uncollectible minimum receivable was USD 6 million (31 December 2018: USD 7 million). No contingent rents were received in 2019. Amounts in the table below are disclosed on a gross basis. The finance lease receivables in Note 17a of USD 1,444 million are presented net of expected credit loss allowances. Lease receivables USD million 2020 2021–2024 Thereafter Total Total USD million 2019 2020–2023 Thereafter Total Total Total minimum lease Total minimum lease payments payments 448 874 221 1,544 1,544 31.12.19 31.12.19 Unearned finance Unearned finance income income 31 52 6 89 89 31.12.18 Total minimum lease payments Unearned finance income 359 703 103 1,166 1,166 22 35 2 58 58 Present value Present value 417 822 215 1,455 1,455 Present value 337 669 102 1,107 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. Gross Gross Total gross Total gross Sub-participations Sub-participations Net Net Measured Measured at fair value at fair value Not measured Not measured at fair value at fair value 986 986 6,308 6,308 20,284 20,284 7,740 7,740 1,639 3,535 8,117 7,926 18,142 18,142 27,547 27,547 1,657 1,657 408 408 18,146 31,212 925 12 400 19,128 19,128 33,856 33,856 21,941 21,941 8,148 8,148 19,785 34,747 9,042 12 8,326 (2,646) (2,646) (787) (787) 16,482 16,482 33,069 33,069 (2,803) (647) 16,982 34,099 As of 31.12.19, USD million Total guarantees Total guarantees Loan commitments Loan commitments Forward starting transactions1 Forward starting transactions1 Reverse repurchase agreements Repurchase agreements As of 31.12.18, USD million Total guarantees Total guarantees Loan commitments Loan commitments Forward starting transactions1 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. 1 466 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 TToottaall 3311..1122..1199 31.12.18 31.12.17 3322 1144 2211 33 11 3377 110088 27 15 22 3 2 40 109 25 15 22 3 2 40 106 TToottaall ((CCHHFF mmiilllliioonn))44 11 May include role-based allowances in line with market practice and regulatory requirements. 22 The cash portion may also include blocked shares in line with regulatory requirements. 33 Expenses for shares granted are calculated at grant date of the respective award and allocated over the vesting period of generally five years. Refer to Note 30 for more information. For GEB members, equity-based compensation for 2019 was entirely comprised of LTIP awards and equity-based compensation for 2018 and 2017 was entirely comprised of EOP awards. For the Chairman of the BoD the equity-based compensation for 2019, 2018 and 2017 was entirely comprised of UBS shares. 44 Swiss franc amounts disclosed represent the respective US dollar amounts translated at the applicable performance award currency exchange rates (2019: USD / CHF 0.99; 2018: USD / CHF 0.98; 2017: USD / CHF 1.00). 106 107 110077 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 7.3 million (CHF 7.3 million) in 2019, USD 7.6 million (CHF 7.4 million) in 2018 and USD 7.1 million (CHF 7.1 million) in 2017. 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 11 Refer to Note 30 for more information. 22 Excludes shares granted under variable compensation plans with forfeiture provisions. 3311..1122..1199 31.12.18 00 0 66,,888877,,882266 5,954,967 Of the share totals above, no shares were held by close family members of key management personnel on 31 December 2019 and 95,597 shares were held by close family members of key management personnel on 31 December 2018. 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 2019 and 31 December 2018. Refer to Note 30 for more information. As of 31 December 2019, no member of the BoD or GEB was the beneficial owner of more than 1% of UBS Group AG’s shares. 467 Financial statements Consolidated financial statements 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 Balance at the end of the year 2019 2019 2018 34 34 9 9 (11) (11) 33 33 32 32 42 15 (22) 34 34 Balance at the end of the year (CHF million)2, 3 Balance at the end of the year (CHF million) 1 All loans are secured loans. 1 31 December 2018. 3 Swiss franc amounts disclosed represent the respective US dollar amounts translated at the relevant year-end closing exchange rate. 3 2 No unused uncommitted credit facilities as of 31 December 2019. Excludes unused uncommitted credit facilities for one GEB member of USD 3,000,000 (CHF 2,949,690) as of 2 d) Other related-party transactions with entities controlled by key management personnel In 2019 and 2018, 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 2019, 31 December 2018 and 31 December 2017, there were no outstanding balances related to such transactions. Furthermore, in 2019 and 2018, 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 2019 and 2018, and therefore also received no fees. e) Transactions with associates and joint ventures Loans to and outstanding receivables from associates and joint ventures USD million Carrying amount at the beginning of the year Additions Reductions Foreign currency translation Carrying amount 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 Liabilities 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 468 2019 2019 829 829 145 145 (5) (5) 13 13 982 982 971 971 2018 565 276 (13) 0 829 818 As of or for the year ended 31.12.19 31.12.19 31.12.18 124 124 1 1 101 101 1,598 1,598 177 4 4 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. Invested assets and net new money USD billion Fund assets managed by UBS Discretionary assets Other invested assets TToottaall iinnvveesstteedd aasssseettss11 of which: double counts NNeett nneeww mmoonneeyy11 11 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) TToottaall iinnvveesstteedd aasssseettss aatt tthhee eenndd ooff tthhee yyeeaarr11 11 Includes double counts. 22 Includes interest and dividend income. 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. to/from inflows and outflows Net new money is calculated using the direct method, under invested assets are which 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 the change in service level directly results from an externally imposed regulation or from a strategic decision by UBS to exit a market or specific service offering, the one-time net effect is reported as Other effects. 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 may produce 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 2019 and 2018. As of or for the year ended 3311..1122..1199 31.12.18 335588 11,,220099 22,,004400 33,,660077 224488 5511 22001199 33,,110011 5511 444444 66 55 ((11)) 342 999 1,760 3,101 213 59 2018 3,262 59 (180) (35) (5) 7 33,,660077 3,101 469 Financial statements Consolidated financial statements 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 Closing exchange rate As of Average rate1 Average rate1 For the year ended 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 31.12.17 1.03 1.03 1.12 1.12 1.32 1.32 0.92 0.92 1.02 1.15 1.28 0.91 1.01 1.01 1.12 1.12 1.28 1.28 0.92 0.92 1.02 1.18 1.33 0.91 1.02 1.14 1.30 0.89 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 1 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. 470 Note 38 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, debt instruments are measured at amortized cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL), depending on the nature of the business model within which the asset is held and the characteristics of the contractual cash flows of the asset. Equity instruments are accounted for at FVTPL by UBS. Under Swiss GAAP, trading assets and derivatives are measured at FVTPL in line with IFRS. However, non-trading debt instruments are generally measured at amortized cost, even when the assets are managed on a fair value basis. In addition, the measurement of financial assets in the form of securities depends on the nature of the asset: debt instruments that are not held to maturity, i.e. instruments which are 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. intent are Equity classified as participations in Non-consolidated investments in subsidiaries and other participations and are measured at cost less impairment. instruments with a permanent holding 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 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 lending agreements and investment agreements, amounts due under unit-linked contracts, and brokerage payables. 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. 471 Financial statements Consolidated financial statements Note 38 Main differences between IFRS and Swiss GAAP (continued) Under Swiss GAAP, the effective portion of the fair value change of the derivative instrument designated as a cash flow or as a fair value hedge is deferred on the balance sheet as Other assets or Other liabilities. The carrying amount 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. 7. Pension and other post-employment benefit plans Swiss GAAP permits the use of IFRS or Swiss accounting standards for pension and other post-employment benefit plans, with the election made on a plan-by-plan basis. UBS has elected to apply IFRS (IAS 19) for the non-Swiss defined benefit plans in UBS AG standalone financial statements and Swiss GAAP (FER 16) for the Swiss pension plan in the UBS AG and financial the UBS Switzerland AG standalone statements. The requirements of Swiss GAAP are better aligned with the specific nature of Swiss pension plans, which are hybrid in that they combine elements of defined contribution and defined benefit plans, but are treated as defined benefit plans under IFRS. Key differences between Swiss GAAP and IFRS include the treatment of dynamic elements, such as future salary increases and future interest credits on retirement savings, which are not considered under the static method used in accordance with Swiss GAAP. Also, the discount rate used to determine the defined benefit obligation in accordance with IFRS is based on the yield of high-quality corporate bonds of the market in the respective pension plan country. The discount rate used in accordance with Swiss GAAP (i.e., the technical interest rate) is determined by the Pension Foundation Board based on the expected returns of the Board’s investment strategy. 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 observed subsequent to the instrument’s initial recognition. Lifetime ECL are also recognized for credit-impaired to as 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 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 measured at amortized cost, a debt instrument available for sale measured 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 amount of a financial asset. For an off-balance sheet item, such as a commitment, a provision for credit losses 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. 472 Note 38 Main differences between IFRS and Swiss GAAP (continued) 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. Furthermore, 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). 8. Leasing Under IFRS, a single lease accounting model applies that requires UBS to record a right-of-use (RoU) asset and a corresponding lease liability on the balance sheet when UBS is a lessee in a lease arrangement. The RoU asset and the lease liability are recognized when UBS acquires control of the physical use of the asset. The lease liability is measured based on the present value of the lease payments over the lease term, discounted using UBS’s unsecured borrowing rate. The RoU asset is recorded at an amount equal to the lease liability but is adjusted for rent prepayments, initial direct costs, any costs to refurbish the leased asset and/or is depreciated over the shorter of the lease term or the useful life of the underlying asset. incentives received. The RoU asset lease administrative expenses on a straight-line basis over the lease term, which commences with control of the physical use of the asset. Lease incentives are treated as a reduction of rental expense and are recognized on a consistent basis over the lease term. 9. 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. 10. 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. 11. Extraordinary income and expense Under Swiss GAAP, 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. Whereas finance leases are recognized on the balance sheet and measured in line with IFRS, operating lease payments are recognized as General and 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.  473 Financial statements Standalone financial statements UBS Group AG standalone financial statements Table of contents 477 UBS Group AG standalone financial statements Income statement 477 478 Balance sheet 479 Statement of proposed appropriation of total profit and dividend distribution out of total profit and capital contribution reserve 486 12 Accrued income and prepaid expenses Investments in subsidiaries 487 13 Financial assets 488 14 488 15 Current interest-bearing liabilities 488 16 Accrued expenses and deferred income 488 17 490 18 Compensation-related long-term liabilities 490 19 Long-term interest-bearing liabilities Share capital Treasury shares 480 1 481 2 Corporate information Accounting policies 490 20 491 Additional information 491 21 Guarantees 491 22 Assets pledged to secure own liabilities 491 23 Contingent liabilities 492 24 493 25 495 26 Significant shareholders Share and option ownership of the members of the Board of Directors, the Group Executive Board and other employees Related parties 496 Report of the statutory auditor on the financial statements 498 Independent auditor’s report related to the issue of new shares from conditional capital 484 Income statement notes 484 3 484 4 484 5 484 6 485 7 485 8 Dividend income from investments in subsidiaries Other operating income Financial income Personnel expenses Other operating expenses Financial expenses 486 Balance sheet notes 486 9 486 10 Marketable securities 486 11 Other short-term receivables Liquid assets 476 UBS Group AG standalone financial statements Audited | Income statement Dividend income from investments in subsidiaries Other operating income Financial income OOppeerraattiinngg iinnccoommee Personnel expenses Other operating expenses Amortization of intangible assets Financial expenses OOppeerraattiinngg eexxppeennsseess Profit / (loss) before income taxes Tax expense / (benefit) NNeett pprrooffiitt // ((lloossss)) USD million For the year ended CHF million For the year ended Note 3311..1122..1199 31.12.18 3311..1122..1199 31.12.18 3 4 5 6 7 8 33,,440000 115555 449988 44,,005522 2211 8811 44 662255 773322 33,,332200 00 33,,332200 3,212 157 77 3,446 23 216 4 30 273 3,174 3 3,171 33,,446644 115533 449911 44,,110088 2211 8800 44 661188 772244 33,,338844 00 33,,338844 3,152 155 76 3,383 23 212 4 30 268 3,114 3 3,111 477 Financial statements USD million CHF million Note 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 9 10 11 12 13 14 15 16 17 18 19 20 1,177 1,177 83 83 2,412 2,412 1,010 1,010 4,682 4,682 41,209 41,209 40,889 40,889 47,113 47,113 8 8 15 15 88,346 88,346 93,028 93,028 51,295 51,295 2,547 2,547 2,102 2,102 4,649 4,649 45,989 45,989 2,938 2,938 48,927 48,927 53,576 53,576 926 83 788 7 1,804 41,209 40,889 1,444 12 8 42,674 44,479 2,938 457 1,465 1,922 224 3,022 3,246 5,168 1,140 1,140 80 80 2,335 2,335 978 978 4,533 4,533 39,896 39,896 39,586 39,586 45,612 45,612 8 8 15 15 85,530 85,530 90,063 90,063 49,660 49,660 2,466 2,466 2,035 2,035 4,501 4,501 44,523 44,523 2,845 2,845 47,368 47,368 51,869 51,869 910 82 775 7 1,774 40,518 40,203 1,420 12 8 41,959 43,733 2,888 450 1,440 1,890 220 2,972 3,192 5,082 987 987 694 955 955 682 393 393 28,352 28,352 28,352 28,352 28,352 28,352 10,682 10,682 (3,297) (3,297) 1 1 3,320 3,320 39,452 39,452 93,028 93,028 393 30,846 30,846 30,846 7,513 (2,612) 0 3,171 39,310 44,479 386 386 27,730 27,730 27,730 27,730 27,730 27,730 9,937 9,937 (3,244) (3,244) 1 1 3,384 3,384 38,194 38,194 90,063 90,063 386 30,271 30,271 30,271 7,452 (2,569) 0 3,111 38,651 43,733 UBS Group AG standalone financial statements Balance sheet Assets Liquid assets Marketable securities Other short-term receivables Accrued income and prepaid expenses Total current assets Total current assets Investments in subsidiaries of which: investment in UBS AG Financial assets Other intangible assets Other non-current assets Total non-current assets Total non-current assets Total assets Total assets of which: amounts due from subsidiaries Liabilities Current interest-bearing liabilities Accrued expenses and deferred income Total short-term liabilities Total short-term liabilities Long-term interest-bearing liabilities Compensation-related long-term liabilities Total long-term liabilities Total long-term liabilities Total liabilities Total 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) Equity attributable to shareholders Equity attributable to shareholders Total liabilities and equity Total liabilities and equity 478 Statement of proposed appropriation of total profit and dividend distribution out of total profit and capital contribution reserve The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 29 April 2020 approve the total profit and an ordinary dividend appropriation of distribution of USD 0.73 (gross) in cash per share of CHF 0.10 par value under the terms set out below: Net profit for the period Profit / (loss) carried forward TToottaall pprrooffiitt aavvaaiillaabbllee ffoorr aapppprroopprriiaattiioonn AApppprroopprriiaattiioonn ooff ttoottaall pprrooffiitt Appropriation to voluntary earnings reserve Dividend distribution: USD 0.73 (gross) per dividend-bearing share, USD 0.365 of which out of total profit1 PPrrooffiitt // ((lloossss)) ccaarrrriieedd ffoorrwwaarrdd USD million CHF million For the year ended For the year ended 3311..1122..1199 3311..1122..1199 33,,332200 00 33,,332200 ((11,,991111)) ((11,,440099)) 00 33,,338844 00 33,,338844 ((22,,002200)) ((11,,336644))22 00 11 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 1,409 million presented is based on the total number of shares issued as of 22 For illustrative purposes, translated at 31 December 2019. If the final total amount of the dividend is higher / lower, the difference will be balanced through the appropriation to the voluntary earnings reserve. closing exchange rate as of 31 December 2019 (CHF / USD 1.03). Total statutory capital reserve: capital contribution reserve before proposed distribution1 Dividend distribution: USD 0.73 (gross) per dividend-bearing share, USD 0.365 of which out of capital contribution reserve2 TToottaall ssttaattuuttoorryy ccaappiittaall rreesseerrvvee:: ccaappiittaall ccoonnttrriibbuuttiioonn rreesseerrvvee aafftteerr pprrooppoosseedd ddiissttrriibbuuttiioonn USD million CHF million For the year ended For the year ended 3311..1122..1199 2288,,335522 ((11,,440099)) 2266,,994433 3311..1122..1199 2277,,773300 ((11,,336644))33 2266,,336666 11 The Swiss Federal Tax Administration’s current position is that, of the CHF 27.7 billion capital contribution reserve available as of 31 December 2019, an amount limited to CHF 13.1 billion is available from which dividends may be paid without a Swiss withholding tax deduction. 22 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 1,409 million presented is based on the total number of shares issued as of 31 December 2019. 33 For illustrative purposes, translated at closing exchange rate as of 31 December 2019 (CHF / USD 1.03). As set out above, half of the ordinary dividend distribution of USD 0.73 (gross) in cash per share is payable out of total profit and the other half is payable out of the capital contribution reserve. The portion of the dividend paid out of total profit will be subject to a 35% Swiss withholding tax. The ordinary dividend distribution is declared in USD. Shareholders whose shares are held through SIX SIS AG (ISIN CH0244767585) will receive dividends in CHF, based on a published exchange rate calculated up to five decimal places on the day prior to the ex-dividend date. Shareholders holding shares through DTC (ISIN: CH0244767585; CUSIP: H42097107) or directly registered in the US share register will be paid dividends in USD. The total amount of the dividend distribution will be capped at CHF 5,256 million (the Cap). To the extent that the CHF equivalent of the total dividend distribution would exceed the Cap on the day of the AGM, based on the exchange rate determined by the Board of Directors in its reasonable opinion, the USD per share amount of the dividend will be reduced on a pro-rata basis so that the total CHF amount does not exceed the Cap. Provided that the proposed dividend distribution out of the total profit and the capital contribution reserve is approved, the payment of the dividend will be made on 7 May 2020 to holders of shares on the record date 6 May 2020. The shares will be traded ex-dividend as of 5 May 2020 and, accordingly, the last day on which the shares may be traded with entitlement to receive the dividend will be 4 May 2020. 479 Financial statements UBS Group AG standalone financial statements Note 1 Corporate information UBS Group AG is incorporated and domiciled in Switzerland and its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland. UBS Group AG operates under article 620 et seq. 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 issuer of loss-absorbing capital notes which qualify as Basel III additional tier 1 (AT1) capital on a consolidated UBS Group basis and senior unsecured debt which contributes to the total loss-absorbing capacity (TLAC) of the Group. Issuance of AT1 capital and senior debt instruments In October 2019, loss-absorbing AT1 perpetual capital notes and senior unsecured debt instruments that had previously been issued by UBS Group Funding (Switzerland) AG and guaranteed by UBS Group AG were transferred to UBS Group AG at book value affecting comparability of presented amounts. 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 investors’ seniority of claims against UBS Group AG remains unchanged. The transfer followed changes in the tax treatment of too-big-to-fail (TBTF) instruments issued by the holding companies of Swiss systemically important banks that entered into force as of 1 January 2019. The proceeds from the issuances of loss-absorbing AT1 senior unsecured debt capital notes and TLAC-eligible instruments are on-lent to UBS AG.  Refer to Notes 15 and 17 for more information about the main terms and conditions of the loss-absorbing AT1 capital notes and TLAC-eligible senior unsecured debt instruments issued 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 2019, UBS Group AG’s distributable items for the purpose of AT1 capital instruments were USD 39.0 billion (CHF 37.7 billion) (31 December 2018: USD 38.8 billion (CHF 38.2 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. 480 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. Presentation currencies As the primary presentation currency of the standalone financial statements of UBS Group AG is the US dollar, amounts in Swiss francs are additionally presented for each component of the financial statements. UBS Group AG applies the modified closing rate method for converting 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 currency translation effects are recognized separately in Voluntary earnings reserve, amounting to a negative currency translation effect of CHF 544 million as of 31 December 2019 (31 December 2018: positive CHF 81 million). 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 income statement. exchange rate presented net in the in subsidiaries measured at historic cost are Investments translated at the spot exchange rate on the date of the 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 the perpetual AT1 capital notes, the TLAC-eligible senior unsecured debt instruments issued and the 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 on the balance sheet 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. 481 Financial statements UBS Group AG standalone financial statements 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 Long-term interest bearing liabilities Long-term interest-bearing liabilities include perpetual loss- absorbing capital notes that qualify as Basel III AT1 capital and TLAC-eligible senior unsecured debt instruments at Group level. They are measured at nominal value. Any difference to nominal value, e.g., premium, discount or external costs that are directly related to the issue, is deferred as Accrued income and prepaid expenses or Accrued expenses and deferred income and amortized to Financial expenses or Financial income over the maturity of the instrument or until the first call date or optional redemption date, where applicable.  Refer to Note 17 for more information 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 UBS Group AG shares 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 UBS Group AG shares and hold such in their trading portfolios, no Reserve for own shares held by subsidiaries is created.  Refer to Note 20 for more information Share-based and other deferred 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. Share-based compensation plans The grant date fair value of equity-settled share-based compensation awards granted to employees is generally recognized over the vesting period of the awards. Awards granted in the form of UBS Group AG shares and notional shares are settled by delivering UBS Group AG shares at vesting except in jurisdictions where this is not permitted for legal or tax reasons. They 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 of the balance sheet date. The amount recognized is adjusted for forfeiture assumptions, such that the amount ultimately recognized is based on the number of awards that meet the related service conditions at the vesting date. The grant date fair value is based on the UBS Group AG share price, taking into consideration post-vesting sale and hedge conditions and market conditions, where applicable. restrictions, non-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-based awards represent the difference between the market price of the UBS Group AG 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 of 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. 482 Note 2 Accounting policies (continued) Other deferred compensation plans Deferred compensation plans that are not share-based, including DCCP awards and awards in the form of AIVs, are accounted for as cash-settled awards. The present value or fair value of the amount payable to employees that is settled in cash is recognized as a liability generally over the vesting period, as Compensation-related long-term liabilities if vesting is more than 12 months after the balance sheet date and as Accrued expenses and deferred income if vesting is within 12 months from the balance sheet date. The liabilities are remeasured at each balance sheet date at the present value of the corresponding DCCP award and the fair value of investments in from AIVs, remeasurement of the in Other operating income and Other operating expenses, respectively. liabilities are recognized respectively. Gains resulting losses and Recharge of compensation expenses Expenses related to deferred compensation plans are recharged by UBS Group AG to its subsidiaries employing the personnel. Upon recharge, UBS Group AG recognizes a receivable from its subsidiaries corresponding its to a obligation toward the 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 financial statements. The disclosures dispensations include the management report and the statement of cash flows, as well as certain note disclosures. the standalone in 483 Financial statements UBS Group AG standalone financial statements Income statement notes Note 3 Dividend income from investments in subsidiaries Dividend income from investments in subsidiaries in 2019 consisted of USD 3,250 million (CHF 3,311 million) received from UBS AG related to the financial year 2018, which was approved by the Annual General Meeting of the Shareholders of UBS AG on 18 April 2019, USD 143 million (CHF 146 million) received from UBS Business Solutions AG related to the financial year ended 31 December 2018, which was approved by the Annual General Meeting of the Shareholders of UBS Business Solutions AG on 17 April 2019, and USD 6 million (CHF 6 million) received from UBS Group Funding (Switzerland) AG related to the financial year ended 31 December 2018, which was approved by the Annual General Meeting of the Shareholders of UBS Group Funding (Switzerland) AG on 8 March 2019. In 2018, dividend income from investments in subsidiaries consisted 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 the 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 the 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 the Shareholders of UBS Group Funding (Switzerland) AG on 8 March 2018. Note 4 Other operating income Fair value gains on AIV awards Gains related to equity-settled awards Amortization of net liability related to deferred compensation plan transfer Commission income from guarantees issued Total other operating income Total other operating income Note 5 Financial income Fair value gains on investments in AIVs 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 Total financial income Note 6 Personnel expenses USD million For the year ended CHF million For the year ended 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 0 0 119 119 1 1 35 35 155 155 8 106 5 37 157 0 0 118 118 1 1 34 34 153 153 9 105 5 36 155 USD million For the year ended CHF million For the year ended 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 45 45 2 2 0 0 445 445 4 4 1 1 498 498 0 6 47 13 11 0 77 45 45 2 2 0 0 439 439 4 4 1 1 491 491 0 6 46 13 11 0 76 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 2019 and 2018. 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 2019, the UBS Group employed 68,601 personnel (31 December 2018: 66,888) on a full-time equivalent basis. 484 Note 7 Other operating expenses Fair value losses on AIV awards Losses related to equity-settled awards Capital tax Other TToottaall ootthheerr ooppeerraattiinngg eexxppeennsseess Note 8 Financial expenses Fair value losses on investments in AIVs Impairment losses on financial assets Treasury share losses Interest expense on interest-bearing liabilities Interest expense on derivatives Fees paid Foreign currency losses TToottaall ffiinnaanncciiaall eexxppeennsseess USD million For the year ended CHF million For the year ended 3311..1122..1199 31.12.18 3311..1122..1199 31.12.18 4455 00 1133 2222 8811 0 184 14 18 216 4455 00 1133 2222 8800 0 181 14 17 212 USD million For the year ended CHF million For the year ended 3311..1122..1199 31.12.18 3311..1122..1199 31.12.18 00 00 119911 442299 55 11 00 662255 8 0 0 13 6 1 2 30 00 00 119911 442222 11 55 00 661188 8 0 0 13 6 1 2 30 485 Financial statements UBS Group AG standalone financial statements Balance sheet notes Note 9 Liquid assets As of 31 December 2019, liquid assets comprised USD 794 31 December 2018, liquid assets comprised USD 542 million million (CHF 533 million) held on current accounts at UBS Switzerland UBS Switzerland AG and UBS AG and USD 383 million (CHF 371 AG and UBS AG and USD 384 million (CHF 378 million) of time million) of time deposits placed with UBS AG. As of deposits placed with UBS AG. (CHF 769 million) held on current accounts at 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 Onward lending to UBS AG1 Loans to UBS Business Solutions AG Receivables from employing entities related to compensation awards Other Total other short-term receivables Total other short-term receivables USD million CHF million 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 1,870 1,870 55 55 482 482 5 5 2,412 2,412 0 216 567 5 788 1,811 1,811 53 53 466 466 5 5 2,335 2,335 0 213 557 5 775 1 Short-term receivables from the onward lending of the proceeds from the issuances of TLAC-eligible senior unsecured debt and loss-absorbing additional tier 1 perpetual capital notes to UBS AG. Refer to Note 1 1 for more information. Note 12 Accrued income and prepaid expenses Accrued interest income Other accrued income and prepaid expenses Total accrued income and prepaid expenses Total accrued income and prepaid expenses USD million CHF million 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 816 816 194 194 1,010 1,010 6 1 7 790 790 188 188 978 978 6 1 7 486 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, the 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. Subsidiaries of UBS Group AG as of 31 December 2019 Company UBS AG Registered office Zurich and Basel, Switzerland UBS Business Solutions AG1 Zurich, Switzerland UBS Group Funding (Switzerland) AG Zurich, Switzerland 11 UBS Business Solutions AG holds subsidiaries in Poland, China and India. Individually significant subsidiaries of UBS AG as of 31 December 20191 Company Registered office UBS Americas Holding LLC Wilmington, Delaware, USA UBS Americas Inc. Wilmington, Delaware, USA UBS Asset Management AG Zurich, Switzerland Primary business Corporate Center 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 Securities LLC UBS Switzerland AG Wilmington, Delaware, USA Investment Bank Zurich, Switzerland Personal & Corporate Banking Share capital in million Equity interest accumulated in % CHF CHF CHF 385.8 1.0 0.1 100.0 100.0 100.0 Share capital in million Equity interest accumulated in % USD USD CHF USD EUR USD USD CHF 3,150.02 0.0 43.2 0.0 446.0 0.0 1,283.13 10.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 11 Includes direct and indirect subsidiaries of UBS AG. 22 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 3,150,000,000. 33 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 487 Financial statements UBS Group AG standalone financial statements 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 Total financial assets USD million CHF million 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 46,644 46,644 236 236 229 229 4 4 993 224 224 4 45,158 45,158 229 229 222 222 4 4 976 220 220 4 47,113 47,113 1,444 45,612 45,612 1,420 1 As of 31 December 2019, long-term receivables from UBS AG include the onward lending of the proceeds from the issuances of TLAC-eligible senior unsecured debt and loss-absorbing additional tier 1 perpetual 1 capital notes for the total amount of USD 45,682 million (CHF 44,226 million). Refer to Note 1 for more information. Note 15 Current interest-bearing liabilities Current interest-bearing liabilities totaled USD 2,547 million (CHF 2,466 million) as of 31 December 2019 comprising TLAC- eligible senior unsecured debt instruments of USD 1,800 million (CHF 1,743 million) and loans from UBS AG of USD 747 million (CHF 723 million). As of 31 December 2018, current interest- bearing liabilities comprised loans from UBS AG of USD 457 million (CHF 450 million). In October 2019, all loss-absorbing AT1 capital notes and TLAC-eligible senior unsecured debt instruments previously issued by UBS Group Funding (Switzerland) AG were transferred to UBS Group AG by means of an issuer substitution at book value.  Refer to Note 1 for more information Notes issued, overview by amount, maturity and coupon 31.12.19 31.12.19 Carrying amount Carrying amount Carrying amount in transaction in transaction Carrying amount Carrying amount in CHF currency In million, except where indicated in CHF currency 290 300 290 300 US dollar-denominated TLAC-eligible senior unsecured notes 1,452 1,500 1,452 1,500 US dollar-denominated TLAC-eligible senior unsecured notes Total notes issued 1,743 1,743 Total notes issued 1 Disclosed maturity refers to the contractual maturity date or, if applicable, to the earlier optional redemption date of the respective issuance. The disclosed coupon rate refers to the contractual coupon rate applied 1 from the issue date up to the contractual maturity date or, if applicable, to the earlier optional redemption date. Maturity1 Coupon1 Coupon1 Maturity1 24.09.20 3M USD LIBOR + 144 bps 24.09.20 3M USD LIBOR + 144 bps 2.950% 24.09.20 2.950% 24.09.20 Carrying amount in USD in USD 300 300 1,500 1,500 1,800 1,800 Note 16 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 USD million CHF million 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 0 0 1,268 1,268 497 497 771 771 784 784 50 50 3 1,405 550 856 4 53 0 0 1,228 1,228 482 482 746 746 759 759 48 48 3 1,382 541 841 3 52 Total accrued expenses and deferred income Total accrued expenses and deferred income 2,102 2,102 1,465 2,035 2,035 1,440 Note 17 Long-term interest-bearing liabilities Long-term interest-bearing liabilities totaled USD 45,989 million (CHF 44,523 million) as of 31 December 2019 comprising loss- absorbing AT1 perpetual capital notes and TLAC-eligible senior unsecured debt instruments of USD 45,752 million (CHF 44,294 million) and fixed-term loans from UBS AG of USD 236 million (CHF 229 million). As of 31 December 2018, long-term interest- bearing liabilities comprised fixed-term loans from UBS AG of USD 224 million (CHF 220 million). In October 2019, all loss- absorbing AT1 capital notes and TLAC-eligible senior unsecured debt instruments previously issued by UBS Group Funding (Switzerland) AG were transferred to UBS Group AG by means of an issuer substitution at book value.  Refer to Note 1 for more information 488 Note 17 Long-term interest-bearing liabilities (continued) Notes issued, overview by amount, maturity and coupon 3311..1122..1199 CCaarrrryyiinngg aammoouunntt iinn ttrraannssaaccttiioonn ccuurrrreennccyy CCaarrrryyiinngg aammoouunntt iinn UUSSDD CCaarrrryyiinngg aammoouunntt iinn CCHHFF CCoouuppoonn1,2 MMaattuurriittyy1,2 11,,221100 6688 11,,225500 7700 11,,225500 110000 77..112255%% 33..003300%% 11,,550000 11,,000000 22,,000000 11,,550000 11,,000000 22,,000000 11,,445522 996688 11,,993366 1199..0022..220033 1188..1111..2200 11,,006655 11,,990000 448844 11,,993366 11,,110000 11,,775500 550000 22,,000000 11,,110000 11,,996622 550000 22,,000000 11,,008866 330000 11,,993366 996688 11,,221100 11,,993366 113366 11,,335577 11,,000000 330000 22,,000000 11,,000000 11,,225500 22,,000000 114411 11,,225500 11,,112211 331100 22,,000000 11,,000000 11,,225500 22,,000000 114411 11,,440022 2222..0033..2211 66..887755%% 1144..0044..2211 33MM UUSSDD LLIIBBOORR ++ 117788 bbppss 33..000000%% 1155..0044..2211 1100..0088..2211 77..112255%% 33MM EEUURR LLIIBBOORR ++ 7700 bbppss 2200..0099..2211 0011..0022..2222 33MM UUSSDD LLIIBBOORR ++ 115533 bbppss 22..665500%% 0011..0022..2222 55..775500%% 1199..0022..2222 00..775500%% 2222..0022..2222 2233..0055..2222 33..449911%% 2233..0055..2222 33MM UUSSDD LLIIBBOORR ++ 112222 bbppss 33MM UUSSDD LLIIBBOORR ++ 9955 bbppss 1155..0088..2222 22..885599%% 1155..0088..2222 00..000000%% 0044..1111..2222 11..775500%% 1166..1111..2222 In million, except where indicated US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Australian dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Euro-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes Euro-denominated low-trigger loss-absorbing additional tier 1 perpetual capital notes Swiss franc-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes US dollar-denominated TLAC-eligible senior unsecured notes Euro-denominated TLAC-eligible senior unsecured notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Swiss franc-denominated TLAC-eligible senior unsecured notes Yen-denominated TLAC-eligible senior unsecured notes Singapore dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Euro-denominated TLAC-eligible senior unsecured notes Swiss franc-denominated TLAC-eligible senior unsecured notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Euro-denominated TLAC-eligible senior unsecured notes Euro-denominated TLAC-eligible senior unsecured notes Australian dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Singapore dollar-denominated high-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 11,,552255 perpetual capital notes 22,,442200 US dollar-denominated TLAC-eligible senior unsecured notes 227755 Swiss franc-denominated high-trigger loss-absorbing additional tier 1 115500 Swiss franc-denominated TLAC-eligible senior unsecured notes 11,,993366 US dollar-denominated TLAC-eligible senior unsecured notes 11,,335577 Euro-denominated TLAC-eligible senior unsecured notes 11,,993366 US dollar-denominated TLAC-eligible senior unsecured notes 117788 Yen-denominated TLAC-eligible senior unsecured notes 11,,445522 US dollar-denominated TLAC-eligible senior unsecured notes TToottaall nnootteess iissssuueedd 4444,,229944 11 For the TLAC-eligible senior unsecured notes, disclosed maturity refers to the contractual maturity date or, if applicable, to the earlier optional redemption date of the respective issuance. The disclosed coupon rate 22 For the loss-absorbing additional tier 1 perpetual refers to the contractual coupon rate applied from the issue date up to the contractual maturity date or, if applicable, to the earlier optional redemption date. capital notes, disclosed maturity refers to the first call date and the disclosed coupon rate refers to the contractual fixed coupon rate from the issue date up to, but excluding, the first call date. 33 Instrument was called on 10 January 2020. 0077..0088..2255 2244..0099..2255 1133..1111..2255 2233..0022..2266 1155..0044..2266 0011..0099..2266 2233..0033..2277 0099..1111..2277 1133..0088..2299 66..887755%% 44..112255%% 33..000000%% 11..225500%% 44..112255%% 11..225500%% 44..225533%% 00..997733%% 33..112266%% 11,,557755 22,,550000 228844 115555 22,,000000 11,,440022 22,,000000 118844 11,,550000 4455,,775522 11,,557755 22,,550000 227755 115500 22,,000000 11,,225500 22,,000000 2200,,000000 11,,550000 3311..0011..2244 0044..0033..2244 1177..0044..2244 2288..1111..2233 3300..1111..2233 3300..0011..2244 3311..0011..2233 1188..0055..2233 0088..1111..2233 22,,000000 440000 113300,,000000 77..000000%% 22..112255%% 11..225500%% 55..887755%% 11..550000%% 00..887755%% 55..000000%% 00..662255%% 00..771199%% 552211 11,,440022 441133 770000 11,,225500 440000 22,,550000 775500 11,,775500 22,,550000 884411 11,,996622 22,,000000 441133 11,,119966 550044 11,,335577 440000 22,,442200 881144 11,,990000 11,,993366 440000 11,,115577 0044..0099..2244 2277..0088..2244 1199..0022..2255 44..337755%% 44..885500%% 77..000000%% 11,,225500 11,,225500 11,,221100 770000 449911 775500 555588 447755 554400 489 Financial statements UBS Group AG standalone financial statements Note 18 Compensation-related long-term liabilities Long-term portion of compensation liabilities of which: Deferred Contingent Capital Plan of which: other deferred compensation plans Total compensation-related long-term liabilities Total compensation-related long-term liabilities Note 19 Share capital USD million CHF million 31.12.19 31.12.19 31.12.18 31.12.19 31.12.19 31.12.18 2,938 2,938 1,340 1,340 1,598 1,598 2,938 2,938 3,022 1,415 1,607 3,022 2,845 2,845 1,298 1,298 1,547 1,547 2,845 2,845 2,972 1,391 1,581 2,972 As of 31 December 2019, the issued share capital consisted of 3,859,055,395 (31 December 2018: 3,855,634,749) registered shares with a par value of CHF 0.10 each.  Refer to “UBS shares” in the “Capital management” section of this report for more information about UBS Group AG shares Note 20 Treasury shares Balance as of 31 December 2017 Balance as of 31 December 2017 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 2018 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 Acquisitions Disposals Delivery of shares to settle equity-settled awards Balance as of 31 December 2019 Balance as of 31 December 2019 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 132,301,550 132,301,550 132,211,630 89,920 103,979,927 (2,438,508) (67,375,167) 166,467,802 166,467,802 166,203,791 264,011 146,876,692 146,876,692 (5,999,827) (5,999,827) (64,323,371) (64,323,371) 243,021,296 243,021,296 242,930,084 242,930,084 91,212 91,212 16.65 16.65 16.65 17.99 15.32 16.90 16.69 15.71 15.71 15.71 12.27 11.86 11.86 11.88 11.88 15.35 15.35 13.57 13.57 13.57 13.57 12.65 12.65 16.23 16.23 16.23 17.54 15.10 16.61 16.39 15.45 15.45 15.46 12.05 11.75 11.75 11.50 11.50 15.28 15.28 13.35 13.35 13.35 13.35 12.75 12.75 1 The carrying amount of treasury shares held by UBS Group AG as of 31 December 2019 was USD 3,297 million / CHF 3,244 million (31 December 2018: USD 2,612 million / CHF 2,569 million). 1 490 Additional information Note 21 Guarantees UBS Group AG used to issue guarantees to the external investors against any default in payments of interest and principal by UBS Group Funding (Switzerland) AG, a direct subsidiary of UBS Group AG. As of 31 December 2018, UBS Group Funding (Switzerland) (CHF 30,920 million) AG had issued USD 31,448 million equivalent of TLAC-eligible senior debt and USD 10,334 million (CHF 10,161 million) equivalent of loss-absorbing AT1 capital notes. In October 2019, those guarantees were canceled upon the transfer of the underlying instruments to UBS Group AG.  Refer to Note 1 for more information Note 22 Assets pledged to secure own liabilities As of 31 December 2019, total pledged assets of UBS Group AG amounted to USD 2,021 million (CHF 1,957 million). These assets consisted of certain liquid assets, marketable securities and financial assets and were pledged to UBS AG. As of 31 December 2018, total pledged assets of UBS Group AG amounted to USD 1,862 million (CHF 1,831 million). The associated liabilities secured by these pledged assets were USD 933 million (CHF 903 million) and USD 633 million (CHF 623 million) as of 31 December 2019 and 31 December 2018, respectively. Note 23 Contingent liabilities UBS Group AG is jointly and severally liable for the combined value added tax (VAT) liability of UBS entities that belong to the VAT group of UBS in Switzerland. 491 Financial statements UBS Group AG standalone financial statements Note 24 Significant shareholders Shareholders registered in the UBS Group AG share register with 3% or more of the total share capital % of share capital Chase Nominees Ltd., London1 DTC (Cede & Co.), New York1,2 31.12.19 31.12.19 10.94 10.94 7.57 7.57 31.12.18 12.08 7.23 Nortrust Nominees Ltd., London1 1 Nominee companies and securities clearing organization cannot autonomously decide how voting rights are exercised and are therefore not obligated to notify UBS and the SIX if they reach, exceed or fall below 1 2 DTC (Cede & Co.), New the threshold percentages according to the FMIA disclosure notification. Consequently, they do not appear in the below section “Shareholders subject to FMIA disclosure notifications.” 2 York, “The Depository Trust Company,” is a US securities clearing organization. 4.14 4.90 4.90 10 February 2016. As registration in the UBS share register is optional, shareholders crossing the aforementioned thresholds requiring SIX notification under FMIA, do not necessarily appear in the above table. The above disclosures have not been subsequently superseded and no new disclosures of significant shareholdings have been made since 31 December 2019. 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.  Refer to www.six-exchange-regulation.com/en/home/ publications/significant-shareholders.html for information about disclosures under the FMIA Shareholders registered in the UBS Group AG share register with 3% or more of the share capital of UBS Group AG As a supplement to the mandatory disclosure requirements according to the SIX Swiss Exchange Corporate Governance Directive, the shareholders (acting in their own name or in their capacity as nominees for other investors or beneficial owners) that were registered in the UBS share register with 3% or more of total share capital of UBS Group AG as of 31 December 2019 or as of 31 December 2018 are listed in the table above. the 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 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 required to notify the company and SIX if they reach, exceed or fall below the threshold percentages. Pursuant to the Swiss Code of Obligations, UBS Group AG identity of any discloses shareholder with a holding of more than 5% of the total share capital of UBS Group AG. its financial statements the in Shareholders subject to FMIA disclosure notifications According to the mandatory FMIA disclosure notifications filed with UBS Group AG and SIX, as of 31 December 2019, the following entities held more than 3% of the total share capital of UBS Group AG: Artisan Partners Limited Partnership, Milwaukee, disclosed a holding of 3.02% of the total share capital of UBS Group AG on 20 September 2019; Norges Bank, Oslo, disclosed a holding of 3.01% on 24 July 2019; Dodge & Cox, San Francisco, disclosed a holding of 3.03% 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 492 Note 25 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 TToottaall FFoorr tthhee yyeeaarr eennddeedd 3311..1122..1199 For the year ended 31.12.18 NNuummbbeerr ooff sshhaarreess 556600,,888899 VVaalluuee ooff sshhaarreess iinn UUSSDD mmiilllliioonn 77 VVaalluuee ooff sshhaarreess iinn CCHHFF mmiilllliioonn 77 Number of shares 354,265 Value of shares in USD million 6 Value of shares in CHF million 6 44,,887788,,990088 7722,,776633,,000011 7788,,220022,,779988 5588 881122 887788 5566 778877 885500 2,996,831 55,332,567 58,683,663 52 926 984 51 908 965  Refer to the “Corporate governance and compensation” section of this report for more information about 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, former Vice Chairman2 David Sidwell, Vice Chairman and Senior Independent Director Jeremy Anderson, member William C. Dudley, member2 Reto Francioni, member Ann F. Godbehere, former member2 Fred Hu, member Julie G. Richardson, member Isabelle Romy, member Robert W. Scully, member Beatrice Weder di Mauro, member Dieter Wemmer, member Jeanette Wong, member2 TToottaall oonn 3311 DDeecceemmbbeerr 22001199 NNuummbbeerr ooff sshhaarreess hheelldd 993388,,662277 Voting rights in % 0.053 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 776644,,332299 – – 332222,,555588 116677,,559955 118899,,880055 3311,,445566 00 00 – – 112255,,662288 9988,,883322 – – 225599,,222255 1155,,114455 00 4466,,228833 1177,,115577 114433,,992288 111144,,880022 7711,,554400 4477,,007744 117722,,339977 114455,,660011 6600,,228855 3311,,115599 00 – – 11,,777722,,888844 0.042 – 0.018 0.009 0.010 0.002 0.000 0.000 – 0.007 0.005 – 0.014 0.001 0.000 0.003 0.001 0.008 0.006 0.004 0.003 0.010 0.008 0.003 0.002 0.000 – 0.100 0.109 11 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2019 and 2018. 22 At the 2019 AGM, William C. Dudley and Jeanette Wong were newly elected and Michel Demaré and Ann F. Godbehere did not stand for re-election. 11,,999900,,554422 22001188 493 Financial statements UBS Group AG standalone financial statements Note 25 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, former Co-President Global Wealth Management Christian Bluhm, Group Chief Risk Officer Markus U. Diethelm, Group General Counsel Kirt Gardner, Group Chief Financial Officer Suni Harford, President Asset Management Robert Karofsky, Co-President Investment Bank Sabine Keller-Busse, Group Chief Operating Officer and President UBS EMEA Iqbal Khan, Co-President Global Wealth Management Edmund Koh, President Asia Pacific Ulrich Körner, former 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 Markus Ronner, Group Chief Compliance and Governance Officer Total Total Number of on on unvested 31 December shares / at risk2 31 December 2019 1,862,480 2019 Number of vested shares 2,150,003 Total number of Total number of shares shares 4,012,483 4,012,483 Potentially conferred voting rights in % 0.227 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 2018 2018 2019 2019 1,715,430 – 1,757,766 – 256,356 440,953 259,745 698,402 614,222 532,643 343,120 63,211 – 577,606 500,902 423,778 259,762 712,342 – 380,340 – – 910,951 522,202 307,090 1,307,554 1,132,938 599,156 471,049 214,850 161,152 0 0 0 458,426 317,516 129,807 107,472 0 – 492,476 254,119 315,922 263,362 0 – 183,104 – – 95,597 277,978 277,978 609,477 484,075 429,652 256,367 68,097 173 3,473,196 3,473,196 – – 256,356 256,356 440,953 440,953 259,745 259,745 1,156,828 1,156,828 931,738 931,738 662,450 662,450 450,592 450,592 63,211 63,211 – – 1,070,082 1,070,082 755,021 755,021 739,700 739,700 523,124 523,124 712,342 712,342 – – 563,444 563,444 – – – – 1,006,548 1,006,548 800,180 800,180 585,068 585,068 1,917,031 1,917,031 1,617,013 1,617,013 1,028,808 1,028,808 727,416 727,416 282,947 282,947 161,325 161,325 8,335,517 5,114,942 13,450,459 13,450,459 0.191 – 0.014 0.025 0.014 0.065 0.051 0.037 0.025 0.004 – 0.061 0.042 0.042 0.029 0.040 – 0.032 – – 0.055 0.045 0.032 0.108 0.089 0.058 0.040 0.016 0.009 0.761 0.591 1 Includes all vested and unvested shares of GEB members, including those held by related parties. No options were held in 2019 and 2018 by any GEB member or any of its related parties. Refer to “Note 30 1 Employee benefits: variable compensation” in the “Consolidated financial statements” section of the Annual Report 2019 for more information. 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 about the plans. 3,814,425 10,747,142 10,747,142 6,932,717 2018 2018 2 494 Note 26 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 3311..1122..1199 31.12.18 3311..1122..1199 31.12.18 117788 7766 110011 00 156 78 78 0 117722 7744 9988 00 154 77 77 0  495 Financial statements Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone: Fax: www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of UBS Group AG, Zurich Basel, 27 February 2020 Report of the statutory auditor on the financial statements As statutory auditor, we have audited the financial statements of UBS Group AG, which comprise the balance sheet, income statement and notes, for the year ended 31 December 2019. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 31 December 2019 comply with Swiss law and the company’s articles of incorporation. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to communicate in our report. 496 2 Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. Ernst & Young Ltd - Marie Laure Delarue Licensed audit expert (Auditor in charge) Bruno Patusi Licensed audit expert 497 Financial statements 498 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 UBS AG (standalone) USD million, UBS Switzerland AG (standalone) CHF million, UBS Europe SE (consolidated) EUR million, UBS Americas Holding LLC (consolidated) USD million, 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 capital8 Tier 2 capital Total gone concern loss-absorbing capacity8,9 Total capital Total loss-absorbing capacity8,9 except where indicated except where indicated except where indicated except where indicated 31.12.182 31.12.191 31.12.191 31.12.19 31.12.19 31.12.19 31.12.19 31.12.18 31.12.18 31.12.19 31.12.19 11,975 11,975 8,086 8,086 3,889 3,889 3,848 3,848 12,040 9,539 2,501 3,333 7,688 7,688 6,351 6,351 1,337 1,337 1,039 1,039 8,257 6,439 1,818 1,401 997 997 810 810 186 186 188 188 478,946 478,946 427,242 427,242 51,705 51,705 480,238 429,130 51,107 285,014 285,014 272,341 272,341 12,673 12,673 293,034 279,200 13,834 46,247 46,247 41,756 41,756 4,490 4,490 49,521 49,521 11,958 11,958 61,479 61,479 66,632 66,632 49,411 7,805 57,217 63,225 10,895 10,895 4,711 4,711 15,606 15,606 15,606 15,606 10,225 4,243 14,468 14,468 10,915 10,915 10,932 26,521 26,521 25,400 3,486 3,486 290 290 3,776 3,776 3,776 3,776 1,84010 1,84010 3,776 3,776 5,616 5,616 12,169 12,169 10,830 10,830 1,339 1,339 730 730 12,953 11,162 1,791 3,969 139,293 139,293 111,016 111,016 28,277 28,277 142,761 115,340 27,421 11,939 11,939 3,048 3,048 14,987 14,987 11,746 2,141 13,887 714 714 714 15,702 15,702 14,601 Risk-weighted assets and leverage ratio denominator6,7 Risk-weighted assets Leverage ratio denominator 287,999 287,999 589,127 589,127 292,888 601,013 99,667 99,667 302,304 302,304 95,646 306,487 15,146 15,146 41,924 41,924 54,058 54,058 127,290 127,290 54,063 122,829 Capital and leverage ratios (%)6,7 Common equity tier 1 capital ratio Tier 1 capital ratio Going concern capital ratio8 Total capital ratio Total loss-absorbing capacity ratio8 Leverage ratio11 Total loss-absorbing capacity leverage ratio8 Liquidity7,8,12 High-quality liquid assets (billion) Net cash outflows (billion) Liquidity coverage ratio (%)14,15 17.2 17.2 16.9 10.9 10.9 10.7 23.1 23.1 21.6 15.7 15.7 15.1 11.3 11.3 10.5 26.6 26.6 26.6 8.8 8.8 8.3 74 74 54 54 137 137 76 55 139 67 67 52 52 130 130 67 53 128 23.0 23.0 24.9 24.9 24.9 24.9 37.1 37.1 9.0 9.0 13.4 13.4 14 14 1013 1013 14713 14713 22.1 22.1 27.7 27.7 29.0 29.0 11.8 11.8 21.7 25.7 27.0 11.3 17 17 Other Joint and several liability between UBS AG and UBS Switzerland AG (billion)16 1 As a result of the cross-border merger of UBS Limited into UBS Europe SE effective 1 March 2019, UBS Europe SE became a significant regulated subsidiary of UBS Group AG. The size, scope and business model of 1 2 Figures as of or for the year the merged entity is now materially different. Comparatives for 31 December 2018 have not been provided in the table because data produced on the same basis is not available. 2 ended 31 December 2018 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 3 UBS AG and UBS Switzerland AG financial information is prepared in accordance with Swiss GAAP (FINMA Circular 2015/1 and Report 2018 and the 31 December 2018 Pillar 3 report on 15 March 2019. 3 4 UBS Europe SE financial information is prepared in accordance with International Financial Reporting Standards (IFRS), but Banking Ordinance), but does not represent financial statements under Swiss GAAP. 4 5 UBS Americas Holding LLC financial information is prepared in accordance with accounting principles generally accepted in the US (US GAAP), but does not does not represent financial statements under IFRS. 5 6 For UBS AG and UBS Switzerland AG, based on applicable transitional arrangements for Swiss systemically relevant banks (SRBs). For UBS Europe SE, based on represent financial statements under US GAAP. 6 applicable EU Basel III rules. For UBS Americas Holding LLC, based on applicable US Basel III rules. 7 Refer to the 31 December 2019 Pillar 3 report available under “Pillar 3 disclosures” at www.ubs.com/investors for more information. 8 There was no local disclosure requirement for UBS Americas Holding LLC as of 31 December 2019 and 31 December 2018. 9 Total loss-absorbing capacity of UBS Americas Holding LLC is 10 Consists of positions which meet the conditions laid down in Art. 72a–b of the Capital Requirements Regulation (CRR) II with regard to contractual, disclosed on a semi-annual basis in our Pillar 3 report. 10 structural or legal subordination. 12 For UBS Europe SE, figures as of 12 13 Revised 31 December 2019 are based on a ten-month average, rather than a twelve-month average, as data produced on the same basis is only available for the period since the cross-border merger. 13 14 UBS AG is required to maintain a minimum liquidity coverage ratio of 105% as communicated by FINMA. calculation excludes inflows from overdrafts which we cannot demand repayment of within 30 days. 14 16 Refer to the “Capital management” section of this report for more information about the joint and 15 UBS Switzerland AG, as a Swiss SRB, is required to maintain a minimum liquidity coverage ratio of 100%. 15 16 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. 11 For UBS AG, on the basis of going concern capital. On the basis of tier 1 capital for UBS Europe SE and UBS Americas Holding LLC. 11 26 8 7 9 500 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 contribute a significant portion of their respective capital and provide substantial liquidity to their 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 an entity to engage in new activities or take capital actions based on the results of those tests. In June 2019, the Federal Reserve Board released the results of its Comprehensive Capital Analysis and Review (CCAR) and did not object to the capital plan of UBS Americas Holding LLC, our US intermediate holding company. Standalone regulatory information for UBS AG and UBS Switzerland AG, as well as consolidated regulatory information for UBS Europe SE and UBS Americas Holding LLC is provided in the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors. Standalone financial statements for UBS Group AG as well as standalone financial statements and regulatory information for UBS AG and UBS Switzerland AG are available under “Holding company and significant regulatory subsidiaries and sub-groups” at www.ubs.com/investors. 501 Significant regulated subsidiary andsub-group information Appendix Alternative performance measures Alternative performance measures An alternative performance measure (APM) is a financial measure of historical or future financial performance, financial position or cash flows other than a financial measure defined or specified in the applicable recognized accounting standards or in other applicable regulations. We report a number of APMs, including adjusted results, in the discussion of the financial and operating performance of the Group, our business divisions and our Corporate Center. We use APMs to provide a fuller picture of our operating performance and to reflect management’s view of the fundamental drivers of our business results. A definition of each APM, the method used to calculate it and the information content are presented in the table below. Our APMs may qualify as non-GAAP measures as defined by SEC regulations. AAPPMM llaabbeell DDeeffiinniittiioonn IInnffoorrmmaattiioonn ccoonntteenntt Adjusted results (adjusted operating profit / (loss) before tax, adjusted operating income, adjusted operating expenses) Invested assets Calculated by adjusting operating profit / (loss), operating income and operating expenses as reported in accordance with International Financial Reporting Standards (IFRS) for restructuring and litigation expenses, as well as other material profit or loss items that management believes are not representative of the underlying business performance. Calculated as the sum of 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. These measures provide information about the financial and operating performance, excluding items that management believes are not representative of the underlying performance of our businesses. This measure provides information about the volume of client assets managed by or deposited with UBS for investment purposes. Recurring income – GWM Calculated as total of net interest income and recurring net fee income. This measure provides information about the amount of the recurring net interest and fee income. Recurring net fee income – GWM, P&C Transaction-based income – GWM, P&C Calculated as total 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. Calculated as total of the non-recurring portion of net fee and commission income, mainly composed of brokerage and transaction-based investment fund fees, as well as credit card fees and fees for payment transactions, together with other net income from financial instruments measured at fair value through profit or loss. This measure provides information about the amount of recurring net fee income. This measure provides information about the amount of the non-recurring portion of net fee and commission income. 502 AAPPMM llaabbeell CCaallccuullaattiioonn IInnffoorrmmaattiioonn ccoonntteenntt Adjusted cost / income ratio (%) Calculated as adjusted operating expenses divided by adjusted operating income before credit loss expense or recovery. This measure provides information about 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. Cost / income ratio (%) Calculated as operating expenses divided by operating income before credit loss expense or recovery. This measure provides information about the efficiency of the business by comparing operating expenses with gross income. Gross margin on invested assets (bps) – GWM, AM Calculated as operating income before credit loss expense or recovery (annualized as applicable) divided by average invested assets. This measure provides information about the operating income before credit loss expense or recovery of the business in relation to invested assets. Net interest margin (bps) – P&C Calculated as net interest income (annualized as applicable) divided by average loans. Net margin on invested assets (bps) – GWM, AM Calculated as operating profit before tax (annualized as applicable) divided by average invested assets. Net new business volume growth (%) – P&C Net profit growth (%) Calculated as total net inflows and outflows of client assets and loans during the period (annualized as applicable) divided by total business volume / client assets at the beginning of the period. Calculated as change in net profit attributable to shareholders from continuing operations between current and comparison periods divided by net profit attributable to shareholders from continuing operations of comparison period. This measure provides information about the profitability of the business by calculating the difference between the price charged for lending and the cost of funding, relative to loan value. This measure provides information about the operating profit before tax of the business in relation to invested assets. This measure provides information about the growth of the business volume as a result of net new business volume flows during a specific period. This measure provides information about profit growth in comparison with the prior period. Recurring income as a % of income – GWM Calculated as net interest income and recurring net fee income divided by operating income before credit loss expense or recovery. This measure provides information about the proportion of recurring income in operating income. Return on common equity tier 1 capital (%) Calculated as net profit attributable to shareholders divided by average common equity tier 1 capital. This measure provides information about the profitability of the business in relation to common equity tier 1 capital. Return on equity (%) Calculated as net profit attributable to shareholders divided by average equity attributable to shareholders. This measure provides information about the profitability of the business in relation to equity. Return on leverage ratio denominator, gross (%) Calculated as operating income before credit loss expense or recovery divided by average leverage ratio denominator. This measure provides information about the revenues of the business in relation to leverage ratio denominator. Return on risk-weighted assets, gross (%) Return on tangible equity (%) Calculated as operating income before credit loss expense or recovery divided by average risk-weighted assets. This measure provides information about the revenues of the business in relation to risk-weighted assets. Calculated as net profit attributable to shareholders divided by average equity attributable to shareholders less average goodwill and intangible assets.1 This measure provides information about the profitability of the business in relation to tangible equity. Total book value per share (USD and CHF2) Calculated as equity attributable to shareholders divided by the number of shares outstanding. This measure provides information about net assets on a per-share basis. Total tangible book value per share (USD and CHF2) Calculated as equity attributable to shareholders less goodwill and intangible assets divided by the number of shares outstanding. This measure provides information about tangible net assets on a per-share basis. 1 Effective 1 January 2019, the definition of the numerator for return on tangible equity has been revised to align it with the numerators for return on equity and return on common equity tier 1 capital; i.e., we no 1 longer adjust for amortization and impairment of goodwill and intangible assets. Prior periods have been restated. 2 Total book value per share and total tangible book value per share in Swiss francs are calculated based on a translation of equity under our US dollar presentation currency. 2 503 Appendix Abbreviations frequently used in our financial reports E EAD EB EBA EC ECB ECL EIR EL EMEA EOP EPE EPS ESG ETD ETF EU EUR EURIBOR EVE EY F FA FCA FCT FINMA FMIA exposure at default Executive Board European Banking Authority European Commission European Central Bank expected credit loss effective interest rate expected loss Europe, Middle East and Africa Equity Ownership Plan expected positive exposure earnings per share environmental, social and governance exchange-traded derivatives exchange-traded fund European Union euro Euro Interbank Offered Rate economic value of equity Ernst & Young (Ltd) financial advisor UK Financial Conduct Authority foreign currency translation Swiss Financial Market Supervisory Authority Swiss Financial Market Infrastructure Act asset-backed securities automatic exchange of information Annual General Meeting of shareholders advanced internal ratings-based alternative investment vehicle Asset and Liability Committee advanced measurement approach anti-money laundering Articles of Association Asia Pacific alternative performance measure alternative reference rate auction rate securities available stable funding additional tier 1 assets under management Basel Committee on Banking Supervision base erosion and anti-abuse tax Bank for International Settlements Board of Directors Swiss occupational pension plan Capital Adequacy Ordinance Comprehensive Capital Analysis and Review credit conversion factor CCP CCR CCRC CCyB CDO CDS CEA CEM CEO CET1 CFO CFTC CHF CIC CIO CLS CMBS C&ORC CRD IV CRM CST CVA D DBO DCCP DJSI DM DOJ D-SIB DTA DVA central counterparty counterparty credit risk Corporate Culture and Responsibility Committee countercyclical buffer collateralized debt obligation credit default swap Commodity Exchange Act 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 Continuous Linked Settlement commercial mortgage- backed security Compliance & Operational Risk Control EU Capital Requirements Directive of 2013 credit risk mitigation (credit risk) or comprehensive risk measure (market risk) combined stress test credit valuation adjustment defined benefit obligation Deferred Contingent Capital Plan Dow Jones Sustainability Indices discount margin US Department of Justice domestic systemically important bank deferred tax asset debit valuation adjustment A ABS AEI AGM A-IRB AIV ALCO AMA AML AoA APAC APM ARR ARS ASF AT1 AuM B BCBS BEAT BIS BoD BVG C CAO CCAR CCF 504 Abbreviations frequently used in our financial reports (continued) FSB FTA FVA FVOCI FVTPL FX G GAAP GBP GDP GEB GIA GIIPS GMD GRI GSE G-SIB H HQLA HR I IAA IAS IASB IBOR IFRIC Financial Stability Board Swiss Federal Tax Administration funding valuation adjustment fair value through other comprehensive income fair value through profit or loss foreign exchange generally accepted accounting principles pound sterling gross domestic product Group Executive Board Group Internal Audit Greece, Italy, Ireland, Portugal and Spain Group Managing Director Global Reporting Initiative government sponsored entities global systemically important bank high-quality liquid assets human resources internal assessment approach International Accounting Standards International Accounting Standards Board interbank offered rate International Financial Reporting Interpretations Committee IFRS IHC IMA IMM IRB IRC IRRBB ISDA K KRT L LAS LCR LGD LIBOR LLC LRD LTIP LTV M M&A MiFID II MRT N NAV NCL NII NRV NSFR NYSE O OCA OCI OTC P PD PFE PIT P&L POCI PRA PRV Q QRRE R RBA RBC RbM RMBS RniV RoAE RoCET1 RoTE RoU RV RW RWA International Financial Reporting Standards intermediate holding company internal models approach internal model method internal ratings-based incremental risk charge interest rate risk in the banking book International Swaps and Derivatives Association Key Risk Taker liquidity-adjusted stress liquidity coverage ratio loss given default London Interbank Offered Rate limited liability company leverage ratio denominator Long-Term Incentive Plan loan-to-value mergers and acquisitions Markets in Financial Instruments Directive II Material Risk Taker net asset value Non-core and Legacy Portfolio net interest income negative replacement value net stable funding ratio New York Stock Exchange own credit adjustment other comprehensive income over-the-counter probability of default potential future exposure point in time profit or loss purchased or originated credit-impaired UK Prudential Regulation Authority positive replacement value qualifying revolving retail exposures role-based allowances risk-based capital risk-based monitoring residential mortgage- backed securities risks not in VaR return on attributed equity return on CET1 capital return on tangible equity right-of-use replacement value risk weight risk-weighted assets 505 Appendix Abbreviations frequently used in our financial reports (continued) S SA SA-CCR SAR SBC SDG SE SEC SEEOP SFT SI SICR SIX SME SMF SNB SPPI SRB SRM SVaR standardized approach standardized approach for counterparty credit risk stock appreciation right or Special Administrative Region Swiss Bank Corporation Sustainable Development Goal structured entity US Securities and Exchange Commission Senior Executive Equity Ownership Plan securities financing transaction sustainable investing significant increase in credit risk SIX Swiss Exchange small and medium-sized corporate clients Senior Management Function Swiss National Bank solely payments of principal and interest systemically relevant bank specific risk measure stressed value-at-risk T TBTF TCJA TLAC TTC U UoM USD V VaR VAT too big to fail US Tax Cuts and Jobs Act total loss-absorbing capacity through-the-cycle units of measure US dollar value-at-risk value added tax 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. 506 Information sources Reporting publications Other information including framework, information in English, this single-volume Annual publications: Annual Report (SAP no. 80531): 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 about compensation for the Board of Directors and the Group Executive Board members; and financial information, including the financial statements. Geschäftsbericht (SAP no. 80531): This publication provides the translation into German of our Annual Report. Annual Review (SAP no. 80530): This booklet contains key information about 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): This report discusses our compensation framework and provides information about compensation for the Board of Directors and the Group Executive Board members. It is available in English and German. Quarterly publications: The quarterly financial report provides an update on our strategy and performance for the respective quarter. It is available in English. How to order publications: The annual and quarterly publications are available in .pdf format at www.ubs.com/ investors, in the “UBS Group AG and UBS AG financial information” section, and printed copies can be requested from UBS free of charge. For annual publications, refer to the “Investor at www.ubs.com/investors. 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. services” section Website: The “Investor Relations” website at www.ubs.com/ investors provides the following information about 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 for under “UBS news alert” at www.ubs.com/global/ en/investor-relations/contact/investor-services.html. 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 the combined UBS Group AG and UBS AG 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. 507 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, geopolitical tensions, and changes to national trade policies on the financial position or creditworthiness of UBS’s clients and counterparties as well as on client sentiment and levels of activity; (iii) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings, as well as availability and cost of funding to meet requirements for debt eligible for total loss-absorbing capacity (TLAC); (iv) changes in or the implementation of financial legislation, including Interest Rate Benchmark Reform, and regulation in Switzerland, the US, the UK, the European Union and other financial centers that have imposed, or resulted in, or may do so in the future, more stringent or entity-specific capital, TLAC, leverage ratio, net stable funding ratio, liquidity and funding requirements, heightened operational resilience requirements, incremental tax requirements, additional levies, limitations on permitted activities, constraints on remuneration, constraints on transfers of capital and liquidity and sharing of operational costs across the Group or other measures, and the effect these will or would have on UBS’s business activities; (v) the degree to which UBS is successful in implementing further changes to its legal structure to improve its resolvability and meet related regulatory requirements and the potential need to make further changes to the legal structure or booking model of the UBS Group in response to legal and regulatory requirements, proposals in Switzerland and other jurisdictions for mandatory structural reform of banks or systemically important institutions or to other external developments, and the extent to which such changes will have the intended effects; (vi) UBS’s ability to maintain and improve its systems and controls for the detection and prevention of money laundering and compliance with sanctions to meet evolving regulatory requirements and expectations, in particular in the US; (vii) the uncertainty arising from the UK’s exit from the EU; (viii) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s ability to compete in certain lines of business; (ix) changes in the standards of conduct applicable to our businesses that may result from new regulations or new enforcement of existing standards, including recently enacted and proposed measures to impose new and enhanced duties when interacting with customers and in the execution and handling of customer transactions; (x) the liability to which UBS may be exposed, or possible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claims and regulatory investigations, including the potential for disqualification from certain businesses, potentially large fines or monetary penalties, or the loss of licenses or privileges as a result of regulatory or other governmental sanctions, as well as the effect that litigation, regulatory and similar matters have on the operational risk component of our RWA as well as the amount of capital available for return to shareholders; (xi) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies and practices relating to this business; (xii) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses, which may be affected by competitive factors; (xiii) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xiv) UBS’s ability to implement new technologies and business methods, including digital services and technologies, and ability to successfully compete with both existing and new financial service providers, some of which may not be regulated to the same extent; (xv) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xvi) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyberattacks or other cybersecurity disruptions, and systems failures; (xvii) restrictions on the ability of UBS Group AG to make payments or distributions, including due to restrictions on the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficulties, due to the exercise by FINMA or the regulators of UBS’s operations in other countries of their broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (xviii) the degree to which changes in regulation, capital or legal structure, financial results or other factors may affect UBS’s ability to maintain its stated capital return objective; and (xix) the effect that these or other factors or unanticipated events may have on our reputation and the additional consequences that this may have on our business and performance. The sequence in which the factors above are presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. Our business and financial performance could be affected by other factors identified in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2019. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. Rounding | Numbers presented throughout this report may not add up precisely to the totals provided in the tables and text. Percentages, percent changes, and adjusted results are calculated on the basis of unrounded figures. Information about absolute changes between reporting periods, which is provided in text and which 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. 508 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, geopolitical tensions, and changes to national trade policies on the financial position or creditworthiness of UBS’s clients and counterparties as well as on client sentiment and levels of activity; (iii) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings, as well as availability and cost of funding to meet requirements for debt eligible for total loss-absorbing capacity (TLAC); (iv) changes in or the implementation of financial legislation, including Interest Rate Benchmark Reform, and regulation in Switzerland, the US, the UK, the European Union and other financial centers that have imposed, or resulted in, or may do so in the future, more stringent or entity-specific capital, TLAC, leverage ratio, net stable funding ratio, liquidity and funding requirements, heightened operational resilience requirements, incremental tax requirements, additional levies, limitations on permitted activities, constraints on remuneration, constraints on transfers of capital and liquidity and sharing of operational costs across the Group or other measures, and the effect these will or would have on UBS’s business activities; (v) the degree to which UBS is successful in implementing further changes to its legal structure to improve its resolvability and meet related regulatory requirements and the potential need to make further changes to the legal structure or booking model of the UBS Group in response to legal and regulatory requirements, proposals in Switzerland and other jurisdictions for mandatory structural reform of banks or systemically important institutions or to other external developments, and the extent to which such changes will have the intended effects; (vi) UBS’s ability to maintain and improve its systems and controls for the detection and prevention of money laundering and compliance with sanctions to meet evolving regulatory requirements and expectations, in particular in the US; (vii) the uncertainty arising from the UK’s exit from the EU; (viii) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s ability to compete in certain lines of business; (ix) changes in the standards of conduct applicable to our businesses that may result from new regulations or new enforcement of existing standards, including recently enacted and proposed measures to impose new and enhanced duties when interacting with customers and in the execution and handling of customer transactions; (x) the liability to which UBS may be exposed, or possible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claims and regulatory investigations, including the potential for disqualification from certain businesses, potentially large fines or monetary penalties, or the loss of licenses or privileges as a result of regulatory or other governmental sanctions, as well as the effect that litigation, regulatory and similar matters have on the operational risk component of our RWA as well as the amount of capital available for return to shareholders; (xi) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies and practices relating to this business; (xii) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses, which may be affected by competitive factors; (xiii) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xiv) UBS’s ability to implement new technologies and business methods, including digital services and technologies, and ability to successfully compete with both existing and new financial service providers, some of which may not be regulated to the same extent; (xv) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xvi) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyberattacks or other cybersecurity disruptions, and systems failures; (xvii) restrictions on the ability of UBS Group AG to make payments or distributions, including due to restrictions on the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficulties, due to the exercise by FINMA or the regulators of UBS’s operations in other countries of their broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (xviii) the degree to which changes in regulation, capital or legal structure, financial results or other factors may affect UBS’s ability to maintain its stated capital return objective; and (xix) the effect that these or other factors or unanticipated events may have on our reputation and the additional consequences that this may have on our business and performance. The sequence in which the factors above are presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. Our business and financial performance could be affected by other factors identified in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2019. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. Rounding | Numbers presented throughout this report may not add up precisely to the totals provided in the tables and text. Percentages, percent changes, and adjusted results are calculated on the basis of unrounded figures. Information about absolute changes between reporting periods, which is provided in text and which 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. 508 UBS Group AG P.O. Box CH-8098 Zurich ubs.com

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