UBS Group AG

Annual Report 2016

Contents

3.
2 Letter to shareholders Risk, treasury and
5 Key figures capital management
8 Our Board of Directors
10 Our Group Executive Board 117 Risk management and control
12 History 168 Treasury management
13 The legal structure of UBS Group 184 Capital management
15 External reporting 202 UBS shares

1. 4.
Operating environment Corporate governance, responsibility and
and strategy compensation

18 Current market climate and industry trends 208 Corporate governance

21 Regulation and supervision 239 UBS and Society
23 Regulatory and legal developments 250 Our employees
27 Our strategy 256 Compensation
29 Measurement of performance

5.
31 Wealth Management Financial
33 Wealth Management Americas statements
35 Personal & Corporate Banking
37 Asset Management 301 Consolidated financial statements
39 Investment Bank 461 Standalone financial statements
41 Corporate Center
44 Risk factors Appendix

2. Financial 481 Abbreviations frequently used in our financial reports

and operating performance 483 Information sources
484 Cautionary statement
58 Critical accounting estimates and judgments
59 Significant accounting and financial reporting changes
64 Group performance
78 Wealth Management
82 Wealth Management Americas
88 Personal & Corporate Banking
92 Asset Management
97 Investment Bank
103 Corporate Center
Annual Report 2016
Letter to shareholders

Dear shareholders,

Axel A. Weber Chairman of the Board of Directors

2016 was another challenging year for the industry and UBS, Despite these many challenges, which had a particularly strong
marked by macroeconomic uncertainty, geopolitical tensions and impact on European banks, our results in 2016 were solid and
divisive politics, which adversely affected client sentiment. Com- once again demonstrated the benefits of our balanced business
bined with the implementation of stricter prudential standards mix and geographic diversification. As the world’s largest and only
and the unclear trajectory of the future regulatory landscape, truly global wealth manager, we have a significant presence in
these factors contributed to headwinds for our businesses. both mature and high-growth markets. We are the number one
bank in Switzerland and have competitive and specialized Invest-
In particular, economic conditions in the world’s major economic ment Bank and Asset Management businesses. 2016 was another
centers – the US, the eurozone and China – were mixed. The US example of the power of our business model, as strong results in
grew more slowly than expected, and although consumption the US and Switzerland partly offset headwinds in Asia and the
remained strong and unemployment fell, the Federal Reserve rest of Europe.
Board delayed raising interest rates until the end of the year. In the
eurozone, exceptionally loose monetary policy, continuing nega- For the year, Group net profit attributable to shareholders was
tive interest rates, low oil prices and improving credit conditions CHF 3.2 billion, with profit before tax of CHF 4.1 billion, and
supported a modest recovery. Emerging market economies were adjusted1 profit before tax was CHF 5.3 billion, down 5% year on
highly divergent, although the slowdown in China proved milder year. Our return on equity was 5.9% and our adjusted1 return on
than anticipated. While the Swiss economy rebounded following tangible equity was 9.0%. We generated CHF 42 billion of net
the sharp appreciation of the Swiss franc in the prior year, negative new money in our wealth management businesses, while absorb-
interest rates continued to provide challenging conditions with ing substantial cross-border outflows in Wealth Management.
unclear medium- to long-term consequences. The results of the US
election and the UK’s vote to leave the EU produced the year’s big-
gest political surprises, creating additional volatility and concerns.

2
 Sergio P. Ermotti Group Chief Executive Officer

Wealth Management’s adjusted1 profit before tax was CHF 2.4 We made good progress toward achieving our ambitious cost tar-
billion, down 15% on the prior year as cost reductions only partly gets, increasing our net cost savings by CHF 0.5 billion to CHF 1.6
offset lower revenues caused by reduced client activity, the effects billion, measured based on our year-end exit rate, and on course
of cross-border outflows and shifts into retrocession-free ­products, to achieve our CHF 2.1 billion net cost reduction target by the end
and changes in clients’ asset allocation. Net new money was CHF of 2017. We achieved these savings while maintaining our focus
27 billion, despite cross-border outflows of CHF 14 billion. on properly managing risk, serving our clients and selectively
Wealth Management Americas delivered a record adjusted1 investing in our businesses. We also continued to absorb costs
profit before tax of USD 1.3 billion, a 43% increase year on year, related to legacy issues and provisions for litigation, regulatory
and net new money of USD 15 billion. Personal & Corporate and similar matters, amounting to CHF 0.8 billion, down from
Banking’s adjusted1 profit before tax was CHF 1.8 billion, up 4% CHF 1.1 billion in 2015.
year on year, and the best result since 2008. Asset Management
recorded an adjusted1 profit before tax of CHF 552 million, down Our capital position at the end of 2016 remains one of the stron-
10% year on year. The Investment Bank maintained its disci- gest among large global banks, with a fully applied common
plined resource utilization and delivered an adjusted1 profit before equity tier 1 (CET1) capital ratio of 13.8%. We also reached the
tax of CHF 1.5 billion, down 34% compared with a strong prior 2020 minimum CET1 leverage ratio of 3.5% in the fourth quarter
year. With an adjusted1 return on attributed equity of 19.6%, it of 2016. During the year, we issued CHF 14 billion of loss-absorb-
continued to more than cover its cost of capital and added sig- ing debt, bringing our total loss-absorbing capacity to over CHF
nificant value to our wealth management, corporate and institu- 73 billion, well ahead of Swiss and, in particular, international
tional client bases. regulatory requirements. Our strong capital position and success-
ful execution of our strategy resulted in rating upgrades from the
three leading credit rating agencies, placing us among the top-
rated global banks.

1 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.

3
Annual Report 2016
Letter to shareholders

In addition to the progress made on building our capital, we suc- ucts and services, UBS is actively engaged in supporting the UN
cessfully executed a series of measures to improve the resolvability Sustainable Development Goals (SDGs). The UBS Grand Chal-
of the Group in response to regulatory requirements in Switzer- lenge mobilized over 1,200 employees to develop innovative solu-
land and other countries. In 2016, we completed the establish- tions for five of the SDGs. UBS also announced plans to direct at
ment of UBS Americas Holding LLC as our US intermediate hold- least USD 5 billion of client assets to support the SDGs over the
ing company and implemented our Group service company. The next five years. UBS’s ongoing commitment to sustainable invest-
measures taken over the last few years have made our bank stron- ing found expression in a number of groundbreaking initiatives,
ger and more resolvable. most notably the closing of the USD 471 million UBS Oncology
Impact Fund. This is the largest amount ever raised for an impact
We continue to support effective and reasonable regulation. fund dedicated to a single cause.
However, we believe further regulatory tightening would create
additional costs for the financial system and the economy at large, In 2016, our Community Affairs program benefited over 117,000
with unclear benefits and a negative impact on the international young people and entrepreneurs across all of the regions in which
competitive playing field. we operate. Our local volunteering programs saw over 30% of
UBS employees record a total of over 155,000 volunteer hours in
Our solid results and leading capital position have allowed us community engagement projects.
to maintain our ordinary dividend at 2015 levels and reconfirm
our dividend policy. We intend to propose a 2016 dividend of We would like to take this opportunity to thank both our clients
CHF 0.60 per share for approval at our next Annual General and our shareholders for their continued support and our employ-
Meeting (AGM). ees for their dedication and commitment over the year. Our focus
remains on the disciplined execution of our strategy, staying close
In 2016, we further strengthened our reputation for excellence. to our clients and delivering sustainable performance, while
This was demonstrated by numerous awards and accolades for investing for growth. Our unique business model, successful track
our businesses. In March, UBS was named the world’s number record of execution and strategic clarity position us well to deliver
one investment banking house by Global Finance in its annual for our clients and generate shareholder value in a variety of
World’s Best Investment Banks Survey. UBS dominated the recently m
­ arket conditions.
announced 2017 Euromoney Private Banking Survey, taking the
top spot in over 180 categories, including Best Global Private We look forward to seeing you at this year’s AGM.
Bank and in the two “Innovative Technology” categories, Client
Experience and Back Office Systems. In October 2016, UBS was
named Best Global Private Bank and Best Private Bank in Asia at 10 March 2017
the FT’s PWM / The Banker Awards. In July 2016, wealth manage-
ment researcher Scorpio Partnership confirmed UBS as the world’s Yours sincerely,
largest wealth manager.
UBS
UBS confirmed its reputation as a global sustainability leader
when it was named Diversified Financials Industry Group leader in
the Dow Jones Sustainability Indices for the second year running.
As of 31 December 2016, sustainable investments by our clients
totaled CHF 976 billion, representing over a third of total invested Axel A. Weber Sergio P. Ermotti
assets. As one of the first signatories of the UN Global Compact Chairman of the Group Chief Executive Officer
with one of the largest portfolios of sustainable investment prod- Board of Directors

4
UBS Group key figures
As of or for the year ended
CHF million, except where indicated 31.12.16 31.12.15 31.12.14

Group results
Operating income 28,320 30,605 28,027
Operating expenses 24,230 25,116 25,567
Operating profit / (loss) before tax 4,090 5,489 2,461
Net profit / (loss) attributable to shareholders 3,204 6,203 3,466
Diluted earnings per share (CHF)1 0.84 1.64 0.91

Key performance indicators2

Profitability
Return on tangible equity (%) 6.9 13.7 8.2
Return on assets, gross (%) 3.0 3.1 2.8
Cost / income ratio (%) 85.4 81.8 91.0
Growth
Net profit growth (%) (48.3) 79.0 9.3
Net new money growth for combined wealth management businesses (%)3 2.1 2.2 2.5
Resources
Common equity tier 1 capital ratio (fully applied, %)4 13.8 14.5 13.4
Going concern leverage ratio (phase-in, %)5 6.4

Additional information
Profitability
Return on equity (RoE) (%) 5.9 11.8 7.0
Return on risk-weighted assets, gross (%)6 13.2 14.4 12.6
Resources
Total assets 935,016 942,819 1,062,478
Equity attributable to shareholders 53,621 55,313 50,608
Common equity tier 1 capital (fully applied)4 30,693 30,044 28,941
Common equity tier 1 capital (phase-in)4 37,788 40,378 42,863
Risk-weighted assets (fully applied)4 222,677 207,530 216,462
Common equity tier 1 capital ratio (phase-in, %)4 16.8 19.0 19.4
Going concern capital ratio (fully applied, %)5 17.9
Going concern capital ratio (phase-in, %)5 24.7
Common equity tier 1 leverage ratio (fully applied, %)7 3.5 3.3 2.9
Going concern leverage ratio (fully applied, %)5 4.6
Leverage ratio denominator (fully applied)7 870,470 897,607 997,822
Liquidity coverage ratio (%)8 132 124 123
Other
Invested assets (CHF billion)9 2,821 2,689 2,734
Personnel (full-time equivalents) 59,387 60,099 60,155
Market capitalization10 61,420 75,147 63,526
Total book value per share (CHF)10 14.44 14.75 13.94
Tangible book value per share (CHF)10 12.68 13.00 12.14
1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 2 Refer to the “Measurement of performance” section of
this report for the definition of our key performance indicators. 3 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital
optimization program. 4 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 5 Based on the
revised Swiss SRB framework that became effective on 1 July 2016. 6 Based on fully applied risk-weighted assets. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 8 Figures reported for 31 December 2016 and 31 December 2015 represent a 3-month average. Refer to the “Treasury management” section of this
report for more information. The figure reported for 31 December 2014 was calculated on a pro forma basis and represents a period-end number. 9 Includes invested assets for Personal & Corporate Banking. 10 Refer
to the “UBS shares” section of this report for more information.

The 2016 results and the balance sheet in this report differ from those presented in the unaudited fourth quarter 2016 report
published on 27 January 2017 as a result of an adjusting event after the reporting period. Provisions for litigation, regulatory and
similar matters increased reflecting an agreement in principle to resolve an RMBS matter related to the National Credit Union
Association. This adjustment reduced 2016 net profit attributable to shareholders by CHF 102 million, and basic and diluted
earnings per share by CHF 0.03 and CHF 0.02, respectively.

5
Connecting
value
Annual Review 2016

The Annual Review 2016 will be available

from mid-April 2017 as a tablet
publication in UBS Newsstand / Annual Review
(AppStore or Google Play Store).
Corporate information

UBS Group AG is incorporated and domiciled in Switzerland and operates number is CHE-395.345.924. UBS Group AG was incorporated on 10 June
under the Swiss Code of Obligations as an Aktiengesellschaft, a corporation 2014 and was established in 2014 as the holding company of the UBS Group.
limited by shares. Its registered office is at Bahnhofstrasse 45, CH-8001 UBS Group AG shares are listed on the SIX Swiss Exchange and on the New
Zurich, Switzerland, phone +41-44-234 11 11, and its corporate identification York Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107).

Contacts
Switchboards Media Relations Shareholder Services
For all general inquiries. UBS’s Media Relations team supports UBS’s Shareholder Services team, a unit
[Link]/contact global media and journalists from of the Group Company Secretary office,
offices in Zurich, London, New York is responsible for the registration of
Zurich +41-44-234 1111 and Hong Kong. UBS Group AG registered shares.
London +44-20-7568 0000
New York +1-212-821 3000 [Link]/media UBS Group AG, Shareholder Services
Hong Kong +852-2971 8888 P.O. Box, CH-8098 Zurich, Switzerland
Zurich +41-44-234 8500
mediarelations@[Link] sh-shareholder-services@[Link]
Investor Relations
UBS’s Investor Relations team supports institu- London +44-20-7567 4714 Hotline +41-44-235 6652
tional, professional and retail investors from our ubs-media-relations@[Link] Fax +41-44-235 8220
offices in Zurich, London, New York and Hong
Kong. New York +1-212-882 5857
mediarelations-ny@[Link] US Transfer Agent
UBS Group AG, Investor Relations For global registered share-related
P.O. Box, CH-8098 Zurich, Switzerland Hong Kong +852-2971 8200 inquiries in the US.
sh-mediarelations-ap@[Link]
[Link]/investors Computershare Trust Company NA
P.O. Box 30170
Hotline Zurich +41-44-234 4100 Office of the Group Company Secretary College Station
Hotline New York +1-212-882 5734 The Group Company Secretary receives TX 77842-3170, USA
Fax (Zurich) +41-44-234 3415 inquiries on compensation and related
issues addressed to members of the Shareholder online inquiries:
Board of Directors. [Link]
investor/Contact
UBS Group AG, Office of the
Group Company Secretary Shareholder website:
P.O. Box, CH-8098 Zurich, Switzerland [Link]/investor
sh-company-secretary@[Link] Calls from the US +1-866-305-9566
Calls from outside
Hotline +41-44-235 6652 the US +1-781-575-2623
Fax +41-44-235 8220 TDD for hearing impaired
+1-800-231-5469
TDD foreign shareholders
+1-201-680-6610

Corporate calendar UBS Group AG Imprint

Publication of the first quarter 2017 report: Friday, 28 April 2017 Publisher: UBS Group AG, Zurich, Switzerland | [Link]
Annual General Meeting 2017: Thursday, 4 May 2017 Language: English / German | SAP-No. 80531E
Publication of the second quarter 2017 report: Friday, 28 July 2017 © UBS 2017. The key symbol and UBS are among the registered and
unregistered trademarks of UBS. All rights reserved.
Publication of the third quarter 2017 report: Friday, 27 October 2017
Printed in Switzerland on chlorine-free paper with mineral oil-reduced inks.
Paper production from socially responsible and ecologically sound forestry
practices

7
Annual Report 2016

Our Board of Directors as of 31 December 2016

Axel A. Weber Chairman of the Board of Directors / Chairperson of the Beatrice Weder di Mauro Member of the Audit Committee / member
Corporate Culture and Responsibility Committee / Chairperson of the Governance of the Risk Committee
and Nominating Committee

David Sidwell Senior Independent Director / Chairperson of the William G. Parrett Chairperson of the Audit Committee / member of
Risk Committee / member of the Governance and Nominating Committee the Compensation Committee / member of the Corporate Culture and
Responsibility Committee

Isabelle Romy Member of the Audit Committee / member of the Michel Demaré Independent Vice Chairman / member of the
Governance and Nominating Committee Audit Committee / member of the Compensation Committee / member
of the Governance and Nominating Committee

8
Reto Francioni Member of the Compensation Committee / member Ann F. Godbehere Chairperson of the Compensation Committee / member
of the Corporate Culture and Responsibility Committee / member of the of the Audit Committee
Risk Committee

Joseph Yam Member of the Corporate Culture and Responsibility Dieter Wemmer Member of the Risk Committee
Committee / member of the Risk Committee

The Board of Directors (BoD) of UBS Group AG, under the leader-
ship of the Chairman, consists of six to twelve members as per our
Articles of Association. The BoD decides on the strategy of the
Group upon recommendation of the Group Chief Executive Officer
(Group CEO) and is responsible for the overall direction, supervision
and control of the Group and its management as well as for super-
vising compliance with applicable laws, rules and regulations. The
BoD exercises oversight over UBS Group AG and its subsidiaries and
is responsible for ensuring the establishment of a clear Group gov-
ernance framework to ensure effective steering and supervision of
the Group, taking into account the material risks to which UBS
Group AG and its subsidiaries are exposed. The BoD has ultimate
Robert W. Scully Member of the Risk Committee responsibility for the success of the Group and for delivering sus-
tainable shareholder value within a framework of prudent and
­effective controls, approves all financial statements for issue and
appoints and removes all Group Executive Board (GEB) members.

9
Annual Report 2016

Our Group Executive Board as of 31 December 2016

Sergio P. Ermotti Group Chief Executive Officer Martin Blessing President Personal & Corporate Banking and
President UBS Switzerland

Tom Naratil President Wealth Management Americas and President UBS Americas Markus U. Diethelm Group General Counsel

Kathryn Shih President UBS Asia Pacific Kirt Gardner Group Chief Financial Officer

10
UBS Group AG operates under a strict dual board structure, as ➔➔Refer to “Board of Directors” and “Group Executive Board” in the
mandated by Swiss banking law, and therefore the BoD delegates “Corporate governance” section of this report or to [Link]/
the management of the business to the GEB. Under the leadership bod and [Link]/geb for the full biographies of our BoD
of the Group CEO, the GEB has executive management responsibil- and GEB members
ity for the steering of the Group and its business. It assumes overall
responsibility for developing the Group and business division strat-
egies and the implementation of approved strategies.

Jürg Zeltner President Wealth Management Ulrich Körner President Asset Management and President UBS Europe,
Middle East and Africa

Sabine ­Keller-Busse Group Head Human Resources Andrea Orcel President Investment Bank

Christian Bluhm Group Chief Risk Officer Axel P. Lehmann Group Chief Operating Officer

11
Annual Report 2016

History
UBS has played a pivotal role in the development and growth of In 2000, UBS acquired PaineWebber, whose roots went back
Swiss banking. Since the firm’s origins in the mid-19th century, to 1879, establishing the firm as a significant player in the US.
UBS has evolved to become a global financial services firm that Over the last half century, UBS has largely organically built a
houses the world’s largest wealth manager, the number one bank strong presence in the Asia Pacific region, where it is the leading
in Switzerland, a specialized and successful investment bank and wealth manager and a top-tier investment bank.
one of the world’s largest asset managers. During the financial crisis from 2007 to 2009, UBS incurred
The scope and international reach of what UBS is today was significant losses. In 2011, we initiated a strategic transformation
largely shaped in the second half of the 20th century. In 1998, of our firm toward a business model that focused on our core
two of Switzerland’s large banks, Union Bank of Switzerland and businesses of wealth management and personal and corporate
Swiss Bank Corporation (SBC), merged to form UBS. At the time banking in Switzerland.
of the merger, both banks were already well-established and suc- We sought to revert to our roots, emphasizing a client-centric
cessful in their own right. Union Bank of Switzerland’s origins go model that required less risk-taking and capital, and have success-
back to the Bank in Winterthur founded in 1862. SBC’s founding fully completed this transformation. The Pillars, Principles and
forebear, the Basler Bankverein, was established in 1872. Behaviors, which we launched in 2014, have been a foundation
In the early 1990s, SBC and Union Bank of Switzerland were for our new corporate strategy, identity and culture.
both commercial banks operating mainly out of Switzerland, and We have also adapted our legal entity structure to improve our
both shared the vision of becoming a world leader in wealth man- resolvability and to respond to the new regulatory environment.
agement, a successful global investment bank and a top-tier Today, we are among the world’s best-capitalized large global
global asset manager, while remaining an important commercial banks with a balanced business mix and geographic diversifica-
and retail bank in their home market of Switzerland. tion. We remain committed to executing our strategy with
Union Bank of Switzerland, the largest Swiss bank of its time, discipline and creating sustainable value for our clients and
pursued these goals primarily through organic growth. In con- shareholders.
trast, SBC, then the third-largest Swiss bank, grew mainly through ➔➔Refer to [Link]/history for more information
a combination of strategic partnerships and acquisitions, includ- ➔➔Refer to the “The legal structure of UBS Group” and “Our
ing O’Connor in 1992, Brinson Partners in 1994, and S.G. strategy” sections of this report for more information
­Warburg, the historical pillar of UBS’s Investment Bank, in 1995.

12
The legal structure of UBS Group
Since 2014, we have undertaken a series of measures to improve In June 2015, we transferred our Personal & Corporate Bank-
the resolvability of the Group in response to too big to fail (TBTF) ing and Wealth Management businesses booked in Switzerland
requirements in Switzerland and other countries in which the from UBS AG to UBS Switzerland AG.
Group operates. Also in 2015, we implemented a more self-sufficient business
In December 2014, UBS Group AG completed an exchange and operating model for UBS Limited and established UBS Busi-
offer for the shares of UBS AG and became the holding company ness Solutions AG as a direct subsidiary of UBS Group AG to act
of the Group. During 2015, UBS Group AG completed a court as the Group service company. The purpose of the service com-
procedure under article 33 of the Swiss Stock Exchange Act pany structure is to improve the resolvability of the Group by
(SESTA procedure) resulting in the cancellation of the shares of the enabling us to maintain operational continuity of critical services
remaining minority shareholders of UBS AG. As a result, UBS Group should a recovery or resolution event occur.
AG owns 100% of the outstanding shares of UBS AG.

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13
Annual Report 2016

In the second half of 2015, we transferred the ownership of propose amendments to the current Swiss tax law in order to
the majority of our existing service subsidiaries outside the US to reduce the additional tax burden on debt issuances by bank top
UBS Business Solutions AG, and we expect to transfer shared ser- holding companies. When such changes become effective, we
vices functions in Switzerland and the UK from UBS AG to this expect loss-absorbing AT1 capital instruments and TLAC-eligible
entity during 2017. As of 1 January 2017, we completed the senior unsecured debt to be issued directly out of UBS Group AG.
transfer of the shared service employees in the US to our US ser- At that point, we also expect to substitute UBS Group AG as
vice company, UBS Business Solutions US LLC. issuer of outstanding capital and debt instruments issued by UBS
As of 1 July 2016, UBS Americas Holding LLC was designated Group Funding (Switzerland) AG. We expect the substitution of
as our intermediate holding company for our US subsidiaries as UBS Group Funding (Switzerland) AG as issuer of outstanding
required under the enhanced prudential standards regulations TLAC-eligible senior unsecured debt to be completed during the
pursuant to the Dodd-Frank Act. UBS Americas Holding LLC holds second quarter of 2017. Upon completion of the issuer substitu-
all of our US subsidiaries and is subject to US capital requirements, tion, outstanding TLAC-eligible senior unsecured debt will con-
governance requirements and other prudential regulation. tinue to be guaranteed by UBS Group AG, and investors’ seniority
In addition, we transferred the majority of the operating sub- of claim against UBS Group AG will remain unchanged.
sidiaries of Asset Management to UBS Asset Management AG Our strategy, our business and the way we serve the vast
during 2016. Furthermore, we merged our Wealth Management majority of our clients are not affected by these changes. These
subsidiaries in Italy, Luxembourg (including its branches in Austria, plans do not create the need to raise additional common equity
Denmark and Sweden), the Netherlands and Spain into UBS capital and are not expected to materially affect the firm’s capital-
Deutschland AG, which was renamed to UBS Europe SE, to estab- generating capability.
lish our new European legal entity which is headquartered in We continue to consider further changes to the Group’s legal
Frankfurt, Germany. structure in response to regulatory requirements and other exter-
We have established UBS Group Funding (Switzerland) AG, a nal developments, including the anticipated exit of the UK from
wholly owned direct subsidiary of UBS Group AG, to issue future the EU. Such changes may include the transfer of operating sub-
loss-absorbing additional tier 1 (AT1) capital instruments and total sidiaries of UBS AG to become direct subsidiaries of UBS Group
loss-absorbing capacity- (TLAC-) eligible senior unsecured debt, AG, further consolidation of operating subsidiaries in the EU and
which will be guaranteed by UBS Group AG. We also intend to adjustments to the booking entity or location of products and
substitute the issuer of outstanding TLAC-eligible senior unsecured services. These structural changes are being discussed on an
debt with UBS Group Funding (Switzerland) AG replacing UBS ongoing basis with FINMA and other regulatory authorities and
Group Funding (Jersey) Limited as the issuer. Outstanding remain subject to a number of uncertainties that may affect their
­loss-absorbing AT1 capital instruments issued by UBS Group AG feasibility, scope or timing.
may in the future be transferred to UBS Group Funding (Switzer- ➔➔Refer to the “Regulatory and legal developments” section of this
land) AG, subject to further regulatory review. The Swiss Federal report for more information
Council has requested the Swiss Federal Tax Administration to

Terms used in this report, unless the context requires otherwise

“UBS,” “UBS Group,” “UBS Group AG consolidated,” UBS Group AG and its consolidated subsidiaries
“Group,” “the Group,” “we,” “us” and “our”
“UBS AG consolidated” UBS AG and its consolidated subsidiaries
“UBS Group AG” and “UBS Group AG standalone” UBS Group AG on a standalone basis
“UBS AG” and “UBS AG standalone” UBS AG on a standalone basis
“UBS Switzerland AG” UBS Switzerland AG on a standalone basis
“UBS Limited” UBS Limited on a standalone basis
“UBS Americas Holding LLC consolidated” UBS Americas Holding LLC and its consolidated subsidiaries

14
External reporting
General requirements UBS Group AG and UBS AG
Also available at [Link]/investors is the combined UBS
Our external reporting requirements and the scope of our external Group AG and UBS AG Annual Report 2016. As financial informa-
reports are defined by general accounting law and principles, rel- tion for UBS AG (consolidated) does not differ materially from
evant stock and debt listing rules, specific legal and regulatory UBS Group AG (consolidated), the MD&A included in the com-
requirements, as well as by our own financial reporting policies. bined Annual Report 2016 is generally provided on a UBS Group
We have to prepare and publish consolidated financial state- AG consolidated basis. In addition, it includes information for UBS
ments in accordance with International Financial Reporting Stan- AG (consolidated) with respect to risk profile as well as capital and
dards (IFRS) on a half-yearly basis, in line with the requirements of leverage ratios in line with the requirements for Swiss systemically
SIX Swiss Exchange and New York Stock Exchange, where our relevant banks. UBS AG consolidated financial statements in
shares are listed. However, we also publish our results on a quarterly accordance with IFRS are also part of the combined UBS Group
basis in order to provide shareholders with more frequent disclo- AG and UBS AG Annual Report 2016.
sures than required by law. Additionally, statutory financial state- This document, excluding the standalone financial statements
ments for UBS Group AG are prepared annually as the basis for our of UBS Group AG and including the supplemental disclosures
Swiss tax return, the appropriation of retained earnings and a required under US Securities and Exchange Commission (SEC)
potential distribution of dividends, subject to shareholder approval regulations for both UBS Group AG (consolidated) and UBS AG
at the Annual General Meeting. Management’s discussion and (consolidated), forms the basis of our Form 20-F filing, which is
­analysis (MD&A) complements our annual financial statements. available under “SEC filings” at [Link]/investors.
In preparing these disclosures, we consistently apply our finan-
cial disclosure principles, such as transparency and relevance to Basel III Pillar 3 disclosures for UBS Group AG
our stakeholders. We also continuously seek to improve our dis- UBS Group AG (consolidated) disclosures required under Basel III
closures by benchmarking them against best practice examples, Pillar 3 regulations are published as a separate report under
including those recommended by the Enhanced Disclosure Task “Pillar 3 disclosures” at [Link]/investors.
Force (EDTF).
➔➔Refer to “Information policy” in the “Corporate governance” Legal entity disclosures
section of this report for more information In accordance with Swiss Financial Market Supervisory Authority
(FINMA) Circular 2016 / 01, Disclosure – banks, which requires
Our Annual Report 2016, Form 20-F and additional ­disclosures for significant Pillar 3 entities and sub-groups, stand-
year-end disclosures alone legal entity financial and regulatory information for UBS
AG, UBS Switzerland AG and UBS Limited as well as consolidated
UBS Group AG financial and regulatory information for UBS Americas Holding
The UBS Group AG Annual Report 2016 is available at [Link]. LLC is provided under “Disclosure for legal entities” at [Link].
com/investors and includes: com/investors. The documents for UBS AG and UBS Switzerland
–– the aforementioned MD&A provided on a UBS Group AG con- AG include audited standalone financial statements. In addition,
solidated basis, covering our strategy and the environment in audited standalone financial statements for UBS Limited will be
which we operate, the financial and operating performance of made available in April 2017.
our business divisions and Corporate Center, our risk, treasury Furthermore, legal entity-specific disclosures in accordance
and capital management and our corporate governance, with Article 89 of the European Union Capital Requirements
­corporate responsibility and compensation frameworks Directive IV (CRD IV) are provided under “EU CRD IV disclosures”
–– audited UBS Group AG consolidated financial statements in at [Link]/investors. Information as of 31 December 2016
accordance with IFRS will be published by the end of 2017.
–– audited UBS Group AG standalone financial statements in
accordance with the Swiss Code of Obligations

15
Operating
environment
and strategy
Management report

Signposts
Throughout the Annual Report 2016, the Audited | signpost that is displayed at the beginning of a section, table or chart indicates that those items have
been audited. A triangle symbol –  – indicates the end of the signpost.
Operating environment and strategy
Current market climate and industry trends

Current market climate and industry trends

Global economic developments in 2016 tionally loose monetary policy, low oil prices and improving credit
conditions supported growth in the eurozone. Meanwhile, UK
Global growth slowed modestly in 2016. Each of the world’s growth was aided by the effects of stronger than expected house-
major economic areas – the US, the eurozone and China – saw hold consumption following the referendum, as well as a weaker
slower growth, primarily due to lower investment spending. Brazil British pound and lower interest rates.
and Russia experienced another year in recession, and Japan’s The Swiss economy recovered from the sharp appreciation of
growth remained muted. India delivered very strong growth. the Swiss franc in the prior year, with economic growth accelerat-
At a global level, economic uncertainty meant investment ing in 2016 to almost double the pace of 2015. Continued sound
spending continued to fall short of pre-financial crisis levels, growth in key eurozone trading partners benefited exports, after
despite record low interest rates across much of the world. In a slowdown in 2015.
2016, the trend of slower investment spending was exacerbated Growth in emerging markets was highly divergent. The slow-
by low energy prices, which led to further cutbacks in capital down in China proved milder than anticipated, as a rebound in
investment, particularly in the US and Russia. Oil prices saw an real estate prices and construction stabilized the economy after an
improvement toward the end of the year, primarily as a result of uncertain start in 2016. India saw another year of strong growth,
an OPEC decision to reduce production, but geopolitical and driven largely by private consumption, although uncertainty
economic uncertainty poses a risk to a broad recovery in invest- related to the government’s action to take high-value banknotes
ment spending. out of circulation acted as a temporary brake on growth toward
Despite these conditions, equity markets delivered generally the end of the year. Brazil saw a second year of deep recession,
positive performance. After a challenging start to 2016 on con- with private consumption and investment continuing to suffer
cerns about China and a decline in oil prices, global equity mar- from high rates of inflation, interest rate hikes, and persistent
kets rallied to record highs, supported by the economic stimulus political uncertainty. Russia’s economy contracted again, but less
in China, and the Bank of England’s monetary easing policy in severely than in 2015, as the economy showed signs of adjust-
response to the rise in political uncertainty following the outcome ment to the drop in oil prices, with consumption recovering well
of the UK referendum on EU membership. in the latter half of the year.
Fixed income markets performed well through much of the
year, although signs of rising US inflation and expectations of fis- Economic and market outlook for 2017
cal stimulus led to a sharp sell-off toward the year-end. Currency
markets saw a recovery in the Brazilian real and the South African We expect a modest acceleration in global growth in 2017, sup-
rand, while the British pound and Mexican peso declined sharply ported by accelerating growth in the US, a beginning of recover-
following the outcomes of the UK referendum on EU membership ing from the recessions in Brazil and Russia, and only modest
and the US presidential election, respectively. slowdowns in Europe and China. Central bank policy globally is
US growth was lower than expected, primarily due to stagna- expected to remain broadly supportive, as the European Central
tion in business investment in the energy sector. Private consump- Bank is likely to continue with quantitative easing, even if at a
tion remained relatively robust, jobs growth was strong, unem- slower pace, even as the Federal Reserve Board continues to
ployment decreased, and improving wage growth and credit increase rates.
availability proved supportive of consumer confidence. The US US consumption continues to benefit from an improving labor
Federal Reserve Board raised interest rates just once toward the market, while a post-election rally in business sentiment bodes
end of the year. Political and financial market uncertainty led the well for investment spending and deregulation could provide
Federal Reserve Board to proceed with caution in 2016. additional stimulus. Eurozone growth could slow modestly as
In Japan, growth remained positive due to positive net exports, political uncertainty weighs on investment spending and the pos-
but continued to show little response to the extensive monetary itive effects of monetary easing begin to wane. A recovery in the
and fiscal stimulus put in place in recent years. Weak wage growth, euro and in oil prices might also slow exports and consumption,
uncertainty over social security, and a negative wealth effect result- respectively. Switzerland is expected to see a continuation of
ing from an appreciating yen weighed on consumption. steady growth, although uncertainty over corporate tax reform
The Bank of Japan introduced a new policy of yield curve con- and the continued Swiss franc strength present headwinds. China
trol to cap longer-term interest rates, contributing to yen weak- is likely to see slower growth as the real estate and construction
ness in the latter months of the year. boom slows, but quasi-fiscal and credit stimuli are likely to keep
In Europe, growth slowed a little, but proved resilient following growth steady. More stable commodity prices and currencies
the outcome of the UK referendum on EU membership. Excep- should prove helpful for Brazil and Russia.

18
 Operating environment and strategy
Major risks to growth and markets relate to uncertainty regard- Digitalization
ing the effect of higher US interest rates, the possibility of greater Over the last few years, investments in financial technology have
protectionism in response to changes in US trade policy, uncer- increased sharply. The market expects continued digital disruption
tainty raised by the commencement of the UK’s negotiation of its in the financial industry, driven by consumer preferences and
withdrawal agreement with the EU, and the potential for sur- expectations. We strongly believe that core technologies, such as
prises from election outcomes in the Netherlands, France and automated investment advice, mobile access to banking services
Germany. China’s management of its rising debt levels and eco- and distributed ledger technology, will become mainstream in the
nomic transition remains an important medium-term factor, as financial services industry. Digital capabilities are likely to play a
does the possibility of heightened geopolitical tensions in an significant role in transforming how banks interact with clients
uncertain global environment. and how they operate internally.

Industry trends Further adaptation of operating models

Increases in operational cost pressure, reflecting higher regulatory
Wealth accumulation costs and a subdued revenue environment, will drive financial ser-
The wealth management industry offers fundamentally attractive vices firms to seek more efficient operating models. This push for
economics with a forecast for robust wealth accumulation around efficiency is forcing banks to reassess their front-to-back pro-
the world. According to the Boston Consulting Group Global cesses, focus on identifying potential for standardization, and
Wealth Report 2016, the ultra high net worth segment is expected reconsider the ownership of value chain components. Over the
to expand by about 9.5% annually from 2015 to 2020, and the past few years, a diverse network of suppliers and service provid-
high net worth segment by about 9.4% annually. Asia Pacific and ers for different parts of the banking industry value chain has
the emerging markets are expected to be the fastest-growing emerged, in particular by disrupting the traditional approach to
regions, with an estimated annual market growth rate of 14.0% process ownership, service and supply chain.
and 10.4% for the high net worth, and 16.0% and 12.4% for the
ultra high net worth segments, respectively. Mature markets, such Consolidation
as Western Europe and North America, are forecast to see wealth Increasing investment requirements along with constrained sup-
accumulation grow within the high net worth and ultra high net ply, a stronger refocus on core businesses and a subdued macro
worth segments at an annual rate exceeding expected gross environment will continue to drive and accelerate efficiency
domestic product growth. We believe that wealth management is efforts that are likely to span all functions in the banking business.
likely to remain a highly fragmented industry with high barriers to A retrenchment of banks’ operations to their core markets is
entry due to the significant investments needed to meet current expected to continue, with banks curtailing or even abandoning
and proposed regulatory requirements. completely some of their past international expansion efforts. This
is expected to foster concentration in certain markets, but also
Demographics, wealth transfer and retirement funding increase competition in certain business lines in order to gain scale
Demographic changes, particularly escalating costs associated and more efficiency.
with the care of an aging population and the funding challenges Considering continuous cost pressures, the industry is likely to
faced by public pension systems, will be a key long-term driver for seek opportunities to achieve further increased efficiency of non-
both wealth consumption and wealth transfer. Pressures on public client-facing logistics and control functions, and the emergence
pension schemes will make reform a pressing matter in several of more utility-like models, for example, centralized providers of
countries. Although change in public pension schemes will vary, a banking infrastructure or shared service companies, is increasingly
general and gradual shift from public to privately funded pension probable. Moreover, we will continue to see banks focusing on
schemes seems inevitable. their business portfolios, exiting their non-core products and
These developments are expected to benefit our businesses, as geographies, and further crystallizing and sharpening their core
individuals and privately funded pension schemes seek invest- value proposition in order to increase revenues, reduce costs and
ment advice and tailored service offerings with a relevant product improve their balance sheets. This could lead to added pressure
range. We believe that our strong capabilities in asset manage- on profitability.
ment, as well as our ability to tailor our service offerings to our
clients’ financial needs and preferences, put us in a position of
strength to address these emerging needs.

19
Operating environment and strategy
Current market climate and industry trends

Banking intermediation developments Regulation

Against the backdrop of digitalization and new market partici- There has been continuous regulatory pressure on the financial
pants, the banking sector’s role as a facilitator of economic policy services industry to become simpler, more transparent and more
and an enabler of domestic growth may come under pressure, as resilient, and we expect that regulation will remain a major driver
well as be subjected to renewed public discussion and regulatory of change and costs for the industry.
scrutiny. The combination of enhanced regulatory requirements, We believe we have the right business model to comply with
reduced risk appetite and subdued macroeconomic prospects new, more demanding regulations without the need to change
continues to curb the lending appetite of banks. While banks are our strategy. We have one of the highest fully applied CET1 capi-
currently still active in more specific or niche areas, such as long- tal ratios among our peer group of large global banks and we
dated assets and high-risk lending, other financial industry players have made substantial progress in our efforts to improve resolv-
are increasingly stepping into banking intermediation and risk- ability. We are well prepared to meet the requirements of the
taking areas. It is expected that this trend will continue with its revised Swiss too big to fail framework by the effective date in
extent and pace depending on regulatory developments. 2020, and we intend to use this period to fully implement the
Despite these challenges, we believe banks still have the neces- new requirements.
sary capital and the competitive ability to preserve their core role ➔➔Refer to the “Regulatory and legal developments” and “Capital
in the economy and to have continued access to their traditional management” sections of this report for more information
sources of revenue.

20
 Operating environment and strategy
Regulation and supervision
The Swiss Financial Market Supervisory Authority (FINMA) is UBS’s tions on intra-group funding and certain guarantees) or to reduce
home country regulator and consolidated supervisor. As a finan- business risk in some manner. The Swiss Banking Act provides
cial services provider with a global footprint, we are also regulated FINMA with the ability to extinguish or convert to common equity
and supervised by the relevant authorities in each of the jurisdic- the liabilities of the Group in connection with its resolution.
tions in which we conduct business, including the US, the UK and Furthermore, Swiss too big to fail requirements require Swiss
the rest of the EU. Through UBS AG and UBS Switzerland AG, systemically relevant banks, including UBS, to put in place viable
which are licensed as banks in Switzerland, we may engage in a emergency plans to preserve the operation of systemically impor-
full range of financial services activities in Switzerland and abroad, tant functions in case of a failure of the institution, to the extent
including personal banking, commercial banking, investment that such activities are not sufficiently separated in advance. In
banking and asset management. response to these requirements in Switzerland, as well as to simi-
As we are a designated global systemically important bank lar requirements in other jurisdictions, UBS has developed com-
(G-SIB) and considered systemically relevant in Switzerland, we are prehensive recovery plans that provide the tools to manage a
subject to more rigorous regulatory requirements and supervision severe loss event. UBS also provides relevant authorities with reso-
than most other Swiss banks. Since the financial crisis of 2007– lution plans for restructuring or winding down certain businesses
2009, regulation of financial services firms has been undergoing in the event the firm could not be stabilized. Alongside these
significant changes both in Switzerland and in the other countries measures, the bank has invested significantly in structural, finan-
where we operate. These changes, which continue to require cial and operational ring-fencing measures to improve the Group’s
­significant resources to implement, have a material effect on how resolvability.
we conduct our business and result in increased ongoing costs. ➔➔Refer to the “Capital management” section of this report for
➔➔Refer to the “The legal structure of UBS Group” section of this more information on the Swiss SRB framework and the Swiss
report for more information too big to fail requirements
➔➔Refer to the “Regulatory and legal developments” and “Risk ➔➔Refer to the “Treasury management” section of this report for
factors” sections of this report for more information more information on liquidity coverage ratio requirements

Regulation and supervision in Switzerland Regulation and supervision outside Switzerland

Supervision Regulation and supervision in the US

UBS Group AG and its subsidiaries are subject to consolidated In the US, UBS is subject to overall regulation and supervision by
supervision by FINMA under the Swiss Federal Law on Banks and the Board of Governors of the Federal Reserve (Federal Reserve
Savings Banks (Swiss Banking Act) and the related ordinances Board) under a number of laws. Furthermore, our US operations
that impose, among other requirements, minimum standards for are subject to additional oversight by the Federal Reserve Board’s
capital, liquidity, risk concentration and organizational structure. Large Institution Supervision Coordinating Committee, which
FINMA fulfills its statutory supervisory responsibilities through coordinates supervision of large or complex financial institutions.
licensing, regulation, monitoring and enforcement. FINMA is UBS AG is a financial holding company under the Bank Holding
responsible for the prudential supervision and mandates audit Company Act and maintains several branches and representative
firms to perform on its behalf a regulatory audit and certain other offices in the US, which are authorized and supervised by either
supervisory tasks. the Office of the Comptroller of the Currency or the state banking
authority of the state in which the branch is located. UBS AG is
Resolution planning and resolvability currently registered as a swap dealer with the Commodity Futures
The Swiss Banking Act and related ordinances provide FINMA Trading Commission (CFTC), and we expect to register it as a
with additional powers to intervene in order to prevent a failure or security-based swap dealer with the Securities and Exchange
resolve a failing financial institution, including UBS Group AG, Commission (SEC) when such registration is required.
UBS AG and UBS Switzerland AG. These measures may be trig- UBS Americas Holding LLC, the holding company for our non-
gered when certain thresholds are breached and permit the exer- branch operations in the US as required under the Dodd-Frank
cise of considerable discretion by FINMA in determining whether, Act, is subject to risk-based capital, liquidity, Comprehensive Cap-
when or in what manner to exercise such powers. In case of a ital Analysis and Review, stress test, capital plan and governance
possible insolvency, FINMA may impose more onerous require- requirements established by the Federal Reserve Board.
ments on us, including restrictions on the payment of dividends UBS Bank USA, a Federal Deposit Insurance Corporation-
and interest as well as measures to alter our legal structure (e.g., insured depository institution subsidiary, is licensed and regulated
to separate lines of business into dedicated entities, with limita- by state regulators in Utah.

21
Operating environment and strategy
Regulation and supervision

UBS Financial Services Inc., UBS Securities LLC and several Europe SE was established in the fourth quarter of 2016, follow-
other US subsidiaries are subject to regulation by a number of ing the merger of UBS Deutschland AG and our Wealth Man-
different government agencies and self-regulatory organiza- agement subsidiaries in Germany, Italy, Luxembourg (including
tions, including the SEC, the Financial Industry Regulatory its branches in Austria, Denmark and Sweden), the Netherlands
Authority, the CFTC, the Municipal Securities Rulemaking Board and Spain.
and national securities exchanges, depending on the nature of
their business. Anti-money laundering and anti-corruption

Regulation and supervision in the UK A major focus of government policy relating to financial institu-
Our operations in the UK are mainly regulated and supervised by tions in recent years has been combating money laundering and
the Prudential Regulation Authority (PRA), an affiliated authority terrorist financing. The US Bank Secrecy Act and other laws and
of the Bank of England, and the Financial Conduct Authority regulations applicable to UBS require the maintenance of effective
(FCA). Some of our subsidiaries and affiliates are also regulated by policies, procedures and controls to detect, prevent and report
the London Stock Exchange and other UK securities and com- money laundering and terrorist financing, and to verify the iden-
modities exchanges of which they are a member. tity of our clients. Failure to maintain and implement adequate
UBS Limited is a private limited company incorporated in the programs to prevent money laundering and terrorist financing
UK and is authorized by the PRA and regulated by the PRA and could result in significant legal and reputational risk.
the FCA to conduct a broad range of banking and investment We are subject to laws and regulations in jurisdictions in which
business. we operate, including the US Foreign Corrupt Practices Act and
UBS AG maintains a UK-registered branch in London that the UK Bribery Act, prohibiting corrupt or illegal payments to gov-
serves as a global booking center for our Investment Bank. ernment officials and others. We maintain policies, procedures
Financial services regulation in the UK is currently conducted in and internal controls intended to comply with these laws and
accordance with EU directives covering, among other topics, com- regulations.
pliance with certain capital and liquidity adequacy standards, cli-
ent protection requirements and business conduct principles. This Data protection
may be subject to change depending on how the relationship
between the UK and the EU evolves. We are subject to laws and regulations concerning the use and
protection of customer, employee, and other personal and confi-
Regulation and supervision in Germany dential information, including provisions under Swiss law, the EU
UBS Europe SE, headquartered in Frankfurt, Germany, is super- Data Protection Directive and laws of other jurisdictions.
vised by the Bundesanstalt für Finanzdienstleistungsaufsicht ➔➔Refer to the “Risk factors” section of this report for more
(BaFin) and subject to EU and German laws and regulations. UBS information

22
 Operating environment and strategy
Regulatory and legal developments
Key international developments discussion paper on the Basel III regulatory capital treatment of
accounting provisions following the publication of IFRS 9, Financial
Revisions of BCBS capital framework and ongoing consultations Instruments, issued by the International Accounting Standards
Board, and the Current Expected Credit Loss (CECL) model, issued
Proposed revisions to the Pillar 1 requirements by the US Financial Accounting Standards Board. The new rules
The Basel Committee on Banking Supervision (BCBS) is currently require the use of expected credit loss models as opposed to the
finalizing a comprehensive reform package for the Basel III capital currently applied incurred credit loss impairment approach under
framework, the elements of which have been proposed in a series IFRS and US GAAP. UBS will adopt the IFRS 9 requirements on
of separate consultation papers. High-level guidance on the revi- 1 January 2018. The BCBS consultative document proposes to
sions issued by the BCBS in November 2016 included: (i) the retain for an interim period the current regulatory treatment of
revised standardized approach to credit risk will be more risk-sen- accounting provisions. This would result in the impact of IFRS 9 on
sitive and more consistent with banks’ internal model-based common equity tier 1 capital to be limited to the excess of expected
approaches, which are subject to approval by the home country credit losses over the current regulatory expected losses for banks
regulator; (ii) a revised standardized approach for operational risk applying the internal ratings-based (IRB) approach. The BCBS also
will replace the existing approaches, including the advanced mea- considers the adoption of transitional arrangements to phase in
surement approach, which is based on banks’ internal models and this impact. The BCBS discussion paper sets out longer-term
also subject to approval by the home country regulator; and (iii) a options that include retaining the current regulatory treatment
leverage ratio surcharge for global systemically important banks and introducing an expected credit loss component to the stan-
(G-SIBs) will be introduced. In addition, an aggregate output floor, dardized regulatory approach. The consultation period ended in
in relation to the level of capital required, is expected to be part of ­January 2017.
the reform package. Final rules, which were expected to be issued ➔➔Refer to the “Significant accounting and financial reporting
in January 2017, have been delayed. We expect that if the changes” section of this report for more information
­proposals are adopted in their current form and implemented in
Switzerland, the proposed changes to the capital framework will Developments on TLAC and MREL requirements
likely result in a significant increase in our overall RWA without Following the publication of the Financial Stability Board’s (FSB)
considering the effect of mitigating measures. international total loss-absorbing capacity (TLAC) standard in
November 2015, a number of major jurisdictions issued TLAC
Revisions to the Pillar 2 requirements requirements during 2016.
In April 2016, the BCBS revised its 2004 principles for the manage- Switzerland was the first jurisdiction to implement TLAC
ment and supervision of interest rate risk. The revised standards requirements as part of the revision of the Swiss Capital Adequacy
include guidance on the development of interest rate shock scenar- Ordinance that became effective on 1 July 2016. Subject to a
ios, enhanced quantitative disclosure requirements as well as an ­limited reduction of the gone concern requirement based on
updated standardized framework, which banks could be mandated improvements to our resolvability, the TLAC requirements appli-
to follow. The impact of these revisions can only be determined once cable to UBS as of 1 January 2020 are 28.6% of RWA (excluding
its implementation in national prudential regulations becomes clearer. countercyclical buffer requirements) and 10% of the leverage ratio
denominator. The revised Capital Adequacy Ordinance requires
Revisions to the Pillar 3 requirements that TLAC-eligible instruments be issued out of a holding com-
FINMA has revised its Pillar 3 disclosure requirements to reflect pany, which would increase the overall tax burden for the Group
changes to the BCBS Pillar 3 standards. Requirements relating to the under the current Swiss tax law. The Swiss Federal Council has
2015 BCBS revisions became effective for Swiss banking institutions requested the Federal Tax Administration to propose amendments
on 31 December 2016 with additional requirements to be imple- to the Swiss tax law in order to address this issue.
mented during 2017. Further revisions to the Pillar 3 framework are In November 2016, the Bank of England published the final UK
expected as part of the finalization of the Basel III capital framework. Minimum Requirement for own Funds and Eligible Liabilities
➔➔Refer to the “Significant accounting and financial reporting (MREL) rules, including minimum standards for domestic systemi-
changes” section of this report and the “Basel III Pillar 3 cally important banks (D-SIBs) in the UK, such as UBS Limited.
UBS Group AG 2016” report under “Pillar 3, SEC filings & other Starting as of 1 January 2020, D-SIBs will have to meet MREL
disclosures” at [Link]/investors for more information requirements amounting to the greater of (i) a multiple, initially
less than two and increasing to two as of 1 January 2022, of the
Consultation on regulatory capital treatment of Pillar 1 requirement of 8% and an institution-specific add-on, or
accounting provisions (ii) if subject to a leverage ratio requirement, two times the appli-
In October 2016, the BCBS issued a consultative document and a cable requirement of currently 3%.

23
Operating environment and strategy
Regulatory and legal developments

Also in November 2016, the European Commission (EC) pub- Key developments in Switzerland
lished a proposal to integrate the FSB TLAC standard into the EU
MREL regime. The EC proposes to apply MREL requirements to Implementation of the mass immigration initiative
global systemically important institutions (G-SIIs) calculated at In December 2016, the Swiss Parliament passed changes to the
16% of RWA and 6% of the leverage exposure measure as of Foreign Nationals Act to implement the mass immigration initia-
1 January 2019, increasing to 18% and 6.75%, respectively, as of tive of February 2014. The rules aim to make better use of the
1 January 2022. The proposal would also introduce internal MREL domestic workforce by giving preferential treatment to the unem-
requirements for material subsidiaries of non-EU G-SIIs. ployed who are resident in Switzerland. In professions, industries
In December 2016, the Federal Reserve Board issued a final or regions where unemployment is above average, employers will
rule that will apply TLAC requirements, minimum long-term debt be required to advertise vacant positions to employment agencies
requirements and clean holding company requirements to all US and to select suitable agency-registered job seekers for interviews.
G-SIBs and to foreign G-SIBs’ US intermediate holding companies However, employers will not be required to justify decisions not to
(covered IHCs), including UBS Americas Holding LLC. The final hire such candidates. The Swiss Parliament deems the new rules
rule will require covered IHCs to maintain debt to the parent G-SIB compatible with the Agreement on the Free Movement of Per-
qualifying as TLAC (internal TLAC) of at least the greatest of 16% sons between Switzerland and the EU.
of RWA, 6% of leverage exposure or 9% of average total con- The legislation is subject to an optional national referendum
solidated assets, plus a buffer, including eligible long-term debt of vote, for which 50,000 signatures of Swiss citizens would have to
at least the greatest of 6% of RWA, 2.5% of leverage exposure or be collected by 7 April 2017. If there is no referendum vote, the
3.5% of average total consolidated assets. The final rule prohibits rules will take effect after this deadline.
covered IHCs from having liabilities to unrelated third parties that
exceed 5% of its total TLAC (clean holding company requirement) Corporate Tax Reform III rejected in referendum vote
unless all of its TLAC is contractually subordinated to third-party In June 2016, the Swiss Parliament approved legislation to reform
liabilities. It further prohibits a covered IHC from incurring short- the Swiss corporate tax code. The reform aimed to align the indi-
term debt, entering into derivatives with unaffiliated parties and vidual cantonal corporate tax regimes with international stan-
issuing certain guarantees. The rule becomes effective as of 1 Jan- dards by eliminating reduced holding company tax rates and
uary 2019. other privileges and providing a set of both optional and manda-
➔➔Refer to the “Capital management” section of this report for tory measures for the cantons to mitigate the effect on the corpo-
more information on the revised Swiss SRB framework rate tax burden.
The reform was rejected by popular referendum on 12 Febru-
Implementation of margin requirements for ary 2017. The Federal Council announced that a new proposal
non-cleared OTC derivatives will be drafted.
The G20 commitments on derivatives call for adoption of manda-
tory exchange of initial and variation margin for uncleared over- Company law reform
the-counter (OTC) derivative transactions (margin rules). In November 2016, the Swiss Federal Council submitted a draft
Margin rules for the largest counterparties (phase 1 counter- bill to Parliament proposing to reform Swiss company law. The
parties) became effective in the US, Canada and Japan on 1 Sep- revision is aimed at transferring the provisions of the Ordinance
tember 2016 and in the EU, Switzerland and major jurisdictions in against Excessive Compensation in Listed Companies Limited by
Asia in the first quarter of 2017. Margin requirements for the next Shares into the relevant federal law. Moreover, the Federal Coun-
group of counterparties, including significant numbers of end cil included new proposals to balance gender representation at
users, have generally become effective in these jurisdictions on senior executive and board level in listed companies and to intro-
1 March 2017. In recognition of the low level of industry and end- duce transparency rules for payments to government authorities
user readiness for these requirements, regulators in many of these by commodity firms.
jurisdictions have issued supervisory guidance or other relief Under the current proposal, we expect the impact on UBS to
intended to allow market participants to continue to transact concern mainly corporate governance and shareholder rights.
while proceeding as quickly as practicable to implement the However, the exact impact can only be determined once the final
requirements. This relief is generally effective until September law has been passed.
2017. The non-cleared margin requirements will have a signifi-
cant operational and funding impact on the OTC derivatives activ- Switzerland begins automatic exchange of information
ities of UBS and many of our clients. The delays in the completion Automatic exchange of information in tax matters (AEI) between
of rulemaking have affected our ability to complete the execution Switzerland and all EU member states and a number of other
of required documentation and operational processes with coun- countries took effect on 1 January 2017. The first exchange of
terparties ahead of relevant compliance dates, which may limit information between Switzerland and tax authorities in these
our and other dealers’ ability to transact with clients until this is countries will begin in 2018 based on 2017 data. The Swiss
remedied. ­Federal Department of Finance has initiated consultations to extend
the standard to additional countries.

24
 Operating environment and strategy
We have experienced outflows of cross-border client assets as Parliamentary debate on FinSA and FinIA
a result of changes in local tax regimes or their enforcement. The Financial Services Act (FinSA) and Financial Institutions Act
(FinIA), which were approved by the Swiss Federal Council in
FINMA launches consultations on revision of November 2015, have entered parliamentary debate. The two
Swiss Banking Insolvency Ordinance comprehensive acts will have far-reaching consequences for the
In September 2016, the Swiss Financial Market Supervisory provision of financial services in Switzerland. The FinSA primarily
Authority (FINMA) conducted a consultation on revisions to the aims to improve client protection, while the FinIA will introduce a
Banking Insolvency Ordinance, which governs restructuring pro- prudential supervision of managers of individual client assets,
ceedings and bankruptcy proceedings for Swiss banking institu- managers of the assets of occupational benefits schemes and
tions. The draft includes provisions on the requirement for banks trustees. The upper house of the Swiss Parliament made a num-
to include in financial contracts that are subject to foreign laws or ber of major adjustments to the proposal by the Federal Council,
foreign places of jurisdiction contractual acknowledgment of e.g., by reducing the areas of expanded information, documenta-
FINMA’s ability to temporarily postpone exercise of remedies tion and clarification duties. The lower house of Parliament starts
against banks. Such postponement is intended to ensure the con- its debate in the first quarter of 2017.
tinuation of key contractual relationships without interruption in
crisis situations. Regulatory authorities in the UK, France, Germany, Key developments in the EU
Japan, Switzerland and the US have adopted or proposed similar
requirements to increase legal certainty in cross-border bank EC proposes implementation rules for Basel III reforms
resolutions. Implementation of these requirements is likely to
­ In November 2016, alongside its proposals to implement the FSB
require us to amend the terms of a significant number of trading TLAC standard, the European Commission (EC) published propos-
agreements. als to implement the remaining elements of the Basel III reforms in
the EU. The proposals would require non-EU G-SIBs with two or
FINMA issues final corporate governance guidelines for banks more EU entities to establish an EU-domiciled intermediate hold-
In November 2016, FINMA issued a circular on corporate gover- ing company. In addition, banks would be required to maintain a
nance, risk management and internal controls at banks. The circu- tier 1 leverage ratio of 3%, with the possibility of a G-SII add-on,
lar sets out the duties and responsibilities of boards of directors and a minimum net stable funding ratio of 100%. The EC would
and executive board members and defines requirements for the also create a new asset class of non-preferred senior debt, which
design of the relevant group-wide risk management framework, would rank below other senior debt in insolvency. The precise
the internal control framework and the internal audit function. At impact on UBS will depend on the final rules and their implemen-
the same time, FINMA introduced new principles on IT and cyber tation at a national level.
risks in the circular on operational risk. We do not expect the
aforementioned requirements to have a significant impact on us. UK referendum on EU membership
In addition, FINMA revised the circular on remuneration schemes. Following the result of the June 2016 referendum on the UK’s
The requirements will enter into force on 1 July 2017 and will also membership in the EU, the UK prime minister, Theresa May, has
apply to UBS. confirmed the UK will invoke Article 50 of the Treaty on European
Union by no later than the end of March 2017 subject to passing
Switzerland launches consultation on data protection the necessary legislation required by the Supreme Court judg-
In an effort to improve data protection and to reflect the new ment on 24 January 2017. This will trigger a two-year period,
technological and social landscape in existing laws, the Swiss subject to extension, during which the UK will negotiate its with-
­Federal Council launched a consultation on the proposed revision drawal agreement with the EU. Barring any changes to this time
of the data protection law in December 2016. The Federal Council schedule, it is expected that the UK will formally leave the EU in
intends to increase the transparency of data processing and early 2019. The future of the UK’s relationship with the EU remains
strengthen data privacy. To this end, individuals and institutions unclear, although the UK government has stated that the UK will
with access to personal data should be subject to increased trans- leave the EU single market and will seek a phased period of imple-
parency and information requirements. The revision would enable mentation for the new relationship that could cover the legal and
Switzerland to meet the requirements of the EU directive on data regulatory framework for the financial services industry.
protection and to ratify the revised Council of Europe Convention Any future limitations on providing financial services into the
on the Protection of Individuals with regard to Automatic Process- EU from our UK operations could require us to make potentially
ing of Personal Data, both of which are key to ensuring that the significant changes to our operations in the UK and our legal
EU continues to recognize Switzerland as having an adequate structure. Potential effects of a UK exit from the EU and potential
level of data protection and that cross-border data transmission mitigating actions may vary considerably depending on the timing
will remain possible in the future. Implementation of new data of withdrawal and the nature of any transition or successor
protection requirements has required and will require significant arrangements.
investment by the Group.

25
Operating environment and strategy
Regulatory and legal developments

Application of MiFID II / MiFIR package postponed until Changes to rules regulating systemic risks
January 2018 UBS Americas Holding LLC, the intermediate holding company for
The EU Markets in Financial Instruments Directive II and Regula- our US subsidiaries, is subject to US capital requirements, gover-
tion package (MiFID II / MiFIR) came into force in July 2014. The nance requirements and other prudential regulation, including
bulk of the requirements were intended to become applicable on the Comprehensive Capital Analysis and Review (CCAR) process
3 January 2017, with transitional provisions in several areas. How- beginning in 2017. In January 2017, the Federal Reserve Board
ever, taking into account the significant technical implementation adjusted its capital plan and stress testing rules. Among other
challenges faced by regulators and market participants, the appli- changes, the rules will decrease the amount of capital any firm
cation date has been postponed to 3 January 2018. MiFID II / MiFIR subject to the quantitative requirements of CCAR can distribute
will affect many areas of our business in the Investment Bank, to shareholders outside an approved capital plan without seeking
Wealth Management, Asset Management and Personal & Corpo- prior approval from the Federal Reserve Board from 1% to 0.25%.
rate Banking. We have a Group-wide implementation program in This change will apply to UBS Americas Holding LLC for the 2017
place for MiFID II / MiFIR. CCAR cycle. As announced by Federal Reserve Board Governor
Daniel Tarullo in September 2016, the Federal Reserve Board may
EU Benchmarks Regulation entered into force further revise the CCAR process and make various changes to the
The EU Benchmarks Regulation (EBR), which aims to improve the modeling assumptions used in the CCAR scenarios. The revised
accuracy and integrity of benchmarks, entered into force on CCAR process could, among other things, require firms to hold an
30 June 2016 and the majority of requirements will take effect as additional stress capital buffer determined every year.
of 1 January 2018. New EU and third-country benchmarks may Separately, in March 2016, the Federal Reserve Board proposed
not be used in the EU after 1 January 2018 unless they comply a rule to impose new limits on significant single-counterparty
with EBR. Existing benchmarks (financial indices used as a refer- credit exposures of large banking organizations, including large
ence in financial instruments, contracts or investment funds on US bank holding companies and US operations of foreign banking
1 January 2018) are subject to transitional provisions. The regula- organizations. The proposal would apply single-counterparty
tion will have a cross-divisional and a cross-regional impact, as it credit limits to US-domiciled bank holding companies with total
affects UBS at three levels: administrator of UBS benchmarks, consolidated assets of USD 50 billion or more. The proposed limits
contributor to various benchmarks, and as a user of benchmarks. are designed to become more stringent as the systemic impor-
The governance, control and transparency requirements for tance of a firm increases. Under the proposal, the exposure of
administrators and contributors will have cost implications. The UBS’s US operations to another systemically important financial
application of EBR may have a significant effect across the indus- firm would be limited to a maximum of 15% of our tier 1 capital,
try as it may result in a reduction in benchmarks available for use and exposure to any other single counterparty would be restricted
in financial instruments and financial contracts or to measure the to 25% of our tier 1 capital. In addition, the single-counterparty
performance of investment funds. credit limits would apply separately to UBS Americas Holding LLC,
based on its capital. If adopted as proposed, these limits may
Key developments in the US affect how UBS conducts its operations in the US, including the
use of other financial firms for payments and securities clearing
US Department of Labor finalizes fiduciary rule services and as transactional counterparties.
In April 2016, the US Department of Labor (DOL) adopted a rule
that expands the definition of “fiduciary” under the Employee US incentive compensation regulation
Retirement Income Security Act of 1974 (ERISA). On 1 March In May 2016, US federal financial regulators, including the Board
2017, the DOL proposed a 60 day extension of the current of Governors of the Federal Reserve (Federal Reserve Board),
10 April 2017 applicability date of the fiduciary rule and its jointly proposed regulations that would, among other things,
exemptions. The proposed delay is intended to give the DOL time (i) prescribe mandatory deferral amounts and periods for incentive
to commence an examination of the rule called for by a memo- compensation based on the size of the financial institution and
randum issued by President Donald Trump on 3 February 2017. (ii) require downward adjustment, forfeiture and / or claw-back of
That memo directed the DOL to review the fiduciary rule to incentive compensation in certain circumstances. The proposal
“determine whether it may adversely affect the ability of would apply to incentive compensation plans of our principal
­Americans to gain access to retirement information and financial operating entities in the US and would prescribe specific deferral
advice.” The rule would require all advisors, including broker- and forfeiture requirements for executive officers, highly compen-
dealers, to abide by an ERISA fiduciary standard in dealings with sated employees and significant risk takers as defined in the pro-
qualified retirement plans and individual retirement accounts. It posal. If implemented as proposed, these regulations would
would also prohibit various customary transactions and fee require changes to our incentive compensation programs.
arrangements in the financial services industry with respect to
retirement plan investors, unless certain exemption criteria are ➔➔Refer to the “Risk factors” section of this report for more
fully met. Wealth Management Americas and Asset Management information
would be required to materially change some of their business
processes in response to the rule.

26
 Operating environment and strategy
Our strategy
Who we are We are committed to an attractive capital returns policy
Our earnings capacity and capital efficiency support our objective
The world’s largest and only truly global wealth manager to deliver sustainable and growing capital returns to our share-
Our strategy is centered on our leading wealth management busi- holders. We are committed to a total capital return of at least
nesses and our premier universal bank in Switzerland, which are 50% of net profit attributable to shareholders, provided that we
enhanced by Asset Management and the Investment Bank. We maintain a fully applied CET1 capital ratio of at least 13% and
focus on businesses that have a strong competitive position in consistent with our objective of maintaining a post-stress fully
their targeted markets, are capital efficient, and have an attractive applied CET1 capital ratio of at least 10%. Total capital returns
long-term structural growth or profitability outlook. We are the will consist of an ordinary dividend, which we intend to grow
world’s largest and only truly global wealth manager, with a steadily over time, and other forms of capital returns. For the
strong presence in the largest and fastest growing markets. Our financial year 2016, our Board of Directors intends to propose a
wealth management businesses benefit from significant scale in dividend payment of CHF 0.60 per share, which is in line with the
an industry with attractive growth prospects, increasingly high ordinary dividend paid for 2015, and which represents a payout
barriers to entry, and their leading position across the attractive ratio of 71%.
high net worth and ultra high net worth client segments. We are
the preeminent universal bank in Switzerland, the only country Our priorities
where we operate in all business divisions. Our leading position in
our home market is central to UBS’s global brand and profit stabil- 1. Continue to execute our strategy and deliver on
ity. The partnership between our wealth management businesses our performance targets
and our other businesses is a key differentiating factor and a The strategic change we initiated in 2011 was driven by our deci-
source of competitive advantage. sion to focus on our strengths and our anticipation of more
demanding regulation. Having successfully completed our strate-
Strong capital position and capital efficient business model gic transformation in 2014, we intend to continue building on our
Capital strength is the foundation of our strategy and provides successful track record and to focus on disciplined execution to
another competitive advantage. Our fully applied common equity deliver on our performance targets.
tier 1 (CET1) capital ratio is one of the highest among large global
banks, and we are well-positioned to meet the revised fully 2. Improve effectiveness and efficiency
applied Swiss too big to fail provisions as of 1 January 2020. Our Our effectiveness and efficiency programs focus on creating the
capital-accretive and efficient business model helps us adapt to right infrastructure and cost framework for the future, including
changes in regulatory requirements, while pursuing growth optimizing our global workforce and footprint. Delivering on our
opportunities without the need for significant earnings retention. cost savings target is critical to offsetting the escalating costs
We believe that our business model can generate an adjusted associated with regulatory change and to achieve our return
return on tangible equity of more than 15% in a normalized mar- objectives.
ket environment.
3. Invest for growth
We continue to upgrade and enhance our capabilities in technol-
ogy and digitalization with a focus on innovation, better serving
our clients and further strengthening our competitive position.
We are also committed to investing in the development of our
employees and attracting the best available talent.

27
Operating environment and strategy
Our strategy

Our performance targets, expectations and ambitions tainable business performance over the cycle. Our performance
targets, expectations and ambitions are based on adjusted results
The tables below show our performance targets, expectations and assume constant foreign currency translation rates.
and ambitions for the Group and business divisions. They are cal- ➔➔Refer to the “Group performance” section of this report for more
culated on an annual basis, and represent our objectives for sus- information on adjusted results and adjusting items

Group

Adjusted cost / income ratio 60–70%

Adjusted return on tangible equity >15%
Common equity tier 1 capital ratio (fully applied)1 At least 13%2
Risk-weighted assets (fully applied) Expectation: around CHF 250 billion short / medium term3
Leverage ratio denominator (fully applied) Expectation: around CHF 950 billion short / medium term3
Net cost reduction4
CHF 2.1 billion by end 2017
1 Based on the revised Swiss SRB capital framework that became effective on 1 July 2016. Refer to the “Capital management” section of this report for more information. 2 Our capital returns policy also includes our
objective of maintaining a post-stress fully applied common equity tier 1 (CET1) capital ratio of at least 10%. 3 Based on the currently applicable rules. Refer to the “Capital management” section of this report for
more information. Also reflects known FINMA multipliers and methodology changes for risk-weighted assets (RWA), and assumes normalized market conditions for both RWA and leverage ratio denominator
(LRD). 4 Year-end 2017 exit rate compared with full-year 2013 adjusted operating expenses for Corporate Center and compared with full-year 2015 adjusted operating expenses for business divisions. Cost reductions
exclude expenses for provisions for litigation, regulatory and similar matters, foreign currency movements and temporary regulatory program costs. Business division adjusted operating expenses are before allocations
and exclude items that are not representative of the underlying net cost reduction performance, mainly related to variable compensation expenses and compensation for financial advisors in Wealth Management
Americas.

Business divisions

Wealth Management Net new money growth rate 3–5%

Adjusted cost / income ratio 55–65% Expectation: 10–15% annual adjusted
pre-tax profit growth for combined
Wealth Management Americas 1
Net new money growth rate 2–4% businesses over the cycle
Adjusted cost / income ratio 75–85%
Personal & Corporate Banking Net new business volume growth rate 1–4% (personal banking)
Net interest margin 140–180 bps
Adjusted cost / income ratio 50–60%
Asset Management Net new money growth rate 3–5% excluding money market flows
Adjusted cost / income ratio 60–70%
Adjusted annual pre-tax profit Ambition: CHF 1 billion in the medium term
Investment Bank Adjusted annual pre-tax RoAE >15%2
Adjusted cost / income ratio 70–80%
Risk-weighted assets (fully applied) Expectation: around CHF 85 billion
short / medium term3
Leverage ratio denominator (fully applied) Expectation: around CHF 325 billion
short / medium term3
1 Based on US dollars. 2 Under the current capital regime. 3 Based on the currently applicable rules. Refer to the “Capital management” section of this report for more information. Also reflects known FINMA mul-
tipliers and methodology changes for RWA, and assumes normalized market conditions for both RWA and LRD. Including RWA and LRD directly associated with activity that Corporate Center – Group Asset and Liability
Management manages centrally on the Investment Bank’s behalf.

28
 Operating environment and strategy
Measurement of performance
Performance measures Changes to our key performance indicators in 2017
We have fully aligned our performance targets and our KPI frame-
Key performance indicators work as of 1 January 2017, and as a result our “Cost reduction”
The Group and business divisions are managed on the basis of a target will be classified as a KPI for the Group as of 2017. Further-
KPI framework, which identifies profit and growth financial mea- more, to simplify the KPI framework, “Average value-at-risk
sures, in the context of sound risk and capital management objec- (1-day, 95% confidence, 5 years of historical data)” for the Invest-
tives. When determining variable compensation, both Group and ment Bank will be reported as “Additional information” rather
business division KPIs are taken into account. than as a KPI, and “Return on assets, gross (%)” for the Group
We review the KPI framework on a regular basis, considering and the Investment Bank will be removed from the KPI frame-
our strategy and the market environment in which we operate. work, as these will no longer be used as strategic steering metrics.
KPIs are disclosed in our quarterly and annual reporting to In addition, the going concern leverage ratio will change from a
allow comparison of our performance over the reporting periods. phase-in to a fully applied basis.
For certain KPIs we have performance targets in place, which are
defined in order to measure our performance against our strategy.
Our KPIs are designed to be assessed on an over-the-cycle basis
and are subject to seasonal patterns.
➔➔Refer to the “Our strategy” section of this report for more
information on performance targets

29
Operating environment and strategy
Measurement of performance

2016 Group and business division key performance indicators

Management

Management

Management

Investment
Personal &
Corporate
Americas

Banking
Wealth

Wealth
Group

Asset

Bank
Key performance indicators Definition
Change in net profit attributable to shareholders from continuing
operations between current and comparison periods / net profit
attributable to shareholders from continuing operations of l
Net profit growth (%) comparison period
Change in business division operating profit before tax between
current and comparison periods / business division operating profit l l l l l
Pre-tax profit growth (%) before tax of comparison period
Operating expenses / operating income before credit loss
Cost / income ratio (%) (expense) or recovery l l l l l l
Net profit attributable to shareholders before amortization and
impairment of goodwill and intangible assets (annualized as
applicable) / average equity attributable to shareholders less l
Return on tangible equity (RoTE) (%) average goodwill and intangible assets
Business division operating profit before tax (annualized as
Return on attributed equity (RoAE) (%) applicable) / average attributed equity l
Operating income before credit loss (expense) or recovery
Return on assets, gross (%)1 (annualized as applicable) / average total assets l l
Going concern leverage ratio
(phase-in, %)1 Total going concern capital / leverage ratio denominator l
Common equity tier 1 capital ratio
(fully applied, %) Common equity tier 1 capital / risk-weighted assets l
Net new money for the period (annualized as
applicable) / invested assets at the beginning of the period. Group
net new money growth is reported as net new money growth for l l l l
combined wealth management businesses. Asset Management
Net new money growth (%) net new money excludes money market flows
Operating income before credit loss (expense) or recovery
Gross margin on invested assets (bps) (annualized as applicable) / average invested assets l l l
Business division operating profit before tax (annualized as
Net margin on invested assets (bps) applicable) / average invested assets l l l
Net new business volume (i.e., total net inflows and outflows of
client assets and loans) for the period (annualized as
Net new business volume growth for applicable) / business volume (i.e., total of client assets and loans) l
personal banking (%) at the beginning of the period
Net interest margin (%) Net interest income (annualized as applicable) / average loans l
Value-at-risk (VaR) expresses maximum potential loss measured
Average VaR (1-day, 95% confidence, to a 95% confidence level, over a 1-day time horizon and based l
5 years of historical data)1 on five years of historical data
1 Removed from the key performance indicator framework in 2017.

New key performance indicators in 2017

Management

Management

Management

Investment
Personal &
Corporate
Americas

Banking
Wealth

Wealth
Group

Asset

Bank

Key performance indicators Definition

Cost reduction Net exit rate cost reduction1 l
Going concern leverage ratio
(fully applied, %) Total going concern capital / leverage ratio denominator l
1 Exit rate compared with full-year 2013 adjusted operating expenses for Corporate Center and full-year 2015 adjusted operating expenses for business divisions. Cost reductions exclude expenses for provisions for
litigation, regulatory and similar matters, foreign currency movements and temporary regulatory program costs. Business division adjusted operating expenses are before allocations and exclude items that are not
representative of the underlying net cost reduction performance, mainly related to variable compensation expenses and compensation for financial advisors in Wealth Management Americas.

30
 Operating environment and strategy
Wealth Management
Business and the Investment Bank through the Global Family Office Group.
Furthermore, we have enhanced our coverage and offering by
Wealth Management provides comprehensive advice and tailored establishing a global distribution management function and a
financial services to wealthy private clients around the world, dedicated global ultra high net worth organization.
except those served by Wealth Management Americas. Our cli- We have unique scale, an industry-leading platform and are
ents benefit from the full spectrum of resources that UBS as a active in the most diverse wealth management markets and seg-
global firm can offer, including banking and lending solutions, ments. Our booking centers across the globe give us a strong local
wealth planning, investment management solutions, and corpo- presence that allows us to book client assets in multiple locations,
rate finance advice. Our guided architecture model gives clients in response to client preferences.
access to a wide range of products from the world’s leading third- In Asia Pacific, we have accelerated our growth and expanded
party institutions that complement our own products. our onshore presence, with a particular focus on Hong Kong, Sin-
gapore and China, as well as on other major markets such as
Strategy and clients Japan and Taiwan, to capture long-term growth opportunities. In
emerging markets, we continue to focus on markets such as
We are the preeminent wealth manager for private clients outside ­Mexico, Brazil, Turkey, Russia, Israel and Saudi Arabia. We regularly
the US, particularly in the ultra high net worth, high net worth assess our local presence to ensure proximity to our clients in key
and affluent segments. We generally define ultra high net worth markets, as well as to make sure client needs for global diversifica-
clients as those with investable assets of more than CHF 50 mil- tion and local offerings are met.
lion, and high net worth clients as those with investable assets of In Europe, our long-established local presence in all major mar-
between CHF 2 million and CHF 50 million. Affluent clients are kets supports our growth ambition. We have combined our off-
those with investable assets between CHF 250,000 and CHF 2 shore and onshore businesses, creating economies of scale and
million. enabling us to deal efficiently with increased regulatory and fiscal
We believe the wealth management business has attractive requirements. In December 2016, we established UBS Europe SE,
long-term growth prospects and expect its growth to outpace an important step in simplifying our governance structure and in
that of global gross domestic product. From a client segment per- improving operational and capital efficiency across our European
spective, we believe the global ultra high net worth market, operations. UBS Europe SE was formed through the merger of
including family offices, has the highest growth potential, fol- UBS Deutschland AG and our Wealth Management subsidiaries in
lowed by the high net worth and affluent markets. We seek to Germany, Italy, Luxembourg (including branches in other coun-
capitalize on our market-leading position in the ultra high net tries), the Netherlands and Spain. Further countries may be
worth business and to increase our market share considerably in included in the future.
this segment. We also invest significantly in growing our high net In Switzerland, Wealth Management collaborates closely with
worth and affluent businesses, especially by leveraging and fur- our colleagues in the personal and corporate banking, asset man-
ther strengthening our leading competence in investment man- agement and investment banking businesses. This creates oppor-
agement, as well as by investing in our digital capabilities. tunities to expand our business through client referrals and gener-
Investment management and portfolio construction are at the ates efficiencies by enabling us to use UBS’s extensive branch
heart of our offering. We aspire to provide our clients a wider network, which includes around 100 Wealth Management
selection of discretionary and advisory services, helping them to offices.
more effectively achieve their goals. This in turn would further We offer extensive training to our client advisors, designed to
increase our mandate penetration and contribute to higher recur- enable the delivery of superior advice and solutions. All of our cli-
ring revenues. Our integrated client service model allows us to ent advisors must obtain the Wealth Management Diploma, a
bundle capabilities across the Group to identify investment oppor- program accredited by the Swiss Accreditation Service of the
tunities in varying market conditions and create solutions that suit State Secretariat for Economic Affairs, which ensures a high level
individual client needs. For example, ultra high net worth clients of knowledge and expertise. For our most senior client advisors,
benefit from tailored institutional coverage and global execution we offer extensive training through the Wealth Management
provided by dedicated specialist teams from Wealth Management Master program.

31
Operating environment and strategy
Wealth Management

We are investing in digitalization and innovation to meet the ary and advisory offerings with the UBS House View. Clients can
evolving needs of our clients. The One Wealth Management Plat- invest in a full range of financial instruments, from single securi-
form program is our signature business transformation strategy, ties, such as equities and bonds, to various investment funds,
through which we aim to deliver advisory, digital and back office structured products and alternative investments. Additionally, we
capabilities to our clients around the world. We intend to stan- offer our clients advice on structured lending and corporate
dardize our operating model and deliver operating efficiencies finance.
across our global wealth management business. The program has To help our clients address the challenges of an increasingly
already been rolled out in Switzerland and Germany and is cur- complex financial world, we continue to develop innovative prod-
rently being implemented in Hong Kong and Singapore. In addi- ucts. In 2016, we rolled out expanded investment mandate solu-
tion, we are developing new solutions to deliver our services tions based on our Chief Investment Office’s new asset allocation
through digital channels. For example, in 2016, we launched UBS framework. These innovative investment solutions are designed
SmartWealth in the UK, which combines digital wealth manage- to meet specific client needs and preferences beyond those
ment with UBS’s market-leading expert insight, offering clients addressed in our existing discretionary mandate offering. For
tailored investment advice based on their personal goals, and example, our UBS Manage Advanced Systematic Asset Allocation
online access to their investments at any time. mandate is a quantitatively driven investment concept that allows
We evaluate our performance against key performance indica- investors to participate fully in upward-trending equity markets
tors and our performance targets. and to reduce their exposure to equity risk in downward-trending
➔➔Refer to the “Our strategy” section of this report for more and volatile equity markets.
information on our performance targets By aggregating demand for private investments, we are able to
➔➔Refer to the “Measurement of performance” section of this offer our clients access to investment opportunities in the private
report for information on our key performance indicators markets space that are traditionally only available to institutional
investors. In 2016, we expanded our private markets offering,
Products and services most notably through a joint venture with Hamilton Lane, one of
the largest independent alternative investment management
Our approach focuses on gaining an understanding of our clients’ firms globally.
financial objectives that enables us to provide proprietary and We have also continued to invest significantly into our discre-
third-party solutions tailored to their individual needs. Clients tionary and advisory platform infrastructure, with a focus on cus-
benefit from a comprehensive set of capabilities and expertise, tomizing these offerings on a large scale and processing them
including planning, investing, lending, protection, philanthropy, more efficiently.
corporate and banking services. Investment management capa-
bilities are a core component of this value proposition. Organizational structure
Our Global Chief Investment Office, which serves both Wealth
Management and Wealth Management Americas, synthesizes the We are primarily organized along regional lines, with our business
research and expertise of UBS’s global network of economists, areas being Asia Pacific, Europe and Emerging Markets, Switzer-
strategists, analysts and investment specialists across all business land and Global Ultra High Net Worth.
divisions. These experts closely monitor and assess financial mar- We are governed by executive, risk and operating committees
ket developments and form a clear, concise and consistent invest- and operate mainly through UBS Switzerland AG and UBS AG
ment view, known as the UBS House View. branches. Headquartered in Switzerland, we have a presence in
The UBS House View identifies and communicates investment more than 40 countries with approximately 190 offices, of which
opportunities and market risks to help protect and grow our cli- around 100 are in Switzerland.
ents’ wealth, which we apply to our clients’ portfolios and asset
allocations, underpinning the investment strategies for our flag- Competitors
ship discretionary mandates. The strategic asset allocation is an
essential part of our disciplined style of managing our clients’ Our main global competitors include the private banking opera-
wealth and strives to ensure that our clients remain on course to tions of BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank,
meet their financial goals over the long term. It is complemented HSBC, JPMorgan Chase and Julius Baer. In the European domestic
by our tactical asset allocation, which uses our global expertise to markets, we primarily compete with the local private banking
help our clients navigate markets and ultimately improve the risk operations of large banks such as Deutsche Bank in Germany, RBS
and return trade-off potential of their portfolios. in the UK and UniCredit in Italy. In Asia Pacific, the private banking
Our Investment Products and Services unit ensures our solu- franchises of Citigroup, Credit Suisse and HSBC are our main
tions are in step with market conditions by aligning our discretion- competitors.

32
 Operating environment and strategy
Wealth Management Americas
Business firm with all of the capabilities of a premier, truly global wealth
manager. To accomplish that, in 2016 we introduced a new
Wealth Management Americas provides advice-based solutions Wealth Management Americas operating model designed to
through financial advisors who deliver a fully integrated set of move decision-making closer to clients, better leverage the capa-
products and services specifically designed to address the needs bilities that our unrivaled global footprint can offer, invest in next-
of our clients. Our business is primarily domestic US but includes generation technology and achieve long-term sustainable organic
Canada and international business booked in the US. We believe growth through an increased focus on retaining and developing
we have attractive growth opportunities and a clear strategy our financial advisors. We aim to differentiate ourselves from
focused on serving our target client segments, particularly the competitors and be a trusted and leading provider of financial
high and ultra high net worth segments. advice and solutions to our clients by enabling our financial advi-
sors to leverage the full resources of UBS globally, including access
Strategy and clients to wealth management research, our global Chief Investment
Office, and solutions from our other business divisions. These
Wealth Management Americas is one of the leading wealth man- resources are augmented by our commitment to an open archi-
agers in the Americas in terms of financial advisor productivity tecture platform and supported by our partnerships with many of
and invested assets by financial advisor. We offer a fully integrated the world’s leading third-party institutions. Moreover, our wealth
set of products and services to meet the needs of our high net management offering includes banking, mortgage and financing
worth and ultra high net worth client segments, while also serv- solutions that enable us to provide advice on both the asset and
ing the needs of core affluent clients. We define high net worth liability sides of our clients’ balance sheets.
clients as those with investable assets of between USD 1 million We believe the long-term growth prospects of the wealth
and USD 10 million, and ultra high net worth clients as those with management business are attractive in the Americas, with high
investable assets of more than USD 10 million. Core affluent cli- net worth and ultra high net worth expected to be the fastest-
ents are defined as those with investable assets of between USD growing client segments in terms of invested assets in the region.
250,000 and USD 1 million. The Global Family Office – Americas, We plan to grow our business by enabling our financial advisors
a joint venture between Wealth Management Americas and the to focus on delivering holistic advice across the full spectrum of
Investment Bank, provides integrated, comprehensive wealth client needs through continued expansion of our cross-business
management and institutional-type services to select Family Office collaboration throughout the firm, and delivering banking and
clients. Our Wealth Advice Center serves emerging affluent clients lending services that complement our wealth management solu-
with investable assets of less than USD 250,000. We are commit- tions. We also plan to continue investing in platforms and tech-
ted to providing high-quality advice to our clients across all their nology, while remaining disciplined on cost. We expect these
financial needs by employing the best professionals in the indus- efforts to enable us to achieve higher levels of client satisfaction,
try, delivering the highest standard of execution and running a strengthen our client relationships and lead to greater productivity
streamlined and efficient business. across our financial advisors.
We evaluate our performance against key performance indica-
tors and our performance targets. Products and services
➔➔Refer to the “Our strategy” section of this report for more
information on our performance targets We offer clients a full array of solutions that focus on meeting
➔➔Refer to the “Measurement of performance” section of this their individual financial needs. Our financial advisors work
report for information on our key performance indicators closely with internal specialists to support evolving goals and
expectations throughout the client life cycle, including compre-
We believe we are uniquely positioned to serve high net worth hensive wealth planning and portfolio strategy and manage-
and ultra high net worth investors in the world’s largest wealth ment. Our offering is designed to meet a wide variety of invest-
market. With a network of over 7,000 financial advisors and USD ment objectives, including wealth accumulation and preservation,
1 trillion in invested assets, we have a distinctive opportunity to income generation, portfolio diversification, legacy planning and
“feel small and play big” by combining the agility of a boutique philanthropy.

33
Operating environment and strategy
Wealth Management Americas

We offer products and solutions including equities, fixed Organizational structure

income, retirement services, annuities, alternative investments,
managed accounts and structured products. Wealth Manage- Our business is primarily domestic US but includes Canada and
ment Americas’ financial advisors are supported by a dedicated international business booked in the US.
capital markets team collaborating with the Investment Bank and In the US and Puerto Rico, we operate primarily through UBS
Asset Management in order to leverage the resources of the Financial Services Inc. and UBS Financial Services Incorporated of
entire firm, as well as with third-party investment banks and asset Puerto Rico through 208 branches. Our banking services in the US
management firms. To address the full range of our clients’ finan- include those conducted through UBS Bank USA, an FDIC-insured
cial needs, the Wealth Management Americas Banking Group depository institution subsidiary, and branches of UBS AG.
offers competitive lending and cash management services, such ­Canadian wealth management and banking operations are
as securities-backed lending, resource management accounts, ­conducted through UBS Bank (Canada). We are governed by
Federal Deposit Insurance Corporation (FDIC)-insured deposits, executive, risk and operating committees.
mortgages and credit cards. Wealth Management Americas cli-
ents also benefit from our commitment to close collaboration Competitors
with our Wealth Management business. Our integrated Wealth
Management Research Americas and Global Chief Investment We compete with national full-service brokerage firms, domestic
Office Wealth Management organizations together provide mar- and global private banks, regional broker-dealers, independent
ket analysis, economic outlooks and research guidance through a broker-dealers, registered investment advisors, trust companies
global lens and deliver them in our UBS House View to help sup- and other financial services firms offering wealth management
port investment decisions. services to US and Canadian private clients, as well as foreign
For corporate and institutional clients, we offer a robust suite non-resident clients seeking wealth management services within
of solutions, including equity compensation, administration, the US. Our main competitors include the wealth management
investment consulting, defined benefit and contribution pension businesses of Bank of America, Morgan Stanley and Wells Fargo.
programs, and cash management services. For example, our UBS
Equity Plan Advisory Services provides equity compensation plan
services and advice to more than 180 US corporations, represent-
ing one million participants worldwide.

34
 Operating environment and strategy
Personal & Corporate Banking
Business tered on cash flow-based lending and our strategic advisory and
trading business. Additionally, we are selectively expanding our
As the leading personal and corporate banking business in Swit- international footprint to serve Swiss corporate clients abroad as
zerland, we provide comprehensive financial products and ser- well as global corporate clients headquartered in Switzerland.
vices to private, corporate and institutional clients in Switzerland. Our clients value their relationship with us and our efforts to
We are among the leading players in the private and corporate provide them with superior service. In 2016, for the sixth consecu-
loan market in Switzerland, with a well-collateralized and conser- tive year, the international finance magazine Euromoney named
vatively managed lending portfolio. UBS “Best Domestic Cash Manager Switzerland” based on a sur-
Our business is a central element of UBS’s universal bank deliv- vey of cash managers and chief financial officers. Additionally,
ery model in Switzerland. We work with the Group’s wealth man- UBS was rated best asset servicing provider for asset managers
agement, investment bank and asset management businesses to and as the leading custodian bank in Switzerland and Europe,
ensure that our clients receive the best products and solutions for according to The R & M Survey, one of the industry’s most impor-
their specific financial needs. We are also an important source of tant client surveys.
growth for our other business divisions in Switzerland through Constant employee development is a crucial element of our
client referrals. In addition, we manage a substantial part of UBS’s divisional strategy, as this is our key to ensuring superior client
Swiss infrastructure and banking products platform, both of service. UBS sets the pace in client advisor certification, specifically
which are leveraged across the Group. with the implementation of its state-accredited ISO certification
Our distribution model is based on a multi-channel strategy. program.
With a steadily rising number of users and client interactions for Moreover, we continuously strive to simplify structures and
our expanding electronic and mobile banking offering, we con- processes in order to improve client experience without compro-
tinue to strengthen our position as the leading multi-channel mising our risk standards.
bank in Switzerland. We evaluate our performance against key performance indica-
tors and our performance targets.
Strategy and clients ➔➔Refer to the “Our strategy” section of this report for information
on our performance targets
Our strategy focuses on profitable and qualitative growth in Swit- ➔➔Refer to the “Measurement of performance” section of this
zerland. We aim to provide stable and substantial profits for the report for information on our key performance indicators
Group and create revenue opportunities for other businesses
within the firm. Products and services
In the personal banking business, we aspire to be the bank of
choice for private clients in Switzerland. We continue to pursue Our private clients have access to a comprehensive life cycle based
our strategy of moderately and selectively growing our business in offering and convenient digital banking, targeting the specific
high-quality loans and to further leverage the potential of digitali- needs of day-to-day banking, retirement and investment goals,
zation. Currently, we serve one in three Swiss households through and real estate transactions. In 2016, new services such as digital
our branch network, customer service centers and digital banking account opening and UBS Safe, where clients can securely store
services. We are continuously expanding our multi-channel offer- electronic files, were introduced.
ing and continue to build on UBS’s long tradition as a leader and Our corporate and institutional clients benefit from our financ-
innovator in digital services to deliver a superior client experience, ing and investment solutions, notably regarding access to equity
capture market share and increase efficiency and customer loyalty. and debt capital markets, syndicated and structured credit, pri-
In the corporate and institutional business, we want to be our vate placements, leasing and traditional financing. Our transac-
clients’ main bank. We aim to continuously improve our profit- tion banking offers solutions for payment and cash management
ability and capital efficiency, striving to expand our market share services, trade and export finance, receivable finance, as well as
in Switzerland with a focus on a qualitative growth strategy, cen- global custody solutions to institutional clients.

35
Operating environment and strategy
Personal & Corporate Banking

In 2016, we implemented a number of product and service Organizational structure

innovations, such as the launch of UBS Atrium, an innovative plat-
form in the real estate business, where UBS acts as an intermedi- Our business is organized into Personal Banking, Wealth Manage-
ary in the market, connecting clients and institutional investors. ment Switzerland and Corporate & Institutional Clients. The Swiss
UBS’s platform services focus on credit origination and servicing of network includes over 300 branches, covering 10 geographical
brokered mortgages, thereby providing an attractive investment regions.
opportunity for institutional investors in a low-yield environment. We are governed by executive, risk and operating committees
Additionally, we enhanced our digital Asset Wizard, which gives and operate mainly through UBS Switzerland AG.
clients comprehensive wealth oversight, including a new func-
tionality that allows clients to create a wide range of reports tai- Competitors
lored to their individual needs.
We collaborate closely with the Investment Bank to offer capi- In the Swiss retail business, our competitors are Credit Suisse,
tal market and foreign exchange products, hedging strategies, PostFinance, Raiffeisen, the cantonal banks and other regional
trading capabilities, as well as corporate finance advice. Working and local Swiss banks.
with Asset Management, we also provide state-of-the-art fund In the Swiss corporate and institutional business, our main
and portfolio management solutions. competitors are Credit Suisse, the cantonal banks and globally
active foreign banks in Switzerland.

36
 Operating environment and strategy
Asset Management
Business We continue to develop our well-established passive capabili-
ties, including indexed strategies and exchange-traded funds
Asset Management provides investment management products (ETFs), where we are building on our strong position in Asia
and services, platform solutions and advisory support to institu- Pacific, Europe and Switzerland. We also continue to expand our
tions, wholesale intermediaries and wealth management clients world-class fund-of-hedge-fund business.
around the world, with an onshore presence in 22 countries. We We evaluate our performance against key performance indica-
are a leading fund house in Europe, the largest mutual fund man- tors and our performance targets.
ager in Switzerland and one of the largest fund of hedge funds ➔➔Refer to the “Our strategy” section of this report for more
and real estate investment managers in the world. Our global information on our performance targets
investment capabilities include all major traditional and alterna- ➔➔Refer to the “Measurement of performance” section of this
tive asset classes. report for information on our key performance indicators

Strategy and clients Products and services

While market conditions and the low-yield environment in 2016 We offer clients a wide range of investment products and services
proved to be challenging for the industry, our global, diversified in different asset classes, which can be delivered through segre-
asset management business model continues to provide a solid gated, pooled or advisory mandates as well as registered invest-
foundation to capture growth opportunities in the shifting market ment funds in various jurisdictions. Our active traditional and
dynamics. alternative capabilities are:
The long-term outlook for the asset management industry –– Equities – investment strategies with varying risk and return
remains positive, with three main drivers: (i) aging populations will objectives, including global, regional and thematic strategies,
lead to higher savings requirements; (ii) tighter government as well as a high alpha and growth and quantitative styles.
spending budgets will lead to increased private pension funding; –– Multi Asset – global and regional asset allocation and currency
and (iii) emerging regulation is creating opportunities for asset investment strategies across the risk / return spectrum.
managers that have the necessary scale and expertise. –– O’Connor – a global, relative value-focused, single-manager
We have defined our current strategy with an overarching goal hedge fund platform providing investors with absolute and
to deliver holistic investment and platform solutions to our clients, risk-adjusted returns.
by leveraging our global reach and investment expertise. –– Fixed Income – global, regional and local market-based single-
Moreover, we are strengthening our institutional business and sector, multi-sector and extended-sector strategies, such as
seeking to accelerate the growth of our wholesale business by high-yield and emerging market debt, as well as unconstrained
building strategic partnerships, platforms and advisory support. and currency strategies.
This is a key area in which we intend to pursue growth in the com- –– Global Real Estate – global and regional strategies across the
ing years. Asset Management also continues to collaborate with major real estate sectors, mainly focused on core and value
the wealth management businesses to provide best-in-class prod- added strategies and also including other strategies across the
ucts and services to meet private clients’ needs. risk / return spectrum.
We aim to drive profitable and sustainable growth in key mar- –– Infrastructure and Private Equity – direct infrastructure invest-
kets in Europe, Switzerland, the Americas and Asia Pacific, includ- ment in core infrastructure assets globally, and multi-manager
ing China, where we also continue to expand our long-standing infrastructure and private equity strategies in broadly diversi-
onshore presence. fied fund-of-funds portfolios.
To support our efforts to achieve growth and increase our oper-
ational efficiency, we continue to invest in our operating platform Our Solutions business offers:
and have made significant progress transforming our organization –– Multi-manager hedge fund solutions and advisory services,
to create a less complex and unified global platform. We com- providing exposure to hedge fund investments with tailored
pleted the sale of our Alternative Fund Services business in 2015, risk and return profiles.
and announced an agreement in 2017 to sell our fund administra- –– Customized multi-asset solutions and advisory services, includ-
tion servicing units in Luxembourg and Switzerland to Northern ing risk-managed and structured strategies, manager selec-
Trust. The transaction is expected to close in the second half of the tion, pension risk management, risk advisory and global tacti-
year, subject to relevant approvals and other customary conditions. cal asset allocation.

37
Operating environment and strategy
Asset Management

Our passive capabilities include indexed, alternative beta and In 2017, we aligned our businesses to enable us to better
rules-based strategies across equities, fixed income, commodities, leverage our best investment processes, tools and systems to
real estate and alternatives with benchmarks ranging from main- generate high alpha, systematic products and solutions for cli-
stream to highly customized indices and rules-driven solutions. ents. Our Equities, Fixed Income and Solutions capabilities and
We offer our products in various structures, including ETFs, pooled hedge funds business were integrated within a new area named
funds, structured funds and mandates. Investments.
In addition, our Global Real Estate and Infrastructure and Pri-
Organizational structure vate Equity businesses were also combined to form a new area
named Real Estate & Private Markets. We will continue to grow
Our business is organized by the products and services we offer, this business by developing integrated and innovative solutions,
with principal offices located in Chicago, Frankfurt, Hartford, Hong as well as expanding in key markets, such as Brazil, Canada and
Kong, London, New York, Singapore, Sydney, Tokyo and Zurich. Japan.
We are governed by executive, risk and operating committees.
As part of UBS’s efforts to improve the resolvability of the Competitors
Group, we have established UBS Asset Management AG, a sub-
sidiary of UBS AG, to which we transferred the majority of Asset Our main competitors include global firms with wide-ranging
Management’s operating subsidiaries during 2016, excluding capabilities and distribution channels, such as AllianceBernstein
subsidiaries domiciled in the US, which were transferred to UBS Investments, Amundi, BlackRock, Deutsche Bank Asset Manage-
Americas Holdings LLC. ment, Goldman Sachs Asset Management, Invesco, JPMorgan
➔➔Refer to the “The legal structure of UBS Group” section of this Chase Asset Management, Morgan Stanley Investment Manage-
report for more information ment and Schroders.

38
 Operating environment and strategy
Investment Bank
Business To support our goal of earning attractive returns on our allo-
cated capital, we operate within a tightly controlled framework of
The Investment Bank is present in over 35 countries, with principal balance sheet, risk-weighted assets and leverage ratio denomina-
offices in all major financial centers, providing investment advice, tor. We evaluate our performance against key performance indi-
financial solutions and capital markets access. We serve corpo- cators and our performance targets.
rate, institutional and wealth management clients across the ➔➔Refer to the “Our strategy” section of this report for more
globe and form a synergetic partnership with our wealth manage- information on our performance targets and expectations
ment, personal and corporate banking and asset management ➔➔Refer to the “Measurement of performance” section of this
businesses. report for information on our key performance indicators
The business division is organized into Corporate Client Solu-
tions and Investor Client Services, and also includes UBS Securities Products and services
Research. Our specialist teams work closely together, comple-
menting our global product offering with their regional expertise. Corporate Client Solutions
This enables us to understand our clients and provide services tai- In Corporate Client Solutions, we advise our clients on strategic
lored to their investment and financing needs. business opportunities and help them raise capital to fund their
business activities. Together with Investor Client Services, we offer
Strategy and clients a full-service solution, which includes the distribution and risk
management of capital markets products and financing solutions.
We aspire to provide best-in-class services and solutions to our Its main business lines are:
corporate, institutional and wealth management clients, through –– Advisory consults clients on matters such as mergers and
an integrated, solutions-led approach, driven by our intellectual acquisitions, spin-offs, exchange offers, leveraged buyouts,
capital and leveraging our award-winning electronic platforms. joint ventures, exclusive sales, restructurings, takeover defense
With our client-centric business model, we partner with our and corporate broking.
wealth management, personal and corporate banking and asset –– Equity Capital Markets offers comprehensive equity capital-
management businesses, and we believe we are well positioned raising services, as well as related derivative products. This
to provide our clients with market insight, global coverage of mar- includes managing initial public offerings and private place-
kets and products, and execution services. ments, as well as equity-linked transactions and other strategic
Our focus remains on our traditional strengths in advisory, cap- equities solutions.
ital markets, equities and foreign exchange businesses, comple- –– Debt Capital Markets provides financing advice and helps cli-
mented by a rates and credit platform, to deliver attractive and ents raise various types of debt capital, as well as hedge result-
sustainable risk-adjusted returns. Using our powerful research ing exposures.
and technology capabilities, we pioneer integrated solutions to –– Financing Solutions provides customized solutions across asset
support our clients as they adapt to evolving market structures, classes via a wide range of financing capabilities, including
driven by changes to the regulatory, technological and economic structured financing, real estate finance and special situations.
landscape. –– Risk Management includes corporate lending and associated
We continue to invest in talent and technology and to hedging activities.
strengthen our operational risk framework. In 2016, we contin-
ued to implement our technology plan, aimed at enhancing the Investor Client Services
effectiveness of our platform for clients and simplifying our pro- In Investor Client Services, we enable our clients to buy and sell
cesses. securities on capital markets across the globe and to manage their
risk and liquidity. Its businesses are:

39
Operating environment and strategy
Investment Bank

Equities UBS Securities Research

As one of the world’s largest equities houses and leading equity In UBS Securities Research, we offer clients key insights on securi-
market participants in the primary and secondary markets, we ties in major financial markets around the globe. In our flagship Q
distribute, structure, execute, finance and clear equity cash and series reports, experts from across the UBS research team respond
derivative products. Our main business lines are: to questions from clients, providing a coordinated perspective
–– Cash offers trade execution and clearing for single stocks and across regions, sectors and asset classes.
portfolios through both traditional and electronic channels, The UBS Evidence Lab is a team of experienced primary
along with investment advisory and consultancy services. research experts and works closely with UBS Securities Research
–– Derivatives enables clients to manage risk and meet funding analysts to uncover new evidence that is not yet reflected in mar-
requirements through a wide range of listed and over-the- ket prices.
counter equity derivative instruments. We create and distribute
structured products and notes, enabling our clients to optimize Organizational structure
their investment returns.
–– Financing Services provides our hedge fund and institutional Our business is organized along the aforementioned products and
clients with a fully integrated platform for financing transac- services and has a global reach.
tions, which includes prime brokerage. In addition, we execute We are governed by executive, risk and operating committees
and clear exchange-traded equity derivatives in more than 45 and operate through UBS AG branches and other subsidiaries of
markets globally. UBS Group. Securities activities in the US are conducted through
UBS Securities LLC, a registered broker-dealer. In the UK, Invest-
Foreign Exchange, Rates and Credit ment Bank activities are conducted mainly out of UBS AG London
Foreign Exchange, Rates and Credit provides execution services branch and UBS Limited.
and solutions with an emphasis on electronic trading and main-
tains high levels of balance sheet velocity. The main business lines Competitors
are:
–– Foreign Exchange helps our clients manage their currency The main competitors are the major global investment banks,
exposures and is recognized as one of the leading foreign including Bank of America Merrill Lynch, Barclays, Citigroup,
exchange market-makers as well as the market leader in the Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase
precious metals business. and Morgan Stanley.
–– Rates and Credit encompasses sales, trading and market-mak-
ing in a selected range of rates and credit products. In addition,
we work closely with Corporate Client Solutions, providing
support to our debt capital markets businesses and tailoring
customized financing solutions for our clients.

40
 Operating environment and strategy
Corporate Center
Corporate Center is comprised of the functions that provide ser- and high-quality liquid asset (HQLA) portfolios on behalf of spe-
vices to the Group, which we present from a reporting perspective cific business divisions. Beginning in the third quarter of 2016, the
organized under Services and Group Asset and Liability Manage- area also includes Risk Exposure Management, which performs
ment (Group ALM). Corporate Center also includes the Non-core risk management over credit, debit and funding valuation adjust-
and Legacy Portfolio unit. ments for our over-the-counter derivatives portfolio. Net income
generated by these activities is fully allocated to the associated
Corporate Center – Services business divisions and Corporate Center units.
Capital investment and issuance activities consist of managing
Corporate Center – Services consists of the Group Chief Operat- the Group’s equity and capital instruments as well as instruments
ing Officer area (Group Corporate Services, Group Operations, that contribute to our total loss-absorbing capacity (TLAC). Reve-
Group Sourcing, Group Technology), Group Finance (excluding nues from investing the Group’s equity and the incremental
Group ALM), Group Legal, Group Human Resources, Group Risk expenses of issuing capital and TLAC instruments at the UBS
Control, Group Communications and Branding, Group Regula- Group AG level (the holding company for the UBS Group) relative
tory and Governance, and UBS and Society. to issuing senior debt out of operating subsidiaries are fully allo-
Corporate Center – Services allocates the majority of its oper- cated to the business divisions and other Corporate Center units
ating expenses to the business divisions and other Corporate Cen- based on their attributed portion of the Group’s equity.
ter units based on service consumption. Each year, as part of the Group structural risk management activities are performed to
annual business planning cycle, Corporate Center – Services meet overall Group-wide risk management objectives. They
agrees with the business divisions and other Corporate Center include managing the Group’s HQLA and long-term debt portfo-
units cost allocations for services at fixed amounts or at variable lios. The net positive or negative income generated through these
amounts based on fixed formulas, depending on capital and ser- activities is allocated to the business divisions and other Corporate
vice consumption levels as well as the nature of the service per- Center units based on their consumption of the underlying risks.
formed. In 2015 and 2016, where costs incurred were different This consumption is determined by various liquidity and funding
from those expected, Corporate Center – Services recognized models and, to reduce volatility, is allocated using stable, internal
over- and under-recoveries. In 2017, costs will be allocated to the benchmark rates rather than actual income earned by Group
business divisions and other Corporate Center units based on ALM. Net positive or negative income not arising as a result of
actual costs incurred by Corporate Center – Services. business division consumption is retained by Group ALM.
Operating expenses remaining in Corporate Center – Services As part of its risk management activities, Group ALM enters
after allocations relate mainly to Group governance functions and into derivative hedges to manage the economic and the interest
other corporate activities, certain strategic and regulatory projects rate risk of the different portfolios. The results of certain hedging
and certain retained restructuring expenses. activities, including any non-economic volatility caused by the
applicable accounting treatment, are retained by Group ALM.
Corporate Center – Group ALM
Corporate Center – Non-core and Legacy Portfolio
Group ALM manages the structural risks of our balance sheet,
including interest rate risk in the banking book, currency risk and Corporate Center – Non-core and Legacy Portfolio is comprised of
collateral risk, as well as the risks associated with the Group’s the positions from businesses that were part of the Investment
liquidity and funding portfolios. Group ALM also seeks to opti- Bank prior to its restructuring, and is overseen by a committee
mize the Group’s financial performance by better matching assets chaired by the Group Chief Risk Officer.
and liabilities within the context of the Group’s liquidity, funding Non-core and Legacy Portfolio pursues a primarily passive wind-
and capital targets. Group ALM serves all business divisions and down strategy, focusing on a disciplined reduction of risk-weighted
other Corporate Center units through three main risk manage- assets, leverage ratio denominator and costs. Positions are man-
ment areas, and its risk management is fully integrated into the aged and exited over time with the objective of maximizing share-
Group’s risk governance framework. holder value. Non-core and Legacy Portfolio also includes positions
Business division-aligned risk management activities performed relating to legal matters arising from businesses that were trans-
on behalf of business divisions and other Corporate Center units ferred to it.
include managing the interest rate risk in the banking book on ➔➔Refer to “Note 20 Provisions and contingent liabilities” in the
behalf of Wealth Management and Personal & Corporate Banking “Consolidated financial statements” section of this report for
more information

41
Operating environment and strategy
Corporate Center

Roles and responsibilities within Corporate Center – Services

Functional Responsibilities
head
Group –– Is responsible for ensuring transparency in, and the assessment of, the financial performance of the Group and business divisions, and for the Group’s financial
Chief Financial accounting, controlling, forecasting, planning and reporting processes
Officer1 –– Is responsible for treasury and capital management, including management and control of funding and liquidity risk with independent oversight from the
Group Chief Risk Officer, and for UBS’s regulatory capital ratios
–– Ensures asset and liability management by balancing consumption of the firm’s financial resources through consolidation and management of the Group’s
­structural risks enabling sustainable earnings generation
–– Manages and controls the Group’s tax affairs
–– Manages the divisional and Group financial control functions
–– Makes proposals to the Board of Directors (BoD) regarding the accounting standards adopted by the Group, and defines financial reporting and disclosure
standards, after consultation with the Audit Committee of the BoD
–– Provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act of 2002
–– Coordinates the working relationship with external auditors under the supervision of the Audit Committee of the BoD
–– Supports the Group Chief Executive Officer (CEO) in strategy development and key strategic topics
–– Provides advice on financial aspects of strategic projects and transactions
–– Manages relations with investors and analysts, in coordination with the Group CEO
Group Chief –– Provides quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Center
Operating functions
Officer –– Delivers a wide range of operational services across all business divisions and regions
–– Supplies real estate infrastructure and general administrative services, directs and controls all supply and demand management activities, supports the firm with
its third-party sourcing strategies and takes responsibility for the firm’s nearshore, offshore, outsourcing and supplier-related processes
–– Formulates and agrees Group-wide operating strategies, objectives, and financial and execution plans for the Group Chief Operating Officer function in support
of each business division and the Group functions
–– Delivers cross-divisional operational initiatives to enhance the firm’s operating platform
Group Chief –– Manages the divisional, regional and firm-wide risk control functions and monitors and challenges the firm’s risk-taking activities
Risk Officer –– Develops the Group’s risk appetite framework, risk management and control principles, and risk policies
–– In accordance with the risk appetite framework approved by the BoD, is responsible for:
(i) implementing appropriate independent control frameworks for the Group’s credit, market, treasury, country, compliance and operational risks
(ii) developing and implementing the frameworks for risk measurement, aggregation, portfolio controls and, jointly with the Group Chief Financial Officer,
for risk reporting
(iii) authorizing transactions, positions, exposures, portfolio limits, and credit risk provisions and allowances in accordance with the risk control authorities
delegated to this role
–– Maintains a control framework to ensure that UBS meets relevant regulatory and professional standards in the conduct of its business and coordinates in
this respect with the Group General Counsel
Group General –– Is responsible for legal matters, policies and processes and for managing the Group’s legal function
Counsel –– Assumes responsibility for legal oversight in respect of the Group’s key regulatory interactions and maintains relationships with our key regulators with respect
to legal matters
–– Reports legal risks and material litigation and manages litigation
Group Head –– Defines and executes a human resources strategy aligned with UBS’s objectives and positions the Group as an employer of choice
Human –– Ensures cost-efficient operational and advisory services to employees as well as strategic advice to managers and executives, supporting them to attract,
Resources engage, develop and retain talent
–– Maintains relationships with the Group’s key regulators with respect to compensation matters
Group Head –– Manages UBS’s corporate and brand communication to its stakeholders in alignment with the Group’s overall strategy
Communica- –– Develops UBS’s communications strategy, content and positioning with the primary purpose to build and protect the firm’s reputation and brand
tions and –– Manages and coordinates Group-wide marketing communications activities, including partnership marketing and sponsorship measures
Branding –– Provides shared service delivery of Group-wide communication channels
Group Head –– Develops governmental policy and regulatory strategy and coordinates key external relationships
Regulatory and –– Manages the Strategic Regulatory Initiatives portfolio and oversees the planning and execution of relevant initiatives
Governance –– Establishes global and local resolution planning and develops key resolvability improvement measures
–– Designs the Group’s legal entity structure and further develops coherent corporate governance standards
–– Governs the Group’s investigation portfolio and performs important investigations
Head UBS and –– Coordinates the Group’s corporate responsibility and sustainability strategy activities
Society
1 Relates to responsibilities for both Corporate Center – Services and Corporate Center – Group ALM.

42
 Operating environment and strategy
Priorities and initiatives realize efficiencies by reducing our footprint in high-cost real
estate locations.
Our Corporate Center functions strive to provide best-in-class We seek to increase value by leveraging common capabili-
financial, risk, legal and shared services to the Group based on ties and creating centralized functions. Within Group Technol-
commercially sound service management principles, including ogy, we continue to modernize our infrastructure and simplify
transparency on both qualitative and quantitative components of our portfolio of applications. In 2016, we began the transfer of
the services offered. Moreover, we continue to focus on achieving the majority of shared service functions to our separate Group
greater effectiveness and efficiency through the strategic levers of service companies, which, in addition to meeting regulatory
workforce and footprint, organization and process optimization, requirements, allows us to further strengthen our approach to
and technology, and we remain fully committed to contributing service management without losing efficiency in the way we
to the Group’s net cost reduction. operate.
As of 31 December 2016, 31% of Corporate Center employ- ➔➔Refer to the “Our strategy” section of this report for more
ees and contractors were in offshore or nearshore locations com- information
pared with 18% three years earlier. In addition to lower person- ➔➔Refer to the “The legal structure of UBS Group” section of this
nel expenses, this allows us to tap growing talent pools and report for more information

43
Operating environment and strategy
Risk factors

Risk factors
Certain risks, including those described below, may affect our Our global presence subjects us to risk from
ability to execute our strategy or our business activities, financial currency fluctuations
condition, results of operations and prospects. Because a broad-
based international financial services firm such as UBS is inher- We prepare our consolidated financial statements in Swiss francs.
ently exposed to multiple risks many of which become apparent However, a substantial portion of our assets, liabilities, invested
only with the benefit of hindsight, risks of which we are not pres- assets, revenues and expenses, equity of foreign operations and
ently aware or which we currently do not consider to be material risk-weighted assets (RWA) are denominated in US dollars, euros,
could also adversely affect us. The order of presentation of the British pounds and in other foreign currencies. Accordingly,
risk factors below does not indicate the likelihood of their occur- changes in foreign exchange rates may adversely affect our prof-
rence or the potential magnitude of their consequences. its, balance sheet, including deferred tax assets, and capital, lever-
age and liquidity ratios. In particular, the portion of our operating
Continuing low or negative interest rates may have income denominated in non-Swiss franc currencies is greater than
a detrimental effect on our capital strength, liquidity and the portion of operating expenses denominated in non-Swiss
funding position, and profitability franc currencies. Therefore, the appreciation of the Swiss franc
against other currencies generally has an adverse effect on our
Low and negative interest rates in Switzerland and the eurozone profits, in the absence of any mitigating actions. Moreover, in
negatively affected our net interest income in 2016 and a con- order to hedge our CET1 capital ratio, CET1 capital needs to have
tinuing low or negative interest rate environment may further foreign currency exposure, leading to currency sensitivity of CET1
erode interest margins and adversely affect the net interest capital. As a consequence, it is not possible to simultaneously fully
income generated by our Personal & Corporate Banking and hedge both the amount of capital and the capital ratio. As the
Wealth Management businesses. Our performance is also affected proportion of RWA denominated in non-Swiss franc currencies
by the cost of maintaining the high-quality liquid assets required outweighs the capital in these currencies, a significant apprecia-
to cover regulatory outflow assumptions embedded in the liquid- tion of the Swiss franc against these currencies could benefit our
ity coverage ratio (LCR). The Swiss National Bank permits Swiss capital ratios, while a significant depreciation of the Swiss franc
banks to make deposits up to a threshold at zero interest. Any against these currencies could adversely affect our capital ratios.
reduction in, or limitations on the use of this exemption from the Swiss counterparties are, in general, highly reliant on the
otherwise applicable negative interest rates could exacerbate the domestic economy and the economies to which they export, in
effect of negative interest rates in Switzerland. Low and negative particular the EU and the US. In addition, the EUR / CHF exchange
interest rates may also affect customer behavior and hence our rate is an important risk factor for Swiss corporates. The stronger
overall balance sheet structure. Mitigating actions that we have Swiss franc may have a negative effect on the Swiss economy,
taken, or may take in the future, such as the introduction of selec- particularly on exporters, which could adversely affect some of
tive deposit fees or minimum lending rates, have resulted and the counterparties within our domestic lending portfolio and lead
may further result in the loss of customer deposits, a key source of to an increase in the level of credit loss expenses in future periods
our funding, net new money outflows and / or a declining market from the low levels recently observed.
share in our domestic lending business.
Our equity and capital are also affected by changes in interest Regulatory and legal changes may adversely affect our
rates. In particular, the calculation of our pension plan net defined business and our ability to execute our strategic plans
benefit assets and liabilities is sensitive to the discount rate
applied. Any further reduction in interest rates would lower the Fundamental changes in the laws and regulations affecting finan-
discount rates and result in pension plan deficits due to the long cial institutions can have a material and adverse effect on our
duration of corresponding liabilities. This would lead to a corre- business. In the wake of the 2007–2009 financial crisis and the
sponding reduction in our equity and fully applied common equity subsequent instability in global financial markets, regulators and
tier 1 (CET1) capital. legislators are considering, have proposed or have adopted a wide
range of changes to these laws and regulations. These measures
are generally designed to address the perceived causes of the cri-
sis and to limit the systemic risks posed by major financial institu-
tions. They include:
–– significantly higher regulatory capital requirements, including
changes in the definition and calculation of regulatory capital
as well as in the calculation of RWA;

44
 Operating environment and strategy
–– prudential adjustments to the valuation of assets at the discre- ness lines globally or in particular locations, and in some cases, on
tion of regulators; our ability to compete with other financial institutions, and may
–– introduction of a more demanding leverage ratio as well as require us to increase prices for or cease to offer certain services
new or significantly enhanced liquidity and stable funding and products. The developments have been and will likely con-
requirements; tinue to be costly to implement. They could also have a negative
–– requirements to maintain liquidity and capital in jurisdictions in effect on our legal structure or business model, potentially gener-
which activities are conducted and booked, and requirements ating capital, liquidity and other resource inefficiencies, all of
to adopt risk, corporate and other governance structures at a which may adversely affect our profitability. Finally, the uncer-
local jurisdiction or entity level; tainty related to, or the implementation of, legislative and regula-
–– limitations on principal trading and other activities and limita- tory changes may have a negative impact on our relationships
tions on risk concentrations and maximum levels of risk; with clients and our success in attracting client business.
–– new licensing, registration and compliance regimes, and cross- Capital and TBTF regulation: As an internationally active Swiss
border market access restrictions; systemically relevant bank (SRB), we are subject to capital and
–– taxes and government levies that would effectively limit bal- total loss-absorbing capacity (TLAC) requirements that are among
ance sheet growth or reduce the profitability of trading and the most stringent in the world. New Swiss SRB capital require-
other activities; ments impose significantly higher requirements based on RWA
–– a variety of measures constraining, taxing or imposing addi- and a significantly higher leverage ratio requirement. In addition,
tional requirements relating to compensation; a TLAC requirement has become applicable.
–– requirements to maintain loss-absorbing capital or debt instru- We may be subject to further increases in capital requirements
ments subject to write-down as part of recovery measures or a in the future, from the imposition of further add-ons in the calcu-
resolution of the Group or a Group company, including require- lation of RWA or from other changes to other components of
ments for subsidiaries to maintain such instruments; minimum capital requirements. The Basel Committee on Banking
–– requirements to adopt structural and other changes designed Supervision (BCBS) and other regulators are considering changes
to reduce systemic risk and to make major financial institutions to the Basel III capital framework, including revisions related to
easier to manage, restructure, disassemble or liquidate, includ- the credit risk and operational risk frameworks, as well as the
ing ring-fencing certain activities and operations within sepa- introduction of an output floor. If the proposed changes to the
rate legal entities, and adoption of new liquidation regimes capital framework are adopted in their current form in Switzer-
intended to prioritize the preservation of systemically signifi- land, we expect our overall RWA would significantly increase,
cant functions. absent any mitigating measures. We also expect that we would
incur significant costs to implement the proposed changes.
There remains significant uncertainty regarding a number of Liquidity and funding: The requirements to maintain an LCR of
the measures referred to above, including whether, or the form in high-quality liquid assets to estimated stressed short-term net
which, they will be adopted, the timing and content of imple- cash outflows and a net stable funding ratio (NSFR), or other
menting regulations and interpretations, and the dates of their similar liquidity and funding requirements we are subject to,
effectiveness. There is also uncertainty as to whether the laws and oblige us to maintain substantially higher levels of overall liquidity
regulations that have been adopted will be repealed or modified than was previously the case, may limit our efforts to optimize
as a result of geopolitical developments, particularly in the US interest income and expense, make certain lines of business less
with its recent change in presidential administration. attractive and reduce our overall ability to generate profits. Both
Notwithstanding attempts by regulators to align their efforts, the LCR and NSFR requirements are intended to ensure that we
the measures adopted or proposed differ significantly across the are not overly reliant on short-term funding and that we have
major jurisdictions, making it increasingly difficult to manage a sufficient long-term funding for illiquid assets, and the relevant
global institution like UBS. Swiss regulatory changes with regard calculations make assumptions about the relative likelihood and
to such matters as capital and liquidity have generally proceeded amount of outflows of funding and available sources of addi-
more quickly than those in other major jurisdictions, and the tional funding in a market- or firm-specific stress situation. There
requirements for Swiss major international banks are among the can be no assurance that in an actual stress situation our funding
strictest of the major financial centers. This could put Swiss banks, outflows would not exceed the assumed amounts. Moreover,
such as UBS, at a disadvantage when they compete with peer many of our subsidiaries must comply with minimum capital,
financial institutions subject to more lenient regulation or with liquidity and similar requirements and as a result UBS Group AG
unregulated non-bank competitors. and UBS AG have contributed a significant portion of their capi-
Planned and potential regulatory and legislative developments tal and provide substantial liquidity to them. These funds are
in Switzerland and in other jurisdictions in which we have opera- available to meet funding and collateral needs in the relevant
tions may have a material adverse effect on our ability to execute jurisdictions, but are generally not readily available for use by the
our strategic plans, on the profitability or viability of certain busi- Group as a whole.

45
Operating environment and strategy
Risk factors

Banking structure and activity limitations: We have undertaken The Swiss Banking Act and implementing ordinances provide
and continue to undertake significant changes in our legal and FINMA with significant powers to intervene in order to prevent a
operational structure to meet legal and regulatory requirements failure of, or to resolve, a failing financial institution. FINMA has
and expectations. considerable discretion in determining whether, when, or in what
Changes to our legal and operational structure, particularly the manner to exercise such powers. In case of a threatened insol-
transfer of operations to subsidiaries, require significant time and vency, FINMA may impose more onerous requirements on us,
resources to implement and create operational, capital, liquidity, including restrictions on the payment of dividends and interest.
funding and tax inefficiencies. In addition, they may increase our FINMA could also require us, directly or indirectly, for example, to
aggregate credit exposure to counterparties as they transact with alter our legal structure, including by separating lines of business
multiple entities within the UBS Group, expose our businesses to into dedicated entities, with limitations on intra-group funding
local capital, liquidity and funding requirements, and potentially and certain guarantees, or to further reduce business risk levels in
give rise to client and counterparty concerns about the credit some manner. FINMA also has the ability to write down or convert
quality of individual subsidiaries. Such changes could also nega- into common equity the capital instruments and other liabilities of
tively affect our funding model, limit our operational flexibility UBS Group AG, UBS AG and UBS Switzerland AG in connection
and negatively affect our ability to benefit from synergies between with a resolution. Refer to “If we experience financial difficulties,
business units. FINMA has the power to open resolution or liquidation proceed-
In the US, we have incurred substantial costs for implement- ings or impose protective measures in relation to UBS Group AG,
ing a compliance and monitoring framework in connection with UBS AG or UBS Switzerland AG, and such proceedings or mea-
the Volcker Rule under the Dodd-Frank Act. We have also been sures may have a material adverse effect on our shareholders and
required to modify our business activities both inside and outside creditors” below.
the US to conform to its activity limitations. The Volcker Rule Market regulation: The implementation by the G20 countries
may also have a substantial impact on market liquidity and the of the commitment to require all standardized OTC derivative
economics of market-making activities. We may incur additional contracts to be traded on exchanges or trading facilities and
costs in the short term if aspects of the Volcker Rule are repealed cleared through central counterparties has had and will continue
or modified. We may become subject to other similar regulations to have a significant effect on our OTC derivatives business, which
substantively limiting the types of activities in which we may is conducted primarily in the Investment Bank. These market
engage or the way we conduct our operations. If adopted as changes are likely to reduce the revenue potential of certain lines
proposed, the rule on single counterparty risk proposed by the of business for market participants generally, and we may be
US Federal Reserve Board may affect how we conduct our oper- adversely affected. For example, we expect that, as a rule, the
ations in the US, including our use of other financial firms for shift of OTC derivatives trading to a central clearing model will
payments and securities clearing services and as transactional tend to reduce profit margins in these products. Also, these laws
counterparties. may have a material impact on the market infrastructure that we
Resolvability and resolution and recovery planning: Under the use, available platforms, collateral management and the way we
Swiss TBTF framework, and similar requirements in other jurisdic- interact with clients, and may cause us to incur material imple-
tions, we are required to put in place viable emergency plans to mentation costs. Margin requirements for non-cleared OTC deriv-
preserve the operation of systemically important functions in the atives will require significant changes to collateral agreements
event of a failure, to the extent that such activities are not suffi- with counterparties and our clients’ operational processes. In
ciently separated in advance. If we adopt measures to reduce some jurisdictions implementation is ongoing, while rule-making
resolvability risk beyond what is legally required, we are eligible for and implementation are delayed in others. This may result in mar-
a limited rebate on the gone concern requirements. Such actions ket dislocation, disruption of cross-border trading, and concentra-
include changes to the legal structure of a bank group, such as the tion of counterparty trading. It also affects our ability to imple-
creation of separate legal entities, in a manner that would insulate ment the required changes and may limit our ability to transact
parts of the group to exposure from risks arising from other parts with clients.
of the group, thereby making it easier to dispose of certain parts Some of the regulations applicable to UBS AG as a registered
of the group in a recovery scenario, to liquidate or dispose of cer- swap dealer with the Commodity Futures Trading Commission
tain parts of the group in a resolution scenario or to execute a debt (CFTC) in the US, and certain regulations that will be applicable
bail-in. Additionally, if a recovery or resolution plan that we are when UBS AG registers as a security-based swap dealer with the
required to produce in a jurisdiction is determined by the relevant SEC, apply to UBS AG globally, including those relating to swap
authority to be inadequate or not credible, relevant regulation may data reporting, recordkeeping, compliance and supervision. As a
permit the authority to place limitations on the scope or size of our result, in some cases US rules will likely duplicate or conflict with
business in that jurisdiction, oblige us to hold higher amounts of legal requirements applicable to us elsewhere, including in Swit-
capital or liquidity, or to change our legal structure or business in zerland, and may place us at a competitive disadvantage to firms
order to remove the relevant impediments to resolution. that are not required to register in the US with the SEC or CFTC.

46
 Operating environment and strategy
In many instances, we provide services on a cross-border basis, ­calculation of RWA and regulatory add-ons to RWA have offset a
and we are therefore sensitive to barriers restricting market access substantial portion of this reduction. Changes in the calculation of
for third-country firms. In particular, efforts in the EU to harmo- RWA, or, as discussed above, the imposition of additional supple-
nize the regime for third-country firms to access the European mental RWA charges or multipliers applied to certain exposures,
market may have the effect of creating new barriers that adversely or the imposition of an RWA floor based on the standardized
affect our ability to conduct business in these jurisdictions from approach or other methodology changes could substantially
Switzerland. In addition, a number of jurisdictions are increasingly increase our RWA. In addition, we may not be successful in our
regulating cross-border activities based on determinations of plans to further reduce RWA, either because we are unable to
equivalence of home country regulation, substituted compliance carry out fully the actions we have planned or because other busi-
or similar principles of comity. A negative determination could ness or regulatory developments or actions counteract the effects
limit our access to the market in those jurisdictions and may neg- of our actions.
atively influence our ability to act as a global firm. In addition, as We are also subject to significantly higher leverage ratio-based
such determinations are typically applied on a jurisdictional level capital and TLAC requirements under the revised Swiss Capital
rather than on an entity level, we will generally need to rely on Adequacy Ordinance. The leverage ratio is a simple balance sheet
jurisdictions’ willingness to collaborate. measure and therefore limits balance sheet-intensive activities,
➔➔Refer to the “Regulation and supervision” and “Regulatory and such as lending, more than activities that are less balance sheet
legal developments” sections of this report for more information intensive, and it may constrain our business activities even if we
satisfy other risk-based capital requirements. Our leverage ratio
If we are unable to maintain our capital strength, this denominator is driven by, among other things, the level of client
may adversely affect our ability to execute our strategy, activity, including deposits and loans, foreign exchange rates,
client franchise and competitive position interest rates and other market factors. Many of these factors are
wholly or partially outside our control.
Maintaining our capital strength is a key component of our strat- ➔➔Refer to the “Regulatory and legal developments” section of this
egy. It enables us to support the growth of our businesses as well report for more information
as to meet potential regulatory changes in capital requirements. It
provides comfort to our stakeholders, forms the basis for our cap- We may not be successful in the ongoing execution of our
ital return policy, and contributes to our credit ratings. Our capital strategic plans
ratios are determined primarily by RWA, eligible capital and lever-
age ratio denominator (LRD), all of which may fluctuate based on In October 2012, we announced a significant acceleration in the
a number of factors, some of which are outside our control. implementation of our strategy. The strategy included transform-
Our eligible capital may be reduced by losses recognized within ing our Investment Bank to focus it on its traditional strengths,
net profit or other comprehensive income. Eligible capital may very significantly reducing RWA and further strengthening our
also be reduced for other reasons, including certain reductions in capital position, and significantly reducing costs and improving
the ratings of securitization exposures, acquisitions and divest- efficiency. We also set targets and expectations for our perfor-
ments changing the level of goodwill, adverse currency move- mance. We have substantially completed the transformation of
ments affecting the value of equity, prudential adjustments that our business. However, the risk remains that we may not succeed
may be required due to the valuation uncertainty associated with in executing the rest of our plans, or may need to delay them, that
certain types of positions, and changes in the value of certain market events or other factors may adversely affect their imple-
pension fund assets and liabilities or in the interest rate and other mentation or that their effects may differ from those intended.
assumptions used to calculate the changes in our net defined Macroeconomic conditions, geopolitical uncertainty, the changes
benefit obligation recognized in other comprehensive income. to the Swiss TBTF framework and the continuing costs of meeting
RWA are driven by our business activities, by changes in the new regulatory requirements have prompted us to adapt our tar-
risk profile of our exposures, changes in our foreign currency gets and expectations in the past and we may need to do so again
exposures and foreign exchange rates and by regulation. For in the future.
instance, substantial market volatility, a widening of credit We have substantially reduced the RWA and LRD usage of our
spreads, which is a major driver of our value-at-risk, adverse cur- Corporate Center – Non-core and Legacy Portfolio positions, but
rency movements, increased counterparty risk, deterioration in there is no assurance that we will continue to be able to exit the
the economic environment, or increased operational risk could remaining positions as quickly as our plans suggest or that we will
result in a rise in RWA. We have significantly reduced our market not incur significant losses in doing so. The continued illiquidity
risk and credit risk RWA in recent years. However, increases in and complexity of many of our legacy risk positions in particular
operational risk RWA, particularly those arising from litigation, could make it difficult to sell or otherwise exit these positions and
regulatory and similar matters, and regulatory changes in the reduce the RWA and LRD usage associated with these exposures.

47
Operating environment and strategy
Risk factors

As part of our strategy, we also have a program underway to nate licenses and regulatory authorizations, and may permit
achieve significant incremental cost reductions, but a number of financial market utilities to limit, suspend or terminate our par-
factors could negatively affect our plans. Higher permanent regu- ticipation in such utilities. Failure to obtain such waivers, or any
latory costs and business demand than we had originally antici- limitation, suspension or termination of licenses, authorizations or
pated have partly offset our gross cost reductions and delayed the participations, could have material consequences for us.
achievement of cost reduction targets in the past, and we could Our settlements with governmental authorities in connection
continue to be challenged in the execution of our ongoing plans. with foreign exchange, LIBOR and benchmark interest rates
Moreover, as is often the case with major effectiveness and effi- starkly illustrate the significantly increased level of financial and
ciency programs, cost reduction plans involve significant risks, reputational risk now associated with regulatory matters in major
including that restructuring costs may be higher and may be rec- jurisdictions. In December 2012, we announced settlements total-
ognized sooner than projected, that we may not be able to iden- ing approximately CHF 1.4 billion in fines by and disgorgements
tify feasible cost reduction opportunities that are also consistent to US, UK and Swiss authorities. We entered into a non-prosecu-
with our business goals, and that cost reductions may be realized tion agreement (NPA) with the US Department of Justice (DOJ),
later or may be less than we anticipate. Changes in our workforce and UBS Securities Japan Co. Ltd. pleaded guilty to one count of
as a result of outsourcing, nearshoring or offshoring or staff wire fraud relating to the manipulation of certain benchmark
reductions may introduce new operational risks that, if not effec- interest rates. In May 2015, the DOJ exercised its discretion to
tively addressed could affect our ability to recognize the desired terminate the NPA based on its determination that certain UBS
cost and other benefits from such changes or could result in oper- employees had committed a US crime related to foreign exchange
ational losses. Such changes can also lead to expenses recognized matters. As a consequence, UBS AG has pleaded guilty to one
in the income statement well in advance of the cost savings count of wire fraud for conduct in the LIBOR matter, and paid a
intended to be achieved through such workforce strategy, for USD 203 million fine and is subject to a three-year term of proba-
example, if provisions for real estate lease contracts need to be tion. The very large fines and disgorgement amounts were
recognized or when, in connection with the closure or disposal of assessed against us, and we were required to enter guilty pleas,
non-profitable operations, foreign currency translation losses pre- despite our full cooperation with the authorities in the investiga-
viously recorded in other comprehensive income are reclassified to tions, and despite our receipt of conditional leniency or condi-
the income statement. tional immunity from antitrust authorities in a number of jurisdic-
As we implement our effectiveness and efficiency programs, tions, including the US and Switzerland. We understand that, in
we may also experience unintended consequences, such as the determining the consequences for us, the authorities considered
loss or degradation of capabilities that we need in order to main- the fact that it had in the recent past been determined that we
tain our competitive position, achieve our targeted returns or had engaged in serious misconduct in several other matters.
meet existing or new regulatory requirements and expectations. Ever since our material losses arising from the 2007–2009
financial crisis, we have been subject to a very high level of regula-
Material legal and regulatory risks arise in the conduct of tory scrutiny and to certain regulatory measures that constrain our
our business strategic flexibility. While we believe that we have remediated the
deficiencies that led to those losses as well as to the unauthorized
As a global financial services firm operating in more than 50 coun- trading incident announced in September 2011, the effects on
tries, we are subject to many different legal, tax and regulatory our reputation and relationships with regulatory authorities of the
regimes and we are subject to extensive regulatory oversight and LIBOR-related settlements of 2012 and settlements with some
exposed to significant liability risk. We are subject to a large num- regulators of matters related to our foreign exchange and pre-
ber of claims, disputes, legal proceedings and government inves- cious metals business, have proven to be more difficult to over-
tigations, and we expect that our ongoing business activities will come. We are in active dialog with our regulators concerning the
continue to give rise to such matters in the future. The extent of actions that we are taking to improve our operational risk man-
our financial exposure to these and other matters is material and agement and control framework, but there can be no assurance
could substantially exceed the level of provisions that we have that our efforts will have the desired effects. As a result of this
established. We are not able to predict the financial and non- history, our level of risk with respect to regulatory enforcement
financial consequences these matters may have when resolved. may be greater than that of some of our peers.
Resolution of regulatory proceedings may require us to obtain ➔➔Refer to “Note 20 Provisions and contingent liabilities” in the
waivers of regulatory disqualifications to maintain certain opera- “Consolidated financial statements” section of this report for
tions, may entitle regulatory authorities to limit, suspend or termi- more information

48
 Operating environment and strategy
Operational risks affect our business As a result of new and changed regulatory requirements and
the changes we have made in our legal structure to meet regula-
Our businesses depend on our ability to process a large number of tory requirements and improve our resolvability, the volume, fre-
transactions, many of which are complex, across multiple and quency and complexity of our regulatory and other reporting has
diverse markets in different currencies, to comply with require- significantly increased. Regulators have also significantly increased
ments of many different legal and regulatory regimes to which we expectations for our internal reporting and data aggregation. We
are subject and to prevent, or promptly detect and stop, unau- have incurred and continue to incur significant costs to implement
thorized, fictitious or fraudulent transactions. We also rely on infrastructure to meet these requirements. Failure to timely and
access to, and on the functioning of, systems maintained by third accurately meet external reporting requirements or to meet regu-
parties, including clearing systems, exchanges, information pro- latory expectations for internal reporting could result in enforce-
cessors and central counterparties. Failure of our or third-party ment action or other adverse consequences for us.
systems could have an adverse effect on us. Our operational risk Certain types of operational control weaknesses and failures
management and control systems and processes are designed to could also adversely affect our ability to prepare and publish accu-
help ensure that the risks associated with our activities, including rate and timely financial reports. Following the unauthorized trad-
those arising from process error, failed execution, misconduct, ing incident announced in September 2011, management deter-
unauthorized trading, fraud, system failures, financial crime, mined that we had a material weakness in our internal control
cyberattacks, breaches of information security and failure of secu- over financial reporting as of the end of 2010 and 2011, although
rity and physical protection, are appropriately controlled. If our this did not affect the reliability of our financial statements for
internal controls fail or prove ineffective in identifying and reme- either year.
dying these risks, we could suffer operational failures that might In addition, despite the contingency plans we have in place,
result in material losses, such as the loss from the unauthorized our ability to conduct business may be adversely affected by a
trading incident announced in September 2011. disruption in the infrastructure that supports our businesses and
We and other financial services firms have been subject to the communities in which we are located. This may include a dis-
breaches of security and to cyber and other forms of attack, some ruption due to natural disasters, pandemics, civil unrest, war or
of which are sophisticated and targeted attacks intended to gain terrorism and involve electrical, communications, transportation
access to confidential information or systems, disrupt service or or other services used by us or third parties with whom we con-
destroy data. It is possible that we may not be able to anticipate, duct business.
detect or recognize threats to our systems or data or that our
preventative measures will not be effective to prevent an attack or Our reputation is critical to the success of our business
a security breach. A successful breach or circumvention of security
of our systems or data could have significant negative conse- Our reputation is critical to the success of our strategic plans, busi-
quences for us, including disruption of our operations, misappro- ness and prospects. Reputational damage is difficult to reverse, and
priation of confidential information concerning us or our custom- improvements tend to be slow and difficult to measure. Our very
ers, damage to our systems, financial losses for us or our large losses during the financial crisis, the investigations into our
customers, violations of data privacy and similar laws, litigation cross-border private banking services to US private clients and the
exposure and damage to our reputation. settlements entered into with US authorities with respect to this
A major focus of US and other countries’ governmental poli- matter, and other events seriously damaged our reputation. Repu-
cies relating to financial institutions in recent years has been fight- tational damage was an important factor in our loss of clients and
ing money laundering and terrorist financing. We are required to client assets across our asset-gathering businesses, and contributed
maintain effective policies, procedures and controls to detect, pre- to our loss of, and difficulty in attracting, staff in 2008 and 2009.
vent and report money laundering and terrorist financing, and to These developments had short-term and also more lasting adverse
verify the identity of our clients. We are also subject to laws and effects on our financial performance, and we recognized that
regulations related to corrupt and illegal payments to government restoring our reputation would be essential to maintaining our rela-
officials by others, such as the US Foreign Corrupt Practices Act tionships with clients, investors, regulators and the general public,
and the UK Bribery Act. We have implemented policies, proce- as well as with our employees. The unauthorized trading incident
dures and internal controls that are designed to comply with such announced in September 2011 and our involvement in the LIBOR
laws and regulations. Failure to maintain and implement adequate matter and investigations relating to our foreign exchange and pre-
programs to combat money laundering, terrorist financing or cor- cious metals business have also adversely affected our reputation.
ruption, or any failure of our programs in these areas, could have Any further reputational damage could have a material adverse
serious consequences both from legal enforcement action and effect on our operational results and financial condition and on our
from damage to our reputation. ability to achieve our strategic goals and financial targets.

49
Operating environment and strategy
Risk factors

Performance in the financial services industry is affected A decrease in business and client activity and market volumes,
by market conditions and the macroeconomic climate for example, as a result of significant market volatility, adversely
affects transaction fees, commissions and margins, particularly in
Our businesses are materially affected by market and economic our wealth management businesses and in the Investment Bank,
conditions. Adverse changes in interest rates, credit spreads, secu- as we experienced in 2016. A market downturn is likely to reduce
rities’ prices, market volatility and liquidity, foreign exchange the volume and valuations of assets that we manage on behalf of
rates, commodity prices, and other market fluctuations, as well as clients, reducing our asset and performance-based fees, and
changes in investor sentiment, can affect our earnings and ulti- could also cause a decline in the value of assets that we own and
mately our financial and capital positions. account for as investments or trading positions. On the other
A market downturn and weak macroeconomic conditions can hand, reduced market liquidity or volatility limit trading opportu-
be precipitated by a number of factors, including geopolitical nities and impede our ability to manage risks, impacting both
events, changes in monetary or fiscal policy, trade imbalances, trading income and performance-based fees.
natural disasters, pandemics, civil unrest, acts of violence, war or Credit risk is an integral part of many of our activities, including
terrorism. Macroeconomic and political developments can have lending, underwriting and derivatives activities. Worsening eco-
unpredictable and destabilizing effects and, because financial nomic conditions and adverse market developments could lead to
markets are global and highly interconnected, even local and impairments and defaults on credit exposures and on our trading
regional events can have widespread impact well beyond the and investment positions. Losses may be exacerbated by declines
countries in which they occur. We are closely monitoring develop- in the value of collateral we hold. We are exposed to credit risk in
ments in Europe following the UK referendum on EU member- activities, such as our prime brokerage, reverse repurchase and
ship, with potential adverse consequences for the UK economy Lombard lending, as the value or liquidity of the assets against
and for the recovery of a weak EU economy. Moreover, if individ- which we provide financing may decline rapidly. Macroeconomic
ual countries impose restrictions on cross-border payments or developments, such as the continuing strength of the Swiss franc
other exchange or capital controls, or change their currency (for and its effect on Swiss exports, the adoption of negative interest
example, if one or more countries should leave the eurozone), we rates by the Swiss National Bank or other central banks or any
could suffer losses from enforced default by counterparties, be return of crisis conditions within the eurozone or the EU, and the
unable to access our own assets, and / or be impeded in, or pre- potential implications of the decision in Switzerland to reinstate
vented from, managing our risks. immigration quotas for EU and European Economic Area citizens,
We could be materially affected if a crisis develops, regionally could also adversely affect the Swiss economy, our business in
or globally, as a result of disruptions in emerging markets or Switzerland in general and, in particular, our Swiss mortgage and
developed markets that are susceptible to macroeconomic and corporate loan portfolios.
political developments, or as a result of the failure of a major The aforementioned developments have in the past affected,
market participant. Our strategic plans depend more heavily on and could materially affect, the financial performance of business
our ability to generate growth and revenue in emerging markets, divisions and of UBS as a whole, including through impairment of
including China, causing us to be more exposed to the risks asso- goodwill and the adjustment of deferred tax asset levels.
ciated with such markets. The binding scenario we use in our
combined stress test framework reflects these aspects, and UK referendum on EU membership
assumes a hard landing in China leading to severe contagion of
Asian and emerging markets economies and at the same time Following the outcome of the June 2016 referendum on the UK’s
multiple debt restructurings in Europe, related direct losses for membership in the EU, the UK government has stated that it
European banks and fear of a eurozone breakup severely affect- intends to invoke Article 50 of the Treaty on European Union by
ing developed markets such as Switzerland, the UK and the US. no later than the end of March 2017. This will trigger a two-year
➔➔Refer to the “Risk measurement” section of this report for more period during which the UK will negotiate its withdrawal agree-
information on our stress testing framework ment with the EU. Barring any changes to this time schedule, the
UK is expected to leave the EU in early 2019. The nature of the
We have material exposures to a number of markets, and the UK’s future relationship with the EU remains unclear. Any future
regional balance of our business mix also exposes us to risk. Our limitations on providing financial services into the EU from our UK
Investment Bank’s Equities business, for example, is more heavily operations could require us to make potentially significant
weighted to Europe and Asia, and within this business our deriva- changes to our operations in the UK and our legal structure. We
tives business is more heavily weighted to structured products for are evaluating the potential effects of a UK exit from the EU and
wealth management clients, in particular with European and potential mitigating actions, although the effects and actions may
Asian underlyings. Turbulence in these markets can therefore vary considerably depending on the timing of withdrawal and the
affect us more than other financial service providers. nature of any transition or successor agreements with the EU.

50
 Operating environment and strategy
We may not be successful in implementing changes in our changes in client product preferences as a result of which low-
wealth management businesses to meet changing market, margin products account for a larger share of our revenues than
regulatory and other conditions in the past, has put downward pressure on our Wealth Manage-
ment’s margins.
Our wealth and asset management businesses operate in an envi- Initiatives that we may implement to overcome the effects of
ronment of increasing regulatory scrutiny and changing standards changes in the business environment on our profitability, balance
also with respect to fiduciary and other standards of care and the sheet and capital positions give no assurance that we will be able
focus on mitigating or eliminating conflicts of interest between a to counteract those effects and may cause net new money out-
manager or advisor and the client, which require effective imple- flows and reductions in client deposits, as happened with our bal-
mentation across the global systems and processes of investment ance sheet and capital optimization program in 2015. In addition,
managers and other industry participants. For example, the US we have made changes to our business offerings and pricing prac-
Department of Labor has adopted a rule expanding the definition tices in line with the Swiss Supreme Court case concerning retro-
of “fiduciary” under the Employee Retirement Income Security Act cessions and other industry developments. These changes may
(ERISA), which will require us to comply with fiduciary standards adversely affect our margins on these products, and our current
under ERISA when dealing with certain retirement plans. We will offering may be less attractive to clients than the products it
likely be required to materially change business processes, policies replaces. There is no assurance that we will be successful in our
and the terms on which we interact with these clients in order to efforts to offset the adverse effect of these or similar trends and
comply with these rules if and when they become effective. developments.
We are exposed to possible outflows of client assets in our
asset-gathering businesses and to changes affecting the profit- We may be unable to identify or capture revenue or
ability of our wealth management businesses and we may not be competitive opportunities, or retain and attract qualified
successful in implementing the business changes needed to employees
address them.
We experienced substantial net outflows of client assets in our The financial services industry is characterized by intense competi-
wealth management and asset management businesses in 2008 tion, continuous innovation, restrictive, detailed, and sometimes
and 2009. The net outflows resulted from a number of different fragmented, regulation and ongoing consolidation. We face com-
factors, including our substantial losses, damage to our reputa- petition at the level of local markets and individual business lines,
tion, the loss of client advisors, difficulty in recruiting qualified and from global financial institutions that are comparable to us in
client advisors and tax, legal and regulatory developments con- their size and breadth. Barriers to entry in individual markets and
cerning our cross-border private banking business. Many of these pricing levels are being eroded by new technology. We expect
factors have been successfully addressed. However, long-term these trends to continue and competition to increase. Our com-
changes affecting the cross-border private banking business petitive strength and market position could be eroded if we are
model will continue to affect client flows in the wealth manage- unable to identify market trends and developments, do not
ment businesses for an extended period of time. respond to them by devising and implementing adequate busi-
We have experienced cross-border outflows over a number of ness strategies, adequately developing or updating our technol-
years as a result of heightened focus by fiscal authorities on cross- ogy, particularly in trading businesses, and our digital channels
border investment and fiscal amnesty programs, in anticipation of and tools, or are unable to attract or retain the qualified people
the implementation in Switzerland of the global automatic needed to carry them out.
exchange of tax information, and as a result of the measures we The amount and structure of our employee compensation is
have implemented in response to these changes. Further changes affected not only by our business results but also by competitive
in local tax laws or regulations and their enforcement, the imple- factors and regulatory considerations.
mentation of cross-border tax information exchange regimes, In recent years, in response to the demands of various stake-
national tax amnesty or enforcement programs or similar actions holders, including regulatory authorities and shareholders, and in
may affect our clients’ ability or willingness to do business with us order to better align the interests of our staff with those of other
and result in additional cross-border outflows. stakeholders, we have made changes to the terms of compensa-
In recent years, our Wealth Management net new money tion awards. Among other things, we have introduced individual
inflows have come predominantly from clients in Asia Pacific and caps on the proportion of fixed to variable pay for the GEB mem-
in the ultra high net worth segment globally. Over time, inflows bers, as well as certain other employees. We have increased aver-
from these lower-margin segments and markets have been age deferral periods for stock awards, expanded forfeiture provi-
replacing outflows from higher-margin segments and markets, in sions, and, to a more limited extent, introduced claw-back
particular cross-border clients. This dynamic, combined with provisions for certain awards linked to business performance.

51
Operating environment and strategy
Risk factors

Constraints on the amount or structure of employee compen- We hold positions related to real estate in various countries,
sation, higher levels of deferral, performance conditions and and could suffer losses on these positions. These positions include
other circumstances triggering the forfeiture of unvested awards a substantial Swiss mortgage portfolio. Although management
may adversely affect our ability to retain and attract key employ- believes that this portfolio is prudently managed, we could never-
ees. The loss of key staff and the inability to attract qualified theless be exposed to losses if the concerns expressed by the
replacements, depending on which and how many roles are Swiss National Bank and others about unsustainable price escala-
affected, could seriously compromise our ability to execute our tion in the Swiss real estate market come to fruition. In addition,
strategy and to successfully improve our operating and control we continue to hold substantial legacy risk positions, primarily in
environment and may affect our business performance. Corporate Center − Non-core and Legacy Portfolio. They remain
illiquid in many cases, and we continue to be exposed to the risk
We depend on our risk management and control processes that they may again deteriorate in value.
to avoid or limit potential losses in our businesses We also manage risk on behalf of our clients in our asset and
wealth management businesses. The performance of assets we
Controlled risk-taking is a major part of the business of a financial hold for our clients in these activities could be adversely affected
services firm. Some losses from risk-taking activities are inevitable, by the same factors mentioned above. If clients suffer losses or
but to be successful over time, we must balance the risks we take the performance of their assets held with us is not in line with
against the returns we generate. We must, therefore, diligently relevant benchmarks against which clients assess investment per-
identify, assess, manage and control our risks, not only in normal formance, we may suffer reduced fee income and a decline in
market conditions but also as they might develop under more assets under management, or withdrawal of mandates.
extreme, stressed conditions, when concentrations of exposures Investment positions, such as equity investments made as part
can lead to severe losses. of strategic initiatives and seed investments made at the inception
As seen during the financial crisis of 2007–2009, we are not of funds that we manage, may also be affected by market risk
always able to prevent serious losses arising from extreme or sud- factors. These investments are often not liquid and generally are
den market events that are not anticipated by our risk measures intended or required to be held beyond a normal trading horizon.
and systems. The deterioration of financial markets since the They are subject to a distinct control framework. Deteriorations in
beginning of the crisis was extremely severe by historical stan- the fair value of these positions would have a negative effect on
dards. Value-at-risk, a statistical measure for market risk, is derived our earnings.
from historical market data, and thus by definition could not have
anticipated the losses suffered in the stressed conditions of the Liquidity and funding management are critical to our
crisis. Moreover, stress loss and concentration controls and the ongoing performance
dimensions in which we aggregated risk to identify potentially
highly correlated exposures proved to be inadequate. As a result, The viability of our business depends on the availability of funding
we recorded substantial losses on fixed income trading positions, sources, and our success depends on our ability to obtain funding
particularly in 2008 and 2009. Notwithstanding the steps we at times, in amounts, for tenors and at rates that enable us to
have taken to strengthen our risk management and control efficiently support our asset base in all market conditions. The
framework, we could suffer further losses in the future if, for volume of our funding sources has generally been stable, but
example: could change in the future due to, among other things, general
–– we do not fully identify the risks in our portfolio, in particular market disruptions or widening credit spreads, which could also
risk concentrations and correlated risks; influence the cost of funding. A substantial part of our liquidity
–– our assessment of the risks identified or our response to nega- and funding requirements is met using short-term unsecured
tive trends proves to be untimely, inadequate, insufficient or funding sources, including retail and wholesale deposits and the
incorrect; regular issuance of money market securities. A change in the
–– markets move in ways that we do not expect – in terms of their availability of short-term funding could occur quickly.
speed, direction, severity or correlation – and our ability to Moreover, more stringent capital and liquidity and funding
manage risks in the resulting environment is, therefore, requirements will likely lead to increased competition for both
affected; secured funding and deposits as a stable source of funding, and
–– third parties to whom we have credit exposure or whose secu- to higher funding costs. The addition of loss-absorbing debt as a
rities we hold for our own account are severely affected by component of capital requirements, the regulatory requirements
events not anticipated by our models, and accordingly we suf- to maintain minimum TLAC at holding company level and / or at
fer defaults and impairments beyond the level implied by our subsidiaries level, as well as the power of resolution authorities to
risk assessment; or bail in TLAC and other debt obligations, and uncertainty as to
–– collateral or other security provided by our counterparties how such powers will be exercised, will increase our cost of fund-
proves inadequate to cover their obligations at the time of ing and could potentially increase the total amount of funding
their default. required absent other changes in our business.

52
 Operating environment and strategy
Reductions in our credit ratings may adversely affect the mar- The effect of taxes on our financial results is significantly
ket value of the securities and other obligations and increase our influenced by reassessments of our deferred tax assets
funding costs, in particular with regard to funding from whole-
sale unsecured sources, and can affect the availability of certain Our effective tax rate is highly sensitive both to our performance
kinds of funding. In addition, as we experienced in connection and our expectation of future profitability. Based on prior years’
with Moody’s downgrade of our long-term rating in June 2012, tax losses, we have recognized deferred tax assets (DTAs) reflect-
rating downgrades can require us to post additional collateral or ing the probable recoverable level based on future taxable profit
make additional cash payments under master trading agree- as informed by our business plans. If our performance is expected
ments relating to its derivatives businesses. Our credit ratings, to produce diminished taxable profit in future years, particularly in
together with our capital strength and reputation, also contrib- the US or the UK, we may be required to write down all or a por-
ute to maintaining client and counterparty confidence and it is tion of the currently recognized DTAs through the income state-
possible that rating changes could influence the performance of ment. This would have the effect of increasing our effective tax
some of our businesses. rate in the year in which any write-downs are taken. Conversely,
if our performance is expected to improve, particularly in the US
Our financial results may be negatively affected by or the UK, we could potentially recognize additional DTAs as a
changes to assumptions and valuations, as well as changes result of that assessment. The effect of doing so would be to sig-
to accounting standards nificantly reduce our effective tax rate in years in which additional
DTAs are recognized and to increase our effective tax rate in
We prepare our consolidated financial statements in accordance future years. We generally revalue our deferred tax assets in the
with IFRS. The application of these accounting standards requires second half of the financial year based on a reassessment of
the use of judgment based on estimates and assumptions that may future profitability taking into account updated business plan
involve significant uncertainty at the time they are made. This is the forecasts. Our results in recent periods have demonstrated that
case, for example, with respect to the measurement of fair value of changes in the recognition of DTAs can have a very significant
financial instruments, the recognition of deferred tax assets, or the effect on our reported results.
assessment of the impairment of goodwill. Such judgments, includ- Our full-year effective tax rate could also change if aggregate
ing the underlying estimates and assumptions, which encompass tax expenses in respect of profits from branches and subsidiaries
historical experience, expectations of the future and other factors without loss coverage differ from what is expected, or in case of
are regularly evaluated to determine their continuing relevance changes to the forecast period used for DTA recognition pur-
based on current conditions. Using different assumptions could poses as part of the aforementioned reassessment of future prof-
cause the reported results to differ. Changes in assumptions, or itability. Moreover, tax laws or the tax authorities in countries
failure to make the changes necessary to reflect evolving market where we have undertaken legal structure changes may prevent
conditions, may have a significant effect on the financial state- the transfer of tax losses incurred in one legal entity to newly
ments in the periods when changes occur. Moreover, if the esti- organized or reorganized subsidiaries or affiliates or may impose
mates and assumptions in future periods deviate from the current limitations on the utilization of tax losses that relate to businesses
outlook, our financial results may also be negatively affected. formerly conducted by the transferor. Were this to occur in situa-
Changes to IFRS or interpretations thereof, may cause our tions where there were also limited planning opportunities to
future reported results and financial position to differ from cur- utilize the tax losses in the originating entity, the DTAs associated
rent expectations, or historical results to differ from those previ- with such tax losses could be written down through the income
ously reported due to the adoption of accounting standards on a statement.
retrospective basis. Such changes may also affect our regulatory Our effective tax rate is also sensitive to any future reductions
capital and ratios. Currently, there are a number of issued but not in statutory tax rates, particularly in the US and Switzerland, which
yet effective IFRS changes, as well as potential IFRS changes, some would cause the expected future tax benefit from items such as
of which could be expected to affect our reported results, finan- tax loss carry-forwards in the affected locations to diminish in
cial position and regulatory capital in the future. For example, IFRS value. This in turn would cause a write-down of the associated
9, when fully adopted, will require us to record loans at inception DTAs. For example, for every percentage point reduction in the US
net of expected losses instead of recording credit losses on an federal corporate income tax rate, we would expect a CHF 0.2
incurred loss basis and is generally expected to result in an increase billion decrease in the Group’s deferred tax assets. In addition,
in recognized credit loss allowances. statutory and regulatory changes, as well as changes to the way
➔➔Refer to the “Critical accounting estimates and judgments” in which courts and tax authorities interpret tax laws could cause
section and “Note 1 Summary of significant accounting policies” the amount of taxes ultimately paid by us to materially differ from
in the “Consolidated financial statements” section of this report the amount accrued.
for more information

53
Operating environment and strategy
Risk factors

Our stated capital returns objective is based, in part, prior-month or prior-quarter data as an estimate. Changes to our
on capital ratios that are subject to regulatory change results, business plans and forecasts, in the assumptions used to
and may fluctuate significantly reflect the effect of a stress event on our business forecasts or in
the results of our CST, could have a material effect on our stress
Our capital return policy envisages total capital returns to share- scenario results and on the calculation of our post-stress fully
holders of at least 50% of net profit attributable to shareholders, applied CET1 capital ratio. In assessing whether our post-stress
provided that we maintain a fully applied CET1 capital ratio of at fully applied CET1 capital ratio objective has been met at any
least 13% and consistent with our objective of maintaining a time, we may consider both the current ratio and our expectation
post-stress fully applied CET1 capital ratio of at least 10%. as to its future developments.
Our ability to maintain a fully applied CET1 capital ratio of at
least 13% is subject to numerous risks, including the financial As UBS Group AG is a holding company, its operating
results of our businesses, the effect of changes to capital stan- results, financial condition and ability to pay dividends
dards such as those recently introduced in Switzerland, method- and other distributions and / or to pay its obligations in
ologies and interpretation that may adversely affect the calcula- the future depend on funding, dividends and other
tion of our fully applied CET1 capital ratio, the imposition of risk distributions received directly or indirectly from its
add-ons or capital buffers, and the application of additional capi- subsidiaries, which may be subject to restrictions
tal, liquidity and similar requirements to subsidiaries. Refer to the
discussion of these risks earlier in this section and in particular to UBS Group AG’s ability to pay dividends and other distributions
“Continuing low or negative interest rates may have a detrimental and to pay its obligations in the future will depend on the level of
effect on our capital strength, liquidity and funding position, and funding, dividends and other distributions, if any, received from
profitability” above for more information on the effect on capital UBS AG and other subsidiaries. The ability of such subsidiaries to
of changes to pension plan defined benefit obligations. make loans or distributions, directly or indirectly, to UBS Group
To calculate our post-stress CET1 capital ratio, we forecast AG may be restricted as a result of several factors, including
capital one year ahead based on internal projections of earnings, restrictions in financing agreements and the requirements of
expenses, distributions to shareholders and other factors affecting applicable law and regulatory, fiscal or other restrictions. In par-
CET1 capital, including our net defined benefit plan assets and ticular, UBS Group AG’s direct and indirect subsidiaries, including
liabilities. We also forecast one-year developments in RWA. We UBS AG, UBS Switzerland AG, UBS Limited and UBS Americas
adjust these forecasts based on assumptions as to how they may Holding LLC, are subject to laws and regulations that restrict divi-
change as a result of a severe stress event. We then further deduct dend payments, authorize regulatory bodies to block or reduce
from capital the stress loss estimated using our combined stress the flow of funds from those subsidiaries to UBS Group AG, could
test (CST) framework. impact their ability to repay any loans made to, or other invest-
Our CST framework relies on various risk exposure measure- ments in, such subsidiary by UBS Group AG or another member
ment methodologies, which are predominantly proprietary, on of the Group, or limit or prohibit transactions with affiliates, and
our selection and definition of potential stress scenarios and on could be subject to additional restrictions in the future. Restric-
our assumptions regarding estimates of changes in a wide range tions and regulatory actions of this kind could impede access to
of macroeconomic variables and certain idiosyncratic events for funds that UBS Group AG may need to make payments. In addi-
each of those scenarios. We periodically review these methodolo- tion, UBS Group AG’s right to participate in a distribution of assets
gies. Assumptions are also subject to periodic review and change upon a subsidiary’s liquidation or reorganization is subject to all
on a regular basis. Our risk exposure measurement methodolo- prior claims of the subsidiary’s creditors.
gies may change in response to developing market practice and Our capital instruments may contractually prevent UBS Group
enhancements to our own risk control environment, and input AG from proposing the distribution of dividends to shareholders,
parameters for models may change due to changes in positions, other than in the form of shares, if we do not pay interest on
market parameters and other factors. these instruments.
Our stress scenarios, the events comprising a scenario and the Furthermore, UBS Group AG may guarantee some of the pay-
assumed shocks and market and economic consequences applied ment obligations of certain of the Group’s subsidiaries from time
in each scenario are subject to periodic review and change. Our to time. These guarantees may require UBS Group AG to provide
business plans and forecasts are subject to inherent uncertainty, substantial funds or assets to subsidiaries or their creditors or
our choice of stress test scenarios and the market and macroeco- counterparties at a time when UBS Group AG is in need of liquid-
nomic assumptions used in each scenario are based on judg- ity to fund its own obligations.
ments and assumptions about possible future events. Our risk The credit ratings of UBS Group AG or its subsidiaries used for
exposure measurement methodologies are subject to inherent funding purposes could be lower than the ratings of the Group’s
limitations, rely on numerous assumptions as well as on data operating subsidiaries, which may adversely affect the market
which may have inherent limitations. In particular, certain data is value of the securities and other obligations of UBS Group AG or
not available on a monthly basis and we may therefore rely on those subsidiaries on a standalone basis.

54
 Operating environment and strategy
If we experience financial difficulties, FINMA has the to have that decision reviewed by a judicial or administrative pro-
power to open resolution or liquidation proceedings or cess or otherwise.
impose protective measures in relation to UBS Group AG, Upon full or partial write-down of the equity and of the debt
UBS AG or UBS Switzerland AG, and such proceedings of the entity subject to restructuring proceedings, the relevant
or measures may have a material adverse effect on our shareholders and creditors would receive no payment in respect
shareholders and creditors of the equity and debt that is written down, the write-down
would be permanent, and the investors would not, at such time
Under the Swiss Banking Act, FINMA is able to exercise broad or at any time thereafter, receive any shares or other participation
statutory powers with respect to Swiss banks and Swiss parent rights, or be entitled to any write-up or any other compensation
companies of financial groups, such as UBS AG, UBS Group AG in the event of a potential recovery of the debtor. If FINMA orders
and UBS Switzerland AG, if there is justified concern that the the conversion of debt of the entity subject to restructuring pro-
entity is over-indebted, has serious liquidity problems or, after the ceedings into equity, the securities received by the investors may
expiration of any relevant deadline, no longer fulfils capital ade- be worth significantly less than the original debt and may have a
quacy requirements. Such powers include ordering protective significantly different risk profile, and such conversion would also
measures, instituting restructuring proceedings (and exercising dilute the ownership of existing shareholders. In addition, credi-
any Swiss resolution powers in connection therewith), and insti- tors receiving equity would be effectively subordinated to all cred-
tuting liquidation proceedings, all of which may have a material itors in the event of a subsequent winding up, liquidation or dis-
adverse effect on our shareholders and creditors or may prevent solution of the entity subject to restructuring proceedings, which
UBS Group AG, UBS AG or UBS Switzerland AG from paying divi- would increase the risk that investors would lose all or some of
dends or making payments on debt obligations. their investment.
Protective measures may include, but are not limited to, certain FINMA has broad powers and significant discretion in the
measures that could require or result in a moratorium on, or the exercise of its powers in connection with a resolution proceeding.
deferment of, payments. We would have limited ability to chal- Furthermore, certain categories of debt obligations, such as cer-
lenge any such protective measures, and creditors would have no tain types of deposits, are subject to preferential treatment. As a
right under Swiss law or in Swiss courts to reject them, seek their result, holders of obligations of an entity subject to a Swiss
suspension, or challenge their imposition, including measures that restructuring proceeding may have their obligations written
require or result in the deferment of payments. down or converted into equity even though obligations ranking
If restructuring proceedings are opened with respect to UBS on par with or junior to such obligations are not written down or
Group AG, UBS AG or UBS Switzerland AG, the resolution pow- converted.
ers that FINMA may exercise include the power to (i) transfer all Moreover, FINMA has expressed its preference for a “single-
or some of the assets, debt and other liabilities, and contracts of point-of-entry” resolution strategy for global systemically impor-
the entity subject to proceedings to another entity, (ii) stay for a tant financial groups, led by the bank’s home supervisory and
maximum of two business days the termination of, or the exer- resolution authorities and focused on the top-level group com-
cise of rights to terminate, netting rights, rights to enforce or pany. This would mean that, if UBS AG or one of UBS Group AG’s
dispose of certain types of collateral or rights to transfer claims, other subsidiaries faces substantial losses, FINMA could open
liabilities or certain collateral, under contracts to which the entity restructuring proceedings with respect to UBS Group AG only and
subject to proceedings is a party, and / or (iii) partially or fully write order a bail-in of its liabilities if there is a justified concern that in
down the equity capital and, if such equity capital is fully written the near future such losses could impact UBS Group AG. In that
down, convert into equity or write down the capital and other case, it is possible that the obligations of UBS AG or any other
debt instruments of the entity subject to proceedings. Sharehold- subsidiary of UBS Group AG would remain unaffected and out-
ers and creditors would have no right to reject, or to seek the standing, while the equity capital and the capital and other debt
suspension of, any restructuring plan pursuant to which such instruments of UBS Group AG would be written down and / or
resolution powers are exercised. They would have only limited converted into equity of UBS Group AG in order to recapitalize
rights to challenge any decision to exercise resolution powers or UBS AG or such other subsidiary.

55
Financial and
operating
performance
Management report

.
Financial and operating performance
Critical accounting estimates and judgments

Critical accounting estimates and judgments

In preparing our financial statements in accordance with Interna- Key areas involving a high degree of judgment and areas
tional Financial Reporting Standards (IFRS), as issued by the Inter- where estimates and assumptions are significant to the consoli-
nal Accounting Standards Board (IASB), we apply judgment and dated and individual financial statements include:
make estimates and assumptions that may involve significant –– Consolidation of structured entities
uncertainty at the time they are made. We regularly reassess those –– Fair value of financial instruments
estimates and assumptions, which encompass historical experi- –– Allowances and provisions for credit losses
ence, expectations of the future and other pertinent factors, to –– Pension and other post-employment benefit plans
determine their continuing relevance based on current conditions –– Income taxes
and we update them as necessary. Changes in estimates and –– Goodwill
assumptions may have a significant impact on the financial state- –– Provisions and contingent liabilities
ments. Furthermore, actual results may differ significantly from
our estimates, which could result in significant losses to the We believe that the judgments, estimates and assumptions we
Group, beyond what we anticipated or provided for. have made are appropriate under the circumstances and that our
financial statements fairly present, in all material respects, the
financial position of UBS as of 31 December 2016 and the results
of our operations and cash flows for the year ended on 31 Decem-
ber 2016 in accordance with IFRS.
➔➔Refer to “Note 1a Significant accounting policies” in the
“Consolidated financial statements” section of this report for
more information
➔➔Refer to the “Risk factors” section of this report for more
information

58
Significant accounting and financial
reporting changes
Significant accounting changes Significant financial reporting changes

Financial and operating performance

Own credit Revised regulatory framework for Swiss SRBs and
In 2016, we adopted the own credit presentation requirements of change in equity attribution framework
IFRS 9, Financial Instruments for financial liabilities designated at On 1 July 2016, a revised regulatory framework, reflecting amend-
fair value through profit or loss. From this date onward, changes ments to the too big to fail (TBTF) provisions applicable to Swiss
in the fair value of financial liabilities designated at fair value systemically relevant banks (SRBs), became effective.
through profit or loss related to own credit are recognized in Effective 1 January 2017, we have revised our equity attribu-
Other comprehensive income directly within Retained earnings. tion framework to reflect the revision of these TBTF provisions.
➔➔Refer to the “Capital management” section of this report for
Balance sheet classification of newly purchased high-quality more information
liquid debt securities
In 2016, we generally classified newly purchased debt securities Revised Pillar 3 disclosure requirements
held as high-quality liquid assets (HQLA) and managed by Corpo- During 2015, the Basel Committee on Banking Supervision (BCBS)
rate Center – Group Asset and Liability Management (Group issued revised Pillar 3 disclosure requirements that aim to improve
ALM) as either financial assets designated at fair value through comparability and consistency of disclosures by introducing har-
profit or loss or financial assets held to maturity. monized templates. Moreover, FINMA published its associated
Debt securities acquired prior to 2016 and held for liquidity Pillar 3 disclosure requirements for Swiss banking institutions in its
purposes remain classified as financial assets available for sale. Circular 2016 / 01, Disclosures – banks. The revised Pillar 3 disclo-
sure requirements relate to information on risk management, the
Interest rate swaps converted to a settlement model linkage between a bank’s financial statements and its regulatory
In 2016, we elected to convert our interest rate swaps (IRS) traded exposures, credit risk, counterparty credit risk, securitization and
with the London Clearing House and Japan Securities Clearing market risk. In August 2016, BCBS issued additional guidance on
Corporation from the previous collateral model to a settlement the revised Pillar 3 disclosure requirements in a Frequently asked
model. The IRS are now legally settled on a daily basis, resulting in questions document. In December 2016, FINMA issued additional
derecognition of the associated assets and liabilities. disclosure requirements relating to the Swiss too big to fail provi-
sions within its Circular 2016 / 01, Disclosures – banks. The Circu-
Derecognition of exchange-traded derivative client cash balances lar includes additional disclosure requirements effective as of
from the Group’s balance sheet 31 December 2016, as well as certain requirements that will
In 2016, we formally and legally waived certain rights available to become effective in 2017.
us under the rules of the US Commodity Futures Trading Commis- The disclosures in our Basel III Pillar 3 2016 report or in other
sion that had previously enabled us to invest certain client cash documents referenced within this report are based on the revised
balances in other assets, making them a source of benefit to the requirements effective in 2016.
Group. As a result, we derecognized related client cash balances. ➔➔Refer to the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at [Link]/
➔➔Refer to “Note 1b Changes in accounting policies, comparability investors for more information
and other adjustments” in the “Consolidated financial state-
ments” section of this report for more information A consultative document issued by BCBS in March 2016 pro-
posing further enhancements to the Pillar 3 framework for selec-
tive disclosure topics is subject to finalization.

Corporate Center – Group ALM

To further enhance the transparency of Corporate Center – Group
ALM, effective 2016, Corporate Center – Group ALM’s results are
disclosed for its three main risk management activities: (i) business
division-aligned risk management, (ii) capital investment and issu-
ance and (iii) Group structural risk management.

59
Financial and operating performance
Significant accounting and financial reporting changes

Also, in 2016 we transferred the Risk Exposure Management mendations in our Annual Report 2015 and will continue to do so
function from Corporate Center – Non-core and Legacy Portfolio beyond the full adoption of IFRS 9 in 2018. In addition, we have
to Corporate Center – Group ALM. considered and we address further guidance issued by relevant
➔➔Refer to the “Corporate Center” sections in “Operating bodies, including “The implementation of IFRS 9 impairment
environment and strategy” and in ”Financial and operating requirements by banks – Considerations for those charged with
performance” of this report for more information governance of systemically important banks” issued in November
➔➔Refer to “Note 1b Changes in accounting policies, comparability 2016 by the Global Public Policy Committee (GPPC), which con-
and other adjustments” in the “Consolidated financial state- sists of representatives of the six largest accounting networks, and
ments” section of this report for more information the Basel Committee on Banking Supervision (BCBS) guidelines
related to expected credit losses.
Implementation of IFRS 9, Financial Instruments IFRS 9 is a key strategic initiative for UBS and is implemented
under the joint sponsorship of the Group Chief Risk Officer and
In July 2014, the International Accounting Standards Board (IASB) the Group Chief Financial Officer. The implementation project
issued the final International Financial Reporting Standard (IFRS) structure is defined to address the critical requirements of the
9, Financial Instruments, which will become mandatory as of standard and to manage the appropriate involvement of key
1 January 2018. The standard reflects the classification and mea- stakeholders, including Risk Control, Finance, Group Technology
surement, impairment and hedge accounting phases of the IASB’s and the business divisions. The steering committee, operating
project to replace the International Accounting Standard IAS 39, committee, technical board and individual work streams continue
Financial instruments: Recognition and Measurement. to ensure a streamlined implementation with appropriate controls
IFRS 9 requires all financial assets, except equity instruments, and governance over all key decisions. The program has identified
to be classified at amortized cost, fair value through other com- the primary changes to existing systems, processes, data and
prehensive income (OCI) or fair value through profit or loss, on models required for the purposes of meeting the IFRS 9 require-
the basis of the entity’s business model for managing the finan- ments and to allow for a sound front-to-back implementation.
cial assets and its contractual cash flow characteristics. If a finan- We made significant progress in 2016 toward achieving key mile-
cial asset meets the criteria to be measured at amortized cost or stones across all work streams.
at fair value through OCI, it can be designated at fair value We intend to perform a parallel run in 2017 and to disclose the
through profit or loss under the fair value option if doing so potential financial effects of adopting IFRS 9 no later than in our
would significantly reduce or eliminate an accounting mismatch. Annual Report 2017. As permitted under IFRS 9, we do not intend
Equity instruments that are not held for trading may be accounted to restate prior periods and will recognize the difference between
for at fair value through OCI, with no subsequent reclassification carrying amounts as of 31 December 2017 and those on adoption
of realized gains or losses to the income statement, while all of IFRS 9 on 1 January 2018 directly in retained earnings as of
other equity instruments will be accounted for at fair value 1 January 2018.
through profit or loss.
IFRS 9 classification and measurement requirements for liabili- Classification and measurement
ties are unchanged except that any gain or loss arising on a finan- Based on the revised classification and measurement require-
cial liability designated at fair value through profit or loss that is ments for financial instruments, we have assessed all material
attributable to changes in the issuer’s own credit risk (own credit) positions and do not expect significant effects on our financial
is presented in OCI and not recognized in the income statement. statements. A number of debt instruments, mainly in the Invest-
We early adopted the own credit presentation change in 2016, as ment Bank and in Corporate Center – Group Asset and Liability
mentioned on the previous page. Management (Group ALM), no longer qualify for amortized cost
IFRS 9 further introduces a forward-looking expected credit accounting due to their cash flow characteristics or the underlying
loss (ECL) approach, replacing the incurred-loss impairment business model within which they are held and will be measured
approach for financial instruments in IAS 39 and the loss-provi- at fair value through profit or loss under IFRS 9. However, a sig-
sioning approach for financial guarantees and loan commitments nificant change in carrying value is not expected as a majority of
in IAS 37, Provisions, contingent liabilities and contingent assets. the respective instruments are collateralized short-term lending
In November 2015, the Enhanced Disclosure Task Force (EDTF) arrangements with no material differences between their amor-
published disclosure recommendations for IFRS 9 in its report tized cost value and fair value. In addition, our financial assets
“Impact of Expected Credit Loss Approaches on Bank Risk Disclo- currently designated at fair value will continue to be measured at
sures.” Disclosures are recommended before transition and once fair value, albeit on a mandatory basis under IFRS 9, and we will
IFRS 9 is fully adopted, to ensure that changes and effects arising elect the fair value option for certain liabilities to prevent an
from using an expected loss model are transparent, understand- accounting mismatch with assets that are newly measured at fair
able and consistently applied. We began addressing these recom- value through profit or loss under IFRS 9.

60
 We are monitoring the IASB’s project to amend IFRS 9 to the respective parameters determined under the Basel III through the
effect that basic lending arrangements with symmetrical break cycle (TTC) based approach. Adjustments will be made to account
clauses continue to qualify for amortized cost accounting. These for current conditions and to incorporate forward-looking eco-
clauses are common features in Personal & Corporate Banking nomic information, which will include gross domestic product
and Wealth Management private mortgage contracts as a conse- forecasts, interest and foreign exchange rates, unemployment
quence of Swiss Law as well as in corporate lending due to mar- rates, real estate price indices and other relevant risk parameters.
ket practice and may result in compensation for early termination In addition, the prudential adjustments from Basel III, such as
being paid by either the borrower or UBS. The IASB is expected to downturn LGD assumptions and floors, will be removed.
issue an exposure draft in April 2017, effective 1 January 2018 in For the ECL calculation, we will consider the maximum con-

Financial and operating performance

line with IFRS 9’s effective date. Based on these anticipated tractual period over which we are exposed to credit risk, taking
amendments, we expect that we can continue to measure our into account the counterparties’ contractual extension, termina-
private mortgages and corporate loans at amortized cost. tion and prepayment options. For certain master credit facilities,
business current accounts and credit card facilities without a
Expected credit loss defined contractual end date, which are callable on demand and
Under the current incurred-loss impairment approach in IAS 39, a where the drawn and undrawn portions are managed as one unit,
financial asset or group of financial assets held at amortized cost the period over which UBS is exposed to credit risk exceeds the
is impaired if there is objective evidence that we will be unable to contractual notice period and will therefore be used instead in the
collect all amounts under the contract. Once such evidence is ECL calculation. For portfolios including Lombard loans and secu-
obtained, we recognize credit losses based on the difference rity financing transactions the period which is used in the ECL
between the carrying value and the present value of estimated calculation may be shorter, but not longer than the contractual
future cash flows. period of a position. This is driven by the fact that those types of
IFRS 9 requires credit losses to be recognized irrespective of portfolios are subject to specific credit risk monitoring processes,
whether a loss event has occurred. Entities will be required to such as daily monitoring, margin calls and close-out processes,
recognize a 12-month ECL for financial assets measured at amor- and therefore the period over which UBS is exposed to credit risk
tized cost, debt instruments measured at fair value through OCI, is limited to the period needed to execute any credit risk mitiga-
lease receivables, financial guarantees and loan commitments tion actions.
from initial recognition. This 12-month ECL reflects cash shortfalls We will determine whether an SICR has occurred at the report-
from default events expected to occur within 12 months from the ing date by assessing changes in an instrument’s risk of default
reporting date. We refer to assets with a 12-month ECL as assets since initial recognition based on the PIT PD, primarily at an indi-
in stage 1. If there is a significant increase in credit risk (SICR) after vidual financial asset level. Additional information will also be
the instrument’s initial recognition, a lifetime ECL is required to be considered, including internal indicators of credit risk and external
recognized capturing cash shortfalls related to default events market indicators of credit risk or general economic conditions.
expected to occur over the life of an asset. Lifetime ECLs are Exception management will be applied allowing for individual and
always recognized for credit-impaired financial assets. We refer to collective adjustments on exposures sharing the same credit risk
financial assets with a lifetime ECL due to an SICR as assets in characteristics to take into account specific situations which are
stage 2 and to credit-impaired financial assets as assets in stage 3. not otherwise fully reflected.
Where the period over which UBS is exposed to credit risk is In line with BCBS expectations, we do not intend to apply the
shorter than 12 months, any ECL covers this shorter period. low-credit-risk exemption practical expedient in determining
The ECL must reflect an unbiased and probability-weighted whether an SICR has occurred. Furthermore, the 30-days-past-
estimate of credit losses, which is determined by evaluating a due SICR indicator will predominantly be used as a backstop,
range of possible outcomes and which incorporates reasonable except for our retail credit portfolio where it will be the primary
and supportable information about past events, current condi- indicator. The 30-days-past-due presumption is only expected to
tions, forecasts of future economic conditions and the time value be rebutted in rare circumstances.
of money. The SICR process will have no effect on certain portfolios,
The method we will use for measuring ECL is mainly based on mainly Lombard loans and reverse repurchase agreements, due to
a combination of the following principal factors: probability of the risk management practices adopted, including regular margin
default (PD), loss given default (LGD), exposure at default (EAD) calls. ECL on these positions is expected to be low. If margin calls
and discounting. The ECL calculation will use point in time (PIT) are not satisfied, the position will be closed out immediately with
based parameters, including PIT PD and PIT LGD, leveraging the any shortfall generally classified as a stage 3 position.

61
Financial and operating performance
Significant accounting and financial reporting changes

We progressed throughout 2016 with respect to the develop- Therefore, we focus on developing effective and robust gover-
ment of material models. Existing internal ratings-based (IRB) Pillar 1 nance over the ECL calculation process and on defining a front-to-
models are used as a basis to derive IFRS 9 relevant PDs on a PIT back control framework in compliance with the Sarbanes-Oxley
basis and are currently being significantly adjusted for the purposes Act requirements.
of IFRS 9 to take into account forward-looking macroeconomic Our economists, risk methodology personnel and credit risk
information. In addition, we are working on an appropriate selec- officers are involved in developing the forward-looking macroeco-
tion of a range of scenarios to capture material non-linearity and nomic assumptions to be used in the ECL calculation. Those
asymmetries between different possible forward-looking scenarios assumptions will be validated and approved through a new gov-
and associated credit losses and we determine adequate weights to ernance process, which will also provide for a consistent use of
reflect a likelihood of their occurrence. Although the ECL concept forward-looking information throughout UBS, including our busi-
is not a stress loss concept, we leverage our existing stress loss ness planning process. New models will be approved as part of
models for this purpose and develop scenarios that reflect a range our existing model validation and oversight processes. Gover-
of probable outcomes. We will align our baseline scenario selection nance will also specifically be established around exception han-
with the baseline used for business planning purposes. dling given the extent of management involvement required. We
Implementation of the IFRS 9 ECL approach is generally intend to build a risk simulation engine to test ECL and SICR
expected to lead to an increase in recognized credit losses com- inputs in a controlled environment.
pared with the current incurred-loss approach. This is partly due Significant new complex disclosures will be required, including
to the 12-month ECL, which will have to be reported for all in- a reconciliation of any changes in the expected loss allowances
scope instruments, and to the lifetime ECL, which will apply to and provisions during the reporting period. We will disclose
positions following an SICR and prior to an incurred credit loss required information at an appropriate level of granularity consid-
event. In addition, we expect income statement volatility to ering respective transactions and their risk characteristics.
increase, due to the use of uncertain forward-looking assump- The IFRS 9 determination of whether an asset is credit-impaired
tions and the application of the SICR approach. follows the same principles as determining impairment under IAS
In 2016, we performed an initial ECL impact assessment in a 39. Therefore, we do not expect credit-impaired financial assets
prototype environment using preliminary models and scenarios. under IFRS 9 to differ significantly from impaired assets under IAS
The calculations covered key portfolios that are expected to con- 39. However, the ECL for credit-impaired financial assets under
tribute to the loss impact, including mortgage loans and corpo- IFRS 9 may differ from the impairment loss under IAS 39 due to
rate lending in Personal & Corporate Banking and Wealth Man- additional scenario considerations to be made under IFRS 9. We
agement and corporate lending in the Investment Bank. We also do not expect the definition of credit-impaired under IFRS 9
observed sensitivities to changes in the economic environment to differ from the definition of default used for the purpose of our
through a range of expected credit loss outcomes, which will be advanced internal ratings-based approach.
further analyzed for continued model development and refine- The table below sets out certain key differences between the
ment. The ECL results calculated in the prototype environment definitions we apply in determining expected losses under the
indicate an increase in credit losses, which should not have a sig- current Basel III framework and those planned to be used in deter-
nificant impact on equity on adoption, due to the relatively short mining ECL for IFRS 9 purposes.
contractual maturities, the high quality of our loan book and the ➔➔Refer to “Credit risk models” in the “Risk management and
current benign credit environment. Actual results as of 1 January control” section of this report for more information
2018 may differ significantly, given the preliminary status of the
models and data included in the prototype and the possibility of Hedging
changes in the macroeconomic environment. We continue to IFRS 9 includes an optional revised hedge accounting model,
monitor the potential effects of IFRS 9 on our regulatory capital which further aligns the accounting treatment with risk manage-
requirements but do not expect a material impact. ment practices. We are currently assessing the changes but do not
➔➔Refer to “Key international developments” in the “Regulatory expect any significant effects, and intend to conclude our adop-
and legal developments” section of this report for more tion decision during the first half of 2017.
information Irrespective of the adoption of the revised hedge accounting
model, new mandatory hedge accounting disclosures will be
The definition and assessment of what constitutes an SICR, adopted on 1 January 2018 as required, providing additional
and the incorporation of forward-looking information are inher- information on the hedging strategies by the hedged risk and
ently subjective and will involve the use of significant judgment. hedge type.

62
 Current Basel III (advanced internal ratings-based approach) IFRS 9 treatment
Scope The Basel III advanced internal ratings-based (A-IRB) treatment applies to The IFRS 9 expected loss calculation mainly applies to financial assets
most credit risk exposures. It includes transactions measured at amortized measured at amortized cost and debt instruments measured at fair value
cost, at fair value through profit or loss and at fair value through other through OCI, as well as loan commitments and financial guarantee con-
comprehensive income (OCI). tracts not at fair value through profit or loss.
12-month versus lifetime The Basel III A-IRB approach takes into account lifetime expected losses In the absence of an SICR event, IFRS 9 takes into account lifetime
expected loss resulting from expected default events over a 12-month period. expected losses considering expected default events over a maximum
period of 12 months from the reporting date. Once an SICR event has
occurred, expected default events over the life of a transaction have to be
considered.

Financial and operating performance

Exposure at default EAD is the amount we expect a counterparty to owe us at the time of a For IFRS 9 purposes, the EAD is generally calculated on the basis of the
(EAD) possible default. For banking products, the EAD equals the book value as cash flows that are expected to be outstanding at the individual points in
of the reporting date, whereas for traded products, such as securities time during the period over which UBS is exposed to credit risk, dis-
financing transactions, the EAD is modeled. The EAD is expected to counted to the reporting date using the effective interest rate. For loan
remain constant over the 12-month period. For loan commitments, a commitments, a credit conversion factor is applied to model expected
credit conversion factor is applied to model expected future drawdowns future drawdowns over the period that UBS is exposed to credit risk,
over the 12-month period. which is capped at 12 months, unless an SICR were to occur.
Probability of default PD estimates are determined on a TTC basis. They represent historical PD estimates will be determined on a PIT basis, based on current condi-
(PD) average PDs, taking into account observed losses over a prolonged histor- tions and incorporating forecasts for future economic conditions at the
ical period, and are therefore less sensitive to movements in the underly- reporting date.
ing economy.
Loss given default LGD includes prudential adjustments, such as downturn LGD assumptions LGD should reflect the losses that are reasonably expected and prudential
(LGD) and floors. Similar to PD, LGD is determined on a TTC basis. adjustments should therefore not be applied. Similar to PD, LGD is deter-
mined on the basis of a PIT approach.
Use of scenarios N /A Multiple forward-looking scenarios have to be taken into account to
determine a probability-weighted ECL.

63
Financial and operating performance
Group performance

Group performance
Income statement
For the year ended % change from
CHF million 31.12.16 31.12.15 31.12.14 31.12.15
Net interest income 6,413 6,732 6,555 (5)
Credit loss (expense) / recovery (37) (117) (78) (68)
Net interest income after credit loss expense 6,376 6,615 6,477 (4)
Net fee and commission income 16,397 17,140 17,076 (4)
Net trading income 4,948 5,742 3,842 (14)
of which: net trading income excluding own credit 4,948 5,190 3,551 (5)
of which: own credit on financial liabilities designated at fair value 553 292 (100)
Other income 599 1,107 632 (46)
Total operating income 28,320 30,605 28,027 (7)
of which: net interest and trading income 11,361 12,474 10,397 (9)
Personnel expenses 15,720 15,981 15,280 (2)
General and administrative expenses 7,434 8,107 9,387 (8)
Depreciation and impairment of property, equipment and software 985 920 817 7
Amortization and impairment of intangible assets 91 107 83 (15)
Total operating expenses 24,230 25,116 25,567 (4)
Operating profit / (loss) before tax 4,090 5,489 2,461 (25)
Tax expense / (benefit) 805 (898) (1,180)
Net profit / (loss) 3,286 6,386 3,640 (49)
Net profit / (loss) attributable to preferred noteholders 142
Net profit / (loss) attributable to non-controlling interests 82 183 32 (55)
Net profit / (loss) attributable to shareholders 3,204 6,203 3,466 (48)

Comprehensive income
Total comprehensive income 2,170 5,781 5,220 (62)
Total comprehensive income attributable to preferred noteholders 221
Total comprehensive income attributable to non-controlling interests 352 83 79 324
Total comprehensive income attributable to shareholders 1,817 5,698 4,920 (68)

64
Performance by business division and Corporate Center unit – reported and adjusted1,2
For the year ended 31.12.16
Wealth CC – Non-
Wealth Manage- Personal & Asset CC – core and
Manage- ment Corporate Manage- Investment CC – Group Legacy
CHF million ment Americas Banking ment Bank Services3 ALM Portfolio UBS
Operating income as reported 7,291 7,782 3,984 1,931 7,688 (102) (219) (36) 28,320
of which: gains on sale of financial assets available for sale4 21 10 102 78 211
of which: gains on sales of real estate 120 120

Financial and operating performance

of which: gains related to investments in associates 21 21
of which: net foreign currency translation losses5 (122) (122)
of which: losses on sales of subsidiaries and businesses (23) (23)
Operating income (adjusted) 7,293 7,772 3,861 1,931 7,610 (222) (97) (36) 28,113

Operating expenses as reported 5,343 6,675 2,224 1,479 6,684 747 (1) 1,078 24,230
of which: personnel-related restructuring expenses6 53 7 4 15 154 518 0 1 751
of which: non-personnel-related restructuring expenses6 55 0 0 15 14 623 0 0 706
of which: restructuring expenses allocated from CC – Services6 339 132 113 70 410 (1,084) 0 21 0
Operating expenses (adjusted) 4,896 6,536 2,107 1,379 6,107 690 (1) 1,057 22,772
of which: expenses for provisions for litigation, regulatory and
similar matters 69 96 3 (2) 42 2 0 584 795

Operating profit / (loss) before tax as reported 1,948 1,107 1,760 452 1,004 (849) (218) (1,114) 4,090
Operating profit / (loss) before tax (adjusted) 2,397 1,236 1,754 552 1,503 (912) (96) (1,093) 5,341

For the year ended 31.12.15

Wealth CC – Non-
Wealth Manage- Personal & Asset CC – core and
Manage- ment Corporate Manage- Investment CC – Group Legacy
CHF million ment Americas Banking ment Bank Services3 ALM Portfolio UBS
Operating income as reported 8,155 7,381 3,877 2,057 8,821 241 277 (203) 30,605
of which: own credit on financial liabilities designated at fair value7 553 553
of which: gains on sales of real estate 378 378
of which: gains on sales of subsidiaries and businesses 169 56 225
of which: net foreign currency translation gains5 88 88
of which: gains related to investments in associates 15 66 81
of which: gains on sale of financial assets available for sale4 11 11
of which: net losses related to the buyback of debt (257) (257)
Operating income (adjusted) 7,971 7,381 3,811 2,001 8,810 (137) (107) (203) 29,526

Operating expenses as reported 5,465 6,663 2,231 1,474 6,929 1,059 (5) 1,301 25,116
of which: personnel-related restructuring expenses6 20 0 2 4 14 406 0 14 460
of which: non-personnel-related restructuring expenses6 38 0 0 11 7 719 0 0 775
of which: restructuring expenses allocated from CC – Services6 265 137 99 68 376 (986) 0 43 0
of which: a gain related to a change to retiree benefit plans in the US (21) (21)
of which: impairment of an intangible asset 11 11
Operating expenses (adjusted) 5,142 6,547 2,130 1,392 6,522 919 (5) 1,245 23,891
of which: expenses for provisions for litigation, regulatory and
similar matters 104 351 (2) (3) 2 15 0 620 1,087

Operating profit / (loss) before tax as reported 2,689 718 1,646 584 1,892 (818) 282 (1,503) 5,489
Operating profit / (loss) before tax (adjusted) 2,828 834 1,681 610 2,288 (1,056) (102) (1,447) 5,635

65
Financial and operating performance
Group performance

Performance by business division and Corporate Center unit – reported and adjusted (continued)1,2
For the year ended 31.12.14
Wealth CC – Non-
Wealth Manage- Personal & Asset CC – core and
Manage- ment Corporate Manage- Investment CC – Group Legacy
CHF million ment Americas Banking ment Bank Services3 ALM Portfolio UBS
Operating income as reported 7,901 6,998 3,741 1,902 8,308 37 2 (862) 28,027
of which: own credit on financial liabilities designated at fair value7 292 292
of which: gains on sales of real estate 44 44
of which: losses on sale of financial assets available for sale4 (5) (5)
Operating income (adjusted) 7,901 6,998 3,741 1,902 8,313 (7) (290) (862) 27,696

Operating expenses as reported 5,574 6,099 2,235 1,435 8,392 688 0 1,144 25,567
of which: personnel-related restructuring expenses6 18 0 4 19 64 221 0 1 327
of which: non-personnel-related restructuring expenses6 49 0 0 2 36 263 0 0 350
of which: restructuring expenses allocated from CC – Services6 119 55 60 30 161 (454) 0 29 0
of which: a gain related to changes to retiree benefit plans in the US 0 (9) 0 (8) (20) 0 0 (3) (41)
Operating expenses (adjusted) 5,389 6,053 2,171 1,393 8,151 658 0 1,116 24,931
of which: expenses for provisions for litigation, regulatory and similar
matters 394 163 59 55 1,855 (125) 0 193 2,594

Operating profit / (loss) before tax as reported 2,326 900 1,506 467 (84) (652) 2 (2,005) 2,461
Operating profit / (loss) before tax (adjusted) 2,511 946 1,570 509 162 (666) (290) (1,977) 2,766
1 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments
following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 3 CC – Services operating
expenses presented in this table are after service allocations to business divisions and other Corporate Center units. 4 Includes gains on partial sales of our investment in IHS Markit in 2016, 2015 and 2014 in the
Investment Bank, a gain on the sale of our investment in Visa Europe in 2016 in Wealth Management and Personal & Corporate Banking as well as an impairment of an investment in the Investment Bank in
2014. 5 Related to the disposal of foreign subsidiaries and branches. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more
information. 7 Refer to the “Significant accounting and financial reporting changes” section of this report for more information on own credit.

66
2016 compared with 2015 On this adjusted basis, profit before tax was CHF 5,341 million
in 2016 compared with CHF 5,635 million in the prior year, reflect-
ing CHF 1,413 million lower operating income, largely offset by
Results CHF 1,119 million lower operating expenses.

We recorded net profit attributable to shareholders of CHF Operating income

3,204 million in 2016, which included a net tax expense of CHF
805 million. In 2015, net profit attributable to shareholders was Total operating income was CHF 28,320 million compared with
CHF 6,203 million, which included a net tax benefit of CHF 898 CHF 30,605 million. On an adjusted basis, total operating income

Financial and operating performance

million. decreased by CHF 1,413 million or 5% to CHF 28,113 million,
Profit before tax was CHF 4,090 million in 2016 compared mainly reflecting a decrease of CHF 743 million in net fee and
with CHF 5,489 million in the prior year. Operating income commission income and CHF 560 million lower combined net
decreased by CHF 2,285 million or 7%, mainly due to CHF 1,113 interest and trading income.
million lower combined net interest and trading income, primar-
ily in the Investment Bank and Corporate Center – Group Asset Net interest and trading income
and Liability Management (Group ALM), and a decline of CHF Total combined net interest and trading income decreased by CHF
743 million in net fee and commission income, primarily in 1,113 million to CHF 11,361 million. Excluding the own credit
Wealth Management. Operating expenses decreased by CHF 886 gain of CHF 553 million in 2015, adjusted net interest and trading
million or 4%, mainly due to CHF 673 million lower general and income decreased by CHF 560 million.
administrative expenses and a decline of CHF 261 million in per- In Wealth Management, net interest and trading income
sonnel expenses. decreased by CHF 36 million to CHF 2,998 million, mainly reflect-
As of 31 December 2016, the Group achieved CHF 1.6 billion ing reduced client activity.
of annualized net cost savings, an improvement from CHF 1.1 bil- Wealth Management Americas net interest and trading income
lion at year-end 2015. We measure our net cost saving as the increased by CHF 302 million to CHF 1,839 million, primarily due
difference between our year-end exit cost on an adjusted basis to an increase in net interest income, reflecting higher short-term
and further excluding temporary regulatory costs and provisions interest rates as well as growth in loan and deposit balances.
for litigation, regulatory and similar matters compared with full In Personal & Corporate Banking, net interest and trading
year costs in 2013 for Corporate Center and 2015 for the busi- income declined by CHF 81 million to CHF 2,532 million, mainly
ness divisions. due to lower treasury-related income from Corporate Center –
In addition to reporting our results in accordance with IFRS, Group ALM and lower deposit-related income.
we report adjusted results that exclude items that management In the Investment Bank, net interest and trading income
believes are not representative of the underlying performance decreased by CHF 909 million to CHF 4,277 million, primarily due
of our businesses. Such adjusted results are non-GAAP financial to a CHF 513 million decline in Equities, with lower revenues in
measures as defined by SEC regulations. For the purpose of Derivatives and Financing Services. In addition, net interest and
determining adjusted results for 2016, we excluded gains of trading income decreased by CHF 217 million in our Foreign
CHF 211 million on sale of financial assets available for sale, Exchange, Rates and Credit businesses, mainly as 2015 benefited
gains on sales of real estate of CHF 120 million, gains of CHF 21 from higher volatility and client activity levels following the Swiss
million related to investments in associates, net foreign currency National Bank’s actions in January 2015.
translation losses of CHF 122 million, losses on sales of subsid- Corporate Center – Group ALM net interest and trading
iaries and businesses of CHF 23 million and net restructuring income, excluding the effect of own credit, improved by CHF 23
expenses of CHF 1,458 million. For 2015, we excluded an own million.
credit gain of CHF 553 million, gains on sales of real estate of In Corporate Center – Non-core and Legacy Portfolio, net
CHF 378 million, gains on sales of subsidiaries and businesses of interest and trading income improved by CHF 251 million, primar-
CHF 225 million, net foreign currency translation gains of CHF ily as the prior year included higher losses related to unwind and
88 million, gains of CHF 81 million related to investments in novation activities.
associates, gains of CHF 11 million on sale of financial assets ➔➔Refer to the “Significant accounting and financial reporting
available for sale, net losses related to the buyback of debt in a changes” section of this report for more information on own
tender offer of CHF 257 million, net restructuring expenses of credit
CHF 1,235 million, a gain of CHF 21 million related to a change ➔➔Refer to “Note 3 Net interest and trading income” in the
to retiree benefit plans in the US and an impairment of an intan- “Consolidated financial statements” section of this report for
gible asset of CHF 11 million. more information

67
Financial and operating performance
Group performance

Net interest and trading income

For the year ended % change from
CHF million 31.12.16 31.12.15 31.12.14 31.12.15

Net interest and trading income

Net interest income 6,413 6,732 6,555 (5)
Net trading income 4,948 5,742 3,842 (14)
Total net interest and trading income 11,361 12,474 10,397 (9)
Wealth Management 2,998 3,034 2,845 (1)
Wealth Management Americas 1,839 1,537 1,352 20
Personal & Corporate Banking 2,532 2,613 2,536 (3)
Asset Management (29) (5) 0 480
Investment Bank 4,277 5,186 4,517 (18)
of which: Corporate Client Solutions 822 1,001 1,030 (18)
of which: Investor Client Services 3,455 4,185 3,487 (17)
Corporate Center (256) 110 (854)
of which: Services (89) (3) 34
of which: Group ALM (104) 426 16
of which: own credit on financial liabilities designated at fair value 553 292 (100)
of which: Non-core and Legacy Portfolio (62) (313) (904) (80)
Total net interest and trading income 11,361 12,474 10,397 (9)

Credit loss expense / recovery

The net credit loss expense was CHF 37 million compared with Net credit loss expense in Personal & Corporate Banking was CHF
CHF 117 million. The Investment Bank recorded a net credit loss 6 million compared with CHF 37 million, mainly due to higher net
expense of CHF 11 million compared with CHF 68 million in the recoveries on existing impaired positions.
prior year, reflecting lower expenses related to the energy sector. ➔➔Refer to the “Risk management and control” section of this
report for more information

Credit loss (expense) / recovery

For the year ended % change from
CHF million 31.12.16 31.12.15 31.12.14 31.12.15
Wealth Management (5) 0 (1)
Wealth Management Americas (3) (4) 15 (25)
Personal & Corporate Banking (6) (37) (95) (84)
Investment Bank (11) (68) 2 (84)
Corporate Center (13) (8) 2 63
of which: Non-core and Legacy Portfolio (13) (8) 2 63
Total (37) (117) (78) (68)

68
Net fee and commission income Personnel expenses
Net fee and commission income decreased by CHF 743 million to Personnel expenses decreased by CHF 261 million to CHF 15,720
CHF 16,397 million. million and included net restructuring expenses of CHF 751 mil-
Investment fund fees declined by CHF 412 million to CHF lion compared with CHF 460 million, largely related to our transi-
3,155 million, mainly in Wealth Management, primarily due to tioning activities to nearshore and offshore locations and our cost
the effects of cross-border outflows and shifts into retrocession- reduction programs. On an adjusted basis, personnel expenses
free products, as well as changes in clients’ asset allocation. decreased by CHF 573 million to CHF 14,969 million.
Underwriting fees decreased by CHF 300 million to CHF 946 Adjusted expenses for salaries decreased by CHF 175 million to
million due to lower equity underwriting revenues, predominantly CHF 5,795 million, mainly reflecting our cost reduction programs.

Financial and operating performance

in the Investment Bank. Adjusted expenses for total variable compensation decreased
Net brokerage fees declined by CHF 276 million to CHF 2,784 by CHF 331 million, reflecting a decrease of CHF 361 million in
million, mainly in Wealth Management and the Investment Bank, expenses for current-year awards.
largely driven by reduced client activity. Adjusted other personnel expenses decreased by CHF 217 mil-
Portfolio management and advisory fees increased by CHF 177 lion, largely due to CHF 149 million lower pension costs for our
million to CHF 8,035 million, primarily in Wealth Management Swiss pension plan, reflecting the effect of changes to demo-
Americas, mainly due to increased managed account fees, reflect- graphic and financial assumptions, and a decline of CHF 76 mil-
ing higher invested asset levels. lion in social security expenses.
➔➔Refer to “Note 4 Net fee and commission income” in the Financial advisor compensation in Wealth Management
“Consolidated financial statements” section of this report for ­Americas increased by CHF 145 million to CHF 3,697 million, mainly
more information due to currency effects and higher expenses for compensation
commitments, reflecting the recruitment of financial advisors.
Other income ➔➔Refer to the “Compensation” section of this report for more
Other income was CHF 599 million compared with CHF 1,107 information
million. Excluding certain gains on sales of financial assets avail- ➔➔Refer to “Note 6 Personnel expenses,” “Note 26 Pension and
able for sale and real estate, gains related to investments in asso- other post-employment benefit plans” and “Note 27 Equity
ciates, net foreign currency translation gains and losses, and gains participation and other compensation plans” in the “Consoli-
and losses on sales of subsidiaries and businesses, adjusted other dated financial statements” section of this report for more
income decreased by CHF 189 million. This decline was mainly information
due to lower gains on sale of financial assets available for sale.
➔➔Refer to “Note 5 Other income” in the “Consolidated financial General and administrative expenses
statements” section of this report for more information General and administrative expenses decreased by CHF 673 mil-
lion to CHF 7,434 million. Excluding net restructuring expenses of
Operating expenses CHF 695 million compared with CHF 761 million, adjusted gen-
eral and administrative expenses decreased by CHF 607 million,
Total operating expenses decreased by CHF 886 million or 4% to primarily reflecting CHF 292 million lower net expenses for provi-
CHF 24,230 million. Net restructuring expenses were CHF 1,458 sions for litigation, regulatory and similar matters, a decrease of
million compared with CHF 1,235 million, reflecting an increase CHF 95 million in professional fees and CHF 79 million lower
of CHF 291 million in personnel-related restructuring expenses, expenses for outsourcing of IT and other services. Also, the net
mainly related to our transitioning activities to nearshore and off- expense for the annual UK bank levy was CHF 123 million com-
shore locations, partly offset by a decrease of CHF 69 million in pared with CHF 166 million, primarily related to currency effects.
non-personnel-related restructuring expenses. This net expense was mainly recorded in the Investment Bank and
Adjusted total operating expenses decreased by CHF 1,119 mil- Corporate Center – Non-core and Legacy Portfolio.
lion or 5% to CHF 22,772 million. This decrease was mainly due to
a decline of CHF 607 million in adjusted general and administrative
expenses, of which CHF 292 million related to net expenses for pro-
visions for litigation, regulatory and similar matters, and a decrease
of CHF 573 million in adjusted personnel expenses, primarily due to
lower expenses for salaries and variable compensation.
➔➔Refer to “Note 30 Changes in organization and disposals” in the
“Consolidated financial statements” section of this report for
more information on restructuring expenses

69
Financial and operating performance
Group performance

Operating expenses
For the year ended % change from
CHF million 31.12.16 31.12.15 31.12.14 31.12.15

Operating expenses as reported

Personnel expenses 15,720 15,981 15,280 (2)
General and administrative expenses 7,434 8,107 9,387 (8)
Depreciation and impairment of property, equipment and software 985 920 817 7
Amortization and impairment of intangible assets 91 107 83 (15)
Total operating expenses as reported 24,230 25,116 25,567 (4)

Adjusting items
Personnel expenses 751 439 286
of which: restructuring expenses1 751 460 327
of which: a gain related to a change to retiree benefit plans in the US (21) (41)
General and administrative expenses2 695 761 319
Depreciation and impairment of property, equipment and software2 11 12 29
Amortization and impairment of intangible assets 0 13 2
of which: restructuring expenses1 0 2 2
of which: impairment of an intangible asset 11
Total adjusting items 1,458 1,225 636

Operating expenses (adjusted)3

Personnel expenses 14,969 15,542 14,994 (4)
of which: salaries 5,795 5,970 6,124 (3)
of which: total variable compensation 3,079 3,410 3,113 (10)
of which: relating to current year4 2,249 2,610 2,338 (14)
of which: relating to prior years5 832 799 775 4
of which: Wealth Management Americas – Financial advisor compensation6 3,697 3,552 3,385 4
of which: other personnel expenses7 2,396 2,613 2,372 (8)
General and administrative expenses 6,739 7,346 9,068 (8)
of which: expenses for provisions for litigation, regulatory and similar matters 795 1,087 2,594 (27)
of which: other general and administrative expenses 5,944 6,259 6,474 (5)
Depreciation and impairment of property, equipment and software 974 908 788 7
Amortization and impairment of intangible assets 91 94 81 (3)
Total operating expenses (adjusted) 22,772 23,891 24,931 (5)
1 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information. 2 Consists of restructuring expenses. 3 Adjusted results are non-
GAAP financial measures as defined by SEC regulations. 4 Includes expenses relating to performance awards and other variable compensation for the respective performance year. 5 Consists of amortization of prior
years’ awards relating to performance awards and other variable compensation. 6 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial
advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial
advisors entered into at the time of recruitment that are subject to vesting requirements. 7 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other
personnel expenses. Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information.

At this point in time, we believe that the industry continues to Depreciation, impairment and amortization
operate in an environment in which expenses associated with liti- Depreciation and impairment of property, equipment and soft-
gation, regulatory and similar matters will remain elevated for the ware increased by CHF 65 million to CHF 985 million, largely
foreseeable future and we continue to be exposed to a number of driven by higher depreciation expenses related to internally gener-
significant claims and regulatory matters. The outcome of many ated capitalized software.
of these matters, the timing of a resolution, and the potential Amortization and impairment of intangible assets was CHF 91
effects of resolutions on our future business, financial results or million compared with CHF 107 million. On an adjusted basis,
financial condition, are extremely difficult to predict. these expenses were broadly unchanged.
➔➔Refer to “Note 7 General and administrative expenses” and ➔➔Refer to “Note 1b Changes in accounting policies, comparability
“Note 20 Provisions and contingent liabilities” in the “Consoli- and other adjustments” in the “Consolidated financial state-
dated financial statements” section of this report for more ments” section of this report for more information on the
information estimated useful life of certain IT hardware and software
➔➔Refer to “Note 14 Property, equipment and software” and
“Note 15 Goodwill and intangible assets” in the “Consolidated
financial statements” section of this report for more information

70
Tax Total comprehensive income attributable to shareholders

We recognized a net income tax expense of CHF 805 million for In 2016, total comprehensive income attributable to shareholders
2016, which included a net Swiss tax expense of CHF 1,094 mil- was CHF 1,817 million, reflecting net profit of CHF 3,204 million,
lion and a net non-Swiss tax benefit of CHF 289 million. partly offset by negative OCI of CHF 1,386 million.
The Swiss tax expense included a current tax expense of CHF Defined benefit plan OCI was negative CHF 824 million com-
459 million related to taxable profits, mainly earned by Swiss sub- pared with positive CHF 298 million. In 2016, we updated and
sidiaries, against which no losses were available to offset. In addi- refined certain actuarial assumptions used in calculating our
tion, it included a deferred tax expense of CHF 635 million, which defined benefit obligations (DBOs). This resulted in net OCI gains

Financial and operating performance

reflected a decrease in deferred tax assets previously recognized in of CHF 319 million related to the Swiss defined benefit plan and
relation to tax losses carried forward and temporary differences. an OCI gain of CHF 63 million related to the UK pension plan.
The net non-Swiss tax benefit included a current tax expense Total pre-tax OCI related to UK defined benefit plans was neg-
of CHF 353 million related to taxable profits earned by non-Swiss ative CHF 615 million, reflecting an OCI loss of CHF 928 million
subsidiaries and branches, against which no losses were available due to a net increase in the DBO, mainly due to a decrease in the
to offset. This was more than offset by a net deferred tax benefit applicable discount rate, partly offset by the aforementioned gain
of CHF 642 million, primarily due to an increase in our US deferred of CHF 63 million from changes in assumptions. The OCI loss
tax assets, reflecting updated profit forecasts. related to the net increase in the DBO was partly offset by OCI
We recognized a tax expense in 2016 compared with a tax gains of CHF 312 million from an increase in the fair value of the
benefit in 2015, mainly due to an upward revaluation of US underlying plan assets.
deferred tax assets in 2015 in relation to the extension of the Total pre-tax OCI related to the Swiss defined benefit plan was
forecast period for US taxable profits to seven years from six. In a loss of CHF 105 million. This reflected an OCI loss of CHF 477
2016, there was no extension of the forecast period. million related to a net DBO increase and a loss of CHF 452 million
We consider the performance of our businesses and the accu- representing an increase in the excess of the pension surplus over
racy of historical forecasts and other factors in evaluating the the estimated future economic benefit, largely offset by an OCI
recoverability of our deferred tax assets, including the remaining gain of CHF 824 million due to an increase in the fair value of the
tax loss carry-forward period, and our assessment of expected underlying plan assets. The OCI loss of CHF 477 million related to
future taxable profits in the forecast period used for recognizing the net DBO increase was mainly due to an experience loss of CHF
deferred tax assets. Estimating future profitability is inherently 438 million, reflecting the effects of differences between the pre-
subjective and is particularly sensitive to future economic, market vious actuarial assumptions and what actually occurred, and a loss
and other conditions, which are difficult to predict. of CHF 433 million from a decline in the applicable discount rate,
For 2017, we forecast a full-year tax rate of approximately partly offset by the aforementioned net gain of CHF 319 million
25%, excluding the effects of any change in the level of deferred from changes in assumptions.
tax assets resulting from their reassessment or any statutory tax OCI related to cash flow hedges was negative CHF 666 million,
rate changes. Consistent with past practice, we expect to revalue which primarily reflected a decrease in unrealized gains on hedg-
our deferred tax assets in the second half of 2017 based on a ing derivatives due to an increase in US dollar long-term interest
reassessment of future profitability taking into account updated rates. In 2015, OCI related to cash flow hedges was negative CHF
business plan forecasts. The full-year effective tax rate could 509 million.
change significantly on the basis of this reassessment. It could also OCI related to own credit on financial liabilities designated at
change if aggregate tax expenses in respect of profits from fair value was negative CHF 115 million in 2016, mainly reflecting
branches and subsidiaries without loss coverage differ from what a downward shift in LIBOR curves.
is expected. Furthermore, any change in statutory tax rates could OCI associated with financial assets available for sale was neg-
significantly impact the level of our deferred tax assets, when the ative CHF 73 million compared with negative CHF 63 million and
law change is enacted. For every percentage point reduction in primarily reflected the reclassification of net gains from OCI to the
the US federal corporate income tax rate, we would expect a CHF income statement upon sale of assets, partly offset by net unreal-
0.2 billion decrease in the Group’s deferred tax assets. ized gains following decreases in the respective long-term interest
➔➔Refer to “Note 8 Income taxes” in the “Consolidated financial rates.
statements” section of this report for more information
➔➔Refer to the “Risk factors” section of this report for more
information

71
Financial and operating performance
Group performance

Foreign currency translation OCI was CHF 292 million, mainly Should interest rates remain constant at the levels prevailing at
resulting from the strengthening of the US dollar against the the end of 2016, the corresponding cumulative increase in net
Swiss franc, partly offset by the significant weakening of the interest income for 2017 to 2019 compared with 2016 levels
­British pound against the Swiss franc. In addition, net losses totaling would be around CHF 0.2 billion.
CHF 126 million were reclassified to the income statement follow- The above estimates further assume no change to balance
ing the disposal of foreign subsidiaries and branches. sheet size and structure, constant foreign exchange rates and no
➔➔Refer to the “Significant accounting and financial reporting management action.
changes” section of this report for more information on own
credit Net profit attributable to non-controlling interests
➔➔Refer to the “Statement of comprehensive income” in the
“Consolidated financial statements” section of this report for Net profit attributable to non-controlling interests was CHF 82
more information million in 2016 compared with CHF 183 million in the prior year.
➔➔Refer to “Note 26 Pension and other post-employment benefit This mainly related to dividends of CHF 79 million that were paid
plans” in the “Consolidated financial statements” section of this to preferred noteholders, for which no accrual was required in a
report for more information on defined benefit plans prior period.
For 2017, we currently expect to attribute approximately CHF
Sensitivity to interest rate movements 70 million of net profit to non-controlling interests, of which CHF
45 million in the first quarter and CHF 25 million in the fourth
As of 31 December 2016, we estimate that a parallel shift in yield quarter. From 2018, we expect to attribute less than CHF 10 mil-
curves by +100 basis points could lead to a combined increase in lion per year.
annual net interest income of approximately CHF 0.7 billion in
Wealth Management, Wealth Management Americas and Personal Key figures
& Corporate Banking. Of this increase, approximately CHF 0.4 bil-
lion would result from changes in US dollar interest rates. Including Cost / income ratio
the estimated impact related to pension fund assets and liabilities, The cost / income ratio was 85.4% compared with 81.8%. On an
the immediate effect of such a shift on shareholders’ equity would adjusted basis, the cost / income ratio was 80.9% compared with
be a decrease of approximately CHF 1.6 billion recognized in OCI, 80.6% and was above our target range of 60–70%.
of which approximately CHF 1.3 billion would result from changes
in US dollar interest rates. Since the majority of this negative OCI Return on tangible equity
impact on shareholders’ equity is related to cash flow hedges, The return on tangible equity (RoTE) was 6.9% compared with
which is not recognized for the purposes of calculating regulatory 13.7%. On an adjusted basis, the RoTE was 9.0% compared with
capital, the immediate impact on regulatory capital would be an 13.7% and was below our target of more than 15% in a normal-
increase of approximately CHF 0.3 billion. The aforementioned esti- ized market environment.
mates are based on an immediate increase in interest rates, equal
across all currencies and relative to implied forward rates applied to Common equity tier 1 capital ratio / risk-weighted assets
our banking book and available-for-sale portfolios. Our fully applied CET1 capital ratio decreased 0.7 percentage
We estimate that if interest rates implied by forward rates at points to 13.8% as of 31 December 2016, exceeding our target
the end of 2016 were to materialize over the next three years, our ratio of 13.0%. The decrease primarily reflected a CHF 15 billion
net interest income in Wealth Management, Wealth Manage- increase in risk-weighted assets (RWA), partly offset by a CHF 0.7
ment Americas and Personal & Corporate Banking would increase billion increase in CET1 capital.
compared with 2016 levels by around CHF 0.2 billion in 2017 and Our RWA increased by CHF 15 billion to CHF 223 billion on a
by around CHF 1.1 billion cumulatively for 2017 to 2019. This fully applied basis as of 31 December 2016. Credit risk RWA
increase would primarily be driven by Wealth Management and increased by CHF 8 billion, primarily driven by methodology and
Wealth Management Americas, which would benefit most from policy changes. Market risk RWA and operational risk RWA both
an increase in US dollar interest rates, and would more than offset increased by CHF 3 billion.
a decline in Personal & Corporate Banking, whose net interest ➔➔Refer to the “Investment Bank,” “Corporate Center” and “Capital
income is mostly generated in Swiss francs and where forward management” sections of this report for more information
rates imply continued negative interest rates.

72
Leverage ratio / leverage ratio denominator Seasonal characteristics
As of 31 December 2016, our fully applied going concern lever-
age ratio was 4.6%, of which the common equity tier 1 leverage Our main businesses may show seasonal patterns. The Investment
ratio was 3.5%. Bank’s revenues have been affected in some years by the seasonal
Our fully applied LRD decreased by CHF 27 billion to CHF 870 characteristics of general financial market activity and deal flows
billion as of 31 December 2016, mainly reflecting incremental in investment banking. Other business divisions may also be
netting and collateral mitigation. impacted by seasonal components, such as lower client activity
➔➔Refer to the “Investment Bank,” “Corporate Center” and “Capital levels related to the summer and end-of-year holiday seasons,
management” sections of this report for more information annual income tax payments (which are concentrated in the sec-

Financial and operating performance

ond quarter in the US) and asset withdrawals that tend to occur
Net new money and invested assets in the fourth quarter.
Management’s discussion and analysis on net new money and
invested assets is provided in the “Wealth Management,”
“Wealth Management Americas” and “Asset Management” sec-
tions of this report.

Return on equity
As of or for the year ended
CHF million, except where indicated 31.12.16 31.12.15 31.12.14

Net profit
Net profit attributable to shareholders 3,204 6,203 3,466
Amortization and impairment of intangible assets 91 107 83
Pre-tax adjusting items1,2 1,251 135 305
Tax effect on adjusting items3 (275) (140) (125)
Adjusted net profit attributable to shareholders 4,271 6,305 3,729

Equity
Equity attributable to shareholders 53,621 55,313 50,608
Less: goodwill and intangible assets4 6,556 6,568 6,564
Tangible equity attributable to shareholders 47,065 48,745 44,044

Return on equity
Return on equity (%) 5.9 11.8 7.0
Return on tangible equity (%) 6.9 13.7 8.2
Adjusted return on tangible equity (%)1 9.0 13.7 8.6
1 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Refer to the “Performance by business division and Corporate Center unit – reported and adjusted” table in this section for more
information. 3 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items. 2015 and 2014 included own credit on financial liabilities designated at fair value as an adjusting item with an indicative tax
rate of 2%. 4 Goodwill and intangible assets used in the calculation of tangible equity attributable to shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling interests in UBS AG.

73
Financial and operating performance
Group performance

Net new money1

For the year ended
CHF billion 31.12.16 31.12.15 31.12.14
Wealth Management 26.8 12.9 34.4
Wealth Management (adjusted)2 26.8 22.8 34.4
Wealth Management Americas 15.4 21.3 9.6
Asset Management (15.5) (5.4) 15.9
of which: excluding money market flows (22.5) (0.7) 22.6
of which: money market flows 7.0 (4.7) (6.7)
1 Net new money excludes interest and dividend income. 2 Adjusted net new money excludes the negative effect on net new money of CHF 9.9 billion in 2015 from our balance sheet and capital optimization program.

Invested assets
As of % change from
CHF billion 31.12.16 31.12.15 31.12.14 31.12.15
Wealth Management 977 947 987 3
Wealth Management Americas 1,131 1,035 1,027 9
Asset Management 656 650 664 1
of which: excluding money market funds 591 592 600 0
of which: money market funds 66 58 64 14

74
2015 compared with 2014 Adjusted operating expenses decreased by CHF 1,040 million
to CHF 23,891 million, mainly due to CHF 1,507 million lower
net expenses for provisions for litigation, regulatory and similar
Results matters, partly offset by CHF 548 million higher personnel
expenses.
We recorded a profit before tax of CHF 5,489 million compared
with CHF 2,461 million, largely reflecting an increase of CHF Operating income
2,578 million in operating income, mainly due to increased net
interest and trading income in the Investment Bank and our Total operating income was CHF 30,605 million compared with

Financial and operating performance

wealth management businesses, as well as reduced losses in Cor- CHF 28,027 million. On an adjusted basis, total operating income
porate Center – Non-core and Legacy Portfolio. Operating increased by CHF 1,830 million to CHF 29,526 million. Adjusted
expenses decreased by CHF 451 million, mainly driven by CHF net interest and trading income increased by CHF 1,816 million,
1,507 million lower net expenses for provisions for litigation, reg- reflecting increases in the Investment Bank and our wealth man-
ulatory and similar matters, partly offset by higher restructuring agement businesses, as well as reduced losses in Corporate Cen-
expenses and increased personnel expenses. ter – Non-core and Legacy Portfolio. Net fee and commission
In addition to reporting our results in accordance with IFRS, we income increased by CHF 64 million, mainly in Wealth Manage-
report adjusted results that exclude items that management ment Americas and Asset Management.
believes are not representative of the underlying performance of
our businesses. Such adjusted results are non-GAAP financial Net interest and trading income
measures as defined by SEC regulations. For the purpose of deter- Net interest and trading income increased by CHF 2,077 million
mining adjusted results for 2015, we excluded an own credit gain to CHF 12,474 million. 2015 included an own credit gain on
of CHF 553 million, gains on sales of real estate of CHF 378 mil- financial liabilities designated at fair value of CHF 553 million
lion, gains on sales of subsidiaries and businesses of CHF 225 compared with a gain of CHF 292 million. In 2015, we made
million, net foreign currency translation gains of CHF 88 million, further enhancements to our valuation methodology for the
gains of CHF 81 million related to investments in associates, gains own credit component of fair value of financial liabilities desig-
of CHF 11 million on sale of financial assets available for sale, net nated at fair value. This change in accounting estimate resulted
losses related to the buyback of debt in a tender offer of CHF 257 in a gain of CHF 260 million. Excluding the effect of own credit
million, net restructuring expenses of CHF 1,235 million, a gain of in both years, net interest and trading income increased by CHF
CHF 21 million related to a change to retiree benefit plans in the 1,816 million to CHF 11,921 million, reflecting increases in the
US and an impairment of an intangible asset of CHF 11 million. Investment Bank and our wealth management businesses, as
For 2014, we excluded an own credit gain of CHF 292 million, well as reduced losses in Corporate Center – Non-core and Leg-
gains on sales of real estate of CHF 44 million, losses of CHF 5 acy Portfolio.
million on sale of financial assets available for sale, net restructur-
ing expenses of CHF 677 million and a gain of CHF 41 million Credit loss expense / recovery
related to changes to retiree benefit plans in the US. Net credit loss expense was CHF 117 million compared with CHF
On this adjusted basis, profit before tax was CHF 5,635 million 78 million. The Investment Bank recorded a net credit loss expense
compared with CHF 2,766 million in the prior year. of CHF 68 million, mainly related to the energy sector, compared
Adjusted operating income increased by CHF 1,830 million to with a net recovery of CHF 2 million. Net credit loss expense in
CHF 29,526 million, largely due to an increase of CHF 1,816 mil- Personal & Corporate Banking was CHF 37 million compared with
lion in adjusted net interest and trading income, reflecting CHF 95 million, predominantly due to lower expenses for newly
increases in the Investment Bank and our wealth management impaired positions.
businesses, as well as reduced losses in Corporate Center – Non-
core and Legacy Portfolio.

75
Financial and operating performance
Group performance

Net fee and commission income and similar matters, partly offset by CHF 548 million higher
Net fee and commission income increased by CHF 64 million to adjusted personnel expenses, primarily reflecting an increase in
CHF 17,140 million. expenses for variable compensation.
Portfolio management and advisory fees increased by CHF 515
million to CHF 7,858 million, primarily in Wealth Management Personnel expenses
Americas, largely due to an increase in managed account fees, Personnel expenses increased by CHF 701 million to CHF 15,981
reflecting higher invested asset levels. Portfolio management and million and included restructuring expenses of CHF 460 million
advisory fees also increased in Wealth Management and Asset compared with CHF 327 million, largely related to our transition-
Management. ing activities to nearshore and offshore locations. On an adjusted
Underwriting fees decreased by CHF 224 million, reflecting basis, excluding restructuring expenses and gains related to
lower equity and debt underwriting fees, largely in the Investment changes to retiree benefit plans in the US, personnel expenses
Bank. increased by CHF 548 million to CHF 15,542 million.
Investment fund fees declined by CHF 150 million, primarily Expenses for salaries, excluding restructuring expenses,
reflecting a decrease in mutual fund-related fees in Wealth Man- decreased by CHF 154 million to CHF 5,970 million, primarily
agement Americas and lower transaction-based income in Wealth reflecting a reduction in staff levels.
Management. This was partly offset by an increase in Asset Man- Excluding restructuring expenses, total variable compensation
agement. expenses increased by CHF 297 million. Expenses for current-year
awards increased by CHF 272 million, reflecting improved busi-
Other income ness performance. Expenses relating to the amortization of prior
Other income was CHF 1,107 million compared with CHF 632 years’ awards increased by CHF 24 million.
million. On an adjusted basis, other income decreased by CHF 12 Financial advisor compensation in Wealth Management Americas
million. Adjusted income related to associates and subsidiaries increased by CHF 167 million to CHF 3,552 million, primarily due
decreased by CHF 124 million, mainly as 2014 included a gain of to unfavorable foreign currency translation effects.
CHF 65 million on an investment in an associate which was reclas- Other personnel expenses, excluding restructuring expenses
sified to a financial asset available for sale following its initial pub- and the aforementioned gains related to changes to retiree ben-
lic offering, as well as a gain of CHF 58 million related to the efit plans in the US, increased by CHF 241 million to CHF 2,613
release of a provision for litigation, regulatory and similar matters million, mainly due to an increase of CHF 113 million in costs for
that was recorded as other income. This was partly offset by CHF pension and other post-employment benefits plans and CHF 113
92 million higher adjusted income from financial assets available million higher expenses for contractors.
for sale, primarily related to net gains on sales of equity invest-
ments in 2015, mainly within the Investment Bank. General and administrative expenses
General and administrative expenses decreased by CHF 1,280 mil-
Operating expenses lion to CHF 8,107 million. Net restructuring expenses increased to
CHF 761 million from CHF 319 million, largely related to our tran-
Total operating expenses decreased by CHF 451 million to CHF sitioning activities to nearshore and offshore locations. On an
25,116 million. Restructuring expenses were CHF 1,235 million adjusted basis, excluding net restructuring expenses, general and
compared with CHF 677 million, largely related to our transition- administrative expenses decreased by CHF 1,722 million, mainly
ing activities to nearshore and offshore locations. Personnel- due to CHF 1,507 million lower net expenses for provisions for
related restructuring expenses increased by CHF 133 million to litigation, regulatory and similar matters.
CHF 460 million, while non-personnel-related restructuring Excluding restructuring expenses, other general and adminis-
expenses increased by CHF 425 million to CHF 775 million. trative expenses decreased by CHF 215 million, primarily as 2014
On an adjusted basis, excluding restructuring expenses and included net expenses of CHF 120 million related to certain dis-
gains related to changes to retiree benefit plans in the US in both puted receivables. Furthermore, occupancy costs and expenses
years and an impairment of an intangible asset in 2015, total for outsourcing of IT and other services decreased.
operating expenses decreased by CHF 1,040 million to CHF General and administrative expenses also included a net
23,891 million. This decrease was mainly due to CHF 1,507 mil- expense of CHF 166 million for the annual UK bank levy com-
lion lower net expenses for provisions for litigation, regulatory pared with CHF 123 million.

76
Tax Defined benefit plan OCI was CHF 298 million. In 2015, we
carried out a methodology review of the actuarial assumptions
We recognized a net income tax benefit of CHF 898 million for used in calculating our DBOs. This resulted in an OCI gain of CHF
2015, which included a net Swiss tax expense of CHF 569 million 2,002 million related to the Swiss pension plan and an OCI gain
and a net non-Swiss tax benefit of CHF 1,467 million, primarily of CHF 188 million related to the UK pension plan. Total pre-tax
relating to the upward revaluation of US deferred tax assets. OCI related to UK defined benefit plans was CHF 321 million,
The Swiss tax expense included a current tax expense of CHF reflecting a net reduction in the DBO of CHF 444 million, primarily
239 million related to taxable profits, mainly earned by Swiss sub- resulting from the aforementioned changes in assumptions and
sidiaries, against which no losses were available to offset. In addi- an increase in the applicable discount rate, partly offset by a

Financial and operating performance

tion, it included a net deferred tax expense of CHF 330 million, decrease of CHF 123 million in the fair value of the underlying
which mainly reflected a net decrease in deferred tax assets previ- plan assets. In addition, we recorded total net pre-tax OCI gains of
ously recognized in relation to tax losses carried forward, partly CHF 53 million on our Swiss pension plan. This reflected an OCI
offset by an increase in recognized deferred tax assets in relation gain of CHF 1,212 million related to a net DBO reduction, primar-
to temporary differences. ily due to the aforementioned changes in assumptions, partly off-
The net non-Swiss tax benefit included a current tax expense set by a market-driven decline in the applicable discount rate, as
of CHF 476 million in respect of taxable profits earned by non- well as an OCI gain of CHF 105 million due to an increase in the
Swiss subsidiaries and branches, against which no losses were fair value of the underlying plan assets. These OCI gains were
available to offset. This was more than offset by a net deferred tax almost entirely offset by an OCI decrease of CHF 1,265 million
benefit of CHF 1,943 million, primarily due to an increase in our representing the excess of the pension surplus over the estimated
US deferred tax assets, reflecting updated profit forecasts and an future economic benefit.
extension of the relevant taxable profit forecast period used in
valuing our deferred tax assets. Net profit attributable to preferred noteholders and
non-controlling interests
Total comprehensive income attributable to shareholders
Net profit attributable to preferred noteholders was zero in 2015
Total comprehensive income attributable to shareholders was CHF compared with CHF 142 million in the prior year. Subsequent to
5,698 million, reflecting net profit of CHF 6,203 million, partly the exchange offer in the fourth quarter of 2014, the preferred
offset by negative OCI of CHF 506 million. notes issued by UBS AG were reclassified in 2015 to equity attrib-
In 2015, OCI related to cash flow hedges was negative CHF utable to non-controlling interests in the UBS Group AG consoli-
509 million compared with positive CHF 689 million in 2014, pri- dated financial statements.
marily reflecting lower unrealized gains on hedging derivatives Net profit attributable to non-controlling interests was CHF
from decreases in long-term interest rates. 183 million in 2015 compared with CHF 32 million in the prior
Foreign currency translation OCI was negative CHF 231 mil- year. This mainly related to net profit attributable to non-control-
lion, primarily resulting from the significant weakening of the ling interests in UBS AG which was CHF 103 million in 2015. As a
euro and British pound against the Swiss franc, combined with result of the completion of the SESTA procedure in the third quar-
the reclassification of net gains totaling CHF 90 million to the ter of 2015, UBS Group AG owns 100% of the issued shares of
income statement. UBS AG. Since then, profits of UBS AG have been fully attribut-
OCI associated with financial assets available for sale was neg- able to UBS Group AG shareholders.
ative CHF 63 million, mainly as previously unrealized net gains Furthermore, dividends of CHF 76 million were paid to pre-
were reclassified from OCI to the income statement upon sale of ferred noteholders, for which no accrual was required in a prior
investments, partly offset by net unrealized gains following period.
decreases in long-term interest rates.

77
Financial and operating performance
Wealth Management

Wealth Management
Wealth Management1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Net interest income 2,331 2,326 2,165 0
Recurring net fee income2 3,548 3,820 3,783 (7)
Transaction-based income3 1,397 1,778 1,928 (21)
Other income 20 231 25 (91)
Income 7,296 8,155 7,902 (11)
Credit loss (expense) / recovery (5) 0 (1)
Total operating income 7,291 8,155 7,901 (11)
Personnel expenses 2,349 2,532 2,467 (7)
General and administrative expenses 640 637 918 0
Services (to) / from Corporate Center and other business divisions 2,348 2,289 2,180 3
of which: services from CC – Services 2,256 2,209 2,122 2
Depreciation and impairment of property, equipment and software 2 5 4 (60)
Amortization and impairment of intangible assets 4 3 5 33
Total operating expenses4 5,343 5,465 5,574 (2)
Business division operating profit / (loss) before tax 1,948 2,689 2,326 (28)

Adjusted results5
Total operating income as reported 7,291 8,155 7,901 (11)
of which: gains / (losses) on sales of subsidiaries and businesses (23) 169
of which: gains related to investments in associates 15
of which: gains on sale of financial assets available for sale6 21
Total operating income (adjusted) 7,293 7,971 7,901 (9)
Total operating expenses as reported 5,343 5,465 5,574 (2)
of which: personnel-related restructuring expenses 53 20 18
of which: non-personnel-related restructuring expenses 55 38 49
of which: restructuring expenses allocated from CC – Services 339 265 119
Total operating expenses (adjusted) 4,896 5,142 5,389 (5)
Business division operating profit / (loss) before tax as reported 1,948 2,689 2,326 (28)
Business division operating profit / (loss) before tax (adjusted) 2,397 2,828 2,511 (15)

Key performance indicators7

Pre-tax profit growth (%) (27.6) 15.6 3.5
Cost / income ratio (%) 73.2 67.0 70.5
Net new money growth (%) 2.8 1.3 3.9
Gross margin on invested assets (bps) 77 86 85 (10)
Net margin on invested assets (bps) 21 28 25 (25)

Adjusted key performance indicators5,7

Pre-tax profit growth (%) (15.2) 12.6 3.5
Cost / income ratio (%) 67.1 64.5 68.2
Net new money growth (%) 2.8 2.3 3.9
Gross margin on invested assets (bps) 77 84 85 (8)
Net margin on invested assets (bps) 25 30 27 (17)

78
Wealth Management (continued)1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Additional information
Recurring income8 5,880 6,146 5,949 (4)
Recurring income as a percentage of income (%) 80.6 75.4 75.3
Average attributed equity (CHF billion)9 3.5 3.5 3.4 0
Return on attributed equity (%) 56.1 77.4 67.9

Financial and operating performance

Risk-weighted assets (fully applied, CHF billion)10 25.8 25.3 25.4 2
Return on risk-weighted assets, gross (%)11 28.1 31.7 34.5
Leverage ratio denominator (fully applied, CHF billion)12 115.5 119.0 138.3 (3)
Goodwill and intangible assets (CHF billion) 1.3 1.3 1.4 0
Net new money (CHF billion) 26.8 12.9 34.4
Net new money adjusted (CHF billion)13 26.8 22.8 34.4
Invested assets (CHF billion) 977 947 987 3
Client assets (CHF billion) 1,157 1,122 1,160 3
Loans, gross (CHF billion) 101.9 105.2 112.7 (3)
Due to customers (CHF billion) 192.3 172.3 191.3 12
Personnel (full-time equivalents) 9,721 10,239 10,337 (5)
Client advisors (full-time equivalents) 3,859 4,019 4,250 (4)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Refer to “Note 30 Changes in organization
and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 5 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 6 Reflects
a gain on the sale of our investment in Visa Europe. 7 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 8 Recurring income consists of net interest
income and recurring net fee income. 9 Refer to the “Capital management” section of this report for more information. 10 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 11 Based on fully applied RWA. 12 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 13 Adjusted net new money excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization
program.

Regional breakdown of key figures1,2

of which: ultra high of which: Global
As of or for the year ended 31.12.16 Europe Asia Pacific Switzerland Emerging markets net worth Family Office3
Net new money (CHF billion) 8.1 20.8 5.0 (6.2) 27.3 11.2
Net new money growth (%) 2.4 7.6 2.9 (4.0) 5.4 14.7
Invested assets (CHF billion) 353 292 180 149 552 94
Gross margin on invested assets (bps) 69 72 86 96 52 474
Client advisors (full-time equivalents) 1,317 1,016 744 681 8055
1 Refer to the "Measurement of performance” section of this report for the definitions of our key performance indicators. 2 Based on the Wealth Management business area structure and excluding minor functions
with 101 client advisors, CHF 3 billion of invested assets, and CHF 0.9 billion of net new money outflows in 2016. 3 Joint venture between Wealth Management and the Investment Bank. Global Family Office is reported
as a sub-segment of ultra high net worth and is included in the ultra high net worth figures. 4 Gross margin includes income booked in the Investment Bank. Gross margin only based on income booked in Wealth
Management is 28 basis points. 5 Represents client advisors who exclusively serve ultra high net worth clients. In addition to these, other client advisors may also serve certain ultra high net worth clients, but not
exclusively.

79
Financial and operating performance
Wealth Management

2016 compared with 2015 General and administrative expenses increased by CHF 3 mil-
lion to CHF 640 million, and adjusted general and administrative
expenses decreased by CHF 14 million to CHF 585 million. This
Results was driven by a CHF 35 million decrease in net expenses for provi-
sions for litigation, regulatory and similar matters, partly offset by
Profit before tax decreased by CHF 741 million or 28% to CHF higher professional fees.
1,948 million and adjusted profit before tax decreased by CHF Net expenses for services from Corporate Center and other
431 million or 15% to CHF 2,397 million, reflecting lower operat- business divisions increased by CHF 59 million to CHF 2,348 mil-
ing income, partly offset by decreased operating expenses. lion and adjusted net expenses for services decreased by CHF 15
million to CHF 2,009 million, mainly reflecting lower expenses
Operating income from Group Operations partly offset by higher occupancy
Total operating income decreased by CHF 864 million or 11% to expenses from Group Corporate Services.
CHF 7,291 million. 2016 included a loss on the sale of subsidiaries
and businesses of CHF 23 million and a gain of CHF 21 million on Net new money
the sale of our investment in Visa Europe. 2015 included net gains Net new money was CHF 26.8 billion compared with adjusted net
of CHF 169 million on the sale of subsidiaries and businesses and new money of CHF 22.8 billion in the prior year, which excluded
a CHF 15 million gain related to our investment in the SIX Group. the negative effect of CHF 9.9 billion from our balance sheet and
Excluding these items, adjusted operating income decreased by capital optimization program. The net new money growth rate
CHF 678 million or 9% to CHF 7,293 million, mainly due to lower was 2.8% compared with an adjusted growth rate of 2.3%, and
transaction-based income and recurring net fee income. was below our target range of 3% to 5%. Net new money was
Net interest income increased by CHF 5 million to CHF 2,331 driven predominantly by inflows in Asia Pacific, but also Europe
million, mainly due to higher deposit revenues, partly offset by and Switzerland, partly offset by outflows in emerging markets,
lower treasury-related income from Corporate Center – Group mainly due to cross-border outflows. Total cross-border outflows
Asset and Liability Management (Group ALM). were CHF 14 billion compared with CHF 8 billion, mainly driven by
Recurring net fee income decreased by CHF 272 million to CHF outflows in emerging markets. On a global basis, net new money
3,548 million due to the effects of cross-border outflows and from ultra high net worth clients was CHF 27.3 billion compared
shifts into retrocession-free products, changes in clients’ asset with adjusted net new money of CHF 23.4 billion.
allocation and the effect of our exit from the Australian and Bel-
gian domestic businesses. This was partly offset by the effects of Invested assets
increases in discretionary and advisory mandate penetration and Invested assets increased by CHF 30 billion to CHF 977 billion,
pricing measures. primarily reflecting net new money of CHF 27 billion and positive
Transaction-based income decreased by CHF 381 million to market performance of CHF 19 billion, partly offset by a CHF 13
CHF 1,397 million across all regions and most products, mainly billion decrease due to the sale of subsidiaries and businesses that
due to reduced client activity, most notably in Asia Pacific and did not affect net new money, and negative foreign currency
emerging markets. Additionally, 2015 included a fee of CHF 45 translation effects of CHF 1 billion. Discretionary and advisory
million received from Personal & Corporate Banking for the shift mandate penetration increased to 26.9% from 26.4%.
of clients, as a result of a detailed client segmentation review.
Other income decreased by CHF 211 million to CHF 20 million, Cost / income ratio
mainly related to the aforementioned net gains on the sale of The cost / income ratio increased to 73.2% from 67.0%. On an
subsidiaries and businesses in 2015. adjusted basis, the ratio increased to 67.1% from 64.5% and was
above our target range of 55% to 65%.
Operating expenses
Total operating expenses decreased by CHF 122 million or 2% to Personnel
CHF 5,343 million and adjusted operating expenses decreased by Wealth Management employed 9,721 personnel compared with
CHF 246 million or 5% to CHF 4,896 million. 10,239. The number of client advisors decreased by 160 to 3,859
Personnel expenses decreased by CHF 183 million to CHF and the number of non-client facing staff decreased by 358 to
2,349 million and adjusted personnel expenses decreased by CHF 5,862, both driven by our cost reduction programs and our exit
216 million to CHF 2,296 million, driven by a decrease in staff from the Australian domestic business. Of the aforementioned
levels and lower variable compensation expenses, as well as lower decrease in client advisors, 82 were related to our exit from the
pension costs for our Swiss pension plan, reflecting the effect of Australian domestic business.
changes to demographic and financial assumptions.

80
2015 compared with 2014 tive expenses decreased by CHF 271 million to CHF 599 million,
mainly due to the aforementioned decreased net expenses for
provisions for litigation, regulatory and similar matters.
Results Net expenses for services from other business divisions and
Corporate Center increased by CHF 109 million to CHF 2,289 mil-
Profit before tax increased by CHF 363 million or 16% to CHF lion and adjusted net expenses for services decreased by CHF 37
2,689 million and adjusted profit before tax increased by CHF 317 million to CHF 2,024 million, mainly due to lower expenses from
million or 13% to CHF 2,828 million, reflecting lower operating Group Operations and Group Corporate Services, partly offset by
expenses and higher operating income. higher expenses from Group ALM.

Financial and operating performance

Operating income Net new money
Total operating income increased by CHF 254 million or 3% to Adjusted net new money, which excludes net outflows of CHF
CHF 8,155 million. Excluding net gains of CHF 169 million on the 9.9 billion from our balance sheet and capital optimization pro-
sale of subsidiaries and businesses and a CHF 15 million gain gram, was CHF 22.8 billion and was driven by inflows in Asia
related to our investment in the SIX Group, adjusted operating Pacific, Switzerland and Europe, partly offset by outflows in
income increased by CHF 70 million or 1% to CHF 7,971 million, emerging markets. This resulted in an adjusted net new money
mainly due to higher net interest income and recurring net fee growth rate of 2.3% compared with 3.9%, below our target
income, partly offset by lower transaction-based income. range of 3% to 5%. Adjusted net new money was negatively
Net interest income increased by CHF 161 million to CHF 2,326 affected by client deleveraging and cross-border outflows. On a
million, mainly due to higher lending revenues and an increase in global basis, adjusted net new money from ultra high net worth
allocated revenues from Corporate Center – Group Asset and clients was CHF 23.4 billion compared with CHF 29.8 billion. On
Liability Management (Group ALM). a reported basis, total net new money was CHF 12.9 billion from
Recurring net fee income increased by CHF 37 million to CHF CHF 34.4 billion.
3,820 million, reflecting the positive effects of a continued
increase in discretionary and advisory mandate penetration and Invested assets
pricing measures, partly offset by lower income due to the ongo- Invested assets decreased by CHF 40 billion to CHF 947 billion due
ing effects of cross-border outflows. to foreign currency translation effects of CHF 25 billion, a CHF 16
Transaction-based income decreased by CHF 150 million to billion reduction due to the aforementioned sale of subsidiaries
CHF 1,778 million across all regions, mainly due to reduced client and businesses that did not affect net new money and negative
activity, most notably in Europe and emerging markets. The over- market performance of CHF 9 billion, partly offset by net new
all decrease was mainly related to investment funds, fixed income money inflows of CHF 13 billion, which included net outflows of
cash products and structured products, partly offset by higher for- CHF 10 billion from our balance sheet and capital optimization
eign exchange trading and mandate revenues. Transaction-based program. Discretionary and advisory mandate penetration
revenues allocated from Group ALM also decreased. These increased to 26.4% compared with 24.4%.
decreases were partly offset by a fee of CHF 45 million received
from Personal & Corporate Banking for the shift of clients as a Cost / income ratio
result of a detailed client segmentation review. The cost / income ratio was 67.0% compared with 70.5%. On an
Other income increased by CHF 206 million to CHF 231 mil- adjusted basis, the cost / income ratio was 64.5% compared with
lion, mainly related to the aforementioned net gains. 68.2% and was within our target range of 55% to 65%.

Operating expenses Personnel

Total operating expenses decreased by CHF 109 million or 2% to Wealth Management employed 10,239 personnel as of 31 Decem-
CHF 5,465 million and adjusted operating expenses decreased by ber 2015 compared with 10,337 as of 31 December 2014.
CHF 247 million or 5% to CHF 5,142 million, mainly as net The number of client advisors decreased by 231 to 4,019 with
expenses for provisions for litigation, regulatory and similar mat- reductions in Europe, Asia Pacific and emerging markets, mainly
ters declined to CHF 104 million from CHF 394 million. due to a reduction in the number of lower-producing advisors and
Personnel expenses increased by CHF 65 million to CHF 2,532 the reclassification of certain staff from client advisors to non-­
million and adjusted personnel expenses increased by CHF 63 mil- client facing staff.
lion to CHF 2,512 million, mainly due to higher pension-related The number of non-client facing staff increased by 133 to
costs and increased expenses for variable compensation, as well 6,220, mainly due to hiring for our strategic and regulatory pri-
as salary increases, partly offset by favorable foreign currency orities, the shift of a team of real estate financing experts from
translation effects and the effect of personnel reductions. Personal & Corporate Banking to Wealth Management, and the
General and administrative expenses decreased by CHF 281 aforementioned reclassification, partly offset by the effect of the
million to CHF 637 million, and adjusted general and administra- sale of subsidiaries and businesses in 2015.

81
Financial and operating performance
Wealth Management Americas

Wealth Management Americas

Wealth Management Americas – in US dollars1
As of or for the year ended % change from
USD million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Net interest income 1,484 1,215 1,067 22
Recurring net fee income2 4,880 4,795 4,666 2
Transaction-based income3 1,474 1,614 1,825 (9)
Other income 35 32 33 9
Income 7,873 7,657 7,590 3
Credit loss (expense) / recovery (3) (4) 16 (25)
Total operating income 7,871 7,653 7,606 3
Personnel expenses 4,874 4,746 4,741 3
Financial advisor compensation4 2,931 2,921 2,944 0
Compensation commitments with recruited financial advisors5 808 761 733 6
Salaries and other personnel costs 1,135 1,064 1,063 7
General and administrative expenses 576 845 597 (32)
Services (to) / from Corporate Center and other business divisions 1,250 1,252 1,234 0
of which: services from CC – Services 1,236 1,236 1,217 0
Depreciation and impairment of property, equipment and software 2 3 0 (33)
Amortization and impairment of intangible assets 50 53 52 (6)
Total operating expenses6 6,752 6,899 6,625 (2)
Business division operating profit / (loss) before tax 1,118 754 981 48

Adjusted results7
Total operating income as reported 7,871 7,653 7,606 3
of which: gains on sale of financial assets available for sale 10
Total operating income (adjusted) 7,861 7,653 7,606 3
Total operating expenses as reported 6,752 6,899 6,625 (2)
of which: personnel-related restructuring expenses 7 0 0
of which: non-personnel-related restructuring expenses 0 0 0
of which: restructuring expenses allocated from CC – Services 134 141 59
of which: a gain related to a change to retiree benefit plans in the US (21) (10)
Total operating expenses (adjusted) 6,610 6,779 6,576 (2)
Business division operating profit / (loss) before tax as reported 1,118 754 981 48
Business division operating profit / (loss) before tax (adjusted) 1,250 874 1,030 43

Key performance indicators8

Pre-tax profit growth (%) 48.3 (23.1) 5.8
Cost / income ratio (%) 85.8 90.1 87.3
Net new money growth (%) 1.5 2.1 1.0
Gross margin on invested assets (bps) 73 74 76 (1)
Net margin on invested assets (bps) 10 7 10 43

Adjusted key performance indicators7,8

Pre-tax profit growth (%) 43.0 (15.1) 3.9
Cost / income ratio (%) 84.1 88.5 86.6
Net new money growth (%) 1.5 2.1 1.0
Gross margin on invested assets (bps) 73 74 76 (1)
Net margin on invested assets (bps) 12 8 10 50

82
Wealth Management Americas – in US dollars (continued)1
As of or for the year ended % change from
USD million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Additional information
Recurring income9 6,364 6,010 5,733 6
Recurring income as a percentage of income (%) 80.8 78.5 75.5
Average attributed equity (USD billion)10 2.6 2.6 2.9 0
Return on attributed equity (%) 43.0 29.3 33.8

Financial and operating performance

Risk-weighted assets (fully applied, USD billion)11 23.4 21.9 21.8 7
Return on risk-weighted assets, gross (%)12 33.9 34.0 29.4
Leverage ratio denominator (fully applied, USD billion)13 66.9 62.8 63.7 7
Goodwill and intangible assets (USD billion) 3.7 3.7 3.8 0
Net new money (USD billion) 15.4 21.4 10.0
Net new money including interest and dividend income (USD billion)14 40.8 47.8 37.2
Invested assets (USD billion) 1,111 1,033 1,032 8
Client assets (USD billion) 1,160 1,084 1,087 7
Loans, gross (USD billion) 51.6 48.7 44.6 6
Due to customers (USD billion) 89.2 83.1 73.5 7
Recruitment loans to financial advisors 3,033 3,179 2,925 (5)
Other loans to financial advisors 462 418 374 11
Personnel (full-time equivalents) 13,526 13,611 13,322 (1)
Financial advisors (full-time equivalents) 7,025 7,140 6,997 (2)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor compensation consists of
grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other
variables. 5 Compensation commitments with recruited financial advisors represents expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting
requirements. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 7 Adjusted results are non-GAAP
financial measures as defined by SEC regulations. 8 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 9 Recurring income consists of net interest
income and recurring net fee income. 10 Refer to the “Capital management” section of this report for more information. 11 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 12 Based on fully applied RWA. 13 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 14 Presented in line with historical reporting practice in the US market.

83
Financial and operating performance
Wealth Management Americas

2016 compared with 2015 million to USD 4,867 million, mainly due to higher salary costs
and other personnel costs due to an increase in support staff, as
well as higher expenses for compensation commitments, reflect-
Results ing the recruitment of financial advisors.
General and administrative expenses decreased by USD 269
Profit before tax increased by USD 364 million or 48% to USD million to USD 576 million, mainly due to the aforementioned
1,118 million, and adjusted profit before tax increased by USD reduction in net expenses for provisions for litigation, regulatory
376 million or 43% to USD 1,250 million due to higher operating and similar matters.
income and lower operating expenses.
Cost / income ratio
Operating income The cost / income ratio was 85.8% compared with 90.1%. On an
Total operating income increased by USD 218 million or 3% to adjusted basis, the cost / income ratio was 84.1% compared with
USD 7,871 million. Adjusted operating income increased by USD 88.5% and was within our target range of 75% to 85%.
208 million or 3% to USD 7,861 million, due to higher net interest
income and recurring net fee income, partly offset by lower trans- Net new money
action-based income. Net new money was USD 15.4 billion compared with USD 21.4
Net interest income increased by USD 269 million to USD billion, reflecting lower inflows from financial advisors employed
1,484 million, due to higher short-term interest rates and growth with UBS for more than one year. The net new money growth rate
in loan and deposit balances. The average mortgage portfolio bal- was 1.5% compared with 2.1%, and was below our target range
ance increased 12% and the average securities-backed lending of 2% to 4%.
portfolio balance increased 6%.
Recurring net fee income increased by USD 85 million to USD Invested assets
4,880 million, mainly due to increased managed account fees, Invested assets increased by USD 78 billion to USD 1,111 billion,
reflecting higher invested asset levels. reflecting positive market performance of USD 62 billion and net
Transaction-based income decreased by USD 140 million to new money inflows of USD 15 billion. Managed account assets
USD 1,474 million, primarily due to lower client activity levels. increased by USD 35 billion to USD 386 billion and comprised
34.7% of invested assets compared with 34.0%.
Operating expenses
Operating expenses decreased by USD 147 million or 2% to USD Personnel
6,752 million and adjusted operating expenses decreased by USD
169 million or 2% to USD 6,610 million, due to USD 260 million As of 31 December 2016, Wealth Management Americas
lower net expenses for provisions for litigation, regulatory and sim- employed 13,526 personnel, a decrease of 85 from 31 December
ilar matters, partly offset by higher adjusted personnel expenses. 2015. Financial advisor headcount decreased by 115 to 7,025,
Personnel expenses increased by USD 128 million to USD 4,874 due to attrition. Non-financial advisor headcount increased by 30
million and adjusted personnel expenses increased by USD 101 to 6,501.

84
2015 compared with 2014 commitments for recruited financial advisors, partly offset by
lower financial advisor compensation, reflecting lower compen-
sable revenues.
Results General and administrative expenses increased by USD 248
million to USD 845 million, mainly as the net expenses for provi-
Profit before tax was USD 754 million compared with USD 981 sions for litigation, regulatory and similar matters increased to
million, mainly reflecting higher net expenses for provisions for USD 356 million from USD 178 million. Furthermore, we recorded
litigation, regulatory and similar matters. Adjusted profit before higher expenses for other provisions and increased legal fees.
tax decreased to USD 874 million from USD 1,030 million. Net expenses for services from Corporate Center and other

Financial and operating performance

business divisions increased by USD 18 million to USD 1,252 mil-
Operating income lion and adjusted net expenses for services decreased by USD 64
Total operating income increased by USD 47 million to USD 7,653 million to USD 1,113 million, reflecting lower expenses from Cor-
million due to higher net interest income and continued growth porate Center – Services.
in managed account fees, partly offset by lower transaction-based
income and a net credit loss expense in 2015 compared with a net Cost / income ratio
credit loss recovery in 2014. The cost / income ratio was 90.1% compared with 87.3%. On an
Net interest income increased by USD 148 million to USD adjusted basis, the cost / income ratio was 88.5% compared with
1,215 million, reflecting continued growth in loan and deposit 86.6% and was above our target range of 75% to 85%.
balances. The average mortgage portfolio balance increased 16%
and the average securities-backed lending portfolio balance Net new money
increased 12%. Net new money was USD 21.4 billion, reflecting strong inflows
Recurring net fee income increased by USD 129 million to USD from advisors who have been with the firm for more than one
4,795 million, mainly due to increased managed account fees, year, as well as net inflows from newly recruited advisors. Net new
reflecting higher invested asset levels. money growth was 2.1% compared with 1.0%, within our target
Transaction-based income decreased by USD 211 million to range of 2% to 4%.
USD 1,614 million, primarily due to lower client activity.
We incurred a net credit loss expense of USD 4 million com- Invested assets
pared with a net recovery of USD 16 million. The 2014 net recov- Invested assets increased by USD 1 billion to USD 1,033 billion,
ery included the full release of a loan loss allowance for a single reflecting strong net new money inflows of USD 21 billion, mostly
client as well as releases of loan loss allowances on securities- offset by negative market performance of USD 20 billion. Managed
backed lending facilities collateralized by Puerto Rico municipal account assets increased by USD 5 billion to USD 351 billion and
securities and related funds. comprised 34% of invested assets, unchanged from 31 December
2014.
Operating expenses
Operating expenses increased by USD 274 million or 4% to USD Personnel
6,899 million. Adjusted operating expenses increased by USD 203
million or 3% to USD 6,779 million, primarily due to USD 178 mil- As of 31 December 2015, Wealth Management Americas
lion higher net expenses for provisions for litigation, regulatory and employed 13,611 personnel, an increase of 289 from 31 Decem-
similar matters, and an increase in other provisions and legal fees, ber 2014. Financial advisor headcount increased by 143 to 7,140,
partly offset by lower expenses from Corporate Center – Services. reflecting the hiring of experienced financial advisors and contin-
Personnel expenses increased by USD 5 million to USD 4,746 ued low financial advisor attrition. Non-financial advisor head-
million and adjusted personnel expenses increased by USD 18 mil- count increased by 146 to 6,471, due to an increase in financial
lion to USD 4,766 million, mainly due to higher compensation advisor support staff.

85
Financial and operating performance
Wealth Management Americas

Wealth Management Americas – in Swiss francs1

As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Net interest income 1,467 1,174 983 25
Recurring net fee income2 4,825 4,623 4,294 4
Transaction-based income3 1,458 1,555 1,678 (6)
Other income 35 31 30 13
Income 7,785 7,384 6,984 5
Credit loss (expense) / recovery (3) (4) 15 (25)
Total operating income 7,782 7,381 6,998 5
Personnel expenses 4,819 4,579 4,363 5
Financial advisor compensation4 2,898 2,817 2,710 3
Compensation commitments with recruited financial advisors5 799 735 675 9
Salaries and other personnel costs 1,122 1,027 979 9
General and administrative expenses 570 822 550 (31)
Services (to) / from Corporate Center and other business divisions 1,235 1,209 1,137 2
of which: services from CC – Services 1,221 1,193 1,121 2
Depreciation and impairment of property, equipment and software 2 3 0 (33)
Amortization and impairment of intangible assets 50 51 48 (2)
Total operating expenses6 6,675 6,663 6,099 0
Business division operating profit / (loss) before tax 1,107 718 900 54

Adjusted results7
Total operating income as reported 7,782 7,381 6,998 5
of which: gains on sale of financial assets available for sale 10
Total operating income (adjusted) 7,772 7,381 6,998 5
Total operating expenses as reported 6,675 6,663 6,099 0
of which: personnel-related restructuring expenses 7 0 0
of which: non-personnel-related restructuring expenses 0 0 0
of which: restructuring expenses allocated from CC – Services 132 137 55
of which: a gain related to a change to retiree benefit plans in the US (21) (9)
Total operating expenses (adjusted) 6,536 6,547 6,053 0
Business division operating profit / (loss) before tax as reported 1,107 718 900 54
Business division operating profit / (loss) before tax (adjusted) 1,236 834 946 48

Key performance indicators8

Pre-tax profit growth (%) 54.2 (20.2) 4.9
Cost / income ratio (%) 85.7 90.2 87.3
Net new money growth (%) 1.5 2.1 1.1
Gross margin on invested assets (bps) 74 74 76 0
Net margin on invested assets (bps) 10 7 10 43

Adjusted key performance indicators7,8

Pre-tax profit growth (%) 48.2 (11.8) 3.2
Cost / income ratio (%) 84.1 88.7 86.7
Net new money growth (%) 1.5 2.1 1.1
Gross margin on invested assets (bps) 74 74 76 0
Net margin on invested assets (bps) 12 8 10 50

86
Wealth Management Americas – in Swiss francs (continued)1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Additional information
Recurring income9 6,292 5,798 5,276 9
Recurring income as a percentage of income (%) 80.8 78.5 75.5
Average attributed equity (CHF billion)10 2.6 2.5 2.7 4
Return on attributed equity (%) 43.4 29.0 33.6

Financial and operating performance

Risk-weighted assets (fully applied, CHF billion)11 23.8 21.9 21.7 9
Return on risk-weighted assets, gross (%)12 34.3 33.8 29.7
Leverage ratio denominator (fully applied, CHF billion)13 68.1 62.9 63.3 8
Goodwill and intangible assets (CHF billion) 3.7 3.7 3.7 0
Net new money (CHF billion) 15.4 21.3 9.6
Net new money including interest and dividend income (CHF billion)14 40.5 46.9 35.0
Invested assets (CHF billion) 1,131 1,035 1,027 9
Client assets (CHF billion) 1,181 1,085 1,081 9
Loans, gross (CHF billion) 52.5 48.8 44.4 8
Due to customers (CHF billion) 90.8 83.2 73.1 9
Recruitment loans to financial advisors 3,087 3,184 2,909 (3)
Other loans to financial advisors 471 418 372 13
Personnel (full-time equivalents) 13,526 13,611 13,322 (1)
Financial advisors (full-time equivalents) 7,025 7,140 6,997 (2)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor compensation consists of
grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other
variables. 5 Compensation commitments with recruited financial advisors represents expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting
requirements. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 7 Adjusted results are non-GAAP
financial measures as defined by SEC regulations. 8 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 9 Recurring income consists of net interest
income and recurring net fee income. 10 Refer to the “Capital management” section of this report for more information. 11 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 12 Based on fully applied RWA. 13 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 14 Presented in line with historical reporting practice in the US market.

87
Financial and operating performance
Personal & Corporate Banking

Personal & Corporate Banking

Personal & Corporate Banking1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Net interest income 2,199 2,270 2,184 (3)
Recurring net fee income2 553 544 556 2
Transaction-based income3 1,028 959 1,022 7
Other income 211 140 75 51
Income 3,990 3,913 3,836 2
Credit loss (expense) / recovery (6) (37) (95) (84)
Total operating income 3,984 3,877 3,741 3
Personnel expenses 845 873 850 (3)
General and administrative expenses 285 264 293 8
Services (to) / from Corporate Center and other business divisions 1,080 1,077 1,074 0
of which: services from CC – Services 1,186 1,180 1,196 1
Depreciation and impairment of property, equipment and software 15 17 17 (12)
Amortization and impairment of intangible assets 0 0 0
Total operating expenses4 2,224 2,231 2,235 0
Business division operating profit / (loss) before tax 1,760 1,646 1,506 7

Adjusted results5
Total operating income as reported 3,984 3,877 3,741 3
of which: gains related to investments in associates 21 66
of which: gains on sale of financial assets available for sale6 102
Total operating income (adjusted) 3,861 3,811 3,741 1
Total operating expenses as reported 2,224 2,231 2,235 0
of which: personnel-related restructuring expenses 4 2 4
of which: non-personnel-related restructuring expenses 0 0 0
of which: restructuring expenses allocated from CC – Services 113 99 60
Total operating expenses (adjusted) 2,107 2,130 2,171 (1)
Business division operating profit / (loss) before tax as reported 1,760 1,646 1,506 7
Business division operating profit / (loss) before tax (adjusted) 1,754 1,681 1,570 4

Key performance indicators7

Pre-tax profit growth (%) 6.9 9.3 3.3
Cost / income ratio (%) 55.7 57.0 58.3
Net interest margin (bps) 163 167 159 (2)
Net new business volume growth for personal banking (%) 3.1 2.4 2.3

Adjusted key performance indicators5,7

Pre-tax profit growth (%) 4.3 7.1 3.8
Cost / income ratio (%) 54.5 55.4 56.6
Net interest margin (bps) 163 167 159 (2)
Net new business volume growth for personal banking (%) 3.1 2.4 2.3

88
Personal & Corporate Banking (continued)1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Additional information
Average attributed equity (CHF billion)8 4.1 3.9 4.1 5
Return on attributed equity (%) 43.2 41.9 36.7
Risk-weighted assets (fully applied, CHF billion)9 41.6 34.6 33.1 20
Return on risk-weighted assets, gross (%)10 10.4 11.3 11.8

Financial and operating performance

Leverage ratio denominator (fully applied, CHF billion)11 152.2 153.8 165.9 (1)
Goodwill and intangible assets (CHF billion) 0.0 0.0 0.0
Business volume for personal banking (CHF billion) 149 148 143 1
Net new business volume for personal banking (CHF billion) 4.6 3.4 3.2
Client assets (CHF billion) 466 444 434 5
Due to customers (CHF billion) 135.9 132.4 137.3 3
Loans, gross (CHF billion) 133.9 135.6 137.4 (1)
Secured loan portfolio as a percentage of total loan portfolio, gross (%) 92.9 93.9 93.1
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)12 0.6 0.6 0.8
Personnel (full-time equivalents) 5,143 5,058 5,206 2
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Refer to “Note 30 Changes in organization
and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 5 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 6 Reflects
a gain on the sale of our investment in Visa Europe. 7 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 8 Refer to the “Capital management”
section of this report for more information. 9 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more
information. 10 Based on fully applied RWA. 11 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the
leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully
comparable. 12 Refer to the “Risk management and control” section of this report for more information on impaired loan exposures.

89
Financial and operating performance
Personal & Corporate Banking

2016 compared with 2015 Operating expenses

Operating expenses decreased by CHF 7 million to CHF 2,224 mil-
lion and adjusted operating expenses decreased by CHF 23 million
Results to CHF 2,107 million.
Personnel expenses decreased by CHF 28 million to CHF 845
Profit before tax increased by CHF 114 million or 7% to CHF million, mainly due to lower pension costs for our Swiss pension
1,760 million. Adjusted profit before tax increased by CHF 73 mil- plan, reflecting the effect of changes to demographic and finan-
lion or 4% to CHF 1,754 million, due to higher operating income cial assumptions, as well as lower variable compensation expenses.
and lower operating expenses. This was partly offset by higher expenses due to a shift of staff
from Wealth Management to Personal & Corporate Banking.
Operating income General and administrative expenses increased by CHF 21 mil-
Total operating income increased by CHF 107 million or 3% to lion to CHF 285 million, mainly reflecting higher capital-related
CHF 3,984 million. 2016 included a gain on the sale of our invest- levies in Switzerland.
ment in Visa Europe of CHF 102 million, as well as gains related Net expenses for services from Corporate Center and other
to investments in associates of CHF 21 million, compared with business divisions increased by CHF 3 million to CHF 1,080 mil-
CHF 66 million. Excluding these items, adjusted operating income lion. Adjusted net expenses decreased by CHF 11 million to CHF
increased by CHF 50 million to CHF 3,861 million, mainly reflect- 967 million, mainly reflecting lower allocations from Group Oper-
ing higher transaction-based income and a lower net credit loss ations and Group Technology.
expense, partly offset by decreased net interest income.
Net interest income decreased by CHF 71 million to CHF 2,199 Cost / income ratio
million, mainly due to lower treasury-related income from Corpo- The cost / income ratio decreased to 55.7% from 57.0%. On an
rate Center – Group Asset and Liability Management (Group adjusted basis, the ratio decreased to 54.5% compared with
ALM) and lower deposit-related income driven by the adverse 55.4% and remained within our target range of 50% to 60%.
effect of persistently low interest rates on our replication portfo-
lios. This was partly offset by higher loan-related income. Net interest margin
➔➔Refer to the “Corporate Center – Group Asset and Liability The net interest margin decreased 4 basis points to 163 basis
Management” section in “Financial and operating performance” points on both a reported and adjusted basis, and remained
of this report for more information within our target range of 140 to 180 basis points.

Recurring net fee income increased by CHF 9 million to CHF Net new business volume growth for personal banking
553 million, mainly reflecting higher account-keeping fees partly The net new business volume growth rate for our personal bank-
offset by lower fee income allocated from Group ALM for the ing business was 3.1% compared with 2.4% and remained within
provision of collateral in relation to issued covered bonds. our target range of 1% to 4%. Net new client assets and, to a
Transaction-based income increased by CHF 69 million to CHF lesser extent, net new loans were positive.
1,028 million, mainly as 2015 included a fee of CHF 45 million
paid to Wealth Management for the shift of clients as a result of Personnel
a detailed client segmentation review. Additionally, 2016 included
higher fees from corporate finance activity. Personal & Corporate Banking employed 5,143 personnel as of
Other income increased by CHF 71 million to CHF 211 million, 31 December 2016, an increase of 85 compared with 5,058 per-
mainly due to the aforementioned gains on the sale of our invest- sonnel as of 31 December 2015, mainly reflecting a shift of staff
ment in Visa Europe and investments in associates. from Wealth Management to Personal & Corporate Banking.
We recorded a net credit loss expense of CHF 6 million com-
pared with CHF 37 million, mainly due to higher net recoveries on
existing impaired positions.
➔➔Refer to the “Risk management and control” section of this
report for more information

90
2015 compared with 2014 Operating expenses
Operating expenses decreased by CHF 4 million to CHF 2,231 mil-
lion and adjusted operating expenses decreased by CHF 41 million
Results or 2% to CHF 2,130 million.
Personnel expenses increased by CHF 23 million to CHF 873
Profit before tax increased by CHF 140 million or 9% to CHF million, mainly reflecting increased expenses for variable compen-
1,646 million. Adjusted profit before tax increased by CHF 111 sation and higher pension-related costs.
million or 7% to CHF 1,681 million, reflecting higher operating General and administrative expenses decreased by CHF 29 mil-
income and lower operating expenses. lion to CHF 264 million, mainly reflecting a net release of CHF 2

Financial and operating performance

million of provisions for litigation, regulatory and similar matters
Operating income compared with net expenses of CHF 59 million in the prior year.
Total operating income increased by CHF 136 million to CHF This was partly offset by higher marketing expenses, which
3,877 million and included a gain of CHF 66 million related to our included a one-time reversal of an accrual in 2014.
investment in the SIX Group. Excluding this gain, adjusted operat- Net expenses for services from Corporate Center and other
ing income increased by CHF 70 million to CHF 3,811 million, business divisions increased by CHF 3 million to CHF 1,077 mil-
reflecting higher net interest income and a lower net credit loss lion. Adjusted net expenses for services decreased by CHF 36 mil-
expense, partly offset by decreased transaction-based and recur- lion to CHF 978 million, reflecting lower expenses from Group
ring net fee income. Operations and Group Corporate Services, partly offset by higher
Net interest income increased by CHF 86 million to CHF 2,270 expenses from Group Technology.
million, primarily due to higher income from loans and deposits,
reflecting our pricing measures. Cost / income ratio
Recurring net fee income decreased by CHF 12 million to CHF The cost / income ratio was 57.0% compared with 58.3%. On an
544 million, mainly reflecting lower treasury-related income from adjusted basis, the cost / income ratio was 55.4% compared with
Group ALM for the provision of collateral in relation to issued 56.6% and remained within our target range of 50% to 60%.
covered bonds, as well as decreased revenues from non-asset-
based products. This was partly offset by increased revenues for Net interest margin
account keeping, banking packages and custody services. The net interest margin increased 8 basis points to 167 basis
Transaction-based income decreased by CHF 63 million to CHF points and remained within our target range of 140 to 180 basis
959 million, mainly driven by a fee of CHF 45 million paid to points.
Wealth Management for the shift of clients as a result of a detailed
client segmentation review, as well as lower credit card fees. Net new business volume growth for personal banking
Other income increased by CHF 65 million to CHF 140 million, The net new business volume growth rate for our personal bank-
mainly due to the aforementioned gain related to our investment ing business was 2.4% compared with 2.3% and remained within
in the SIX Group. our target range of 1% to 4%. Net new client assets were positive
We recorded a net credit loss expense of CHF 37 million com- while net new loans were slightly negative.
pared with CHF 95 million, predominantly due to lower expenses
for newly impaired positions. Personnel

Personal & Corporate Banking employed 5,058 personnel as of

31 December 2015, a decrease of 148 compared with 5,206 per-
sonnel as of 31 December 2014, reflecting the shift of a team of
real estate financing experts from Personal & Corporate Banking
to Wealth Management, as well as staff reductions, including
those related to our ongoing cost reduction programs.

91
Financial and operating performance
Asset Management

Asset Management
Asset Management1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Net management fees2 1,810 1,903 1,756 (5)
Performance fees 122 154 146 (21)
Total operating income 1,931 2,057 1,902 (6)
Personnel expenses 727 729 643 0
General and administrative expenses 241 232 305 4
Services (to) / from Corporate Center and other business divisions 506 502 478 1
of which: services from CC – Services 530 523 495 1
Depreciation and impairment of property, equipment and software 1 2 2 (50)
Amortization and impairment of intangible assets 4 8 9 (50)
Total operating expenses3 1,479 1,474 1,435 0
Business division operating profit / (loss) before tax 452 584 467 (23)

Adjusted results4
Total operating income as reported 1,931 2,057 1,902 (6)
of which: gains / (losses) on sales of subsidiaries and businesses 56
Total operating income (adjusted) 1,931 2,001 1,902 (3)
Total operating expenses as reported 1,479 1,474 1,435 0
of which: personnel-related restructuring expenses 15 4 19
of which: non-personnel-related restructuring expenses 15 11 2
of which: restructuring expenses allocated from CC – Services 70 68 30
of which: a gain related to a change to retiree benefit plans in the US (8)
Total operating expenses (adjusted) 1,379 1,392 1,393 (1)
Business division operating profit / (loss) before tax as reported 452 584 467 (23)
Business division operating profit / (loss) before tax (adjusted) 552 610 509 (10)

Key performance indicators5

Pre-tax profit growth (%) (22.6) 25.1 (18.9)
Cost / income ratio (%) 76.6 71.7 75.4
Net new money growth excluding money market flows (%) (3.8) (0.1) 4.4
Gross margin on invested assets (bps) 30 32 31 (6)
Net margin on invested assets (bps) 7 9 8 (22)

Adjusted key performance indicators4,5

Pre-tax profit growth (%) (9.5) 19.8 (13.0)
Cost / income ratio (%) 71.4 69.6 73.2
Net new money growth excluding money market flows (%) (3.8) (0.1) 4.4
Gross margin on invested assets (bps) 30 31 31 (3)
Net margin on invested assets (bps) 9 9 8 0

Information by business line

Operating income
Equities, Multi Asset & O’Connor 888 921 862 (4)
Fixed Income 297 292 332 2
Global Real Estate 444 403 353 10
Infrastructure and Private Equity 66 57 42 16
Solutions 109 128 135 (15)
Fund Services 127 257 178 (51)
Total operating income 1,931 2,057 1,902 (6)

92
Asset Management (continued)1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Gross margin on invested assets (bps)

Equities, Multi Asset & O’Connor 28 28 27 0
Fixed Income 14 14 16 0
Global Real Estate 82 84 84 (2)
Infrastructure and Private Equity 72 62 49 16

Financial and operating performance

Solutions 21 26 30 (19)
Total gross margin 30 32 31 (6)

Net new money (CHF billion)

Equities, Multi Asset & O’Connor (13.7) (11.9) 14.5
Fixed Income (3.1) (3.2) (2.1)
Global Real Estate 2.4 3.4 2.3
Infrastructure and Private Equity (0.6) (0.2) (0.5)
Solutions (0.5) 6.4 1.7
Total net new money (15.5) (5.4) 15.9
Net new money excluding money market flows (22.5) (0.7) 22.6
of which: from third parties (12.5) (7.7) 11.3
of which: from UBS’s wealth management businesses (10.0) 7.0 11.3
Money market flows 7.0 (4.7) (6.7)
of which: from third parties 3.4 (3.4) 0.0
of which: from UBS’s wealth management businesses 3.5 (1.3) (6.7)

Invested assets (CHF billion)

Equities, Multi Asset & O’Connor 326 327 343 0
Fixed Income 210 208 218 1
Global Real Estate 57 52 46 10
Infrastructure and Private Equity 9 10 9 (10)
Solutions 54 53 48 2
Total invested assets 656 650 664 1
of which: excluding money market funds 591 592 600 0
of which: money market funds 66 58 64 14

Assets under administration by Fund Services

Assets under administration (CHF billion)6 420 407 520 3
Net new assets under administration (CHF billion)7 0.3 24.0 43.9
Gross margin on assets under administration (bps) 3 5 4 (40)

Additional information
Average attributed equity (CHF billion)8 1.4 1.6 1.7 (13)
Return on attributed equity (%) 32.3 36.5 27.5
Risk-weighted assets (fully applied, CHF billion)9 3.9 2.6 3.8 50
Return on risk-weighted assets, gross (%)10 65.7 62.3 52.3
Leverage ratio denominator (fully applied, CHF billion)11 2.7 2.7 14.9 0
Goodwill and intangible assets (CHF billion) 1.4 1.4 1.5 0
Personnel (full-time equivalents) 2,308 2,277 2,323 1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Net management fees include transaction fees, fund administration revenues (including net interest and trading income
from lending activities and foreign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs, gains and losses on the sale of subsidiaries and businesses
and other items that are not performance fees. 3 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring
expenses. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance
indicators. 6 Includes UBS and third-party fund assets, for which the fund services unit provides professional services, including fund setup, accounting and reporting for traditional investment funds and alternative
funds. 7 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits. 8 Refer to the “Capital management” section of this report for more information. 9 Based
on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 10 Based on fully applied RWA. 11 Calculated in
accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III
rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.

93
Financial and operating performance
Asset Management

2016 compared with 2015 Cost / income ratio

The cost / income ratio was 76.6% compared with 71.7%. On an
adjusted basis, the cost / income ratio was 71.4% compared with
Results 69.6%, and was above our target range of 60% to 70%.

Profit before tax decreased by CHF 132 million or 23% to CHF Net new money
452 million, partly as 2015 included a gain of CHF 56 million on Excluding money market flows, net new money outflows were
the sale of our Alternative Fund Services (AFS) business. Adjusted CHF 22.5 billion compared with CHF 0.7 billion, which resulted in
profit before tax decreased by CHF 58 million or 10% to CHF 552 a negative net new money growth rate of 3.8% compared with
million, primarily reflecting lower operating income. negative 0.1%, below our target range of 3% to 5%. By client
segment, net outflows from third parties were CHF 12.5 billion,
Operating income which included a CHF 7.2 billion pricing-related outflow from one
Total operating income decreased by CHF 126 million or 6% to client and asset allocation changes, compared with CHF 7.7 bil-
CHF 1,931 million. Excluding the aforementioned gain on sale of lion. Net outflows were mainly from clients serviced from Asia
our AFS business, adjusted operating income decreased by CHF Pacific, the Americas and Europe, partly offset by inflows in Swit-
70 million or 3%. Adjusted net management fees decreased by zerland. Net new money outflows from clients of UBS’s wealth
CHF 37 million to CHF 1,810 million, mainly in Fund Services, management businesses were CHF 10.0 billion compared with
reflecting the reduced size of our Fund Services business following inflows of CHF 7.0 billion, largely driven by changes in asset allo-
the sale of AFS. This was partly offset by an increase in Global Real cation in the fourth quarter of 2016.
Estate. Performance fees decreased by CHF 32 million to CHF 122
million, primarily in Equities, Multi Asset & O’Connor. Invested assets
As of 31 December 2016, approximately 43% of performance Invested assets increased to CHF 656 billion from CHF 650 billion,
fee-eligible assets within our hedge fund businesses exceeded reflecting positive market performance of CHF 22 billion, partly
high-water marks compared with 26%. These assets are reported offset by net new money outflows of CHF 16 billion.
within Equities, Multi Asset & O’Connor and Solutions. As of 31 December 2016, CHF 385 billion or 59% of invested
assets were managed in active, non-money market strategies and
Operating expenses CHF 206 billion, or 31%, of invested assets were managed in pas-
Total operating expenses increased by CHF 5 million to CHF 1,479 sive strategies. The remaining CHF 66 billion, or 10%, were man-
million and adjusted operating expenses decreased by CHF 13 aged in money market assets. On a regional basis, 34% of
million or 1% to CHF 1,379 million. invested assets related to clients serviced from Switzerland, 24%
Personnel expenses decreased by CHF 2 million to CHF 727 from the Americas, 22% from Europe, Middle East and Africa,
million and adjusted personnel expenses decreased by CHF 13 and 20% from Asia Pacific.
million to CHF 712 million. The decrease in adjusted personnel
expenses was mainly driven by lower variable compensation Assets under administration
expenses and lower salary costs as a result of the aforementioned Total assets under administration increased to CHF 420 billion
sale of our AFS business, partly offset by higher average staffing from CHF 407 billion, primarily reflecting positive market perfor-
levels, primarily in distribution and investments areas. mance of CHF 13 billion.
General and administrative expenses increased by CHF 9 mil-
lion to CHF 241 million. Adjusted general and administrative Personnel
expenses increased by CHF 3 million to CHF 226 million, mainly
driven by higher professional fees and increased costs for market Asset Management employed 2,308 personnel as of 31 Decem-
data services, partly offset by lower travel and entertainment ber 2016 compared with 2,277 personnel as of 31 December
expenses. 2015.

94
Investment performance Although Global Real Estate’s US composite (including farm-
land) and the Swiss direct real estate businesses produced positive
Investment performance was mixed across our equity funds, with absolute returns in 2016, on a relative basis, the US composite
underperformance in growth and concentrated alpha strategies, underperformed its benchmark due to its lower leverage com-
while Asia and emerging markets performed well. UK value and pared with its index. The Swiss composite also underperformed its
income funds generally also performed well. benchmark, given its sizeable weighting in the index.
The majority of our fixed income strategies performed solidly in Our O’Connor multi-strategy fund had a positive absolute per-
2016, with an overall moderate active risk exposure across many formance net of fees, but underperformed against the broader
portfolios. Our multi-sector and investment grade credit strategies hedge fund average. Credit and merger arbitrage strategies pro-

Financial and operating performance

delivered particularly strong results, and our high-yield strategies duced solid returns for the year, but market-neutral and equity
performed relatively well compared with key peers, although long / short strategies underperformed. Hedge Fund Solutions had
some lagged behind indices. a positive absolute performance in 2016, unlike many competi-
Our multi-asset strategies overall had a challenging year versus tors, although equity-hedged allocations had mixed results in
benchmark, but they showed a strong performance compared what was a difficult year for this sub-strategy and fundamental
with peers. A cautious stance on equities over the summer stock picking in general.
reduced performance, while increasing our exposure to emerging Passive strategies and alternative index, or smart beta, prod-
market assets as well as inflation-protected bonds in the US, con- ucts tracked indices closely.
tributed positively in the latter half of the year.

Investment performance as of 31 December 2016

Annualized

Active funds versus benchmark 1 year 3 years 5 years

Percentage of fund assets equaling or exceeding benchmark
Equities1 34 63 62
Fixed income1 77 79 88
Multi-asset1 20 63 88
Total traditional investments 44 69 82
Real estate2 23 21 37

Active funds versus peers

Percentage of fund assets ranking in first or second quartile / equaling or exceeding peer index
Equities1 43 70 79
Fixed income1 70 63 72
Multi-asset1 72 65 78
Total traditional investments 62 66 76
Real estate2 18 18 11
Hedge funds3 30 31 27

Passive funds tracking accuracy

Percentage of passive fund assets within applicable tracking tolerance
All asset classes4 85 89 92
1 Percentage of active fund assets above benchmark (gross of fees) / peer median. Based on the universe of European domiciled active wholesale funds available to UBS’s wealth management businesses and other
wholesale intermediaries as of 31 December 2016. Source of comparison versus peers: ThomsonReuters LIM (Lipper Investment Management). Source of comparison versus benchmark: UBS. Universe represents
approximately 69% of all active fund assets and 17% of all actively managed assets (including segregated accounts) in these asset classes globally as of 31 December 2016. 2 Percentage of real estate fund assets
above benchmark (gross of fess) / peer median. Universe (versus benchmark) includes all fully discretionary real estate funds with a benchmark representing approximately 70% of real estate gross invested assets as of
31 December 2016. Source: IPD, NFI-ODCE, SXI Real Estate Funds TR. Universe (versus peers) includes all real estate funds with externally verifiable peer groups representing approximately 22% of real estate gross
invested assets as of 31 December 2016. Source: ThomsonReuters LIM (Lipper Investment Management). 3 Percentage of fund assets above appropriate HFRI peer indices. Universe of key hedge funds and fund-of-fund
products managed on a fully discretionary basis representing approximately 32% of total O’Connor and Hedge Fund Solutions invested assets. 4 Percentage of passive fund assets within applicable tracking tolerance
on a gross of fees basis. Performance information represents a universe of European domiciled institutional and wholesale funds representing approximately 49% of total passive invested assets as of 31 December 2016.
Source: UBS.

95
Financial and operating performance
Asset Management

2015 compared with 2014 Cost / income ratio

The cost / income ratio was 71.7% compared with 75.4%. On an
adjusted basis, the cost / income ratio was 69.6% compared with
Results 73.2% and was within our target range of 60% to 70%.

Profit before tax increased by 25% to CHF 584 million. Adjusted Net new money
profit before tax increased by 20% to CHF 610 million, primarily Excluding money market flows, net new money outflows were
reflecting higher management fees. CHF 0.7 billion compared with net inflows of CHF 22.6 billion,
which resulted in a negative net new money growth rate of 0.1%
Operating income compared with a positive growth rate of 4.4%, below our target
Total operating income increased by CHF 155 million or 8% to range of 3% to 5%. By client segment, net outflows from third
CHF 2,057 million. Excluding a gain of CHF 56 million on the sale parties were CHF 7.7 billion compared with net inflows of CHF
of our AFS business, adjusted operating income increased by CHF 11.3 billion. 2015 included CHF 33 billion of outflows driven by
99 million or 5% to CHF 2,001 million. Adjusted net manage- client liquidity needs, largely from lower-margin passive products.
ment fees increased by CHF 91 million to CHF 1,847 million, pri- Net outflows were mainly from clients serviced from Europe. Net
marily in Global Real Estate and Fund Services. Performance fees new money inflows from clients of UBS’s wealth management
increased by CHF 8 million to CHF 154 million, mainly in Equities businesses were CHF 7.0 billion compared with CHF 11.3 billion,
and Global Real Estate, partly offset by lower revenues in mainly from clients serviced from Asia Pacific and Switzerland.
O’Connor and Hedge Fund Solutions. Money market net outflows were CHF 4.7 billion compared
As of December 2015, approximately 25% of performance with CHF 6.7 billion.
fee-eligible assets within our hedge fund businesses exceeded
high-water marks compared with 65%. These assets are reported Invested assets
within Equities, Multi Asset & O’Connor and Solutions. Invested assets were CHF 650 billion compared with CHF 664 bil-
lion, reflecting negative foreign currency translation effects of
Operating expenses CHF 11 billion and net new money outflows of CHF 5 billion,
Total operating expenses increased by CHF 39 million or 3% to partly offset by favorable market performance of CHF 4 billion.
CHF 1,474 million, and adjusted operating expenses were CHF As of 31 December 2015, CHF 397 billion, or 61%, of invested
1,392 million, broadly unchanged from 2014. assets was managed in active, non-money market strategies, CHF
Personnel expenses were CHF 729 million compared with CHF 195 billion, or 30%, of invested assets was managed in passive
643 million. Adjusted personnel expenses increased by CHF 97 strategies, and the remaining CHF 58 billion, or 9%, was money
million to CHF 725 million, mainly driven by higher salary-related market assets. On a regional basis, 34% of invested assets related
costs as a result of increased staffing levels, excluding the effect of to clients serviced from Switzerland, 23% from the Americas, 22%
the aforementioned sale of AFS, as well as higher expenses for from Europe, Middle East and Africa, and 21% from Asia Pacific.
variable compensation.
General and administrative expenses were CHF 232 million Assets under administration
compared with CHF 305 million. Adjusted general and adminis- Total assets under administration decreased to CHF 407 billion as
trative expenses decreased by CHF 81 million to CHF 223 million, of 31 December 2015 from CHF 520 billion as of 31 December
mainly due to net expenses for litigation, regulatory and similar 2014. This was due to a decrease of CHF 132 billion related to the
matters of CHF 55 million in 2014, as well as an expense of CHF sale of our AFS business and negative foreign currency translation
14 million in 2014 for a provision for a settlement related to a effects of CHF 5 billion, partly offset by net new assets under
fund liquidation. administration inflows of CHF 24 billion.
Net expenses for services from other business divisions and
Corporate Center were CHF 502 million compared with CHF 478 Personnel
million. Adjusted net expenses for services from other business
divisions and Corporate Center decreased by CHF 18 million to Asset Management employed 2,277 personnel as of 31 Decem-
CHF 434 million as lower expenses from Group Operations were ber 2015 compared with 2,323 personnel as of 31 December
partly offset by higher expenses from Group Technology. 2014, mainly reflecting the aforementioned sale of our AFS busi-
ness, partly offset by higher staffing levels in distribution and
investments areas.

96
Investment Bank
Investment Bank1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Financial and operating performance

Results
Corporate Client Solutions 2,382 2,960 3,189 (20)
Advisory 691 709 708 (3)
Equity Capital Markets 674 1,047 1,021 (36)
Debt Capital Markets 740 691 1,005 7
Financing Solutions 360 441 497 (18)
Risk Management (84) 73 (42)
Investor Client Services 5,318 5,929 5,118 (10)
Equities 3,486 3,962 3,659 (12)
Foreign Exchange, Rates and Credit 1,831 1,967 1,459 (7)
Income 7,699 8,889 8,306 (13)
Credit loss (expense) / recovery (11) (68) 2 (84)
Total operating income 7,688 8,821 8,308 (13)
Personnel expenses 3,082 3,220 2,964 (4)
General and administrative expenses 805 841 2,671 (4)
Services (to) / from Corporate Center and other business divisions 2,765 2,817 2,711 (2)
of which: services from CC – Services 2,675 2,731 2,658 (2)
Depreciation and impairment of property, equipment and software 21 26 32 (19)
Amortization and impairment of intangible assets 12 24 15 (50)
Total operating expenses2 6,684 6,929 8,392 (4)
Business division operating profit / (loss) before tax 1,004 1,892 (84) (47)

Adjusted results3
Total operating income as reported 7,688 8821 8308 (13)
of which: gains / (losses) on sale of financial assets available for sale4 78 11 (5)
Total operating income (adjusted) 7,610 8,810 8,313 (14)
Total operating expenses as reported 6,684 6,929 8,392 (4)
of which: personnel-related restructuring expenses 154 14 64
of which: non-personnel-related restructuring expenses 14 7 36
of which: restructuring expenses allocated from CC – Services 410 376 161
of which: a gain related to a change to retiree benefit plans in the US (20)
of which: impairment of an intangible asset 11
Total operating expenses (adjusted) 6,107 6,522 8,151 (6)
Business division operating profit / (loss) before tax as reported 1,004 1,892 (84) (47)
Business division operating profit / (loss) before tax (adjusted) 1,503 2,288 162 (34)

97
Financial and operating performance
Investment Bank

Investment Bank (continued)1

As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Key performance indicators5

Pre-tax profit growth (%) (46.9)
Cost / income ratio (%) 86.8 78.0 101.0
Return on attributed equity (%)6 13.1 25.9 (1.1)
Return on assets, gross (%) 3.0 3.2 3.2
Average VaR (1-day, 95% confidence, 5 years of historical data) 9 12 12

Adjusted key performance indicators3,5

Pre-tax profit growth (%) (34.3) (92.9)
Cost / income ratio (%) 80.1 73.5 98.1
Return on attributed equity (%)6 19.6 31.3 2.1
Return on assets, gross (%) 3.0 3.2 3.2
Average VaR (1-day, 95% confidence, 5 years of historical data) 9 12 12

Additional information
Total assets (CHF billion)7 242.3 253.5 292.3 (4)
Average attributed equity (CHF billion)6 7.7 7.3 7.6 5
Risk-weighted assets (fully applied, CHF billion)8 70.4 62.9 66.7 12
Return on risk-weighted assets, gross (%)9 11.9 13.7 12.9
Leverage ratio denominator (fully applied, CHF billion)10 231.2 268.0 288.3 (14)
Goodwill and intangible assets (CHF billion) 0.1 0.1 0.1 0
Compensation ratio (%) 40.0 36.2 35.7
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)11 0.9 1.5 0.3
Personnel (full-time equivalents) 4,734 5,243 5,194 (10)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Includes gains on partial sales of our investment in IHS Markit in 2016, 2015
and 2014 as well as an impairment of an investment in 2014. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 6 Refer to the “Capital
management” section of this report for more information. 7 Based on third-party view, i.e., without intercompany balances. 8 Based on the Basel III framework as applicable for Swiss systemically relevant banks
(SRBs). Refer to the “Capital management” section of this report for more information. 9 Based on fully applied RWA. 10 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section
of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in
accordance with former Swiss SRB rules and are therefore not fully comparable. 11 Refer to the “Risk management and control” section of this report for more information on impaired loan exposures.

98
2016 compared with 2015 Investor Client Services
Investor Client Services revenues decreased by CHF 611 million or
10% to CHF 5,318 million. Excluding the aforementioned gains
Results of CHF 78 million in 2016 and CHF 11 million in 2015, adjusted
Profit before tax decreased by CHF 888 million or 47% to CHF revenues decreased by CHF 678 million or 11% to CHF 5,240 mil-
1,004 million, and adjusted profit before tax decreased by CHF lion due to lower revenues in both the Equities and Foreign
785 million or 34% to CHF 1,503 million, primarily due to lower Exchange, Rates and Credit businesses. In US dollar terms,
operating income, partly offset by lower operating expenses. adjusted revenues decreased 14%.

Financial and operating performance

Operating income Equities
Total operating income decreased by CHF 1,133 million or 13% to Equities revenues decreased by CHF 476 million to CHF 3,486
CHF 7,688 million. On an adjusted basis, excluding gains related ­million.
to partial sales of our investment in IHS Markit of CHF 78 million Cash revenues decreased by CHF 146 million to CHF 1,225
in 2016 and CHF 11 million in 2015, total operating income million, mainly due to lower trading revenues.
decreased by CHF 1,200 million or 14% to CHF 7,610 million Derivatives revenues decreased by CHF 324 million to CHF 722
from CHF 8,810 million, as revenues in Investor Client Services million, reflecting lower client activity levels and weaker trading
decreased by CHF 678 million, and revenues in Corporate Client revenues.
Solutions decreased by CHF 578 million. Net credit loss expense Financing Services revenues decreased by CHF 52 million to
was CHF 11 million compared with CHF 68 million, reflecting CHF 1,529 million, due to weaker trading revenues in Equity
lower expenses related to the energy sector. In US dollar terms, Financing from a strong 2015.
adjusted operating income decreased 16%.
➔➔Refer to the “Risk management and control” section of this Foreign Exchange, Rates and Credit
report for more information on credit loss expenses Foreign Exchange, Rates and Credit revenues decreased by CHF
136 million to CHF 1,831 million. Excluding the aforementioned
Operating income by business unit: gain of CHF 78 million compared with CHF 11 million, adjusted
revenues decreased to CHF 1,753 million from CHF 1,956 million,
Corporate Client Solutions mainly as the first quarter of 2015 benefited from higher volatility
Corporate Client Solutions revenues decreased by CHF 578 mil- and client activity levels following the Swiss National Bank’s
lion or 20% to CHF 2,382 million, largely due to lower revenues actions in January 2015.
in Equity Capital Markets, Risk Management and Financing Solu-
tions. In US dollar terms, revenues decreased 22%. Operating expenses
Advisory revenues decreased by CHF 18 million to CHF 691 Total operating expenses decreased by CHF 245 million or 4% to
million, reflecting lower revenues from private transactions, partly CHF 6,684 million, and adjusted operating expenses decreased by
offset by increased revenues from merger and acquisition transac- CHF 415 million or 6% to CHF 6,107 million. In US dollar terms,
tions against a broadly unchanged global fee pool. adjusted operating expenses decreased 9%.
Equity Capital Markets revenues decreased by CHF 373 million Personnel expenses decreased to CHF 3,082 million from CHF
to CHF 674 million, mainly due to lower revenues from public 3,220 million, and adjusted personnel expenses decreased to CHF
offerings as the global fee pool declined 25%, as well as lower 2,928 million from CHF 3,206 million, mainly due to lower vari-
revenues from private transactions. able compensation expenses and lower salary expenses as a result
Debt Capital Markets revenues increased by CHF 49 million to of our cost reduction programs.
CHF 740 million, largely due to higher revenues from leveraged General and administrative expenses decreased to CHF 805
finance against a global fee pool decline of 2%. This increase was million from CHF 841 million and on an adjusted basis decreased
partly offset by lower investment grade revenues. to CHF 791 million from CHF 834 million, mainly due to reduced
Financing Solutions revenues decreased by CHF 81 million to professional fees and travel and entertainment expenses, partly
CHF 360 million, mainly reflecting lower structured finance offset by CHF 44 million higher expenses for provisions for litiga-
r­ evenues. tion, regulatory and similar matters. The expense for the annual
Risk Management revenues were negative CHF 84 million UK bank levy was CHF 80 million compared with CHF 98 million.
compared with positive CHF 73 million, mainly due to losses Net expenses for services from other business divisions and
on portfolio macro hedges largely reflecting tightening credit Corporate Center decreased to CHF 2,765 million from CHF
spreads. 2,817 million and on an adjusted basis decreased to CHF 2,355
million from CHF 2,441 million.

99
Financial and operating performance
Investment Bank

Cost / income ratio Leverage ratio denominator

The cost / income ratio increased to 86.8% from 78.0%. On an The fully applied leverage ratio denominator decreased by CHF 37
adjusted basis, the cost / income ratio increased to 80.1% from billion to CHF 231 billion as of 31 December 2016 and remained
73.5% and was slightly above our target range of 70% to 80%. below our short- to medium-term expectation of around CHF 325
billion. The reduction during 2016 was mainly due to effective
Return on attributed equity resource management.
Return on attributed equity (RoAE) for 2016 was 13.1%, and ➔➔Refer to the “Capital Management” section of this report for
19.6% on an adjusted basis, above our target of over 15%. more information
➔➔Refer to “Equity attribution framework” in the “Capital
management” section of this report for more information Personnel

Risk-weighted assets The Investment Bank employed 4,734 personnel as of 31 Decem-

Fully applied risk-weighted assets (RWA) increased by CHF 7.5 bil- ber 2016, a decrease of 509 compared with 5,243 as of 31 Decem-
lion to CHF 70.4 billion as of 31 December 2016, below our short- ber 2015, largely reflecting our cost reduction programs.
to medium-term expectation of around CHF 85 billion. The
increase was driven by an increase of CHF 3.5 billion in market risk
RWA as well as increases of CHF 2.7 billion in operational risk
RWA and CHF 1.5 billion in credit risk RWA.
➔➔Refer to the “Capital management” section of this report for
more information

100
2015 compared with 2014 to 5,918 million due to higher revenues in both the Equities and
Foreign Exchange, Rates and Credit businesses. In US dollar terms,
adjusted revenues increased 11%.
Results
Equities
The Investment Bank recorded a profit before tax of CHF 1,892 Equities revenues increased by CHF 303 million to CHF 3,962 mil-
million compared with a loss before tax of CHF 84 million and on lion. Excluding the aforementioned gains and impairment loss on
an adjusted basis recorded a profit before tax of CHF 2,288 mil- financial investments in 2014, adjusted revenues increased by
lion compared with CHF 162 million, mainly due to CHF 1,853 CHF 259 million to CHF 3,962 million due to higher revenues in

Financial and operating performance

million lower net expenses for provisions for litigation, regulatory Financing Services and, to a lesser extent, in Cash, partly offset by
and similar matters, as well as increased revenues in Investor Cli- lower revenues in Derivatives.
ent Services, partly offset by lower revenues in Corporate Client Cash revenues increased by CHF 19 million to CHF 1,371 mil-
Solutions. lion. Excluding a gain related to a financial investment of CHF 4
million in 2014, adjusted revenues increased by CHF 23 million to
Operating income CHF 1,371 million, mainly due to higher commission income as
Total operating income increased by CHF 513 million or 6% to client activity levels increased.
CHF 8,821 million, as revenues in Investor Client Services increased Derivatives revenues decreased by CHF 43 million to CHF 1,046
by CHF 811 million, partly offset by CHF 229 million lower reve- million, driven by weaker performance in Europe, Middle East and
nues in Corporate Client Solutions. On an adjusted basis, exclud- Africa, partly offset by increased revenues in the Americas and
ing gains of CHF 11 million in 2015 and CHF 43 million in 2014 Asia Pacific.
related to partial sales of our investment in IHS Markit, as well as Financing Services revenues increased by CHF 292 million to
an impairment loss of CHF 48 million on a financial investment in CHF 1,581 million, driven primarily by increased client activity in
2014, total operating income increased by CHF 497 million or 6% Prime Brokerage and Equity Financing.
to CHF 8,810 million from CHF 8,313 million. Net credit loss
expense was CHF 68 million, mainly related to the energy sector, Foreign Exchange, Rates and Credit
compared with a recovery of CHF 2 million in the prior year. In US Foreign Exchange, Rates and Credit revenues increased by CHF
dollar terms, adjusted operating income increased 1%. 508 million to CHF 1,967 million. Excluding gains related to finan-
cial investments of CHF 11 million compared with CHF 39 million,
Operating income by business unit: adjusted revenues increased by CHF 536 million to CHF 1,956
million, mainly due to higher revenues in our Foreign Exchange
Corporate Client Solutions and Rates businesses, reflecting elevated client activity and higher
Corporate Client Solutions revenues decreased by CHF 229 mil- volatility, particularly heightened following the Swiss National
lion or 7% to CHF 2,960 million, largely due to lower revenues in Bank’s actions of 15 January 2015.
Debt Capital Markets and Financing Solutions. In US dollar terms,
revenues decreased 12%. Operating expenses
Advisory and Equity Capital Markets revenues were both Total operating expenses decreased by CHF 1,463 million or 17%
broadly in line with 2014 at CHF 709 million and CHF 1,047 mil- to CHF 6,929 million. Excluding restructuring expenses of CHF
lion, respectively. 396 million compared with CHF 261 million, an impairment loss
Debt Capital Markets revenues decreased by CHF 314 million of CHF 11 million on an intangible asset in 2015 and gains of CHF
to CHF 691 million, mainly due to lower revenues from leveraged 20 million related to changes to retiree benefit plans in the US in
finance following a global fee pool decline of 23%. Investment 2014, total adjusted operating expenses decreased by CHF 1,629
grade revenues were broadly in line with 2014. million or 20% to CHF 6,522 million, mainly as the net expenses
Financing Solutions revenues decreased by CHF 56 million to for provisions for litigation, regulatory and similar matters
CHF 441 million, reflecting lower volumes and margin compres- decreased to CHF 2 million from CHF 1,855 million, partly offset
sion in 2015. by higher expenses for variable compensation, in line with
Risk Management revenues improved to positive CHF 73 mil- improved business performance. In US dollar terms, adjusted
lion from negative CHF 42 million, mainly due to gains on portfo- operating expenses decreased 23%.
lio macro hedges and lower risk management costs associated Personnel expenses increased to CHF 3,220 million from CHF
with corporate lending. 2,964 million. Excluding restructuring expenses of CHF 14 million
compared with CHF 64 million, as well as an CHF 11 million gain
Investor Client Services related to changes to retiree benefit plans in the US in 2014, per-
Investor Client Services revenues increased by CHF 811 million or sonnel expenses increased to CHF 3,206 million from CHF 2,911
16% to CHF 5,929 million and on an adjusted basis by 795 ­million million, mainly due to higher variable compensation expenses.

101
Financial and operating performance
Investment Bank

General and administrative expenses decreased to CHF 841 Risk-weighted assets

million from CHF 2,671 million. Excluding restructuring expenses Fully applied risk-weighted assets (RWA) decreased by CHF 4 bil-
of CHF 7 million in 2015 compared with CHF 30 million, general lion to CHF 63 billion as of 31 December 2015, below our limit of
and administrative expenses decreased to CHF 834 million from CHF 70 billion for 2015 and our short- to medium-term expecta-
CHF 2,641 million, mainly due to the aforementioned reduction in tion of CHF 85 billion. The decrease was mainly due to CHF 3
the net expenses for provisions for litigation, regulatory and simi- billion lower market risk RWA, primarily related to a reduction in
lar matters. The expense for the annual UK bank levy was CHF 98 stressed value-at-risk and risks-not-in-VaR.
million compared with CHF 64 million.
Net expenses for services from other business divisions and Leverage ratio denominator
Corporate Center increased to CHF 2,817 million from CHF 2,711 The fully applied Swiss systemically relevant bank (SRB) leverage
million. Excluding restructuring costs of CHF 376 million in 2015, ratio denominator (LRD) was CHF 268 billion as of 31 December
and CHF 161 million as well as a gain of CHF 9 million related to 2015, below our short- to medium-term expectation of CHF 325
changes to retiree benefit plans in the US in 2014, adjusted net billion. From 31 December 2015 onward, the Swiss SRB LRD cal-
expenses for services from other business divisions and Corporate culation is fully aligned with the Basel III rules. Prior-period figures
Center decreased to CHF 2,441 million from CHF 2,559 million. are calculated in accordance with the former Swiss SRB rules and
are therefore not fully comparable.
Cost / income ratio
The cost / income ratio decreased to 78.0% from 101.0%. On an Personnel
adjusted basis, the cost / income ratio decreased to 73.5% from
98.1% and was within our target range of 70% to 80%. The Investment Bank employed 5,243 personnel as of 31 Decem-
ber 2015, slightly up from 5,194 as of 31 December 2014.
Return on attributed equity
Return on attributed equity (RoAE) for 2015 was 25.9%, and
31.3% on an adjusted basis, above our target of over 15%.

102
Corporate Center
Corporate Center1
As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Financial and operating performance

Results
Total operating income (357) 315 (823)
Personnel expenses 3,899 4,049 3,993 (4)
General and administrative expenses 4,893 5,311 4,650 (8)
Services (to) / from business divisions (7,933) (7,894) (7,580) 0
Depreciation and impairment of property, equipment and software 944 868 762 9
Amortization and impairment of intangible assets 21 21 6 0
Total operating expenses2 1,824 2,354 1,832 (23)
Operating profit / (loss) before tax (2,181) (2,040) (2,655) 7

Adjusted results3
Total operating income as reported (357) 315 (823)
of which: own credit on financial liabilities designated at fair value 553 292
of which: gains on sales of real estate 120 378 44
of which: net gains / (losses) related to the buyback of debt (257)
of which: net foreign currency translation gains / (losses)4 (122) 88
Total operating income (adjusted) (355) (447) (1,159) (21)
Total operating expenses as reported 1,824 2,354 1,832 (23)
of which: personnel-related restructuring expenses 519 420 223
of which: non-personnel-related restructuring expenses 623 719 264
of which: restructuring expenses allocated from CC – Services (1,064) (943) (425)
of which: a gain related to a change to retiree benefit plans in the US (3)
Total operating expenses (adjusted) 1,746 2,158 1,774 (19)
Operating profit / (loss) before tax as reported (2,181) (2,040) (2,655) 7
Operating profit / (loss) before tax (adjusted) (2,101) (2,606) (2,933) (19)

Additional information
Average attributed equity (CHF billion)5 29.1 25.8 20.5 13
Total assets (CHF billion)6 359.4 354.5 427.6 1
Risk-weighted assets (fully applied, CHF billion)7 57.1 60.2 65.8 (5)
Leverage ratio denominator (fully applied, CHF billion)8 300.7 291.2 327.2 3
Personnel (full-time equivalents) 23,955 23,671 23,773 1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Related to the disposal of foreign subsidiaries and branches. 5 Refer to the
“Capital management” section of this report for more information. 6 Based on third-party view, i.e., without intercompany balances. 7 Based on the Basel III framework as applicable for Swiss systemically relevant
banks (SRBs). Refer to the “Capital management” section of this report for more information. 8 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more
information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss
SRB rules and are therefore not fully comparable.

103
Financial and operating performance
Corporate Center

Corporate Center – Services

Corporate Center – Services1

As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Results
Total operating income (102) 241 37
Personnel expenses 3,801 3,903 3,843 (3)
General and administrative expenses 4,145 4,483 4,123 (8)
Depreciation and impairment of property, equipment and software 944 868 762 9
Amortization and impairment of intangible assets 21 21 6 0
Total operating expenses before allocations to BDs and other CC units 8,911 9,274 8,734 (4)
Services (to) / from business divisions and other CC units (8,164) (8,215) (8,046) (1)
of which: services to Wealth Management (2,256) (2,209) (2,122) 2
of which: services to Wealth Management Americas (1,221) (1,193) (1,121) 2
of which: services to Personal & Corporate Banking (1,186) (1,180) (1,196) 1
of which: services to Asset Management (530) (523) (495) 1
of which: services to Investment Bank (2,675) (2,731) (2,658) (2)
of which: services to CC – Group ALM (110) (96) (88) 15
of which: services to CC – Non-core and Legacy Portfolio (225) (313) (404) (28)
Total operating expenses2 747 1,059 688 (29)
Operating profit / (loss) before tax (849) (818) (652) 4

Adjusted results3
Total operating income as reported (102) 241 37
of which: gains on sales of real estate 120 378 44
Total operating income (adjusted) (222) (137) (7) 62
Total operating expenses as reported before allocations 8,911 9,274 8,734 (4)
of which: personnel-related restructuring expenses 518 406 221
of which: non-personnel-related restructuring expenses 623 719 263
Total operating expenses (adjusted) before allocations 7,770 8,151 8,266 (5)
Services (to) / from BDs and other CC units (8,164) (8,215) (8,046) (1)
of which: restructuring expenses allocated to BDs and other CC units (1,084) (986) (454)
Total operating expenses as reported after allocations 747 1,059 688 (29)
Total operating expenses (adjusted) after allocations 690 919 658 (25)
Operating profit / (loss) before tax as reported (849) (818) (652) 4
Operating profit / (loss) before tax (adjusted) (912) (1,056) (666) (14)

Additional information
Average attributed equity (CHF billion)4 22.8 19.6 12.3 16
Total assets (CHF billion)5 23.7 22.6 19.9 5
Risk-weighted assets (fully applied, CHF billion)6 27.6 23.6 23.0 17
Leverage ratio denominator (fully applied, CHF billion)7 5.8 4.8 (2.6) 21
Personnel (full-time equivalents) 23,750 23,470 23,517 1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Refer to the “Capital management” section of this report for more
information. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section
of this report for more information. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio
denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.

104
2016 compared with 2015 General and administrative expenses decreased by CHF 338
million to CHF 4,145 million and adjusted general and administra-
Corporate Center – Services recorded a loss before tax of CHF 849 tive expenses decreased by CHF 242 million, mainly due to lower
million compared with CHF 818 million, and CHF 912 million on expenses for outsourcing and decreased professional fees.
an adjusted basis compared with CHF 1,056 million. Depreciation and impairment of property, equipment and soft-
ware increased to CHF 944 million from CHF 868 million, reflect-
Operating income ing increased depreciation expenses related to internally gener-
Operating income was negative CHF 102 million compared with ated capitalized software.
positive CHF 241 million, mainly as gains on sales of real estate

Financial and operating performance

decreased to CHF 120 million from CHF 378 million. On an Services to / from business divisions and
adjusted basis, operating income was negative CHF 222 million other Corporate Center units
compared with negative CHF 137 million, mainly due to lower Corporate Center – Services allocated expenses of CHF 8,164 mil-
income from the investment of the Group’s equity allocated from lion to the business divisions and other Corporate Center units
Corporate Center – Group Asset and Liability Management compared with CHF 8,215 million. Adjusted net allocated
(Group ALM). expenses for services to business divisions and other Corporate
Center units were CHF 7,080 million compared with CHF 7,231
Operating expenses million.

Operating expenses before service allocations to Operating expenses after service allocations to / from
business divisions and other Corporate Center units business divisions and other Corporate Center units
Before service allocations to business divisions and other Corpo- Corporate Center – Services retains costs related to Group gover-
rate Center units, total operating expenses decreased by CHF 363 nance functions and other corporate activities, certain strategic
million or 4% to CHF 8,911 million. Restructuring expenses were and regulatory projects and certain restructuring expenses. Total
CHF 1,141 million compared with CHF 1,125 million and mainly operating expenses remaining in Corporate Center – Services
related to our transitioning activities to nearshore and offshore after allocations decreased to CHF 747 million from CHF 1,059
locations, as well as outsourcing of IT and other services. Adjusted million and to CHF 690 million from CHF 919 million on an
operating expenses before allocations decreased by CHF 381 mil- adjusted basis, mainly reflecting lower retained expenses for regu-
lion or 5% to CHF 7,770 million. latory projects, a reduction of CHF 13 million in expenses for pro-
Personnel expenses decreased by CHF 102 million to CHF visions for litigation, regulatory and similar matters, and lower
3,801 million and by CHF 216 million to CHF 3,283 million on an pension costs for our Swiss pension plan, reflecting the effect of
adjusted basis. The decrease in adjusted personnel expenses was changes to demographic and financial assumptions.
mainly a result of nearshoring and offshoring initiatives as well as
lower pension costs for our Swiss pension plan, reflecting the
effect of changes to demographic and financial assumptions.

105
Financial and operating performance
Corporate Center

2015 compared with 2014 General and administrative expenses increased by CHF 360
million to CHF 4,483 million. On an adjusted basis, excluding net
Corporate Center – Services recorded a loss before tax of CHF 818 restructuring expenses of CHF 707 million compared with CHF
million in 2015 compared with CHF 652 million, and CHF 1,056 240 million, general and administrative expenses decreased by
million on an adjusted basis compared with CHF 666 million. CHF 107 million, mainly due to lower occupancy costs and profes-
sional fees. These decreases were partly offset by the aforemen-
Operating income tioned net expenses for provisions for litigation, regulatory and
Total operating income was CHF 241 million compared with CHF similar matters compared with a net release.
37 million, mainly as gains on sales of real estate increased to CHF Depreciation and impairment of property, equipment and soft-
378 million from CHF 44 million, primarily due to the sale of a ware increased to CHF 868 million from CHF 762 million, reflect-
property in Geneva, Switzerland. This was partly offset by lower ing increased depreciation expenses related to internally gener-
income from the investment of the Group’s equity allocated from ated capitalized software.
Group ALM. Furthermore, 2014 included a gain of CHF 58 million
related to the release of a provision for litigation, regulatory and Services to / from business divisions and other Corporate Center
similar matters, which was recorded within other income. units
Net expenses for services to business divisions and other Corpo-
Operating expenses rate Center units were CHF 8,215 million compared with CHF
8,046 million. Adjusted net allocated expenses for services were
Operating expenses before service allocations to business CHF 7,231 million compared with CHF 7,608 million and mainly
divisions and other Corporate Center units related to lower personnel expenses and occupancy costs, partly
Before service allocations to the business divisions and other Cor- offset by increased depreciation expenses.
porate Center units, total operating expenses increased by CHF
540 million or 6% to CHF 9,274 million. Restructuring expenses Operating expenses after service allocations to / from business
were CHF 1,125 million compared with CHF 484 million and mainly divisions and other Corporate Center units
related to our transitioning activities to nearshore and offshore Operating expenses remaining in Corporate Center – Services
locations. Adjusted operating expenses before service allocations after allocations relate mainly to Group governance functions and
were CHF 8,151 million compared with CHF 8,266 million. This other corporate activities, as well as to certain strategic and regu-
decrease of CHF 115 million was mainly due to CHF 139 million latory projects and certain restructuring expenses.
lower personnel expenses as well as decreased occupancy costs Total operating expenses remaining in Corporate Center – Ser-
and professional fees. These decreases were partly offset by net vices after allocations increased to CHF 1,059 million compared
expenses for provisions for litigation, regulatory and similar matters with CHF 688 million. This increase of CHF 371 million was mainly
of CHF 15 million compared with a net release of provisions of CHF due to the aforementioned net expenses for provisions for litiga-
125 million. Moreover, 2015 included higher depreciation expenses tion, regulatory and similar matters compared with a net release,
related to internally generated capitalized software. as well as restructuring expenses of CHF 140 million compared
Personnel expenses increased by CHF 60 million to CHF 3,903 with CHF 30 million. Furthermore, the full-year costs incurred by
million and included restructuring expenses of CHF 406 million Corporate Center – Services exceeded the cost allocations to the
compared with CHF 221 million. On an adjusted basis, personnel business divisions and Non-core and Legacy Portfolio that were
expenses were CHF 3,499 million compared with CHF 3,638 mil- agreed as part of the annual business planning cycle.
lion, mainly as a result of outsourcing, nearshoring and offshoring
initiatives.

106
Corporate Center – Group Asset and Liability Management

Corporate Center – Group ALM1

As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Financial and operating performance

Results
Business division-aligned risk management net income 847 878 564 (4)
Capital investment and issuance net income 45 272 566 (83)
Group structural risk management net income (547) (647) (824) (15)
Total risk management net income before allocations 345 503 307 (31)
Allocations to business divisions and other CC units (512) (832) (831) (38)
of which: Wealth Management (389) (471) (481) (17)
of which: Wealth Management Americas (118) (104) (116) 13
of which: Personal & Corporate Banking (332) (421) (461) (21)
of which: Asset Management (7) (15) (27) (53)
of which: Investment Bank 260 211 100 23
of which: CC – Services (36) (145) (217) (75)
of which: CC – Non-core and Legacy Portfolio 110 114 371 (4)
Total risk management net income after allocations (167) (329) (524) (49)
Accounting asymmetries related to economic hedges 27 (66) (16)
Hedge accounting ineffectiveness2 7 156 89 (96)
Net foreign currency translation gains / (losses)3 (122) 88
Net gains / (losses) related to the buyback of debt (257)
Own credit on financial liabilities designated at fair value 553 292
Other 37 133 162 (72)
Total operating income as reported (219) 277 2
Total operating income (adjusted)4,5 (97) (107) (290) (9)
Personnel expenses 31 30 26 3
General and administrative expenses 17 22 22 (23)
Depreciation and impairment of property, equipment and software 0 0 0
Amortization and impairment of intangible assets 0 0 0
Services (to) / from business divisions and other CC units (49) (57) (48) (14)
Total operating expenses6 (1) (5) 0 (80)
Operating profit / (loss) before tax as reported (218) 282 2
Operating profit / (loss) before tax (adjusted)4 (96) (102) (290) (6)

Additional information
Average attributed equity (CHF billion)7 4.3 3.3 3.2 30
Total assets (CHF billion)8 267.2 237.5 237.9 13
Risk-weighted assets (fully applied, CHF billion)9 10.6 6.0 7.1 77
Leverage ratio denominator (fully applied, CHF billion)10 272.4 247.9 236.3 10
Personnel (full-time equivalents) 142 125 120 14
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Does not include ineffectiveness of hedges of net investments in foreign operations. 3 Related to the disposal of foreign
subsidiaries and branches. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Adjusted total operating income excludes foreign currency translation gains or losses, net gains or
losses related to the buyback of debt and own credit on financial liabilities designated at fair value. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of
this report for information on restructuring expenses. 7 Refer to the “Capital management” section of this report for more information. 8 Based on third-party view, i.e., without intercompany balances. 9 Based on
the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 10 Calculated in accordance with Swiss SRB rules.
Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to
31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.

107
Financial and operating performance
Corporate Center

2016 compared with 2015 Capital investment and issuance net income
Net income from capital investment and issuance activities was
Corporate Center – Group Asset and Liability Management CHF 45 million compared with CHF 272 million. This decrease was
(Group ALM) recorded a loss before tax of CHF 218 million com- due to CHF 168 million in higher net interest expenses as a result
pared with a profit before tax of CHF 282 million. On an adjusted of an increase in total outstanding long-term debt that is eligible
basis, the loss before tax was CHF 96 million compared with a loss for total loss-absorbing capital, fees paid related to the issuance
of CHF 102 million, driven by lower negative net income after of additional tier 1 capital and senior unsecured debt during the
allocations, largely offset by lower gains on hedge accounting year, and CHF 58 million lower interest income from the invest-
ineffectiveness. ment of the Group’s equity due to maturing positions being
replaced at lower long-term interest rates.
Transfer of Risk Exposure Management function
Consistent with changes in the manner in which operating seg- Group structural risk management net income
ment performance is assessed, we transferred in 2016 the Risk Net income from Group structural risk management activities was
Exposure Management (REM) function from Corporate Center – negative CHF 547 million compared with negative CHF 647 mil-
Non-core and Legacy Portfolio to Corporate Center – Group ALM lion. An increase in income of CHF 481 million from the manage-
to further harmonize REM risk management responsibility with ment of the Group’s high-quality liquid assets (HQLA), mainly due
the reporting structure and align it more closely with other activi- to wider spreads between certain HQLA and internal funding lia-
ties performed by Group ALM. REM primarily performs risk man- bilities, was largely offset by an increase in net interest expense of
agement over credit, debit and funding valuation adjustments for CHF 382 million due to issuances of long-term debt during 2016.
our over-the-counter (OTC) derivatives portfolio.
Prior-period profit and loss information has been restated to Allocations to business divisions and other Corporate Center
reflect this transfer. Net income from REM before allocations is units
now presented within the line “Business division-aligned risk Combined allocations from risk management activities to business
management net income” and is fully allocated to the business divisions and other Corporate Center units were CHF 512 million
divisions and other Corporate Center units. There was no effect compared with CHF 832 million. This decrease primarily reflects
on operating profit before tax for any segment for any period the aforementioned lower net income from capital investment
from this restatement. and issuance activities, which is fully allocated to the business divi-
Prior-period information for balance sheet assets and risk- sions and other Corporate Center units in proportion to their
weighted assets has not been restated as the effect would not attributed equity. In addition, cost allocations from Group struc-
have been material. tural risk management activities increased by CHF 62 million. This
The leverage ratio denominator (LRD) of Group ALM has been allocation is based on consumption of funding and liquidity risk
restated for 31 December 2015 and as a result increased by CHF by the business divisions and other Corporate Center units.
7.7 billion, with an equal and opposite decrease in Corporate
Center – Non-core and Legacy Portfolio. Total risk management net income after allocations
Group ALM retained negative CHF 167 million from its risk man-
Operating income agement activities after allocations compared with negative CHF
Total operating income was negative CHF 219 million compared 329 million.
with positive CHF 277 million. Adjusted total operating income Retained income from risk management activities is entirely
retained by Group ALM was negative CHF 97 million compared related to Group structural risk management and is mainly the net
with negative CHF 107 million. result of costs from buffers that are maintained by Group ALM at
levels above the total consumption of the business divisions and
Business division-aligned risk management net income the revenues generated by Group ALM from the management of
Net income from business division-aligned risk management the Group’s HQLA portfolio relative to the benchmark rates used
activities was CHF 847 million compared with CHF 878 million, to allocate the costs.
mainly reflecting reduced interest rate risk management revenues
in the banking book for Wealth Management and Personal & Cor-
porate Banking. This decrease was mainly due to lower penalty
fees received from clients from the early termination of loans and
lower interest income from managing euro-denominated depos-
its in the current negative interest rate environment.

108
Accounting asymmetries related to economic hedges Balance sheet assets
Net income retained by Group ALM due to accounting asymme- Balance sheet assets increased by CHF 30 billion to CHF 267 bil-
tries related to economic hedges was CHF 27 million compared lion, mainly due to a CHF 23 billion net increase in financial assets
with negative CHF 66 million, primarily due to a fair value gain of designated at fair value, available for sale and held to maturity, as
CHF 174 million on certain internal funding transactions due to well as an CHF 18 billion increase in cash and balances with cen-
the tightening of own credit funding spreads compared with a tral banks that primarily occurred toward the end of the year.
loss of CHF 19 million. This was partly offset by a loss of CHF 43 These increases mainly reflected liquidity requirements applicable
million related to HQLA classified as available for sale compared to our US intermediate holding company and UBS Europe SE and
with a gain of CHF 102 million. The lower magnitude of this also resulted from an increase in net funds transferred to Group

Financial and operating performance

asymmetrical result reflects the change applied since the first ALM by the business divisions.
quarter of 2016 to classify the majority of newly purchased HQLA Group ALM is responsible for investing any funding generated
debt securities as financial assets designated at fair value through that is surplus to the requirements of the business divisions. As a
profit or loss, instead of classifying them as financial assets avail- result, Group ALM’s balance sheet is mainly driven by the volume
able for sale. of liabilities created across the Group rather than centrally man-
➔➔Refer to the “Significant accounting and financial reporting aged asset requirements.
changes” section of this report for more information on the ➔➔Refer to the “Treasury management” section of this report for
balance sheet classification of newly purchased high-quality more information
liquid debt securities
Risk-weighted assets
Hedge accounting ineffectiveness Fully applied risk-weighted assets (RWA) increased by CHF 5 bil-
Net income related to hedge accounting ineffectiveness was CHF lion to CHF 11 billion as of 31 December 2016, largely as a result
7 million compared with CHF 156 million. The higher revenue in of a revised methodology for the allocation of operational risk
the prior year mainly related to our cash flow hedges following RWA to business divisions and Corporate Center units and an
the Swiss National Bank’s actions in January 2015. This ineffec- increase in credit risk in Group ALM’s HQLA portfolios.
tiveness primarily arises from changes in the spread between ➔➔Refer to the “Capital management” section of this report for
LIBOR and the overnight index swap rate due to differences in the more information
way these impact the valuation of the hedged items and hedging
instruments through either the benchmark rate determining cash Leverage ratio denominator
flows or the discount rate. The LRD increased to CHF 272 billion from CHF 248 billion, con-
sistent with the increase in balance sheet assets.
Other ➔➔Refer to the “Capital management” section of this report for
Other net income was CHF 37 million compared with CHF 133 more information
million, reflecting negative income related to own-bond market-
making activity in the Investment Bank and lower interest income
retained by Group ALM on behalf of non-controlling interests.
Additionally, 2016 included a loss of CHF 12 million from the
Group ALM-managed monthly conversion of non-Swiss franc
profits compared with a gain of CHF 56 million in 2015.

109
Financial and operating performance
Corporate Center

2015 compared with 2014 ance activities, which is fully allocated to the business divisions
and other Corporate Center units, was largely offset by the afore-
Corporate Center – Group Asset and Liability Management mentioned higher net income from business division-aligned risk
(Group ALM) recorded a profit before tax of CHF 282 million com- management activities, reflecting the incorporation of FVA for
pared with CHF 2 million, and an adjusted loss before tax of CHF certain OTC derivatives in the prior year, which was allocated to
102 million compared with CHF 290 million, driven by lower neg- Corporate Center – Non-core and Legacy Portfolio.
ative net income after allocations.
Total risk management net income after allocations
Operating income Group ALM retained negative CHF 329 million from its risk man-
Total operating income was CHF 277 million compared with CHF agement activities after allocations compared with negative CHF
2 million. Adjusted total operating income retained by Group 524 million. Retained income from risk management activities is
ALM was negative CHF 107 million compared with negative CHF entirely related to Group structural risk management.
290 million.
Accounting asymmetries related to economic hedges
Business division-aligned risk management net income Net income retained by Group ALM due to accounting asymme-
Net income from business division-aligned risk management tries related to economic hedges was negative CHF 66 million
activities was CHF 878 million compared with CHF 564 million, compared with negative CHF 16 million, primarily due to a fair
mainly reflecting a loss in REM of CHF 43 million compared with value loss of CHF 19 million on certain internal funding transac-
CHF 290 million following the incorporation of funding valuation tions due to the tightening of own credit funding spreads com-
adjustments (FVA) into the valuation estimates for certain OTC pared with a gain of CHF 82 million.
derivatives in 2014.
Hedge accounting ineffectiveness
Capital investment and issuance net income Net income related to hedge accounting ineffectiveness was CHF
Net income from capital investment and issuance activities was 156 million compared with CHF 89 million. The higher revenue in
CHF 272 million compared with CHF 566 million. This decrease 2015 mainly related to our cash flow hedges following the Swiss
was due to CHF 201 million higher net interest expenses as a result National Bank’s actions in January 2015.
of an increase in total outstanding long-term debt that is eligible
for total loss-absorbing capital and CHF 93 million lower interest Other
income from the investment of the Group’s equity due to maturing Other net income was CHF 133 million compared with CHF 162
positions being replaced at lower long-term interest rates. million, mainly due to lower interest income retained by Group
ALM on behalf of non-controlling interests.
Group structural risk management net income
Net income from Group structural risk management activities was Balance sheet assets
negative CHF 647 million compared with negative CHF 824 mil- Balance sheet assets were stable at CHF 238 billion as of
lion, mainly due to lower net interest expenses on the long-term 31 December 2015.
debt portfolio as debt matured.
Risk-weighted assets
Allocations to business divisions and other RWA decreased by CHF 1 billion to CHF 6 billion as of 31 Decem-
Corporate Center units ber 2015.
Combined allocations from risk management activities to business
divisions and other Corporate Center units were largely unchanged Leverage ratio denominator
at CHF 832 million compared with CHF 831 million. The afore- Adjusted for the aforementioned REM transfer, the LRD was CHF
mentioned lower net income from capital investment and issu- 248 billion as of 31 December 2015.

110
Corporate Center – Non-core and Legacy Portfolio

Corporate Center – Non-core and Legacy Portfolio1

As of or for the year ended % change from
CHF million, except where indicated 31.12.16 31.12.15 31.12.14 31.12.15

Financial and operating performance

Results
Income (23) (195) (863) (88)
Credit loss (expense) / recovery (13) (8) 2 63
Total operating income (36) (203) (862) (82)
Personnel expenses 66 116 124 (43)
General and administrative expenses 732 806 505 (9)
Services (to) / from business divisions and other CC units 280 379 514 (26)
of which: services from CC – Services 225 313 404 (28)
Depreciation and impairment of property, equipment and software 0 0 0
Amortization and impairment of intangible assets 0 0 0
Total operating expenses2 1,078 1,301 1,144 (17)
Operating profit / (loss) before tax (1,114) (1,503) (2,005) (26)

Adjusted results3
Total operating income as reported (36) (203) (862) (82)
Total operating income (adjusted) (36) (203) (862) (82)
Total operating expenses as reported 1,078 1,301 1,144 (17)
of which: personnel-related restructuring expenses 1 14 1
of which: non-personnel-related restructuring expenses 0 0 0
of which: restructuring expenses allocated from CC – Services 21 43 29
of which: a gain related to a change to retiree benefit plans in the US (3)
Total operating expenses (adjusted) 1,057 1,245 1,116 (15)
Operating profit / (loss) before tax as reported (1,114) (1,503) (2,005) (26)
Operating profit / (loss) before tax (adjusted) (1,093) (1,447) (1,977) (24)

Additional information
Average attributed equity (CHF billion)4 2.1 2.9 4.9 (28)
Total assets (CHF billion)5 68.5 94.4 169.8 (27)
Risk-weighted assets (fully applied, CHF billion)6 18.9 30.7 35.7 (38)
Leverage ratio denominator (fully applied, CHF billion)7 22.4 38.5 93.4 (42)
Personnel (full-time equivalents) 63 77 137 (18)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Refer to the “Capital management” section of this report for more
information. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section
of this report for more information. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio
denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.

111
Financial and operating performance
Corporate Center

2016 compared with 2015 Balance sheet assets

During 2016, balance sheet assets decreased to CHF 68 billion
Corporate Center – Non-core and Legacy Portfolio recorded a loss from CHF 94 billion. Positive replacement values (PRVs) decreased
before tax of CHF 1,114 million compared with CHF 1,503 mil- by CHF 22 billion, primarily reflecting ongoing reduction activity
lion. including negotiated bilateral settlements, third-party novations,
including transfers to central clearing houses, and agreements to
Operating income net down trades with other dealer counterparties, partly offset by
Operating income was negative CHF 36 million compared with fair value increases resulting from increases in interest rates. Total
negative CHF 203 million. The improved result was mainly due to assets excluding PRVs decreased by CHF 4 billion to CHF 12 billion,
lower losses from novation and unwind activities. Furthermore, mainly due to a reduction in cash collateral receivables on deriva-
2016 included a gain related to the settlement of a litigation claim tive instruments.
and valuation gains on financial assets designated at fair value Assets classified as Level 3 in the fair value hierarchy totaled
compared with valuation losses in 2015. CHF 2.0 billion as of 31 December 2016.
➔➔Refer to the “Risk management and control” section of this
report for more information Risk-weighted assets
Fully applied risk-weighted assets (RWA) decreased by CHF 12 bil-
Operating expenses lion to CHF 19 billion, largely as a result of a revised methodology
Total operating expenses decreased by CHF 223 million or 17% to for the allocation of operational risk RWA to business divisions
CHF 1,078 million. Net expenses for services from business divi- and Corporate Center units.
sions and other Corporate Center units decreased by CHF 99 mil- ➔➔Refer to the “Capital management” section of this report for
lion as a result of reduced consumption of shared services. Per- more information
sonnel expenses decreased by CHF 50 million, driven by a decrease
in staff levels. Net expenses for provisions for litigation, regulatory Leverage ratio denominator
and similar matters declined by CHF 36 million to CHF 584 mil- The fully applied leverage ratio denominator (LRD) decreased to
lion. Moreover, 2016 included an expense of CHF 33 million for CHF 22 billion from CHF 38 billion, consistent with the reduction
the annual UK bank levy compared with CHF 50 million in 2015. in balance sheet assets.
➔➔Refer to the “Capital management” and “Treasury management”
sections of this report for more information
➔➔Refer to “Corporate Center – Group Asset and Liability Manage-
ment” in this section for more information on the transfer of the
Risk Exposure Management function

112
Composition of Non-core and Legacy Portfolio

An overview of the composition of Non-core and Legacy Portfolio tude of the risks associated with them, nor do the metrics shown
is presented in the table below. in the table necessarily represent the risk measures used to man-
The groupings of positions by category and the order in which age and control these positions.
these are listed are not necessarily representative of the magni-

CHF billion

Financial and operating performance

Exposure category Description RWA Total assets1 LRD2
31.12.16 31.12.15 31.12.16 31.12.15 31.12.16 31.12.15

Rates (linear) Consists of linear OTC products (primarily vanilla interest

rate, inflation, basis and cross-currency swaps for all 2.5 3.6 42.6 55.9 9.4 17.8
major currencies and some emerging markets) and
non-linear OTC products (vanilla and structured options).
Rates (non-linear) More than 95% of gross PRVs are collateralized.
Uncollateralized exposures are well diversified across
counterparties, of which the majority is rated investment 0.8 0.7 14.5 22.3 2.0 2.8
grade. Approximately 40% of gross PRVs are due to
mature by end-2021.

Credit Consists primarily of a residual structured credit book

that is largely hedged against market risk. The remaining
counterparty risk is fully collateralized and diversified
across multiple names. The residual structured credit 0.5 0.5 1.0 2.0 2.2 7.0
book is expected to materially run off by end-2018. Also
includes corporate lending and residual distressed credit
positions, with a similar expected run-off profile.

Securitizations Consists primarily of a portfolio of CDS positions

referencing ABS assets with related cash and synthetic
hedges to mitigate the impact of directional movements. 2.4 1.5 1.4 1.8 1.4 1.9
The majority of the remaining positions are expected to
run off by end-2018.

Auction preferred stock (APS) Portfolio of long-dated APS and municipal ARSs. All APS
and auction rate securities (ARSs) were rated A or above and all ARS exposures were rated 0.7 0.9 2.5 2.8 2.5 2.8
Ba1 or above as of 31 December 2016.

Muni swaps and options Swaps and options with US state and local governments.
More than 95% of the PRVs are with counterparties that 0.4 0.5 2.3 3.4 1.7 2.5
were rated investment grade as of 31 December 2016.

Other Diverse portfolio of smaller positions. 1.5 1.8 4.2 6.3 3.2 3.53

Operational risk Operational risk RWA allocated to Non-core and Legacy

10.1 21.1 – – – –
Portfolio.

Total 18.9 30.7 68.5 94.4 22.4 38.5

1 Total assets of CHF 68.5 billion as of 31 December 2016 (CHF 94.4 billion as of 31 December 2015) include positive replacement values (gross exposure excluding the impact of any counterparty netting) of CHF 56.5
billion (CHF 78.5 billion as of 31 December 2015). 2 Swiss SRB leverage ratio denominator. 3 Comparative figure as of 31 December 2015 has been restated to reflect the transfer of the Risk Exposure Management
(REM) function from Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM in 2016. Refer to the “Corporate Center – Group Asset and Liability Management” section of this report for
more information.

113
Financial and operating performance
Corporate Center

2015 compared with 2014 net expenses related to certain disputed receivables. 2015
included an expense of CHF 50 million for the annual UK bank
Corporate Center – Non-core and Legacy Portfolio recorded a loss levy compared with CHF 52 million in 2014.
before tax of CHF 1,503 million compared with CHF 2,005 mil-
lion. Balance sheet assets
During 2015, balance sheet assets decreased to CHF 94 billion
Operating income from CHF 170 billion, mainly reflecting CHF 62 billion lower PRVs.
Operating income was negative CHF 203 million in 2015 and Within our rates portfolio, PRVs decreased by CHF 57 billion,
mainly related to losses from novation and unwind activities, and driven by fair value decreases following interest rate movements,
to valuation losses on financial assets designated at fair value. as well as by our ongoing reduction activity including negotiated
In the prior year, revenues were negative CHF 862 million, bilateral settlements (unwinds), third-party novations, including
mainly due to a net loss of CHF 345 million related to funding and transfers to central clearing houses (trade migrations), and agree-
debit valuation adjustments (FVA / DVA) on derivatives, of which ments to net down trades with other dealer counterparties (trade
CHF 252 million was recorded upon the implementation of FVA. compressions). Collateral delivered against over-the-counter
In addition, 2014 included negative revenues of CHF 197 million (OTC) derivatives decreased by CHF 9 billion.
due to novation und unwind activity in Rates, a loss of CHF 108 Assets classified as Level 3 in the fair value hierarchy totaled
million resulting from the termination of certain credit default CHF 2.2 billion as of 31 December 2015.
swap contracts and a loss of CHF 97 million in structured credit as
a result of exiting the majority of the correlation trading portfolio. Risk-weighted assets
Fully applied RWA decreased by CHF 5 billion to CHF 31 billion,
Operating expenses mainly as a result of reductions of outstanding OTC derivative
Total operating expenses increased by CHF 157 million or 14% to transactions, reflecting negotiated bilateral settlements with spe-
CHF 1,301 million, largely as net expenses for provisions for litiga- cific counterparties, third-party novations and trade compres-
tion, regulatory and similar matters increased by CHF 427 million sions.
to CHF 620 million. This increase was partly offset by CHF 135
million lower net expenses for services from business divisions and Leverage ratio denominator
other Corporate Center units as a result of reduced consumption Adjusted for the REM transfer, the LRD was CHF 38 billion as of
of shared services. Moreover, 2014 included CHF 120 million in 31 December 2015.

114
Risk, treasury
and capital
management
Management report

Audited information according to IFRS 7 and IAS 1

Risk and capital disclosures provided in line with the requirements of International Financial Reporting Standard 7 (IFRS 7) Financial
Instruments: Disclosures, and International Accounting Standard 1 (IAS 1) Financial Statements: Presentation form part of the finan-
cial statements included in the ”Consolidated financial statements” section of this report and audited by the independent registered
public accounting firm, Ernst & Young Ltd, Basel. This information is marked as “Audited” within this section of the report. Audited
information provided in this section applies to both UBS Group AG (consolidated) and UBS AG (consolidated). Differences between
these two scopes of consolidation are provided where applicable.
Table of contents

117 Risk management and control 168 Treasury management

117 Overview of risks arising from our business activities 168 Balance sheet, liquidity and funding management
119 Risk categories 179 Off-balance sheet
120 Top and emerging risks 182 Currency management
121 Risk governance 183 Cash flows
122 Risk appetite framework
125 Internal risk reporting 184 Capital management
125 Risk measurement 184 Capital management objectives
129 Credit risk 184 Capital planning
148 Market risk 184 Capital management activities
159 Country risk 185 Swiss SRB capital framework
164 Operational risk 188 Swiss SRB loss-absorbing capacity
194 Risk-weighted assets
198 Leverage ratio denominator
200 Equity attribution framework

202 UBS shares

116
Risk management and control
Overview of risks arising from our business activities

The scale of our business activities is dependent on the capital we

have available to cover the risks in our business, the size of our
on- and off-balance sheet assets through their contribution to our
capital, leverage and liquidity ratios, and our risk appetite.
The table on the next page shows risk-weighted assets (RWA),
the leverage ratio denominator (LRD) and risk-based-capital (RBC),
as well as attributed tangible equity, total assets and operating
profit before tax on both a reported and adjusted basis for our
business divisions and Corporate Center units. This illustrates how
the activities in our business divisions and Corporate Center units
are captured in the risk measures mentioned above, and it illus-
trates their financial performance in the context of these measures.
➔➔Refer to the “Capital management” section of this report for
more information on risk-weighted assets, leverage ratio
denominator and our current and revised equity attribution

Risk, treasury and capital management

framework
➔➔Refer to “Statistical measures” in this section for more informa-
tion on risk-based capital
➔➔Refer to the “Performance by business division and Corporate
Center unit – reported and adjusted” table in the “Group
performance” section of this report for more information

117
Risk, treasury and capital management
Risk management and control

Key risks, risk measures and performance by business division and Corporate Center unit

Business Wealth Wealth Personal & Asset Investment CC – Services CC – Group CC – Non-core
divisions and Management Management Corporate Management Bank ALM and Legacy
Corporate Americas Banking Portfolio
Center units
Key risks Credit risk from Credit risk from Credit risk from Small amounts Credit risk from No material Credit and Credit risk from
arising from lending against lending against retail business, of credit and lending, risk exposures ­market risks remaining
business securities securities collat- mortgages, market risk ­derivatives arising from ­lending and
activities c­ ollateral and eral and secured and ­trading and management of derivatives
mortgages, and a ­mortgages unsecured ­securities the Group’s ­exposures
small amount of Market risk ­corporate ­financing ­balance sheet, Market risk is
derivatives from municipal ­lending, and a Market risk capital, profit or materially
­trading activity. securities and small amount of from primary loss and liquidity hedged
­Minimal taxable fixed derivatives underwriting portfolios
c­ ontribution to income securities ­trading activity. activities and Central manage-
market risk Minimal secondary trading ment of
c­ ontribution to ­liquidity,
market risk ­funding, coun-
terparty credit
and structural
FX risk

Operational risk is an inevitable consequence of being in business, as losses can result from inadequate or failed internal processes, people and systems, or from external events.
It can arise as a result of our past and current business activities across all business divisions and Corporate Center units.

Risk measures and performance

31.12.16
CC –
Wealth Personal & CC – Non-core
Wealth Management Corporate Asset Investment CC – Group and Legacy
CHF billion, as of or for the year ended Management Americas Banking Management Bank Services ALM Portfolio Group
Risk-weighted assets (fully applied)1 25.8 23.8 41.6 3.9 70.4 27.6 10.6 18.9 222.7
of which: credit risk 12.5 9.1 37.7 1.6 37.0 1.4 7.3 6.2 112.8
of which: market risk 0.0 1.4 0.0 0.0 14.0 (3.2)2 0.7 2.6 15.5
of which: operational risk 13.2 13.2 3.9 2.3 19.5 13.1 2.5 10.1 77.8
Leverage ratio denominator (fully applied)3 115.5 68.1 152.2 2.7 231.2 5.8 272.4 22.4 870.5
Risk-based capital4 1.5 1.3 2.7 0.3 7.8 12.7 5.2 2.4 33.9
Average attributed tangible equity5 2.8 1.9 4.1 0.2 7.6 19.2 4.3 2.1 42.2
Total assets 115.5 65.9 139.9 12.0 242.3 23.7 267.2 68.5 935.0
Operating profit / (loss) before tax (as reported) 1.9 1.1 1.8 0.5 1.0 (0.8) (0.2) (1.1) 4.1
Operating profit / (loss) before tax (adjusted)6 2.4 1.2 1.8 0.6 1.5 (0.9) (0.1) (1.1) 5.3

31.12.15
CC –
Wealth Personal & CC – Non-core
Wealth Management Corporate Asset Investment CC – Group and Legacy
CHF billion, as of or for the year ended Management Americas Banking Management Bank Services ALM7 Portfolio7 Group
Risk-weighted assets (fully applied)1 25.3 21.9 34.6 2.6 62.9 23.6 6.0 30.7 207.5
of which: credit risk 12.6 8.5 32.9 1.7 35.5 1.3 5.0 6.9 104.4
of which: market risk 0.0 1.0 0.0 0.0 10.5 (2.9)2 0.9 2.6 12.1
of which: operational risk 12.6 12.4 1.6 0.9 16.8 9.5 0.1 21.1 75.1
Leverage ratio denominator (fully applied)3 119.0 62.9 153.8 2.7 268.0 4.8 240.2 46.2 897.6
Risk-based capital4 1.0 1.3 2.9 0.3 6.1 12.6 3.6 2.7 30.3
Average attributed tangible equity5 2.8 1.9 3.9 0.4 7.2 15.9 3.2 2.9 38.2
Total assets 119.9 61.0 141.2 12.9 253.5 22.6 237.5 94.4 942.8
Operating profit / (loss) before tax (as reported) 2.7 0.7 1.6 0.6 1.9 (0.8) 0.3 (1.5) 5.5
Operating profit / (loss) before tax (adjusted)6 2.8 0.8 1.7 0.6 2.3 (1.1) (0.1) (1.4) 5.6
1 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 2 Corporate Center – Services market risk
RWA were negative, as they included the effect of portfolio diversification across businesses. 3 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more
information. 4 Refer to “Statistical measures” in this section for more information on risk-based capital. 5 Refer to the “Capital management” section of this report for more information on our equity attribution
framework. 6 Adjusted results are non-GAAP financial measures as defined by SEC regulations. Refer to the “Performance by business division and Corporate Center unit – reported and adjusted” table in the “Group
performance” section of this report for more information. 7 Comparative figures as of 31 December 2015 in this table have been restated to reflect the transfer of the Risk Exposure Management (REM) function from
Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM in 2016. Refer to “Corporate Center – Group Asset and Liability Management” in the “Corporate Center” sections in “Operating
environment and strategy” and “Financial and operating performance” of this report for more information.   

118
Risk categories

We categorize the risk exposures of our business divisions and Corporate Center units as outlined in the table below.

Risk definitions
Independent Captured in our risk
Risk managed by oversight by 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 Business management Risk Control
contractual obligations toward UBS. This includes settlement risk and loan underwriting risk:
Settlement risk: the risk of loss resulting from transactions that involve exchange of value
(e.g., security versus cash) where we must deliver without first being able to determine with certainty
that we will receive the countervalue
Loan underwriting risk: the risk of loss arising during the holding period of financing transactions
which are intended for further distribution 
Audited | Market risk (traded and non-traded): the risk of loss resulting from adverse movements in Business management Risk Control
market variables. Market variables include observable variables such as interest rates, foreign exchange
rates, equity prices, credit spreads and commodity (including precious metal) prices, and variables which
may be unobservable or only indirectly observable, such as volatilities and correlations. Market risk
includes issuer risk and investment risk:
Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an
issuer to which we are exposed through tradable securities or derivatives referencing the issuer
Investment risk: issuer risk associated with positions held as financial investments 
Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby Business management Risk Control
a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events
arising from country-specific political or macroeconomic developments

Risk, treasury and capital management

Consequential risks: the risks to which our businesses are exposed as a consequence of being in business
Audited | Liquidity risk: the risk of being unable to generate sufficient funds from assets to meet Group ALM Risk Control
payment obligations when they fall due, including in times of stress 
Audited | Funding risk: the risk of higher-than-expected funding costs due to wider-than-expected UBS
credit spreads when existing funding positions mature and need to be rolled over or replaced by other,
more expensive funding sources. If a shortage of available funding sources is expected in a stress event,
funding risk also covers potential additional losses from forced asset sales 
Structural foreign exchange risk: the risk of decreases in our capital due to changes in foreign Group ALM Risk Control
exchange rates with an adverse translation effect on capital held in currencies other than Swiss francs
Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and Business management Risk Control
systems, or from external events, including cyber risk. Operational risk includes, among other things,
legal risk, conduct risk and compliance risk:
Legal risk: (i) the financial risk resulting from the non-enforceability of a contract or the failure to Legal
assert non-contractual rights, or (ii) the financial or reputational risk resulting from UBS being held
liable for a contractual or legal claim, or otherwise being subject to a penalty or liability in a legal
action, based on a contractual or other legal claim, violation of law, or regulation, or infringement of
intellectual property rights, or failing to manage litigation or other actions appropriately or effectively
Conduct risk: the risk that the conduct of the firm or its individuals unfairly impacts Risk Control
clients or counterparties, undermines the integrity of the financial system or impairs effective competition
to the detriment of consumers.
Compliance risk: the financial or reputational risk incurred by us by not adhering to the applicable Risk Control
laws, rules and regulations, local and international best practice (including ethical standards) and our
own internal standards
Cyber risk: the risk of a material impact from an external or internal attack on our information systems
with the purpose of data theft, fraud or denial of service. Cyberattacks are manifestations of a cyber threat
into an act of aggression or criminal activity causing financial, regulatory or reputational harm or loss
Money laundering risk: the risk that UBS fails to detect money laundering activities to prevent the
financing of illegal activities (including terrorism) and fails to report suspicious activities or respond
to anti-money laundering requests from relevant authorities
Pension risk: the risk of a negative impact on our capital as a result of deteriorating funded status from Human Resources Risk Control and
decreases in the fair value of assets held in the defined benefit pension funds and / or changes in the Finance
value of defined benefit pension obligations due to changes in actuarial assumptions (e.g., discount rate,
life expectancy, rate of pension increase) and / or changes to plan designs
Environmental and social risk: the possibility of us suffering reputational or financial harm from Business management Risk Control
transactions, products, services or activities that involve a party associated with environmentally or
socially sensitive activities.
➔ Refer to the “UBS and Society” section of this report for more information
Business risks: the risks arising from the commercial, strategic and economic environment in which our businesses operate
Business risks: the potential negative impact on earnings from lower-than-expected business volumes Business management Finance
and / or margins, to the extent they are not offset by a decrease in expenses
Reputational risks
Reputational risk: the risk of a decline in our reputation from the point of view of our stakeholders, All businesses and All control functions
such as clients, shareholders, staff and the general public functions

119
Risk, treasury and capital management
Risk management and control

Top and emerging risks currency fluctuations,” and “Performance in the financial ser-
vices industry is affected by market conditions and the macro-
The top and emerging risks disclosed below reflect those that we economic climate” in the “Risk factors” section of this report,
currently think have the potential to materialize within one year these external pressures may have a significant adverse effect
and which could significantly affect the Group. Investors should on our business activities and related financial results, primarily
also carefully consider all information set out in the “Risk factors” through reduced margins and revenues, asset impairments and
section of this report, where we discuss these and other material other valuation adjustments. Accordingly, these macroeco-
risks we currently consider could impact our ability to execute our nomic factors are considered in the development of stress test-
strategy and may affect our business activities, financial condition, ing scenarios for our ongoing risk management activities.
results of operations and prospects. –– Our reputation is critical to achieving our strategic goals and
–– We continue to be exposed to a number of regulatory and financial targets, and damage to it can have fundamental neg-
legislative changes which could have a material adverse effect ative effects on our business and prospects, as described in
on our business, as discussed in the “Regulatory and legal “Our reputation is critical to the success of our business” in the
developments” section of this report, and “Regulatory and “Risk factors” section of this report.
legal changes may adversely affect our business and our ability –– Due to the operational complexity of all our businesses, we are
to execute our strategic plans” in the “Risk factors” section of continually exposed to operational risks such as process error,
this report. failed execution, system failures and fraud. Conduct risks are
–– We are subject to various claims, disputes, legal proceedings inherent in our businesses. Moreover, financial crime, including
and government investigations and we anticipate that our money laundering, terrorist financing, sanctions violation,
ongoing business activities will continue to give rise to such fraud, bribery and corruption, continues to present risks, as
matters in the future, as noted under the item “Material legal emerging technologies and changing geopolitical risks increase
and regulatory risks arise in the conduct of our business” in the complexity, and continued heightened regulatory attention
“Risk factors” section of this report. Information on litigation, and expectations result in increased overall risk. In addition,
regulatory and similar matters we currently consider significant one of the most critical risks facing the broader industry is the
is disclosed in “Note 20 Provisions and contingent liabilities” in threat of cyberattacks, which continue to evolve and become
the “Consolidated financial statements” section of this report. more powerful. Along with the rest of the industry we face
–– We are exposed to a number of macroeconomic issues as well ongoing threats, such as data theft, disruption of service and
as general market conditions. As noted under the items “Con- cyber fraud, all of which have the potential to significantly
tinuing low or negative interest rates may have a detrimental impact our business. Refer to “Operational risk” in this section
effect on our capital strength, liquidity and funding position, and “Operational risks affect our business” in the “Risk fac-
and profitability,” “Our global presence subjects us to risk from tors” section of this report for more information.

120
Risk governance CEO. Control functions provide independent oversight of risks,
including setting risk limits and protecting against non-compli-
Our risk governance framework operates along three lines of ance with applicable laws and regulations. Our third line of
defense. Our first line of defense, business management, owns its defense, Group Internal Audit (GIA), reports to the Audit Commit-
risk exposures and is required to maintain effective processes and tee of the Board of Directors and evaluates the overall effective-
systems to manage its risks, including robust and comprehensive ness of governance, risk management and the control environ-
internal controls and documented procedures. Business manage- ment, including the assessment of how the first and second lines
ment has appropriate supervisory controls and review processes in of defense meet their objectives.
place designed to identify control weaknesses and inadequate These key roles and responsibilities for risk management and
processes. Our second line of defense, the control functions, are control are illustrated in the following chart and described on the
independent from the business and report directly into the Group next pages.

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121
Risk, treasury and capital management
Risk management and control

Audited | The Board of Directors (BoD) is responsible for deter- affairs, as well as treasury and capital management, including the
mining the risk principles, risk appetite and major portfolio limits management of funding and liquidity risk and UBS’s regulatory
of the Group, including their allocation to the business divisions capital ratios.
and Corporate Center units. The BoD is supported by the BoD The Group General Counsel (Group GC) is responsible for
Risk Committee, which monitors and oversees the Group’s risk implementing the Group’s risk management and control princi-
profile and the implementation of the risk framework as approved ples for legal matters, and for managing our legal function.
by the BoD, as well as assessing the Group’s key risk measurement Group Internal Audit (GIA) independently assesses the adher-
methodologies. The Corporate Culture and Responsibility Com- ence to our strategy, the effectiveness of governance, risk man-
mittee supports the BoD in fulfilling its duty to safeguard and agement and control processes at Group, business division and
advance the Group’s reputation for responsible and sustainable regional levels, including compliance with legal, regulatory and
conduct. It reviews and assesses stakeholder concerns and expec- statutory requirements, as well as with internal policies and con-
tations pertaining to UBS’s societal performance and corporate tracts. GIA has a functional reporting line to the Audit Committee.
culture and recommends appropriate actions to the BoD. The above roles and responsibilities are replicated for certain
The Group Executive Board (GEB) implements the risk frame- significant legal entities of the Group through the appointment of
work, controls the Group’s risk profile and approves key risk entity level Presidents, Chief Risk Officers, Chief Financial Officers
­ olicies.
p and General Counsels. 
The Group Chief Executive Officer (Group CEO) is responsible
for the Group’s results, has risk authority over transactions, posi- Risk appetite framework
tions and exposures, and allocates portfolio limits approved by the
BoD within the business divisions and Corporate Center units. Our risk appetite is defined at the aggregate level and reflects the
The business division Presidents are accountable for the results types of risk that we are willing to accept or intend to avoid. It is
of their business divisions. This includes actively managing their established via a complementary set of qualitative and quantita-
risk exposures, and ensuring profit potential, risk, balance sheet tive risk appetite statements defined on a Group-wide level and is
and capital usage are balanced. The regional Presidents coordi- embedded throughout our business divisions and legal entities
nate and implement UBS’s strategy in their regions in conjunction through Group, business division and legal entity policies, limits
with the business division Presidents and heads of the control and and authorities. These statements are a critical foundation to
support functions. They have a veto power over decisions with maintaining a robust risk culture throughout our organization.
respect to all business activities that may have a negative regula- The “Risk appetite framework” chart on the next page shows the
tory or reputational effect in their respective regions. key elements of this framework, which are described in more
The Group Chief Risk Officer (Group CRO) is responsible for detail below.
Risk Control. Risk Control independently oversees all primary risks Qualitative statements aim to ensure we maintain the desired
and most consequential risks as outlined in the “Risk categories” risk culture. Quantitative risk appetite objectives are designed to
section above. This includes establishing methodologies to mea- enhance the Group’s resilience against the impact of potential
sure and assess risk, setting risk limits, and developing and operat- severe adverse economic or geopolitical events. These objectives
ing an appropriate risk control infrastructure. Risk Control is also cover areas such as the Group’s capital buffer, solvency, earnings,
the central function for model risk management, which includes leverage, liquidity and funding, and are subject to periodic review,
the validation of models used in the firm. The risk control process including as part of the annual business planning process.
is supported by a framework of policies and authorities. Business These objectives are complemented by operational risk appe-
division and regional Chief Risk Officers have delegated authority tite objectives, which are established for each of our operational
for their respective divisions and, regions. Moreover, authorities risk categories, such as market conduct, theft, fraud, data confi-
are delegated to risk officers according to their expertise, experi- dentiality and technology risks. Operational risk events that
ence and responsibilities. exceed predetermined risk tolerances, expressed as percentages
The Group Chief Financial Officer (Group CFO) is responsible of the Group’s operating income, must be escalated to the respec-
for assessing and ensuring transparency in the financial perfor- tive business division President or higher, as appropriate.
mance of the Group and business divisions, and for ensuring that The quantitative risk appetite objectives are supported by a
disclosure of our financial performance meets regulatory require- comprehensive suite of risk limits set at the portfolio level. These
ments and corporate governance standards. The Group CFO may apply across the Group, within a business division or busi-
manages the Group’s and divisional financial control functions, ness unit, at legal entity level, or to an asset class. These addi-
including financial accounting, controlling, forecasting, planning tional quantitative controls are typically bottom-up and are
and reporting processes. The Group CFO also provides external designed to monitor specific portfolios and to identify potential
certifications under sections 302 and 404 of the Sarbanes-Oxley risk concentrations.
Act of 2002. Further responsibilities include managing UBS’s tax

122
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Risk reports aggregating measures of risk across products and advantage. By placing prudent and disciplined risk-taking at the
businesses provide insight into the amounts, types, and sensitivi- center of every decision, we want to achieve our goals of deliver-
ties of the various risks in our portfolios and ensure compliance ing unrivaled client satisfaction, creating long-term value for
with defined limits. Risk officers, senior management and the BoD stakeholders, and making UBS one of the most attractive compa-
use this information to understand our risk profile and the perfor- nies to work for in the world.
mance of the portfolios. Our risk appetite framework combines all the important ele-
The status of risk appetite objectives is evaluated each month ments of our risk culture, expressed in our Pillars, Principles and

Risk, treasury and capital management

and reported to the BoD and the GEB. Our risk appetite may Behaviors, our Risk Management and Control Principles, our Code
change over time. Therefore, portfolio limits and associated of Conduct and Ethics, and our Total Reward Principles. Together,
approval authorities are subject to periodic reviews and changes, these aim to align the decisions we make with the Group’s strat-
particularly in the context of our annual business planning process. egy, principles and risk appetite. They help provide a solid founda-
In addition, recovery risk indicators embedded in the firm’s tion for promoting risk awareness, leading to appropriate risk-
recovery plan are drawn from the set of risk limits that manage- taking and the establishment of robust risk management and
ment monitors on a routine basis. control processes. These principles are supported by a range of
Our risk appetite framework is encompassed in a single over- initiatives covering employees at all levels. This includes the UBS
arching policy and conforms to the Financial Stability Board’s House View on Leadership, which is a set of explicit expectations
“Principles for An Effective Risk Appetite Framework” published for leaders that establishes consistent leadership standards across
in 2013. UBS. These initiatives also include our principles of good supervi-
sion, which establish clear expectations of managers and employ-
Risk principles and risk culture ees with respect to supervisory responsibilities, specifically: to take
A strong risk culture is a prerequisite for success in today’s highly responsibility, to organize their business, to know their employees
complex operating environment. We are focused on further and what they do, to know their business, to create a good com-
strengthening our culture as a source of sustainable competitive pliance culture and to respond to and resolve issues.

Risk management and control principles

Protection of Protection of reputation Business management Independent controls Risk disclosure

financial strength accountability
Protecting UBS’s financial strength Protecting our reputation through Ensuring management account- Independent control functions Disclosure of risks to senior
by controlling our risk exposure a sound risk culture characterized ability, whereby business manage- that monitor the effectiveness of ­management, the BoD, investors,
and avoiding potential risk con- by a holistic and integrated view ment, as opposed to Risk Control, the businesses’ risk management regulators, credit rating agencies
centrations at individual exposure of risk, performance and reward, owns all risks assumed throug