Annual Report 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☐
REGISTRATION
STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
☑
EXCHANGE ACT OF 1934
For the fiscal year ended
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
☐
SHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number:
(Jurisdiction of Incorporation or Organization)
,
,
,
,
(Address of Principal Executive Offices)
UBS AG meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K, as applied to annual
reports on Form 20-F,
and is therefore filing this Form 20-
F
with the reduced disclosure format.
,
Telephone: (
)
(Name, Telephone,
E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of
the Act:
Please see page 3.
Securities registered or to be registered pursuant to Section 12(g) of
the Act:
Please see page 3.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Please see page 3.
Annual Report 2023
Indicate the number of outstanding shares of each of the issuer’s classes of capital
or common stock as of 31 December 2023:
UBS AG
Ordinary shares, par value USD 0.10 per share:
(none of which are treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes
☐
☑
If this report is an annual or transition report, indicate by check mark if the registrant is not required
to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
☐
☑
Note — Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 from their obligations under those
Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
☑
No
☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
☑
No
☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer
or an
emerging growth company.
See the definitions of “large accelerated filer”, “accelerated filer” and
“emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
☑
☐
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP,
indicate by check mark
if the registrant has elected not to use the extended transition period for
complying with any new or revised financial
accounting standards† provided pursuant to Section 13(a) of the Exchange
Act.
☐
† The term “new or revised financial accounting standard” refers to any update
issued by the Financial Accounting Standards
Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of
the
effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared
or issued its audit report.
☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check
mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously
issued financial statements.
☐
Indicate by check mark whether any of those error corrections are restatements
that required a recovery analysis of incentive-
based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant
to
§240.10D-1(b).
☐
Indicate by check mark which basis of accounting the registrant has used
to prepare the financial statements included in this
filing.
U.S. GAAP
☐
Standards Board
☑
Other
☐
Annual Report 2023
If “Other” has been checked in response to the previous question, indicate by
check mark which financial statement item the
registrant has elected to follow.
Item 17
☐
Item 18
☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the
Exchange Act)
Yes
☐
☑
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Title of each class
Trading
symbol(s)
Name of each
exchange on
which registered
ETRACS Alerian Midstream Energy Index ETN due June 21, 2050
AMNA
NYSE Arca
ETRACS Alerian Midstream Energy High Dividend Index
ETN due July 19, 2050
AMND
NYSE Arca
ETRACS Alerian Midstream Energy Total
Return Index ETN due October 20, 2050
AMTR
NYSE Arca
ETRACS Alerian MLP Index ETN Series B due July 18, 2042
AMUB
NYSE Arca
ETRACS Quarterly Pay 1.5x Leveraged MarketVector
BDC Liquid Index ETN due June 10,
2050
BDCX
NYSE Arca
ETRACS MarketVector
Business Development Companies Liquid Index ETN due April 26,
2041
BDCZ
NYSE Arca
ETRACS Monthly Pay 1.5x Leveraged Closed-End Fund Index
ETN due June 10, 2050
CEFD
NYSE Arca
ETRACS Bloomberg Commodity Index Total
Return Series B due October 31, 2039
DJCB
NYSE Arca
ETRACS 2x Leveraged MSCI USA ESG Focus TR ETN due September 15,
2061
ESUS
NYSE Arca
UBS AG FI Enhanced Large Cap Growth ETN due
June 19, 2024
FBGX
NYSE Arca
ETRACS 2x Leveraged IFED Invest with the Fed TR Index ETN due September
15, 2061
FEDL
NYSE Arca
ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility
ETN Series B due
October 21, 2049
HDLB
NYSE Arca
ETRACS IFED Invest with the Fed TR Index ETN due September 15,
2061
IFED
NYSE Arca
ETRACS 2x Leveraged US Value
Factor TR ETN due February 9, 2051
IWDL
NYSE Arca
ETRACS 2x Leveraged US Growth Factor TR ETN due February 9, 2051
IWFL
NYSE Arca
ETRACS 2x Leveraged US Size Factor TR ETN due February 9, 2051
IWML
NYSE Arca
E-TRACS Alerian MLP Infrastructure Index Series B due April 2, 2040
MLPB
NYSE Arca
ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN due
June 10, 2050
MLPR
NYSE Arca
ETRACS 2x Leveraged MSCI US Momentum Factor TR ETN due
February 9, 2051
MTUL
NYSE Arca
ETRACS Monthly Pay 1.5x Leveraged Mortgage REIT ETN due June 10, 2050
MVRL
NYSE Arca
ETRACS Monthly Pay 2xLeveraged Preferred Stock ETN due September
25, 2048
PFFL
NYSE Arca
ETRACS 2x Leveraged MSCI US Quality Factor TR ETN due February
9, 2051
QULL
NYSE Arca
ETRACS 2x Leveraged US Dividend Factor TR ETN due February 9, 2051
SCDL
NYSE Arca
ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend
ETN Series B due
November 10, 2048
SMHB
NYSE Arca
ETRACS CMCI Total Return
ETN Series B due April 5, 2038
UCIB
NYSE Arca
ETRACS 2x Leveraged MSCI US Minimum Volatility
Factor TR ETN due February 9, 2051
USML
NYSE Arca
ETRACS Whitney US Critical Technologies
ETN due March 13, 2053
WUCT
NYSE Arca
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
Annual Report 2023
Cautionary Statement:
Refer to the
Cautionary Statement Regarding Forward
-Looking Statements
Report 2023 (page 266).
Cross-reference table
Set forth below are the respective items of SEC Form 20-F,
and the locations in this document where the corresponding
information can be found.
●
Annual Report
●
Supplement
refers to certain supplemental information contained in this forepart of
the Form 20-F,
starting on page 9
following the cross-reference table.
●
Financial Statements
refers to the consolidated financial statements of UBS AG, contained in the Annual
Report.
In the cross-reference table below,
page numbers refer either to the Annual Report or the Supplement, as noted.
Please see page 3 of the Annual Report for definitions of terms used in this Form
20-F relating to UBS.
Form 20-F item
Response or location in this filing
Item 1
.
Identity of Directors,
Senior Management and
Advisors.
Not applicable.
Item 2
.
Offer Statistics and
Expected Timetable.
Not applicable.
Item 3.
B – Capitalization and
Indebtedness.
Not applicable.
C – Reasons for the Offer and
Use of Proceeds.
Not applicable.
D – Risk Factors.
Annual Report,
(23-35).
Item 4
.
Information on the Company.
A
– History and Development
of the Company
Not required under the reduced disclosure format.
B – Business Overview.
Annual Report,
Our businesses
C – Organizational Structure.
Not required under the reduced disclosure format.
D – Property, Plant and
Equipment.
Annual Report,
Property, plant and
equipment
(252)
Information required by SEC
Regulation S-K Part 1400
Annual Report,
Information required
by Subpart 1400 of Regulation S-K
(253-258),
Loss
history statistics
(76-77), and Note 9 to the Financial Statements (
Financial assets at
amortized cost and other positions in scope of expected credit
loss measurement)
168).
Item 4A
.
Unresolved Staff
Comments.
None.
Item 5
.
Operating and Financial Review and Prospects.
A
– Operating Results.
Annual Report,
Financial and operating performance
Statements (
Summary of material accounting policies
) (140-156).
B – Liquidity and Capital
Resources.
Not required under the reduced disclosure format.
C—Research and Development,
Patents and Licenses, etc.
Not required under the reduced disclosure format.
D—Trend Information.
Not required under the reduced disclosure format.
E—Critical Accounting
Estimates
Not applicable.
Item 6.
A
– Directors and Senior
Management.
Not required under the reduced disclosure format.
B – Compensation.
Not required under the reduced disclosure format.
C – Board practices.
1: Annual Report,
Board of Directors
(117-119).
The term of office for members of the
Board of Directors and its Chairman expires after completion of the next Annual
General
Meeting. The next UBS AG Annual General Meeting is scheduled on 23 April
2024.
2: Annual Report,
Clauses on change of control
Statements (
Related parties
) (235-237).
3: Annual Report,
Members of the Board of Directors
Audit Committee
Compensation Committee
(118), and
Auditors
Annual Report 2023
D—Employees.
Not required under the reduced disclosure format.
E—Share Ownership.
Not required under the reduced disclosure format.
F—Disclosure of a registrant’s
action to recover erroneously
awarded compensation.
Not applicable.
Item 7.
A—Major Shareholders.
Not required under the reduced disclosure format.
B—Related Party Transactions.
Not required under the reduced disclosure format.
C—Interests of Experts and
Counsel.
Not applicable.
Item 8
.
Financial Information.
A—Consolidated Statements
and Other Financial Information.
1, 2, 3, 4, 6: Please see Item 18 of this Form 20-F.
5: Not applicable.
7: Information on material legal and regulatory proceedings is in Note 17 to
the Financial
Statements (
Provisions and contingent liabilities
) (176-180).
For developments during the year, please see also the
note
Provisions and contingent
liabilities
reports for the First, Second and Third Quarters 2023, filed on Forms 6-K
dated April 27,
2023, August 31, 2023 and November 7, 2023, respectively.
The disclosures in each such
Quarterly Report speak only as of their respective dates.
8: Annual Report,
(116).
B—Significant Changes.
None.
Item 9
.
The Offer and Listing.
A
– Offer and Listing Details.
Not applicable.
B—Plan of Distribution.
Not applicable.
C—Markets.
Cover page (3). UBS AG shares are not listed.
D—Selling Shareholders.
Not applicable.
E—Dilution.
Not applicable.
F—Expenses of the Issue.
Not applicable.
Item 10
.
Additional Information.
A—Share Capital.
Not applicable.
B—Memorandum and Articles
of Association.
1: Supplement (10-13).
2: Supplement (10-13).
3: Annual Report,
Share
capital structure
(115-116),
Shareholders' participation rights
(116),
Elections and terms of office
Statutory quorums
13).
4: Supplement (10-13).
5: Supplement (10-13).
6:
Share
capital structure
(115-116).
7: Annual Report,
Change of control and defense measures
8: There is no requirement for UBS AG shareholders to disclose ownership,
as UBS AG
shares are not listed.
9: Supplement (10-13) and Annual Report,
Share
capital structure
(115-116),
Shareholders' participation rights
Elections and terms of office
Change of
control and defense measures
10: Supplement (10-13).
Annual Report 2023
C—Material Contracts.
The Terms & Conditions
of the outstanding Tier 2 capital instrument are included
as
exhibit 4.1 to this Form 20-F.
For information on these notes, refer to
Swiss SRB total
loss-absorbing capacity framework
The parent bank merger agreement dated 7 December
2023 UBS AG and Credit Suisse
AG is filed as Exhibits 4.3
hereto and the Swiss bank merger agreement dated 9
February
2024 between UBS Switzerland AG and Credit Suisse (Schweiz) AG is filed
as Exhibit
4.4 hereto. The mergers described in these agreements
will be carried out with some
procedural simplifications and without any consideration given that
both companies are
or – in the case of the merger between UBS Switzerland AG and
Credit Suisse (Schweiz)
AG – will be wholly-owned by the same parent entity.
Upon completion, all assets and
liabilities of Credit Suisse AG and Credit Suisse (Schweiz) AG, respectively,
will, in
principle, transfer automatically to UBS AG and UBS Switzerland AG, respectively.
For
further information, please see
Integration of Credit Suisse
on page 4 of the Annual
Report.
The Asset Transfer Agreement by which
certain assets and liabilities of UBS AG were
transferred to UBS Switzerland AG is filed as Exhibit 4.2, and is described under
Joint
liability of UBS Switzerland AG
D—Exchange Controls.
Other than in relation to economic sanctions, there are no restrictions under
the Articles
of Association of UBS AG, nor under Swiss law,
as presently in force, that limit the right
of non-resident or foreign owners to hold UBS’s
securities freely. There
are currently no
Swiss foreign exchange controls or other Swiss laws restricting the import
or export of
capital by UBS or its subsidiaries, nor restrictions affecting the remittance
of dividends,
interest or other payments to non-resident holders of UBS securities. The
Swiss federal
government may impose sanctions on particular countries, regimes, organizations
or
persons which may create restrictions on exchange of control. A current
list, in German,
French and Italian, of such sanctions can be found at www.seco
-admin.ch. UBS may also
be subject to sanctions regulations from other jurisdictions where it operates
imposing
further restrictions.
E—Taxation.
UBS AG has no shareholders other than UBS Group AG, which is a Swiss company.
F—Dividends and Paying
Agents.
Not applicable.
G—Statement by Experts.
Not applicable.
H—Documents on Display.
UBS files periodic reports and other information with the Securities and Exchange
Commission. You
may read and copy any document that we file with the SEC on the
SEC’s website,
www.sec.gov
. Much of this information may also be found on the UBS
website at
www.ubs.com/investors
.
I—Subsidiary Information.
Not applicable.
J—Annual Report to Security
Holders
Not applicable
Item 11
.
Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information
About Market Risk.
Annual Report,
Market risk
(77-85).
(b) Qualitative Information
About Market Risk.
Annual Report,
Market risk
(77-85).
(c) Interim Periods.
Not applicable.
Item 12.
A
– Debt Securities
Not applicable.
B – Warrants and
Rights
Not applicable.
C – Other Securities
Not applicable.
D – American Depositary Shares
Not applicable.
Item 13
.
Defaults, Dividend
Arrearages and Delinquencies.
There has been no material default in respect of any indebtedness of UBS or any of
its
significant subsidiaries or any arrearages of dividends or any other material delinquency
not cured within 30 days relating to any preferred stock of UBS AG or any of its
significant subsidiaries.
Item 14.
to the Rights of Security Holders
and Use of Proceeds.
None.
Item 15.
(a)
Disclosure Controls and
Procedures
Annual Report,
US disclosure requirements
(123), and
Exhibit 12 to this Form 20-
F.
Annual Report 2023
(b) Management’s Annual
Report on Internal Control over
Financial Reporting
Annual Report,
Management’s
report on internal control
over financial reporting
(c) Attestation Report of the
Registered Public Accounting
Firm
Annual Report,
Report of Independent Registered Public Accounting Firm
(126).
(d) Changes in Internal Control
over Financial Reporting
None.
Item 16A.
Audit Committee
Financial Expert.
Not required under the reduced disclosure format.
Item 16B.
Code of Ethics.
Not required under the reduced disclosure format.
Item 16C.
Principal Accountant
Fees and Services.
Annual Report,
Auditors
None of the non-audit services so disclosed were approved by the Audit Committee
pursuant to paragraph (c) (7)(i)(C) of Rule 2-01 of Regulation S-X.
Item 16D.
Exemptions from
the Listing Standards for
Audit Committees.
Not applicable.
Item 16E.
Purchases of Equity
Securities by the Issuer and
Affiliated Purchasers.
UBS AG does not have any class of equity securities registered pursuant
to Section 12 of
the Exchange Act.
Item 16F.
Changes in
Registrant’s Certifying
Accountant.
Not applicable.
Item 16G.
Corporate
Governance.
UBS AG has debt securities listed on the New York
Stock Exchange (NYSE), and
therefore discloses below the key differences from its corporate governance
practices to
the NYSE standards relevant to US-listed companies.
Responsibility of the Audit Committee regarding independent auditors
Our Audit Committee is responsible for the compensation, retention and oversight
of
independent auditors. It assesses the performance and qualifications of
external auditors
and submits proposals for appointment, reappointment or removal of independent
auditors to the BoD. As required by the Swiss Code of Obligations, the BoD submits
its
proposals for a shareholder vote at the annual general meeting (AGM). Under
NYSE
standards audit committees are responsible for appointing independent auditors.
Discussion of risk assessment and risk management policies by the
Risk Committee
As per the Organization Regulations of UBS AG, the Risk Committee,
instead of the
Audit Committee, as per NYSE standards, oversees our risk principles and
risk capacity
on behalf of the BoD. The Risk Committee is responsible for monitoring our
adherence
to those risk principles and monitoring whether business divisions and
control units
maintain appropriate systems of risk management and control.
Supervision of the internal audit function
Although under NYSE standards only audit committees supervise internal
audit
functions, the Chairman of the BoD (the Chairman) and the Audit Committee
share the
supervisory responsibility and authority with respect to the internal
audit function.
Responsibility of the Compensation Committee for performance
evaluations of senior
management of UBS Group AG
In line with Swiss law, UBS Group
AG’s Compensation Committee, together
with its
BoD, proposes for shareholder approval at the UBS Group AG AGM the maximum
aggregate amount of compensation for the BoD, the maximum aggregate amount
of fixed
compensation and the aggregate amount of variable compensation for
the Group
Executive Board. As UBS AG’s BoD members
are the same as the UBS Group AG BoD
members, this approval by group shareholders is also applicable for UBS AG. The
members of the Compensation Committee are elected by the AGM. Under
NYSE
standards it is the responsibility of compensation committees to evaluate
senior
management’s performance
and to determine and approve, as a committee or together
with the other independent directors, the compensation thereof.
Proxy statement reports of the Audit Committee and the Compensation Committee
NYSE standards require the aforementioned committees to submit their reports
directly to
shareholders. However, under Swiss law all reports
to shareholders, including those from
Annual Report 2023
the aforementioned committees, are provided to and approved by the BoD, which
has
ultimate responsibility to the shareholders.
Shareholder votes on equity compensation plans
NYSE standards require shareholder approval for the establishing of
and material
revisions to all equity compensation plans. However,
as per Swiss law, the BoD approves
compensation plans. Shareholder approval is only mandatory if
equity-based
compensation plans require an increase in capital. No shareholder approval
is required if
shares for such plans are purchased in the market.
Item 16H.
Mine Safety
Disclosure.
Not applicable.
Item 16I.
Disclosure Regarding
Foreign Jurisdictions that
Prevent Inspections
Not applicable.
Item 16J.
Insider trading
policies
Not applicable.
Item 16K.
Cybersecurity.
Annual Report,
Operational risks affect our business
Risk management and
control
Cybersecurity governance
Item 17.
Financial Statements.
Not applicable.
Item 18.
Annual Report,
Financial statements
(124-249), and
Additional regulatory information
(251-258).
Item 19.
Exhibits
Supplement (14).
Annual Report 2023
Supplemental information
Disclosure Pursuant To
Section 219 of the Iran Threat Reduction And Syrian
Human Rights Act
Section 219 of the US Iran Threat Reduction and Syria Human Rights Act of
2012 (“ITRA”) added Section 13(r) to the US
Securities Exchange Act of 1934, as amended (the “Exchange Act”) requiring
each SEC reporting issuer to disclose in its
annual and, if applicable, quarterly reports whether it or any of its affiliates
have knowingly engaged in certain activities,
transactions or dealings relating to Iran or with the Government of Iran
or certain designated natural persons or entities
involved in terrorism or the proliferation of weapons of mass destruction during
the period covered by the report. The required
disclosure may include reporting of activities not prohibited by US or other
law, even if conducted outside the
US by non-US
affiliates in compliance with local law.
Pursuant to Section 13(r) of the Exchange Act, we note the following for
the period
covered by this annual report:
UBS has a Group Sanctions Policy that prohibits transactions involving
sanctioned countries, including Iran, and sanctioned
individuals and entities. However, UBS
Switzerland AG maintains one account involving the Iranian government
under the
auspices of the United Nations in Geneva after agreeing with the Swiss government
that it would do so only under certain
conditions. These conditions include that payments involving the account
must: (1) be made within Switzerland; (2) be
consistent with paying rent, salaries, telephone and other expenses necessary for
its operations in Geneva; and (3) not involve
any Specially Designated Nationals (SDNs) blocked or otherwise restricted under
US or Swiss law. In 2023, the gross
revenues for this UN-related account were approximately USD 5,731.46.
We do not allocate expenses
to specific client
accounts in a way that enables us to calculate net profits with respect to any individual
account. UBS AG intends to continue
maintaining this account pursuant to the conditions it has established with
the Swiss Government and consistent with its Group
Sanctions Policy.
As previously reported, UBS had certain outstanding legacy trade finance arrangements
issued on behalf of Swiss client
exporters in favor of their Iranian counterparties. In February 2012 UBS ceased accepting
payments on these outstanding
export trade finance arrangements and worked with the Swiss government
who insured these contracts (Swiss Export Risk
Insurance "SERV").
On December 21, 2012, UBS and the SERV
entered into certain Transfer and Assignment
Agreements
under which SERV
purchased all of UBS's remaining receivables under or in connection with
Iran-related export finance
transactions. Hence, the SERV
is the sole beneficiary of said receivables. There was no financial activity
involving Iran in
connection with these trade finance arrangements in 2023, and no gross revenue
or net profit.
In connection with these trade finance arrangements, UBS Switzerland
AG has maintained one existing account relationship
with an Iranian bank. This account was established prior to the US designation
of this bank and maintained due to the existing
trade finance arrangements. In 2007, following the designation of the bank
pursuant to sanctions issued by the US, UN and
Switzerland, the account was blocked under Swiss law and remained
subject to blocking requirements until January 2016.
Client assets as of 31 December 2023 were CHF 3,097.40. Gross revenues were
USD 3.69 equivalent.
Annual Report 2023
Item 10.
Additional Information.
B—Memorandum and Articles of Association.
Please see the Articles of Association of UBS AG (Exhibit 1.1 to this Form
20-F) and the Organization Regulations of UBS
AG (Exhibit 1.2 to this Form 20-F).
Set forth below is a summary of the material provisions of the Articles of Association
of UBS AG (the “Articles”),
Organization Regulations of UBS AG (the “Organization
Regulations”) and relevant Swiss laws, in particular the Swiss Code
of Obligations, relating to the ordinary shares of UBS AG (the “shares”).
This description does not purport to be complete and
is qualified in its entirety by references to Swiss law,
including Swiss company law,
and to the Articles and Organization
Regulations.
The principal legislation under which UBS AG operates, and under which the shares are
issued, is the Swiss Code of
Obligations.
Shares and Shareholders
Shares
The shares are registered shares
(Namenaktien)
securities (
einfache Wertrechte
) (in the sense of the Swiss Code of Obligations)The shares are fully paid up,
and there is no
liability of shareholders to further capital calls by UBS AG. The shares rank
pari passu
including voting rights, entitlement to dividends, share of the liquidation
proceeds in case of the liquidation of UBS AG,
preemptive rights in the event of a share issue (
Bezugsrechte
) and advance subscription rights in the event of the issuance of
equity-linked securities (
Vorwegzeichnungsrechte
).
Share Register
Swiss law distinguishes between registration with and without voting rights.
Shareholders must be registered in our share
register as shareholders with voting rights in order to vote and participate
in shareholders’ meetings or to assert or exercise
other rights related to voting rights.
Swiss law and the Articles require UBS AG to keep a share register in which the names,
addresses and nationality (or
registered office in the case of legal entities) of the owners of the
shares are recorded. The main function of the share register is
to register shareholders entitled to vote and participate in shareholders’
meetings, or to assert or exercise other rights related to
voting rights.
A shareholder will be registered in our share register with voting rights upon disclosure
of its name, address and nationality (or
registered office in the case of legal entities). However,
we may decline a registration with voting rights if the shareholder does
not declare that it has acquired the shares in its own name and for its own account. If the shareholder
refuses to make such
declaration, it will be registered in our share register as a shareholder without
voting rights.
In order to register shares in our share register,
a shareholder must file a share registration form with the share register.
Failing
such registration, a shareholder may not vote at or participate in shareholders’
meetings, but will be entitled to receive
dividends and other rights with financial value, such as preemptive rights in the event of
a share issue (
Bezugsrechte
) and
advance subscription rights in the event of the issuance of equity-linked
securities (
Vorwegzeichnungsrechte
), and its share of
liquidation proceeds. Shareholders registered in our share register may at
any time request from us a confirmation of the shares
that they hold according to our share register.
Shareholders’ Meetings
A shareholders’ meeting is convened by the Board of Directors (the “BoD”) or,
if necessary, by the company’s
statutory
auditors upon notification of the shareholders at least 20 days prior to such meeting.
An invitation to any shareholders’ meeting
will be sent to all registered shareholders. The Articles do not require a minimum number
of shareholders to be present in order
to hold a shareholders’ meeting.
Unless otherwise provided by Swiss law or the Articles (as indicated below),
resolutions require the approval of a majority of
the votes represented, excluding blank and invalid ballots, at a shareholders’
meeting in order to be passed.
Annual Report 2023
Under Swiss corporate law (or Swiss banking law,
as the case may be), a resolution passed at a shareholders’ meeting with the
approval of at least a two-thirds of the votes, and a majority of the nominal value
of shares, in each case represented at such
meeting is required in order to approve:
●
A change in the corporation’s stated purpose
in its articles of association;
●
The consolidation of shares, unless the consent of all the shareholders concerned
is required;
●
The restriction or exclusion of preemptive rights in the event of a share
issue (
Bezugsrechte
);
●
The conversion of participation certificates into shares;
●
The introduction of shares with preferential voting rights;
●
Any restriction on the transferability of registered shares;
●
Any change in the currency of the share capital;
●
The introduction of a casting vote for the person chairing the shareholders’
meeting;
●
A provision of the articles of association on holding the shareholders’ meeting abroad;
●
The delisting of the equity securities of the corporation;
●
The creation of conditional capital, the introduction of a capital band or,
in accordance with Swiss banking law,
the
introduction of reserve capital;
●
An increase in share capital in consideration of contributions in kind,
or by off-set of a claim, or involving the
granting of special privileges, or from the transformation of reserves into share
capital;
●
A change of domicile of the corporation;
●
The introduction of an arbitration clause in the articles of association;
●
Dispensing with the designation of an independent voting representative for
conducting a virtual shareholders’
meeting in the case of corporations whose shares are not listed on a stock exchange
(e.g., UBS AG); or
●
Dissolution of the corporation.
Under the Articles, a resolution passed at a shareholders’ meeting with the
approval of at least two-thirds of the votes
represented at such meeting is required in order to approve:
●
A change to the provisions in the Articles regarding the number of members of
the BoD;
●
Removal of one-quarter or more of the members of the BoD; or
●
The deletion or modification of the provision of the Articles establishing these supermajority
requirements.
At shareholders’ meetings, a shareholder can be represented by a legal
representative or under a written power of attorney by a
proxy who does not need to be a shareholder or,
under a written or electronic power of attorney,
by the independent proxy.
Votes
are taken electronically, by
written ballot or by a show of hands. Shareholders representing at least 3% of the votes
represented may always request that a vote or election take place electronically
or by a written ballot.
Net Profits and Dividends
Swiss law requires that at least 5% of the annual net profits of a corporation must
be retained and booked as statutory retained
earnings until these retained earnings equal, together with the corporation’s
statutory capital reserve, no less than 50% of the
corporation’s share capital registered
in the commercial register. Any remaining
net profit of the corporation may be allocated
by the shareholders represented at the applicable shareholders’ meeting.
Under Swiss law, dividends
may be paid by a corporation only if, based on its audited standalone statements prepared
in
accordance with Swiss law, the
corporation has sufficient distributable profits from the previous
financial years or if the
reserves of the corporation are sufficient to allow distribution
of a dividend. In either event, dividends may be paid by the
corporation only after approval by the shareholders’ meeting. The BoD may
propose to the shareholders that a dividend be
paid, but cannot itself set the dividend. The corporation’s
statutory auditors must confirm that any dividend proposal of the
BoD is in accordance with Swiss law and the corporation’s
articles of association.
Dividends are usually due and payable after the shareholders’ resolution relating
to the allocation of profits has been passed.
Under Swiss law, the statute of
limitations in respect of dividend payments is five years.
Preemptive and Advance Subscription Rights
Under Swiss law, any share
issue, whether for cash or non-cash consideration or for no consideration,
is subject to the prior
approval of the shareholders’ meeting. Existing shareholders of a Swiss corporation
have certain preemptive rights in the event
of a share issue (
Bezugsrechte
) and advance subscription rights in the event of the issuance of equity-linked
securities
(
Vorwegzeichnungsrechte
) to subscribe for the new shares or equity-linked securities, as the case may be, in
proportion to the
nominal amount of shares held. However,
the articles of association of the corporation or a resolution approved at a
shareholders’ meeting by at least two-thirds of the votes and a majority
of the nominal value of the shares, in each case
represented at the meeting, may limit or exclude such preemptive or advance
subscription rights in certain limited
circumstances.
Annual Report 2023
Notices
Notices to the shareholders may,
at the choice of the BoD, be validly given by publication in the Swiss Official Gazette of
Commerce or in a form that allows proof by text. The BoD may designate further means
of publication as well.
Board of Directors
Borrowing Power
Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds, provided
that any such borrowing
is entered into on arms’ length terms.
Listed companies, such as UBS Group AG, may grant loans to members of their
BoD based on their articles of association.
UBS Group AG’s articles of association
restrict its ability to grant loans to members of its BoD as follows: First, loans to
the
independent members of the BoD shall be made in accordance with the customary
business and market conditions. Second,
loans to the non-independent members of the BoD shall be made in the ordinary
course of business on substantially the same
terms as those granted to UBS employees. Third, the total amount of such
loas shall not exceed CHF 20m per member. As the
members of UBS AG’s BoD are the
same as the members of UBS Group AG’s BoD, these
restrictions are enforced with
respect to the UBS AG’s BoD members
even though this provision of Swiss law is not applicable to UBS AG.
BoD Compensation
The BoD is ultimately responsible for approving the compensation strategy and
principles proposed by the Compensation
Committee, which determines compensation-related matters in line with the
principles set forth in the Articles. As determined
in the Articles and the Organization Regulations, the Compensation
Committee supports the BoD with its duties to set
guidelines on compensation and benefits, to oversee implementation thereof,
to approve certain compensation, such as the total
compensation for the Chairman and the non-independent BoD members,
and, upon proposal of the Chairman, proposes the
remuneration / fee framework for independent BoD members for approval by
the BoD.
The members of the BoD of UBS AG are the same as of the UBS Group AG BoD. For UBS Group
AG, the Compensation
Committee supports the BoD with its duties to set guidelines on compensation
and benefits, to oversee implementation thereof,
to approve certain compensation and to scrutinize executive performance.
Annually, and on behalf of the Group
BoD, the
Compensation Committee of UBS Group AG (among other things):
●
approves the total compensation for the Chairman and the non-independent
BoD members;
●
upon proposal of the Chairman, proposes the remuneration / fee framework
for independent BoD members for
approval by the BoD;
●
upon proposal of the Chairman and Group CEO, approves the remuneration
/ fee frameworks for external supervisory
board members of significant Group entities;
●
proposes to the BoD, for approval by the AGM, the maximum aggregate amounts
of BoD compensation and GEB
fixed compensation and the aggregate amount of variable compensation for
the GEB.
Members of the UBS Group AG BoD must use a minimum of 50% of their fees to purchase UBS Group
AG shares, which are
blocked for four years, and they may elect to use up to 100% of their fees to purchase
blocked UBS shares. The fixed fees of
the Chairman and Vice Chairman
for their services on the UBS Group AG board are delivered 50% in cash and 50%
in shares,
which are blocked for four years. The number of shares is calculated based on the
average closing price of the 10 trading days
leading up to and including the grant date.
Conflicts of Interests
Swiss law requires directors and members of senior management to inform the BoD immediately
and comprehensively of any
conflicts of interest affecting them. The BoD then has to take the measures
required to safeguard the interests of the
corporation. Directors and officers are personally liable
to the corporation for any breach of these provisions. In addition,
Swiss law contains a provision under which payments made to a shareholder
or a director or any person associated therewith,
other than at arm’s length, must be repaid
to the corporation if the shareholder or director was acting in bad faith.
In addition, the Organization Regulations provide that
the member of the BoD or senior management with a conflict of interest
shall participate in discussions and a double vote (meaning a vote with and a vote without
the conflicted individual) shall take
place. A binding decision on the matter requires the same outcome in both
votes. This is subject to exceptional circumstances
in which the best interests of UBS dictate that the member of the BoD or senior
management with a conflict of interest shall
not participate in the discussions and decision-making involving the
interest at stake.
Retirement of Board Members
There is no age-limit requirement for retirement of the members of the BoD. The term
of office for each BoD member is until
the next annual general meeting of shareholders, and no BoD member may serve
for more than 10 consecutive terms of office.
In exceptional circumstances the BoD can extend this limit.
Annual Report 2023
The Company
Repurchase of Shares
Swiss law limits a corporation’s ability
to hold or repurchase its own shares. We
and our subsidiaries may repurchase shares
only if and to the extent that (i) we have freely distributable reserves in the amount
of the purchase price and (ii) the aggregate
nominal value of all shares held by us and our subsidiaries does not exceed
10% of our nominal share capital (or 20% of our
nominal share capital in specific circumstances). Repurchases for cancellation
purposes approved by the shareholders’ meeting
are not subject to the 10% threshold for own shares within the meaning of article
659 paragraph 2 of the Swiss Code of
Obligations. We
must create a special reserve in our standalone financial statements prepared
in accordance with Swiss law in
the amount of the purchase price of any repurchased shares. Furthermore,
in our consolidated financial statements, own shares
are recorded at cost and reported as treasury shares, resulting in a reduction
in total shareholders’ equity.
Shares held by us or
any of our subsidiaries do not carry any rights to vote at shareholders’ meetings.
Sinking Fund Provisions
There are no provisions in Swiss law or in the Articles requiring us to put resources aside for
the exclusive purpose of
redeeming bonds or repurchasing shares.
Registration and Business Purpose
UBS AG was incorporated and registered as a corporation limited by shares (
Aktiengesellschaft
) under the laws of Switzerland.
It is entered into the commercial registers of Canton Zurich and Canton
Basel-City on February 28, 1978 under the registration
number CHE-101.329.561 and has registered domiciles in Zurich and
Basel, Switzerland. The business purpose of UBS AG,
as set forth in article 2 of the Articles, is the operation of a bank, with a scope of operations extending
to all types of banking,
financial, advisory,
trading and service activities in Switzerland and abroad.
UBS AG may establish branches and
representative offices as well as banks, finance companies and
other enterprises of any kind in Switzerland and abroad, hold
equity interests in these companies, and conduct their management.
UBS AG is authorized to acquire, mortgage and sell real
estate and building rights in Switzerland and abroad. UBS AG may borrow and
invest money on the capital markets. UBS AG
is part of the group of companies controlled by the group parent company
UBS Group AG. It may promote the interests of the
group parent company or other group companies. It may provide loans, guarantees
and other kinds of financing and security
for group companies. UBS AG is a wholly owned subsidiary of UBS Group
AG.
Duration and Liquidation
UBS AG has an unlimited duration.
Under Swiss law, we may be dissolved
at any time by way of liquidation or in the case of a merger in accordance
with the
Swiss Federal Act on Merger, Demerger,
Transformation of Assets of October 3, 2002, as amended, based
on a resolution
passed at a shareholders’ meeting with the approval of at least a two-thirds
majority of the votes, and a majority of the nominal
value of shares, in each case represented at such meeting. As UBS AG is a Swiss bank, the
Swiss Financial Market
Supervisory Authority FINMA is the only competent authority to open restructuring
or liquidation (bankruptcy) proceedings
with respect to UBS AG.
Under Swiss law, any surplus arising
out of a liquidation (after the settlement of all claims of all creditors) must be used
first to
repay the nominal share capital of UBS AG. Thereafter,
any balance must be distributed to shareholders in proportion to the
paid-up nominal value of shares held.
Other
, Aeschengraben 9, 4051
, PCAOB number
, have been appointed as statutory
auditors and as auditors of the consolidated accounts of UBS AG. The auditors
are subject to election each year by the
shareholders at the annual general meeting.
Annual Report 2023
Item 19.
Exhibits.
Exhibit
number
Description
1.1
1.2
2(b)
Instruments defining the rights of the holders of long-term debt issued by
UBS Group AG and its subsidiaries.
We agree to furnish
to the SEC upon request, copies of the instruments, including indentures, defining
the rights of
the holders of our long-term debt and of our subsidiaries’ long-term debt.
2(d)
4.1
. (Incorporated by
reference to Exhibit 4.3 to UBS AG's Annual Report on Form 20-F for the fiscal
year ended December 31, 2014)
4.2
(Incorporated by
reference to Form 6-K of UBS AG filed on June 17, 2015)
4.3
4.4
12
13
15
97
101
Interactive Data Files (sections of the Annual Report formatted in inline XBRL (Extensible
Business Reporting
Language)). Furnished electronically herewith.
Annual Report 2023
SIGNATURES
The registrant hereby certifies that it meets
all of the requirements for filing on Form 20-F and that
it has duly
caused the undersigned to sign this annual report
on its behalf.
UBS AG
_/s/
Sergio Ermotti _______________
Name:
Sergio Ermotti
Title:
President of the Executive Board
Name:
Todd Tuckner
Title:
Chief Financial Officer
Name:
Steffen Henrich
Title:
Controller
Date: March 28, 2024
Contents
2
1
Our business model and environment
4
5
12
13
17
23
2
Financial and
operating performance
36
37
43
44
46
47
49
49
3
Risk, capital, liquidity and funding,
and balance sheet
51
93
4
Corporate governance
114
5
Financial
statements
124
Consolidated financial statements
6
Additional
regulatory information
250
A
Appendix
259
263
265
266
Corporate information
UBS AG
Art. 620ff. of the Swiss Code of Obligations as
an Aktiengesellschaft, a
corporation limited by shares. The addresses and telephone
numbers of the
two registered offices of UBS AG are: Bahnhofstrasse 45, CH-8001
Zurich,
Switzerland, telephone +41-44-234 11 11;
and Aeschenvorstadt 1, CH-4051
Basel, Switzerland, telephone +41-61-288
50 50. The corporate identification
number is CHE-101.329.561. UBS AG is
a bank. The company was formed on
29 June 1998, when Union Bank of Switzerland
(founded in 1862) and
Swiss Bank Corporation (founded in 1872)
merged to form UBS AG.
Contacts
Switchboards
For all general inquiries
ubs.com/contact
Zurich +41-44-234 1111
London +44-207-567 8000
New York +1-212-821 3000
Hong Kong SAR +852-2971 8888
Singapore +65-6495 8000
Investor Relations
UBS’s Investor Relations team manages
relationships with institutional investors,
research analysts and credit rating agencies.
ubs.com/investors
Zurich +41-44-234 4100
New York +1-212-882 5734
Media Relations
UBS’s Media Relations team manages
relationships with global media and
journalists.
ubs.com/media
Zurich +41-44-234 8500
mediarelations@ubs.com
London +44-20-7567 4714
ubs-media-relations@ubs.com
New York +1-212-882 5858
mediarelations@ubs.com
Hong Kong SAR +852-2971 8200
sh-mediarelations-ap@ubs.com
Office of the Group Company Secretary
The Group Company Secretary handles
inquiries directed to the Chairman or to other
members of the Board of Directors.
UBS Group AG, Office of the
Group Company Secretary
PO Box, CH-8098 Zurich, Switzerland
sh-company-secretary@ubs.com
Zurich +41-44-235 6652
Shareholder Services
UBS’s Shareholder Services team, a unit
of the Group Company Secretary’s office,
manages relationships with shareholders
and the registration of UBS Group AG
registered shares.
UBS Group AG, Shareholder Services
PO Box, CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Zurich +41-44-235 6652
US Transfer Agent
For global registered share-related
inquiries in the US.
Computershare Trust Company NA
PO Box 43006
Providence, RI, 02940-3006, USA
Shareholder online inquiries:
www.computershare.com/us/
investor-inquiries
Shareholder website:
computershare.com/investor
Calls from the US
+1-866-305-9566
Calls from outside the US
+1-781-575-2623
TDD for hearing impaired
+1-800-231-5469
TDD for foreign shareholders
+1-201-680-6610
Corporate calendar UBS AG
More information about future publication dates is
available at
ubs.com/global/en/investor-relations/events/calendar.html
Imprint
Publisher: UBS AG, Zurich, Switzerland | ubs.com
Language: English
© UBS 2024. The key symbol and UBS are among
the registered and
unregistered trademarks of UBS. All rights reserved.
Annual Report 2023
Our key figures
UBS AG consolidated key figures
As of or for the year ended
USD m, except where indicated
31.12.23
31.12.22
31.12.21
Results
Total revenues
Credit loss expense / (release)
Operating expenses
Operating profit / (loss) before tax
Net profit / (loss) attributable to shareholders
Profitability and growth
1,2
Return on equity (%)
Return on tangible equity (%)
Return on common equity tier 1 capital (%)
Return on leverage ratio denominator, gross (%)
Cost / income ratio (%)
Net profit growth (%)
Resources
1
Total assets
Equity attributable to shareholders
Common equity tier 1 capital
3
Risk-weighted assets
3
Common equity tier 1 capital ratio (%)
3
Going concern capital ratio (%)
3
Total loss-absorbing capacity ratio (%)
3
Leverage ratio denominator
3
Common equity tier 1 leverage ratio (%)
3
Liquidity coverage ratio (%)
4
Net stable funding ratio (%)
Other
Invested assets (USD bn)
2,5,6
Personnel (full-time equivalents)
1 Refer to the “Targets, capital guidance
and ambitions” section of the UBS Group Annual Report 2023 for more information
about our performance measurement.
2 Refer to “Alternative performance measures”
in the appendix to this report for the
definition and calculation method.
3 Based on the Swiss systemically
relevant bank framework as of 1
January 2020. Refer to the “Capital,
liquidity and funding, and balance
sheet” section of this report for more information.
4 The disclosed ratios represent averages for the fourth quarter of each year presented, which were calculated based on an average of 63 data points in the fourth
quarter of 2023. Refer to the “Capital, liquidity
and funding, and balance sheet” section
of this report for more information.
5 Consists of invested assets for Global Wealth
Management, Asset Management and
Personal & Corporate Banking. Refer to
“Note 31 Invested assets and net new money” in the “Consolidated
financial statements” section of this report for more information.
6 Starting with the second quarter of
2023, invested assets include invested assets from associates in the Asset Management business division, to better reflect the business strategy.
Comparative figures have been restated to reflect this change.
Alternative performance measures
An
alternative
performance
measure
(an
APM)
is
a
financial
measure
of
historical
or
future
financial
performance,
financial
position
or
cash
flows
other
than
a
financial
measure
defined
or
specified
in
the
applicable
recognized
accounting standards or
in other
applicable regulations. A
number of APMs
are reported in
UBS’s external
reports (annual,
quarterly and other reports). APMs are used to provide a more complete picture of operating performance and to reflect
management’s view
of the
fundamental drivers
of the
business results.
A definition
of each APM,
the method
used to
calculate it
and the
information content
are
presented
under “Alternative
performance
measures”
in the
appendix to
this report. These APMs may qualify as non-GAAP measures as defined
by US Securities and Exchange Commission (SEC)
regulations.
1
Annual Report 2023
Terms used in this report
”UBS,” ”UBS Group,” “UBS Group AG consolidated,” “Group” and “the
Group”
UBS Group AG and its consolidated subsidiaries
“UBS Group excluding the Credit Suisse AG sub-group”
All UBS Group entities, excluding the Credit Suisse AG sub-group
“UBS AG,” “UBS AG consolidated,“ “UBS AG sub-group,” “we,”
“us” and
“our”
UBS AG and its consolidated subsidiaries
“Pre-acquisition UBS”
UBS before the acquisition of the Credit Suisse Group
“Credit Suisse AG,” “Credit Suisse AG consolidated” and “Credit Suisse AG
sub-group”
Credit Suisse AG and its consolidated subsidiaries
“Credit Suisse Group” and “Credit Suisse Group AG consolidated”
Credit Suisse Group AG and its consolidated subsidiaries, before the
acquisition by UBS
“Credit Suisse” and “Credit Suisse sub-group”
Credit Suisse AG, its consolidated subsidiaries, Credit Suisse Services
AG, and other small former Credit Suisse Group entities now directly
held by UBS Group AG
“UBS Group AG” and “UBS Group AG standalone”
UBS Group AG on a standalone basis
“Credit Suisse Group AG” and “Credit Suisse Group AG standalone”
Credit Suisse Group AG on a standalone basis
“UBS AG standalone”
UBS AG on a standalone basis
“UBS Switzerland AG”
UBS Switzerland AG on a standalone basis
“UBS Americas Holding LLC”
UBS Americas Holding LLC and its consolidated
subsidiaries
“Pre-acquisition Global Wealth Management”
The UBS Global Wealth Management business division before the
acquisition of the Credit Suisse Group (data, if any, from before the
date of the acquisition of the Credit Suisse Group)
“UBS AG Global Wealth Management”
The Global Wealth Management business division of UBS
AG and its
consolidated subsidiaries
“Pre-acquisition Personal & Corporate Banking”
The Personal & Corporate Banking business division before the
acquisition of the Credit Suisse Group (data, if any, from before the
date of the acquisition of the Credit Suisse Group)
“UBS AG Personal & Corporate Banking”
The Personal & Corporate Banking business division of
UBS AG and its
consolidated subsidiaries
“Pre-acquisition Asset Management”
The Asset Management business division before the acquisition
of the
Credit Suisse Group (data, if any, from before the date of the
acquisition of the Credit Suisse Group)
“UBS AG Asset Management”
The Asset Management business division of UBS AG
and its
consolidated subsidiaries
“Pre-acquisition Investment Bank”
The Investment Bank business division before the acquisition
of the
Credit Suisse Group (data, if any, from before the date of the
acquisition of the Credit Suisse Group)
“UBS AG Investment Bank”
The Investment Bank business division of UBS
AG and its consolidated
subsidiaries
“1m”
One million, i.e., 1,000,000
“1bn”
One billion, i.e., 1,000,000,000
“1trn”
One trillion, i.e., 1,000,000,000,000
In this report, unless the context requires
otherwise, references to any gender shall
apply to all genders.
Annual Report 2023 |
Our business model and environment |
Integration of Credit Suisse
4
Our business model and
environment
Management report
Integration of Credit Suisse
Integration of Credit Suisse
On 12 June
2023, our
parent company,
UBS Group
AG, acquired
Credit Suisse
Group AG,
succeeding by
operation of
Swiss law to
all assets
and liabilities
of Credit
Suisse Group
AG, and
became the
direct or
indirect shareholder
of all
of
the former direct and indirect subsidiaries of Credit Suisse
Group AG.
In December 2023, the Board of Directors of UBS Group AG approved the merger of UBS AG and Credit Suisse AG, and
we
entered
into
a
definitive
merger
agreement
with
Credit
Suisse
AG.
The
completion
of
the
merger
is
subject
to
regulatory
approvals
and
is
expected
to
occur
by
the
end of
the
second
quarter
of
2024. The
Group
also
expects
to
complete the
transition to
a single
US intermediate
holding company
in the
second quarter
of 2024
and the
planned
merger of UBS Switzerland AG and Credit Suisse (Schweiz)
AG in the third quarter of 2024.
›
Refer to “Acquisition and integration of Credit Suisse”
in the “Our strategy, business model and environment” section in the UBS
Group Annual Report 2023
Annual Report 2023 |
Our business model and environment | Our
businesses
5
Our businesses
We
operate
through
five
business
divisions:
Global
Wealth
Management,
Personal
&
Corporate
Banking,
Asset
Management,
the Investment Bank and Non-core and Legacy. Our global reach and the
breadth of our expertise are the
major assets setting us apart
from our competitors. Our Group
functions are support and
control functions that provide
services
to
the
Group.
Virtually
all
costs
incurred
by
the
support
and
control
functions
are
allocated
to
the
business
divisions, leaving a residual
amount that we refer
to as Group Items
in our segment
reporting. Disclosures in
this report
may refer to Group functions as Group Items.
We see
joint efforts
as key
to our
growth, both
within and
between
business divisions.
We combine
our strengths
to
provide
our
clients
with
better,
innovative
solutions
and
differentiated
offerings,
for
example,
our
Global
Family
&
Institutional Wealth offering with integrated global coverage
.
Global Wealth Management
We are a leading and truly global
wealth manager and strive to
help our clients pursue what
matters most to them. We
are
focused on
serving
the
needs of
ultra
high and
high
net
worth
individuals through
trusted
relationships
with
our
advisors, while
expanding our
specialized services.
We offer
clients our
global reach,
our advisory
approach led
by the
Chief Investment
Office (the
CIO) and
access to
our platform
with its
broad array
of solutions,
alongside our
premium
brand.
Organizational changes
During the first half
of 2023, we took
several steps to
simplify our organizational
structure into four
regions: Americas,
EMEA, Asia
Pacific and
Switzerland. We
also unified
key solutions
and functions
under global
leads. This
will facilitate
further convergence and simplification of our global operating model,
while retaining the flexibility for local and regional
differences.
In June
2023, the
new Global
Wealth Management
leadership team
was announced,
including the
creation of
a new
business unit, Global Wealth Management Strategic Clients, which is focused on enabling and delivering to
our strategic
clients globally, working in partnership with our
regional business leaders and supported by senior client
coverage teams.
How we do business
Our distinctive approach to wealth management helps our clients pursue what matters most to them by offering advice,
expertise and solutions, and delivering on our client promise.
Our advice to clients is led by our global CIO, which produces the
UBS House View
, identifying investment opportunities
designed to
protect and
increase our
clients’ wealth
over the
long term.
CIO views
drive investment
recommendations
for advisory
clients and investment
decisions for discretionary
clients representing more
than USD 1.5trn in
fee-generating
assets globally.
We make
available to
clients a
broad range
of securities
and investment
products. In
addition to
traditional equity
and
fixed-income securities, our investment
specialists source and craft
a range of investment products,
including separately
managed accounts (SMAs), structured products,
sustainable-
and impact-investing products, and
alternative investments.
Our alternative
investments offering
gives clients
access to
private markets,
including equity,
real estate
and other
real
assets,
and
investments
in
private
equity
funds
and
hedge
funds.
We
offer
our
own
private
equity
multi-manager
investments and enable clients to access selected single-manager
funds and open-ended programs.
To
complement
this
advice,
we
provide
clients
with
advice
on
wealth
planning,
sustainability-focused
and
impact
investing, and corporate and banking services. Our specialist teams also advise
on art and collecting, family strategy and
governance, philanthropy, next generation, and wealth transition.
Our Global Family
& Institutional Wealth
service model,
in collaboration with
the Investment Bank,
provides specialized
services to
meet the
needs of
family offices
and ultra
high net
worth clients.
For clients
with institutional-level
trading,
execution
and
clearing
needs,
our
Unified
Global
Markets
offers
access
to
the
full
capabilities
of
the
Global
Markets
business of the Investment Bank.
In Asia Pacific and Switzerland, the
Direct Investment Insights
trade directly based on CIO insights via their smartphones
and other digital devices.
Advice Compass
enables advisors to
conveniently identify the most relevant ideas and solutions for clients
during one-to-one meetings.
To provide our clients with the
full breadth of investment management
products and solutions, our Global Lending
Unit
offers
extensive
mortgage,
securities-based
and
structured
lending
expertise,
catering
to
sophisticated
client
lending
needs.
›
Refer to the UBS Group Sustainability Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for more
information about sustainability matters
Annual Report 2023 |
Our business model and environment | Our
businesses
6
Our newly established Global Wealth Management Strategic Clients unit aims to deliver the best advice and guidance to
our strategic client segments,
including business owners, female
clients, the next generation of
wealthy clients, athletes
and entertainers, and multi-cultural
investors. To this end, we
have developed a dedicated
approach and resources with
specialized teams supporting our clients in achieving their
goals.
We are
investing in
our operating
platforms and
tools to
better serve our
clients’ needs,
improve their
experience, enhance
overall
advisor
productivity
and
improve
our
operational
resilience.
We
aim
to
make
our
services
faster
and
more
responsive and offer more
convenience to our clients.
For example, our Global
Wealth Management clients have invested
more than USD 9bn in
UBS My Way
,
themselves via the
UBS mobile banking
app. Additionally, we
continue to broaden
our offering across
asset classes and
themes,
collaborating
with
best-in-class
managers
across
the
most
relevant
strategies.
We
are
making
continuous
improvements to our direct-to-client digital offerings and have rolled out innovative
new solutions, such as
UBS My Way
on mobile
, a next-generation
discretionary mandate
solution that now
enables clients to
tailor their investments
within
their risk profile to their individual preferences via their mobile device
s.
We
also
closely
collaborate
across
business
divisions
to
deliver
our
best
capabilities
to
clients.
Joint
efforts
with
the
Investment Bank, Asset Management and selected external partners enable us to offer
clients broad access to financing,
global capital
markets
and
bespoke
portfolio
solutions.
For example,
in
the
US market,
the
SMA initiative
with
Asset
Management continues to gain momentum, with USD
158bn in assets under management.
Competition
Our main competitors fall
into two categories:
competitors with a strong
position in the Americas
but more limited global
footprints, such as Morgan Stanley, JPMorgan Chase
and Bank of America; and competitors with
international footprints
but with a
smaller presence than UBS in
the US, such as
Julius Baer, BNP Paribas
and HSBC. We also
compete with fintech
firms
in
some
regions
and
products.
We
have
strong
positions
in the
largest
region
(the
US) and
the
fastest-growing
regions (Asia
Pacific and the
Middle East).
The size
of our global
franchise, bespoke cross-divisional
solutions and
premium
brand and reputation set us apart and would be difficult
to replicate.
Annual Report 2023 |
Our business model and environment | Our
businesses
7
Personal & Corporate Banking
As the
leading
bank
in
Switzerland,
we
provide
a
comprehensive
range
of
financial
products
and
services
to
private,
corporate and institutional clients. Personal & Corporate Banking is the core of our bank in
Switzerland, the only country
where we
operate in all
of our
business areas.
We are
fully committed
to our
home market,
as our leading
position in
Switzerland is crucial in
terms of sustaining our
global brand and the
stability of our profits.
We draw on a
broad network
of branches and highly qualified client advisors, complemented by modern digital banking
services and customer service
centers.
Organizational changes
›
Refer to “Personal & Corporate Banking” in the
“Our strategy, business model and environment” section of the UBS Group Annual
Report 2023 for more information about Personal & Corporate
Banking from a Group perspective, including information
about
the planned merger of UBS Switzerland AG
and Credit Suisse (Schweiz) AG
How we do business
We provide our personal banking clients with access to a comprehensive, life-cycle-based
offering. This includes a broad
range of basic
banking products,
from payments
to deposits,
cards and
convenient online
and mobile banking,
as well
as lending
(predominantly
mortgages),
investments and
retirement
planning
services.
In 2023,
UBS was
named
“Best
Bank in
Switzerland”
by
Euromoney
Global Wealth Management to provide
our clients with access to leading wealth management
services.
Our corporate and institutional clients benefit from our financing and investment solutions, in particular access to equity
and debt
capital
markets,
syndicated
and structured
credit, private
placements,
leasing, and
traditional
financing.
We
offer transaction
banking solutions
for payment
and cash
management services,
trade and
export finance,
and global
custody solutions for institutional clients.
Personal
&
Corporate
Banking
works
closely
with
the
Investment
Bank
to
offer
capital
market
and
foreign
exchange
products,
hedging
strategies,
and
trading
capabilities,
as
well
as
corporate
finance
advice.
In
cooperation
with
Asset
Management, we also provide fund and portfolio manage
ment solutions.
In
2023,
we
continued
to
support
our
clients’
sustainability
ambitions.
In
the
corporate
client
segment,
we
further
expanded
our
client-centric
approach
and
focused
on
supporting
our
clients
by
advising
them
as
part
of
a
strategic
dialogue
and
launching
a
sustainability-linked
loan
for
multi-national
corporations.
We
also
took
positive
steps
in
providing transparency and sustainability insights to our private clients. With the launch of the carbon tracker in the UBS
key4
cards
and
through
UBS
TWINT,
helping
them
navigate
the
carbon
footprints
of
their
purchases
in
a
relatively
simple
manner.
›
Refer to the UBS Group Sustainability Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for more
information about sustainability matters
We are
building stronger
relationships with
our clients
during the
life cycle
of their
property ownership
and providing
services
along the
value
chain.
With
our
strategic
partner
Baloise, we
offer
Houzy
,
a
leading homeowner
platform
in
Switzerland with a
nationwide network of
qualified craftsmen and
comprehensive services through
buying, renovation,
maintenance
and
sale
of
property.
Services
relating
to
property
transactions
and
promotion
financing
are
provided
through our partner,
Brixel
. Our exclusive partnership with SMG Swiss Market Group
enables us to extend our ecosystem
network to Switzerland’s largest real estate portals, such
as Homegate and Immoscout24.
Our operations and our competitors
We operate
primarily in
our Swiss
home market,
where we
are organized
into 10
regions, covering distinct
Swiss economic
areas. We operate a multi-channel approach,
and we are constantly developing our digital and remote
channels.
In Personal Banking,
our main competitors
are the cantonal
banks, Raiffeisen, PostFinance
and other regional
and local
Swiss banks; we also face competition from international neobanks and other national digital market participants. Areas
of competition are basic banking services, mortgages and
foreign exchange, as well as investment mandates and
funds.
In the
corporate and institutional
business, the cantonal
banks and
globally active foreign
banks are
our main
competitors.
We compete
in basic banking
services, cash
management, trade
and export
finance, asset
servicing, investment
advice
for institutional
clients, corporate
finance and lending,
and cash and
securities transactions
for banks. We
also support
the international business
activities of our
Swiss corporate
clients through local
hubs in New
York, Frankfurt, Singapore
and the Hong
Kong SAR in
competition with globally active
foreign banks. No
other Swiss bank
offers its corporate
clients
local banking capabilities abroad.
Annual Report 2023 |
Our business model and environment | Our
businesses
8
Asset Management
Asset
Management
is
a
global,
large-scale
and
diversified
asset
manager.
We
offer
investment
capabilities
and
styles
across
all
major
traditional
and
alternative
asset
classes,
as
well
as
advisory
support
to
institutions,
wholesale
intermediaries and our Global Wealth Management
clients.
Our strategy
is focused
on
capitalizing
on the
areas where
we have
a leading
position
1
(including alternatives,
sustainability,
indexed customization,
separately managed
accounts
(SMAs) and
key markets
in
Asia Pacific) in order to further drive profitable growth, while
building on our strong business division partnerships across
the Group.
Organizational changes
In October 2023, we completed the sale of our 51% stake in UBS Hana Asset Management Co., Ltd. to Hana Securities,
after that firm exercised its buyout option. Hana Securities
now owns 100% of UBS Hana Asset Management
Co., Ltd.
›
Refer to “Asset Management” in the “Our strategy, business model and environment”
section of the UBS Group Annual Report
2023 for more information about the Asset Management
business division from a Group perspective
How we do business
We offer clients
a wide range of
investment products and services
across all major
traditional and alternative asset
classes,
in the form
of segregated,
pooled or advisory
mandates, as well
as registered
investment funds
in various jurisdictions.
Our capabilities include equities, fixed income, hedge funds (single-
and multi-manager), real estate and private markets,
and indexed and alternative beta strategies,
including exchange-traded funds (ETFs), as
well as sustainable- and impact-
investing products and solutions.
We also
draw on
the breadth
of our
capabilities to
offer asset
allocation and
currency investment
strategies across
the
risk–return spectrum, customized multi-asset solutions,
and advisory and fiduciary services.
We continue to develop our award-winning
2
solutions
across
equities,
fixed
income
and
commodities,
as
well
as
sustainability-focused
products.
Our
offering
also
includes a wide range of ETFs in Europe, Switzerland and
Asia.
In our
Real Estate
& Private
Markets
business, we
continue
to build
on our
global
scale, leading
core capabilities
and
highly differentiated sustainable-investing and specialized-thematic offering, including our Cold Storage,
Energy Storage
and
Life
Sciences
strategies.
We
also
continue
to
expand
our
leading
multi-manager
capabilities
across
real
estate,
infrastructure and private equity, including the development of new products to meet the growing demand from wealth
management
clients.
Sustainable and impact investing remain
key areas of interest for
our clients. In 2023, we further
expanded our offering
across asset classes and themes, including
new net-zero ambition products. We
launched our first sustainability-focused
fund of hedge funds strategy,
created in close collaboration with
Global Wealth Management.
We also partnered again
with Aon
to launch the
UBS Global
Emerging Markets Equity
Climate Transition Fund,
which tilts
toward emerging market
companies supporting the transition to a low-carbon economy,
while factoring in important social considerations.
Stewardship
is
a
fundamental
element
of
our
sustainability
strategy.
In
2023,
we
sharpened
our
five-year
climate
engagement
program’s
focus
and
also
aligned
our
voting
policy
to
our
evolved
climate
engagement
objectives.
In
addition, to
support our
increasing focus
on natural
capital, we
became a
founding member
of the
Nature Action
100
collaborative
engagement
initiative
and
joined
the
Principles
for
Responsible
Investment’s
Stewardship
Advisory
Committee for its initiative on nature.
›
Refer to the UBS Group Sustainability Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for more
information about sustainability matters
We also continue to build on
our joint efforts with the other
business divisions, enabling our teams
to draw on the best
ideas,
solutions
and
capabilities
from
across
the
firm
in
order
to
deliver
high-quality
investment
performance
and
experiences
for
our
clients.
For
example,
in
2023
we
continued
to
expand
our
separately
managed
accounts
(SMA)
offering as part of
our joint initiative with
Global Wealth Management in
the US. In support
of this initiative, we
launched
the SMA Hub, a
new self-service portal
that enables financial
advisors to generate
custom client reports or
proposals in
only minutes.
Geographically, we are building on our extensive
and long-standing presence in the Asia Pacific
region, including China,
where we continue to capitalize on our on- and offshore
products and market presence, including our joint ventures.
To support
our growth,
we are
focused on
disciplined execution
of our
operational excellence
initiatives. This
includes
further
automation,
simplification,
process
optimization
and
offshoring
or
nearshoring
of
selected
activities,
complemented by continued enhancements to our platform and development of
our analytics and data capabilities. One
example
is
our
Portfolio
Engineering
&
Trading
initiative,
which
will
streamline
trading
and
portfolio
implementation
across our
active and
index capabilities
through an
integrated technology
architecture. It
will harmonize
processes and
enable further scalability of customization across asset classes.
Annual Report 2023 |
Our business model and environment | Our
businesses
9
Our operations and our competitors
Our business division is organized into
five areas: Client Coverage; Investments; Real
Estate & Private Markets; Products;
and the
COO area.
We cover
the main
asset management
markets globally,
and have
a local
presence in
23 locations
across four
regions: the
Americas; Asia
Pacific; EMEA;
and Switzerland.
We have
nine main
hubs: Chicago;
the Hong
Kong SAR; London; New York; Shanghai; Singapore; Sydney;
Tokyo; and Zurich.
Our main
competitors are global
firms with wide-ranging
capabilities and distribution
channels, such as
AllianceBernstein,
Allianz
Asset
Management,
Amundi,
BlackRock,
DWS,
Franklin
Templeton,
Invesco,
J.P.
Morgan
Asset
Management,
Morgan Stanley Investment Management, Schroders, SSGA Funds Management
and T. Rowe Price, as well as firms with
a specific market or asset-class focus.
1
Third-largest asset manager of SI assets (Morningstar); USD 156bn assets invested in hedge fund businesses,
real estate and private markets.
2
Investment Bank
The
Investment
Bank
provides
services
to institutional,
corporate
and wealth
management
clients, helping
them
raise
capital, invest
and manage
risks, while
targeting attractive
and sustainable
risk-adjusted
returns for
shareholders.
Our
traditional strengths are in equities, foreign exchange, research, advisory services and
capital markets, complemented by
a focused rates and credit platform. We use our data-driven research and technology capabilities to help clients adapt to
evolving market structures and changes in regulatory, technological,
economic and competitive landscapes.
Aiming to deliver market-leading
solutions by using our
intellectual capital and electronic platforms,
we work closely with
Global
Wealth
Management,
Personal
&
Corporate
Banking
and
Asset
Management
to
bring
the
best
of
the
firm’s
capabilities to our clients. We do so with a disciplined
approach to balance sheet deployment and
costs.
Our priority is
providing high-quality execution
and seamless client
service, through an
integrated, solutions-led approach,
with disciplined growth in the advisory and execution businesses, while accelerating our digital transformation. In Global
Banking, we position ourselves as trusted advisors via our
client coverage and ability to provide access to the wider suite
of UBS’s capabilities. In Global
Markets, we enable clients to
buy, sell and finance
securities on capital markets worldwide
and to manage their risks and liquidity.
Organizational changes
In October
2023, we
launched
our Strategic
Insights and
Advisory
team
in Global
Banking, our
content
and advisory
offering that brings
together the expertise
of the UBS
Strategic Insights group
and the Credit
Suisse Corporate Insights
group.
In December 2023, we announced the formation of our Executive Client Group, which is aimed at advising our
clients at
the C-suite level on strategic matters and is intended to drive a broad array of transactions to enhance the impact of our
Global Banking coverage teams.
›
Refer to “Investment Bank” in the “Our strategy, business model and environment” section
of the UBS Group Annual Report 2023
for more information about the Investment Bank from a Group
perspective
How we do business
Our business division consists
of two areas: Global
Banking and Global Markets,
which are supported by
Investment Bank
Research. Our global coverage model utilizes our
international industry expertise and product capabilities to meet
clients’
emerging needs.
Our Global Banking business advises
clients on strategic business opportunities, such
as mergers, acquisitions and related
strategic matters, and helps them raise capital, in both public
and private markets, to fund their activities.
Our
Global
Markets
business
enables
clients
to
buy,
sell
and
finance
securities
on
capital
markets
worldwide
and
to
manage their risks and liquidity. We
distribute, trade, finance and clear
cash equities and equity-linked products,
as well
as
structuring,
originating
and
distributing
new
equity
and
equity-linked
issues.
From
origination
and
distribution
to
managing risk
and providing
liquidity in
foreign exchange,
rates, credit
and precious
metals, we
help clients
to realize
their financial
goals. We
provide flexible,
innovative and
bespoke access
to solutions,
from market
and insight
tools to
trading strategies and execution.
Our Investment
Bank Research
business continues
to publish
research based
on primary
data to
concentrate
on data-
driven outcomes and offers clients differentiated content about major financial markets and securities around the globe,
with analysts
based in
more than
20 countries
and with
coverage of
more than
3,400 stocks
in 49
different countries.
The Strategic Insights
team provides timely
and relevant
information and insights
to help clients
quickly make decisions
regarding their most important questions.
Annual Report 2023 |
Our business model and environment | Our
businesses
10
We seek to develop new
products and solutions consistent
with our capital-efficient business
model, typically related
to
new technologies or changing market standards.
The Investment
Bank
offers
our clients
global advice
and access
to the
world’s
primary, secondary
and private
capital
markets,
including
through
an
extensive
array
of
sustainability-focused
advice,
products,
research
and
events.
The
Investment
Bank
is
focused
on
meeting
clients’
needs,
including
those
with
respect
to
environmental,
social
and
governance
(ESG)
considerations
and
sustainable
finance,
helping
to
reshape
business
models
and
investment
opportunities and to develop sustainable finance products and
solutions.
In Global
Markets, we
develop products
and solutions
designed to
meet clients’
specific and
increasingly detailed
ESG
objectives. In carbon
emissions solutions, our
clients continued to
access solutions that are
linked to the
recently launched
UBS
Constant
Maturity
Commodity
Index
emissions
index,
as
well
as
those
that
are
available
via
our
execution
and
clearing capabilities for
carbon emissions futures.
We continued to
scale the number of
portfolio certificates linked
to a
range of sustainability and climate investment themes, despite
challenging market conditions throughout 2023.
UBS is a founding
member of Carbonplace,
a marketplace platform
that seeks to
build infrastructure to
scale voluntary
carbon markets, with
the aim of
enabling firms such
as UBS to
offer clients the
ability to buy,
sell, hold and
retire voluntary
carbon credits.
In
Global
Banking,
ESG
is
a
core
component
of
many
corporate
business
strategies
and
a
key
tool
in
achieving
sustainability in business and corporate operating
models. As pressure from regulators and
other key stakeholder groups,
such as
customers, investo
rs and
employees,
is increasing,
so is
the need
for transformation.
The ESG
Advisory
group
provides the necessary lens helping UBS’s clients assess ESG
topics throughout the corporate life cycle.
UBS
arranged
USD 53.7bn
in
green,
social,
sustainability
and
sustainability-linked
themed
(GSSS)
bonds
through
102
deals during
2023. We also
solidified our
market position in
the Swiss
franc-denominated market with
a combined
market
share of nearly 50%.
We have also built a strong position in the ESG-labelled
local debt market in Brazil.
Our independent
ESG research
team collaborates with
UBS sector
analysts and
UBS Evidence
Lab
providing data-driven insights
into ESG-relevant questions. The
ESG research team
works to identify
touchpoints between
markets, society
and the
environment, and to
respond to
ESG issues as
they move
to the
center of
investors’ agendas.
UBS sector
lead analysts
authored a
variety of
our flagship
ESG Sector
Radar
reports, as
well as
a broad
range of
ESG
Company Radar
reports.
Our
ESG Company
Radar
level,
and
we
continued
to
see
a
very
positive
client
response
to
those
reports.
Other
types
of
ESG
content
include
thematic
and
cross-sectoral
collaborations,
ESG
Keys
number of regional perspectives from our expanded ESG team, which works out of
our offices in New York, London, the
Hong Kong SAR, Tokyo and Sydney.
›
Refer to the UBS Group Sustainability Report 2023, available
under “Annual reporting” at
ubs.com/investors
, for more
information about sustainability matters
Our digital strategy harnesses technology to
provide access to sources of
unique, global liquidity, personalized advice and
differentiated content. The Investment Bank strives to be the
digital investment bank of the future, focused on delivering
innovation-led solutions, and
efficiencies for our
clients. As the
world around us changes,
our digital capabilities
aim to
harness emerging
technologies
and create
new products
and solutions,
which enable
our clients
to adapt
to evolving
market structures and achieve their investment goals.
Our
ambition
to
be
the
most
client-focused,
efficient
and
data-driven
investment
bank
is
being
realized
through
the
simplification of technology architecture, increased
speed and quality of
delivery and the attraction
of best-in-class talent.
As we look forward to the continued
evolution
of our digital capabilities, we will see increased adoption of
technologies,
such as generative
artificial intelligence,
the consistent re-use of
platforms and products, and
the continued drive to
make
progress in our overall strategic imperatives, with regard to a
new, combined Investment Bank.
Joint efforts between
the Investment Bank
and the other
business divisions (for
example, our work
with Global
Wealth
Management
on
our
new
Global
Family
&
Institutional
Wealth
coverage)
and,
externally,
strategic
partnerships
(for
example,
UBS
BB
jointly
with
Banco
do
Brasil,
focused
on
Latin
America)
continue
to
be
key
strategic
priorities.
Partnerships with Global Wealth Management and Asset Management
enable us to provide clients with broad access to
financing, global
capital
markets and
portfolio solutions.
We expect
these initiatives
to continue
to lead
to growth
by
delivering global
products to
each region,
leveraging our
global connectivity
across borders
and sharing
and strengthening
our best client relationships.
Annual Report 2023 |
Our business model and environment | Our
businesses
11
Our operations and our competitors
Our two business areas,
Global Banking and Global
Markets, are organized globally by
product. Our business is
regionally
diversified, with a presence in more
than 30 countries. We cover the main
investment banking markets globally and have
major financial hubs across four regions: the Americas; Asia
Pacific; EMEA; and Switzerland.
Our global reach
gives attractive
options for growth.
In the Americas,
the largest investment
banking fee pool
globally,
we
continue
to
focus
on
increasing
market
share
in
our
core
Global Banking
and
Global
Markets
businesses.
In
Asia
Pacific,
opportunities
arise
mainly
from
expected
market
internationalization
and
growth
in
China,
where
we
plan
to
grow by
strengthening
our
presence,
both
onshore
and
offshore.
In EMEA,
we
plan
to leverage
our strong
base
and
brand recognition even further.
Competing firms operate in many
of our markets, but our strategy
differentiates us, with our focus on leadership
in the
areas where we have chosen to compete and a business model that leverages talent and technology rather than balance
sheet.
Our
main
competitors
are
the
major
global
investment
banks
(e.g.,
Morgan
Stanley
and
Goldman
Sachs)
and
corporate
investment
banks
(e.g.,
Bank
of
America,
Barclays,
Citigroup,
BNP
Paribas,
Deutsche
Bank
and
JPMorgan
Chase). We also compete with boutique investment bank
s
and fintech firms in certain regions and products.
Non-core and Legacy
In 2023, subsequent to the acquisition
of the Credit Suisse Group by
UBS, Non-core and Legacy was
created at the UBS
Group level,
to bring
together positions
and businesses,
mainly including
those of
Credit Suisse,
which are
not aligned
with the Group’s strategy and policies.
From a UBS AG consolidated perspective,
Non-core and Legacy includes the
remaining assets and liabilities of
UBS’s Non-
core and Legacy Portfolio,
previously reported in
Group Functions (now renamed
to Group Items), and
smaller amounts
of assets and
liabilities of UBS’s
business divisions that
have been assessed
as not strategic
in light of
the acquisition of
the Credit Suisse Group.
›
Refer to “Non-core and Legacy” in the “Our strategy, business model and environment” section
of the UBS Group Annual Report
2023 for more information about Non-core and Legacy from a Group
perspective
Group functions
The Group functions are support and control functions that provide services to the Group, focusing on effectiveness, risk
mitigation and efficiency.
How we are organized
The
Group
functions
include
the
following major
areas:
Group
Services
(which
consists
of the
Group
Operations
and
Technology
Office, Corporate Services, Compliance, Regulatory & Governance, Finance, Risk Control, Human Resources,
Communications &
Branding, Legal,
the Group
Integration Office,
Group Sustainability
and Impact, and
Chief Strategy
Office) and Group Treasury.
Group Services
The vast
majority of the
support and
control functions
are fully
aligned or
shared among
the business
divisions, where
they have full management
responsibility.
By keeping the
activities of the businesses
and support and control
functions
closely
aligned,
we
improve
efficiency
and
create
a
working
environment
built
on
accountability
and
collaboration.
Virtually all costs incurred by
the support and control functions
are allocated to the
business divisions, leaving a residual
amount that we refer to
as Group Items in
our segment reporting in accordance with
IFRS Accounting Standards. Certain
activities
are
retained
centrally,
where
not
directly
related
to
the
businesses,
such
as
group
hedging
and
own
debt
activities in Group Treasury and certain other costs that are mainly related to deferred tax assets and costs relating to our
legal entity transformation program.
Group Treasury
Group Treasury
manages balance
sheet structural
risk (e.g.,
interest rate,
structural foreign
exchange and
collateral
risks), as
well as
the risks
associated with
our liquidity,
capital and
funding portfolios.
Group Treasury
serves all
five
business divisions, and its risk management is integrated into
the Group risk governance framework.
Annual Report 2023 |
Our business model and environment | Our
environment
12
Our environment
Market environment
Global economic developments in 2023
1
The global economy was resilient in 2023, in
spite of the steep interest rate rises by
major central banks designed to curb
inflation from the multi-decade highs reached
in 2022.
Global growth slowed only slightly, to 3.2%, in 2023, down from 3.4% in 2022. This partly reflected the strength of the
US economy, where
growth withstood higher
interest rates, tightening
bank lending standards,
and mediocre real
income
growth. US GDP growth increased to 2.5% in 2023, up from 1.9% in 2022, as job security and relatively strong balance
sheets encouraged higher spending by middle-income
consumers. Economies in Europe also expanded
in 2023, though
at a slower pace. Growth in
the Eurozone slowed to 0.5%
in 2023, down from 3.4%
in 2022, as the European
Central
Bank (the ECB) repeatedly raised interest rates.
Growth in the Swiss economy slowed to
0.7% in 2023, down from 2.7%
in 2022. UK
GDP growth slowed to 0.1% in 2023,
down from 4.3% in 2022, as high inflation
and interest rate rises also
limited growth.
Growth in China
increased to 5.2%
in 2023, compared
with 3% in
2022, when its
economy was slowed
by pandemic
restrictions that were in place until late in that
year. However, cautious spending by domestic
consumers meant that the
rebound in
growth was
weaker than
had been
expected. Growth
in India
remained robust
at 7%
in 2023,
down only
slightly from 7.2% in 2022.
Inflation eased across developed economies, especially in the second half of 2023, as supply chains continued to recover
from COVID-19 disruptions,
energy prices were
lower than 2022
and central
bank interest
rate rises increased
the cost
of borrowing.
US consumer
price inflation
slowed to
an annual 3.4%
in December
2023, from
6.4% in January
2023.
Inflation decelerated
even more
markedly in
the Eurozone,
to 2.9%
year over
year in
December 2023,
compared with
8.5% in
January 2023. This
trend enabled the
Federal Reserve and
the ECB
to signal
late in
2023 that
monetary tightening
had probably come to an end.
The MSCI All Country World Index
returned a 22.2% gain in 2023,
with close to half of that
gain coming in the final
two
months of
the year.
The S&P
500 rose
by 26.3%,
lifted by
optimism that
innovations in
artificial intelligence
will boost
profits and hopes that
the Federal Reserve
will cut rates swiftly in
response to falling inflation.
The FANG+ index,
which
tracks the 10 most traded US tech stocks, increased 96%
over the year. The MSCI Japan was the best-performing
major
market in
local currency
terms in 2023,
with a
return of
28.6%, its highest
in a
decade. In
Europe, the MSCI
EMU returned
18.8%. Although the Swiss and
UK markets lagged behind global
stocks, both ended the year
in positive territory,
with
returns of 5.3% and 7.7%, respectively. The weakest performance by a major
market came from the MSCI China, which
lost 10.7% amid disappointment
over the pace
of the economic recovery
from pandemic restrictions
and more limited-
than-expected stimulus.
Economic and market outlook for 2024
1
Our baseline
scenario for
2024 is
for a
soft landing
in
the US
and subdued
but positive
growth in
the Eurozone.
We
expect growth in China to enter a new normal of lower,
but potentially higher-quality, growth.
We believe inflation
will continue falling
toward central bank
targets, and, as
a result, we
believe policymakers will
feel
confident enough to lower
interest rates starting
around the middle
of 2024. We expect
cuts from the Federal
Reserve,
the ECB, the
Swiss National
Bank and the
Bank of England.
In contrast, with
Japanese deflation
coming to an
end, we
expect the Bank of Japan to raise rates into positive territory
for the first time since late 2015.
With regard
to growth,
we expect
the US
to slow to
a sustainable
long-term rate
of growth, due
to declining
housing
affordability and
the withdrawal
of some
government support
measures that
helped households
during the
COVID-19
pandemic. However, middle-income
consumers still appear
to have spending power,
as well as relatively
strong balance
sheets, and
we expect
demand for
labor to
remain resilient.
Overall, we
expect US
GDP growth
to remain
positive, at
around
1.1%
in
2024.
We
expect
growth
to
be
weak
in the
Eurozone,
at
0.6%,
due
to
the
lagged
effect
of higher
interest rates.
We also
expect
UK GDP
to increase
by 0.6%
in 2024,
while GDP
growth in
Switzerland
is expected
to
increase to 1.2% in 2024.
Geopolitical events
and elections
also have
the potential
to play an
outsized role
in 2024.
The US
presidential election,
the ongoing Israel–Hamas and Russia–Ukraine wars,
and the tension between the US and China could all affect markets
globally. In addition, more than four billion people in more than 40 countries are set to
go to the polls in 2024, including
in the US, India and, potentially,
the UK.
1
Based on sources: Haver Analytics, CEIC, National Statistic and UBS.
Annual Report 2023 |
Our business model and environment |
Regulation and supervision
13
Regulation and supervision
As a
financial services provider based
in Switzerland, the
UBS Group
is subject to
consolidated supervision by the
Swiss
Financial Market Supervisory Authority (FINMA). The
Group’s entities are
also regulated and
supervised by authorities in
each
country
where
we
conduct
business. Through
UBS AG,
Credit Suisse AG,
UBS
Switzerland AG and
Credit
Suisse
(Schweiz) AG, which
are licensed as banks in Switzerland,
UBS may engage in a full range of financial services
activities in
Switzerland
and abroad, including
personal banking,
commercial banking,
investment banking
and asset management.
As UBS is a global systemically important
bank (a G-SIB), as designated by the
Financial Stability Board, and a systemically
relevant bank (an SRB) in Switzerland, UBS Group
entities are subject to stricter regulatory
requirements and supervision
than most other Swiss banks.
›
Refer to the “Regulatory and legal developments”
and “Risk factors” sections of this report for
more information
Regulation and supervision in Switzerland
Supervision
UBS Group AG and its subsidiaries, including UBS AG, are subject to consolidated supervision by FINMA under the
Swiss
Banking Act and related ordinances, which impose standards for matters such as capital adequacy
and risk diversification
rules, liquidity,
internal
control systems,
business
conduct, and
corporate
governance.
FINMA meets
its statutory
supervisory
responsibilities through licensing,
regulation, supervision and enforcement.
It is responsible for prudential supervision
and
mandates audit
firms to perform
regulatory audits
and other supervisory
tasks on its behalf.
Capital adequacy and liquidity regulation
As an internationally active
Swiss systemically important bank
(an SIB), UBS is subject
to capital and total loss-absorbing
capacity (TLAC)
requirements
at both
the group
level, for
UBS Group
AG, and
the parent
bank level,
for UBS
AG and
Credit Suisse AG, that
are based on both
risk-weighted assets (RWA)
and the leverage
ratio denominator (LRD)
and are
among the most
stringent in the
world. UBS Group AG,
UBS AG, Credit Suisse AG,
UBS Switzerland AG
and Credit Suisse
(Schweiz) AG are also subject to Swiss SIB liquidity
requirements and to minimum long
-term funding requirements.
›
Refer to the “Risk, capital, liquidity and funding,
and balance sheet” section of this report for
more information about the Swiss
SRB framework and the Swiss too-big-to-fail (TBTF)
requirements
›
Refer to “Liquidity coverage ratio” in the “Risk,
capital, liquidity and funding, and balance sheet”
section of this report for more
information about liquidity coverage ratio requirements
Regulation and supervision outside Switzerland
Regulation and supervision in the US
In the
US, UBS
is subject
to regulation
and supervision
by the
Board of
Governors
of the
Federal Reserve
System (the
Federal
Reserve Board) under a
number of laws.
UBS Group AG, UBS AG and
Credit Suisse AG
are subject to
the Bank Holding
Company Act,
pursuant to
which the Federal
Reserve Board
has supervisory
authority over
the UBS Group’s
US operations.
In addition to being
a financial holding company
under the Bank Holding Company Act,
UBS AG has US branches, which
are authorized
and supervised
by the
Office of
the Comptroller
of the
Currency (the
OCC). UBS
AG is
registered
as a
swap
dealer
with
the
Commodity
Futures
Trading
Commission
(the
CFTC),
and
registered
as
a
securities-based
swap
dealer with the Securities and Exchange Commission (the
SEC).
UBS Americas Holding
LLC, the intermediate
holding company for
our operations in
the US outside
of the UBS AG
branch
network,
as required
under
the
Dodd–Frank
Act,
is subject
to requirements
established
by
the
Federal
Reserve
Board
related to risk-based
capital, liquidity, the
Comprehensive Capital
Analysis and Review
(CCAR) stress testing
and capital
planning process, and resolution planning and governance.
UBS Bank USA,
a Federal Deposit
Insurance Corporation
(FDIC)-insured depository
institution subsidiary,
is licensed and
regulated by state regulators in Utah and is also supervised
by the FDIC.
UBS Financial
Services
Inc.,
UBS Securities
LLC and
several other
US subsidiaries
of UBS
are subject
to regulation
by a
number
of
different
government
agencies
and
self-regulatory
organizations,
including
the
SEC,
the
Financial
Industry
Regulatory Authority, the CFTC,
the Municipal Securities Rulemaking Board
and national securities exchanges,
depending
on the
nature of
their business.
Certain of
our activities
in the
US are
subject to
regulation by
the Consumer
Financial
Protection Bureau.
Regulation and supervision in the UK
Our regulated UK operations are mainly
subject to the authority of the Prudential Regulation
Authority (the PRA), which
is part
of the
Bank of
England, and
the Financial
Conduct Authority
(the FCA).
We are
also subject
to the
rules of
the
London Stock Exchange and other securities and commodities exchanges
of which UBS AG is a member.
UBS AG has a UK-registered branch, UBS AG
London Branch, which serves as a global booking
center for the Investment
Bank. Our regulated subsidiaries that
provide asset management services are
authorized and regulated by the FCA.
UBS
Asset Management Life Ltd is authorized and regulated by
the FCA and subject to the authority of the PRA.
Annual Report 2023 |
Our business model and environment |
Regulation and supervision
14
Regulation and supervision in Germany and the EU
UBS Europe SE, headquartered
in Germany,
is subject to the direct
supervision of the European Central
Bank, as well as
to
continued
conduct,
consumer
protection
and
anti-money-laundering-related
supervision
by
the
German
Federal
Financial Supervisory
Authority (BaFin)
and supervisory
support by
the German
Bundesbank. The
entity is subject
to EU
and
German
laws
and
regulations.
UBS
Europe
SE
maintains
branches
in
Denmark,
France,
Italy,
Luxembourg,
the
Netherlands,
Poland,
Spain,
Sweden
and
Switzerland
and
is
subject
to
conduct
supervision
by authorities
in
all
those
countries.
Regulation and supervision in Asia Pacific
We operate
in numerous
locations in Asia
Pacific, including
Singapore, the
Hong Kong SAR,
mainland China,
Australia
and Japan. The
operations in these
locations are subject
to regulation and
supervision by local
financial regulators.
Our
Asia Pacific regional hubs are in Singapore
and the Hong Kong SAR.
In
Singapore,
UBS AG
Singapore
Branch,
UBS
Securities
Pte
Ltd
and
UBS
Asset
Management
(Singapore)
Ltd
are
supervised by the Monetary Authority of Singapore and the
Singapore Exchange.
In the Hong Kong SAR, UBS
AG Hong Kong Branch is supervised
by the Hong Kong Monetary
Authority. UBS Securities
Hong Kong Limited, UBS Securities Asia Limited and UBS Asset Management (Hong Kong) Limited
are supervised by the
Hong Kong
Securities
and Futures
Commission. In
addition, UBS
Securities
Hong Kong
Limited
is supervised
by Hong
Kong Exchanges and Clearing Limited.
In mainland China, we have
multiple licenses to operate the
business lines of UBS AG, and
the various entities are subject
to regulation by a number of different government agencies. The People’s Bank of China oversees China’s macro capital
markets policies and ensures coordinated supervisory
approaches by the National Administration of
Financial Regulation
(the China Banking and Insurance Regulatory Commission until May 2023), the China Securities Regulatory Commission
and a number of exchanges.
In
Australia,
UBS AG
Australia
Branch
is
supervised
by
the
Australian
Prudential
Regulation
Authority,
the
Australian
Securities
and
Investments
Commission,
the
Australian
Transaction
Reports
and
Analysis
Centre,
the
Reserve
Bank
of
Australia, and the
Australian Securities
Exchange. UBS Securities
Australia Limited
and UBS Asset
Management Limited
are supervised by the Australian Securities and Investments Commission, the Australian Transaction Reports and Analysis
Centre, and the Australian Securities Exchange.
In Japan,
UBS Securities
Japan Co.,
Ltd. is
supervised by
the Financial
Services Agency
and the
Japan Exchange
Group.
UBS AG Tokyo
Branch is
supervised by
the Financial
Services Agency
and the
Bank of
Japan. UBS
SuMi TRUST
Wealth
Management Co.,
Ltd is
supervised by
the Financial
Services
Agency and
the Japanese
Ministry of
Finance.
UBS Asset
Management (Japan) Ltd and UBS Japan Advisors Inc. are
supervised by the Financial Services Agency.
Financial crime prevention
Combating money laundering and terrorist financing has been a major focus of
many governments in recent years. Laws
and regulations, including the Swiss Banking Act and the US Bank Secrecy Act, require effective policies, procedures and
controls to detect,
prevent and report
money laundering and
terrorist financing, and
the verification of client
identities.
Failure to introduce
and maintain adequate
programs to prevent
money laundering and
terrorist financing can
result in
significant legal and reputational risk and fines.
We are
also subject
to laws
and regulations
prohibiting
corrupt or
illegal payments
to government
officials and
other
persons, including
the US
Foreign Corrupt
Practices Act
and the
UK Bribery
Act. We
maintain policies,
procedures and
internal controls intended to comply with those regulations.
›
Refer to “Non-financial risk” in the “Risk
management and control” section of this report for more information
Data protection
We
are
subject
to
regulations
concerning
the
use
and
protection
of
customer,
employee,
and
other
personal
and
confidential information. This includes provisions under Swiss
law, the EU General Data Protection Regulation (the GDPR)
and laws of other jurisdictions.
›
Refer to the “Risk factors” section of this report for
more information about regulatory change
Recovery and resolution
Swiss TBTF legislation
requires each Swiss
SRB to establish
an emergency plan
to maintain systemic
functions in case
of
impending insolvency. In response to these Swiss requirements and similar ones in other jurisdictions, UBS has developed
recovery plans and
resolution strategies, as
well as plans
for restructuring or
winding down businesses
if the firm could
not otherwise be stabilized.
Annual Report 2023 |
Our business model and environment |
Regulation and supervision
15
In 2013, FINMA
stated its
preference for
a single point
of entry
(an SPE)
strategy for globally
active SRBs,
such as
UBS,
with a bail-in
at the group
holding company level.
UBS has made
structural, financial and operational
changes to facilitate
an SPE strategy and
is confident that
a resolution of
the bank is
operationally executable and legally
enforceable. In 2023,
UBS
acquired
the
Credit
Suisse
Group
and
merged
Credit
Suisse
Group AG
into
UBS
Group AG.
A
bail-in
remains
operationally executable for
the combined UBS Group
and an SPE resolution
strategy remains the preferred
strategy for
UBS.
FINMA evaluates the recovery and resolution plans of Swiss SRBs on a regular basis. In its most recent assessment, which
was published in April 2023 and based on year-end 2022 information, FINMA
re-confirmed that UBS’s Swiss emergency
plan is
effective, the
recovery plan
has been
approved and
that UBS
fulfills all
resolvability criteria.
This assessment
did
not reflect the combined organization
and the respective plans will need to
be amended and approved for the new
and
combined Group. FINMA
will review its
resolvability assessment of
the combined UBS
Group as
the integration progresses.
A new, interim assessment is expected to be published
by FINMA at the end of the second quarter of 2024.
Crisis management framework
The UBS Group’s crisis management framework
assigns responsibility and actions depending on the
nature of the stress
incident and the scale of the response needed.
–
For incident,
risk and
crisis
management,
the Group
Crisis Task
Force
works with
incident management
teams that
provide monitoring and early-warning
indicators at the local /
regional level, without needing
to activate protocols at
the Group
level. If
a local
response is
insufficient, global
task forces
and crisis
management teams
provide decision-
making
guidance
and
coordination,
including
crisis
management
plans,
protocols
and
playbooks,
and
contingency
funding plans.
–
The Group Executive Board (the GEB) and the Board of Directors
(the BoD) would evaluate and decide upon the need
to activate
the Global
Recovery
Plan (the
GRP) if
a stress
event reached
a severity
requiring activation
based on
the
GRP’s recovery risk indicators.
–
FINMA has the authority
to determine whether the
point of non-viability (the
PONV), as defined by
Swiss law, has been
reached and, as part of the resolution plan, has the power to order the
bail-in of creditors to recapitalize and stabilize
the Group, limit payments of dividends and interest, alter our legal structure, take actions to reduce business risk, and
order a restructuring of the bank.
Annual Report 2023 |
Our business model and environment |
Regulation and supervision
16
Global Recovery Plan
The GRP
provides a
tool to
restore financial
strength if
UBS comes
under severe
capital or
liquidity stress.
Quantitative
and qualitative triggers are monitored daily and are
subject to predefined governance and escalation processes. Recovery
options
are
linked
to
owners
and
checklists,
with
the
objectives
of
preserving
capital,
raising
capital
or
liquidity,
or
disposing of or winding down businesses.
Global Resolution Strategy
FINMA is required
to produce
a global resolution
plan for UBS.
The plan
includes setting out
measures that
FINMA can
take to resolve
UBS in
an orderly manner
if the
UBS Group enters
resolution. The SPE
bail-in strategy would
involve writing
down the UBS
Group’s remaining equity and
additional tier 1 and
tier 2 instruments, as well
as the bailing
in of the
TLAC-
eligible senior unsecured
bonds at the
UBS Group AG
level. An internal
recapitalization of
undercapitalized subsidiaries
would
be
executed
simultaneously
with
losses
transmitted
to
UBS AG
or
Credit
Suisse AG,
and,
ultimately,
UBS
Group AG. Post-resolution restructuring measures could
include disposals or wind-down of businesses and assets.
Local recovery and resolution plans
The Swiss
emergency plans demonstrate
how UBS’s
systemically important functions
and critical
operations in
Switzerland
can continue if
the UBS Group
cannot be restructured.
This is achieved
mainly by operating
the Swiss-booked
business
in separate legal entities, including
UBS Switzerland AG, and by maintaining
sufficient capital and liquidity to
ensure their
continued operation.
The US resolution plans set
out the steps that could be taken
to resolve the US intermediate
holding companies (the US
IHCs), including UBS Americas Holding LLC, and their subsidiaries,
if they suffered material financial distress and the UBS
Group was unable or
unwilling to provide
financial support. As
such and as required
by US regulations, our
US plan for
UBS Americas
Holding LLC
contemplates that
the US
IHC will commence
US bankruptcy
proceedings. Prior
to this,
the
plan envisages the US IHC downstreaming financial resources
to their respective subsidiaries to facilitate an orderly wind-
down or disposal of businesses.
UBS Europe
SE
updates
a
local
recovery
plan
annually
based
on
European
Central
Bank
requirements,
and
resolution
planning information and capabilities based on
Single Resolution Board requirements. On the basis
of such information,
the
Internal
Resolution
Team,
composed
of
members
of
the
Single
Resolution
Board,
produces
a
resolution
plan
for
UBS Europe SE.
Other local recovery and resolution plans
exist for various UBS AG entities and jurisdictions.
Regulatory trends
In
2023,
regulatory
policy
was
strongly
impacted
by
the
banking
turmoil
in
March,
with
financial
stability
concerns
returning
to
the
forefront,
followed
by
renewed
discussions
around
the
effectiveness
of
too-big-to-fail
/
resolution
frameworks
and
subsequent
initial
lessons
drawn
being
discussed
throughout
the
year.
While
the
reviews
by
supranational standard-setters
and in
Switzerland generally
upheld the
appropriateness
of the
international regulatory
and resolution frameworks, certain themes requiring further
attention were identified with additional analyses ongoing.
The
digitalization
of banking
and corresponding
policy
responses
continued
throughout
2023,
with attention
paid to
systemic risks, market integrity, investor
protection and cross-border aspects
related to digital assets. Initial
policy efforts
started
on
decentralized
finance.
In
the
meantime,
most
major
central
banks
increased
their
engagement
related
to
central bank digital currencies.
New capabilities and wider
adoption of artificial intelligence (AI)
have resulted in increased
regulatory focus on the
topic, particularly regarding
sound governance frameworks,
safety and fairness. The
large-scale
use of both traditional and non-traditional data by AI
models has given rise to questions around the adequacy
of existing
data legislation
and in
some jurisdictions will
likely result
in enhanced
protections. Separately, many
jurisdictions continued
to make data more available across sectors, with a focus
on open finance.
Sustainable finance and climate-related financial
risks remained a key
focus for policymakers in
2023, where we observed
noteworthy activity in
the areas of
corporate and product
disclosures for climate-related
financial risks, specifically
relating
to banks’ governance, strategy and risk management, as well as efforts to standardize and harmonize regulations across
different jurisdictions. Policymakers advanced guidelines
related to nature and
biodiversity topics by intensifying
the focus
on disclosures, risk management and
quantification methodologies. Furthermore, we observed ongoing regulatory
policy
related to net-zero financing, while transition planning started to become an important focus topic for policymakers. On
the topic of products regulation, regulatory initiatives continued
to focus on carbon and carbon markets and addressing
issues related
to greenwashing.
Lastly, we
saw increased
regulatory attention
paid to
solutions related
to social
impact
investing and blended finance.
Annual Report 2023 |
Our business model and environment |
Regulation and supervision
17
The national
implementation of
the Basel III
requirements continued
to be
an important
focus area.
The authorities
in
Switzerland issued
rules to
implement the
final standards
into Swiss
law, and
US banking
regulators launched
a public
consultation in 2023. Switzerland has confirmed the effective date for the revised rules as 1 January 2025. Although the
EU is
still targeting
implementation by
January 2025,
the UK
and the
US have
delayed the
application until
July 2025,
with the US also
including a three-year transition
timeline. Differences in the implementation
timelines and in the
content
of the provisions remain a challenge for globally active banks.
In addition, regulatory
authorities continued to
refine existing regulations,
including efforts to
strengthen the anti-money-
laundering guidelines
on beneficial
ownership and
work
on enhancing
third-party
risk management,
with operational
resilience remaining a key issue. The focus on retail
investor protection sharpened, in particular in asset management.
In
the US, retail investor protection features became a component of an ongoing broader
equity market reform. In the UK,
reviews of the Senior Managers and Certification Regime focused
on determining whether the regime delivers against its
original aim and how it can be improved.
Finally, in light of increasing risks,
non-bank financial intermediation remained
a topic of concern with national and supranational policymakers.
We believe the continued adaptations made to our business model
and our proactive management of regulatory change
put us in a strong position
to absorb upcoming changes
to the regulatory environment.
We trust that our strengthened
position as a combined organization will allow us to cope
with any potential challenges.
›
Refer to the “Regulatory and legal developments”
and the “Risk, capital, liquidity and funding,
and balance sheet” sections of this
report for more information
Regulatory and legal developments
Developments related to the acquisition of the Credit Suisse
Group and the banking turmoil in March 2023
Key developments in Switzerland
Based on the emergency
ordinance issued by the
Swiss Federal Council in
connection with the
acquisition of the Credit
Suisse Group
on 16 March
2023, as amended
on 19 March
2023, (the Emergency
Ordinance), UBS
Group AG entered
into a loss protection agreement (an LPA)
with the Swiss Confederation, with an effective date of 12 June 2023. As part
of
this
agreement,
the
Swiss
Confederation
would
have
borne up
to
CHF 9bn
of
losses,
if
realized,
on
a
designated
portfolio of Credit Suisse’s non-core assets
after the first CHF 5bn of losses, which would have
been borne by UBS.
Under the Emergency
Ordinance, UBS AG
and Credit
Suisse AG also
had access to
additional liquidity
assistance loans,
the Emergency Liquidity Assistance Plus (ELA+) loans, provided by the Swiss National Bank
(the SNB) of up to CHF 100bn
on a combined
basis, with
the loans
under the
facility having
preferential rights
in bankruptcy
proceedings. The
Credit
Suisse Group was also allowed to borrow up
to an additional CHF 100bn from the SNB backed
by a Swiss federal default
guarantee,
the Public Liquidity Backstop
(the PLB), with the loans having preferential rights
in bankruptcy proceedings.
On 11 August 2023, UBS Group AG voluntarily terminated the LPA
and the PLB. After reviewing all assets
covered by the
LPA since the closing of the
Transaction in June 2023 and
taking the appropriate fair
value adjustments, UBS concluded
that the LPA was no
longer required. All loans
under the PLB were
fully repaid by the
Credit Suisse Group as
of the end
of May 2023
and Credit Suisse AG
fully repaid the
outstanding ELA+ loans
on 10 August 2023.
As of 31 December
2023,
Credit Suisse (Schweiz) AG had a total of CHF 38bn outstanding under the Emergency Liquidity Assistance facility, which
is fully collateralized by Swiss mortgages.
In parallel with
the measures
taken by
the Swiss
Confederation in
March 2023,
the Swiss
Financial Market
Supervisory
Authority (FINMA) also ordered a write-off of CHF 15.8bn principal amount of Credit Suisse Group AG’s additional tier 1
(AT1) instruments.
In May 2023,
the Swiss
Federal Department
of Finance
mandated a group
of experts
on banking
stability to assess
the
role
of
banks
and
the
legal
and
regulatory
framework
related
to
the
stability
of
the
Swiss
financial
center.
The
corresponding report,
published in
September 2023,
concluded that
Swiss capital
regulations are
working as
intended
and
that
there
is
no
need
for
a
major
revision.
However,
the
report
sees
a
need
for
reforms
with
regard
to
banking
supervision
and
proposes
that
the
relevant
authorities
be
granted
broader
powers.
Furthermore,
the
report
suggests
improvements regarding liquidity regulations, including a proposal to extend the supply of liquidity in the case of a crisis.
The
report
also
suggests
that
Swiss
authorities
should
make
improvements
with
regard
to
crisis
preparation
and
management.
Annual Report 2023 |
Our business model and environment |
Regulatory and legal developments
18
In
June
2023,
the
Swiss
Parliament
formed
a
parliamentary
inquiry
committee
that
is
mandated
to
investigate
the
legitimacy, expediency and
effectiveness of the
management of the competent
authorities and bodies
in the context
of
the
events
involving
the
Credit
Suisse
Group.
The
committee
will
report
to
the
Swiss
Parliament
on
the
results
of
its
investigation and will
propose measures to
remedy any identified
deficiencies. We
expect the results
to be published
in
the
fourth
quarter
of
2024.
The
conclusions
by
the
inquiry
committee
may
include
potentially
significant
recommendations, which could result in more stringent regulation.
In December 2023, FINMA
published a report on
the case of
Credit Suisse that analyzed
the development of Credit
Suisse
in recent
years and
examined
its supervisory
work with
the bank.
In addition,
FINMA
noted in
its report
a number
of
lessons to
be learned,
calling for
a stronger
legal basis,
specifically for
instruments such
as a
Senior Managers
Regime,
the
power
to impose
fines,
and more
stringent
rules regarding
corporate
governance.
Furthermore,
FINMA explained
that it
will adapt
its supervisory
approach in
certain areas
and will
step up
its review
of whether
stabilization measures
are ready to be implemented.
The findings of the
group of experts and the
lessons drawn by FINMA include
recommendations that could result in
more
stringent
regulation,
and
will
be
considered
by
the
Swiss
Federal
Council
in
its
next
report
on
systemically
important
banks, which is to be presented by April 2024.
Key developments in the US
In May 2023, the
Federal Reserve Board
and the Federal Deposit
Insurance Corporation (the
FDIC) released reports
that
covered the
circumstances leading
to the
closing of
certain banking
organizations following
the events
in the
banking
market in March 2023. The reports noted shortcomings in the supervisory agencies’ execution of
examination programs,
including escalation
of supervisory
issues and
staffing. They
also raised
concerns related
to the
regulatory
framework,
including the Federal Reserve’s Tailoring Rule and other topics, such as interest rate risk management. UBS expects these
developments to impact the regulatory environment
in the US, where UBS has significant
operations.
In November
2023, the
FDIC approved
a final rule
to implement
a special
assessment to
recover losses
incurred by
the
Deposit Insurance
Fund in
connection with
the failures
of Silicon
Valley Bank
and Signature
Bank in
March 2023.
The
assessment
is
based
on
the
estimated
uninsured
deposits
of
each
depository
institution
at
the
end
of
2022.
The
assessment will
be collected
over an
eight-quarter
period that
started in
January 2024.
In the
fourth quarter
of 2023,
UBS Bank USA recorded a charge for the full amount of
its estimated assessment of USD 60m.
Key developments at the supranational level
In October 2023,
the Basel Committee
on Banking Supervision
(the BCBS) released
a report
on the causes
of the 2023
banking turmoil. The BCBS argues that
while the distress of various banks
in March 2023 reflected
idiosyncratic factors,
recurring
themes
can
be
grouped
into
three
broad
categories:
bank
risk-management
practices
and
governance
arrangements; strong and effective
supervision; and robust regulatory standards.
Also in October
2023, the
Financial Stability
Board (the
FSB) identified
in a review
several areas
related to
the effective
operationalization and implementation
of the international
resolution framework that
merit further attention as
part of
future work, but concluded that recent events demonstrate
the soundness of the framework.
No concrete changes to the Basel
standards or the FSB framework
are proposed at this stage, but the
follow-up work is
particularly focused
on strengthening
supervisory effectiveness,
liquidity risk,
interest rate
risk in the
banking book
and
the effectiveness of the resolution frameworks.
Developments regarding capital and liquidity adequacy
and TBTF frameworks
Developments related to liquidity adequacy
In September
2023, the
Swiss Federal
Council adopted
a dispatch
and draft
legislation on
the introduction
of a
public
liquidity
backstop
for
systemically
important
banks
(SIBs),
which
was
initially
implemented
as
part
of
the
Emergency
Ordinance. The proposed legislative changes aim to
establish the public liquidity backstop
as part of ordinary law
in order
to enable the Swiss
government and the SNB
to support an
SIB domiciled in Switzerland
with liquidity in the
process of
resolution, in
line with
other financial
centers. The
introduction of
the public
liquidity backstop
is intended
to increase
the confidence of market
participants in the ability of
SIBs to be successfully
recapitalized and remain
solvent in a crisis.
Furthermore, the draft legislation
provides that SIBs
will pay the
Swiss Confederation an
annual fee to
mitigate a potential
impact on competition
and to compensate
the Swiss
Confederation for
its guarantee
to the SNB
of the
public liquidity
backstop,
if required.
In addition
to the
public liquidity
backstop, the
proposed legislative
changes would
enact into
ordinary law
additional
provisions contained in
the Emergency Ordinance,
including mandated clawback
of variable compensation
in the event
that government support is provided to an SIB.
Annual Report 2023 |
Our business model and environment |
Regulatory and legal developments
19
The legislative changes are expected to come into force by January 2025, at the earliest,
as in November 2023, the Swiss
Parliament suspended
discussions on
the public
liquidity backstop
until the
presentation of
the Swiss
Federal Council’s
report on systemically important banks.
Furthermore, FINMA communicated
in the third
quarter of 2023
the liquidity requirements
arising from the
revisions to
the
Swiss
Liquidity
Ordinance,
with
the
aim
of
strengthening
the
resilience
of
SIBs
in
Switzerland.
The
affected
legal
entities of the UBS Group are compliant with these requirements,
which became effective on 1 January 2024.
Developments related to capital adequacy
In July 2023, US banking regulators,
including the Federal Reserve
Board, the FDIC and the
Office of the Comptroller
of
the Currency
(the OCC), issued
a public consultation
on a proposal
that would
implement the
final components of
the
Basel III capital standards for US banking organizations and foreign-owned intermediate holding
companies, such as UBS
Americas Holding
LLC and
Credit Suisse
Holdings (USA),
Inc. Among
other matters,
the proposed
rules would
end the
use of
the internal
model approach
for credit
risk by
the largest
banking organizations
and would
introduce instead
a
new
standardized
approach.
In
addition,
the
proposed
rules
for
operational
risks
would
replace
the
advanced
measurement approach
with a
standardized
measure. The
proposal calls
for a
three-year
transition period,
starting on
1 July 2025, and full implementation by 1 July 2028. We currently estimate that the proposed rule changes would
result
in increased capital requirements
for our US-based intermediate holding companies
if implemented as proposed.
In November
2023, the
Swiss Federal
Council adopted
amendments to
the Capital
Adequacy Ordinance
(the CAO)
for
banks to
incorporate the
final Basel III
standards adopted
by the
BCBS in
Swiss law.
The amended
CAO will
enter into
force on
1 January 2025. The
final degree
of alignment
between the
Swiss implementation and
those in
other jurisdictions
remains
uncertain
at
this
stage.
Although
EU
legislators
target
implementation
by
January
2025, the
implementation
timelines in the UK and
the US have been
delayed until July 2025.
The Swiss Federal Department
of Finance will inform
the Swiss
Federal Council about
the status of
international implementation by
the end of
July 2024. We
currently estimate
that the revised Basel III framework will lead
to a further net increase in
risk-weighted assets of approximately USD 25bn,
of
which
USD 10bn
is
in
Non-core
and
Legacy.
This
estimate
is
based
on
static
balances,
before
taking
into
account
mitigating actions, as well as not reflecting the impact of
the output floor, which is phased in over time.
Developments related to TBTF frameworks
In
August
2023,
the
Federal
Reserve
Board
and
the
FDIC
issued
joint
proposals
on
long-term
debt
requirements
and
resolution
planning
guidance
for
large
banks.
The
long-term
debt
proposal
would
require
certain
large
bank-holding
companies, intermediate holding companies
and insured depositories with
USD 100bn or more in
total assets to
maintain
a minimum amount of long-term debt, intended
to enhance the resilience and resolvability
of such organizations. Large
banking organizations would also be
prohibited from certain activities that could
complicate the resolution or would lead
to contagion risks.
If the proposals are
implemented, UBS Bank
USA would be
subject to the
long-term debt requirement,
which would be
incremental to
the requirements
already imposed
upon its parent
organization, UBS
Americas Holding
LLC. The resolution
planning guidance
proposed by
US banking regulators
would cover
our US-based
entities and calls
for certain enhancements in the requirements
of the submitted resolution plans.
In November 2023, the FSB published the 2023 list of global
systemically important banks (G-SIBs). UBS has been moved
from Bucket
1 to
Bucket 2,
corresponding to
an increased
FSB common
equity tier
1 capital
surcharge requirement
of
1.5%
from
1.0%,
effective
from
1 January
2025.
Credit
Suisse
has
been
removed
from the
list.
As UBS
is
subject
to
higher requirements under the Swiss CAO, the change does
not affect the capital requirements applicable to UBS.
In February 2024, the FSB published its
Peer Review of Switzerland, which examines Switzerland’s implementation of the
FSB’s
TBTF
reforms
for
G-SIBs.
The
review
states
that
although
Swiss
authorities
have
made
important
steps
toward
implementing an
effective TBTF
regime for
G-SIBs, additional
steps can
be taken
to further
strengthen the
Swiss TBTF
framework.
Recommendations
include
increasing
supervisory
resources,
strengthening
early
intervention
powers
and
enhancing the recovery and resolution regime.
Annual Report 2023 |
Our business model and environment |
Regulatory and legal developments
20
Developments regarding climate-related financial
risks and sustainable finance
In 2023, the Swiss
National Council discussed
the revision of
the Act on
the Reduction of
CO
2
2
which contains
measures to
halve greenhouse
gas emissions
by 2030
compared
with 1990.
The proposal
is based
on
supplementing the
existing
CO
2
economy. For the
financial sector, it
contains a provision
mandating FINMA and
the SNB to
regularly assess climate-related
financial risks
in the
financial sector
and to
report the
results,
as well
as potential
measures,
to the
Swiss government.
FINMA is currently collecting
the data from the
financial sector in
order to be able
to carry out
the assessment in
2024.
It is expected that the proposal will be formally adopted by the
Swiss Parliament in spring 2024.
In June 2023, the Swiss electorate voted in favor of the
new Climate and Innovation Act (the CI Act). The CI
Act defines
a net-zero-by-2050 target
for Switzerland, including
interim targets for
selected sectors of
the Swiss economy
covering
scope 1
and
2
emissions.
In
addition,
each
Switzerland-domiciled
company
is
required
to
set
a
net-zero
target
by
1 January 2025. The CI Act
also contains provisions for
public funding to replace aged
heating systems in buildings and
for application of innovative technologies within companies.
Article 9 of the CI Act requires the financial
sector to make
an effective contribution to the transition to net zero and sets the general goal of the alignment of financial resources to
climate-friendly outcomes. Specific measures to achieve
the targets will be proposed in the CO
2
In December 2023, the Swiss Parliament added a provision on greenwashing to the Unfair Competition Act under which
companies are required
to make truthful and
clear statements in
relation to their
climate impact that
can be substantiated
by objective and verifiable bases.
Also in December 2023, the Swiss Federal Council announced that it intends to further improve climate transparency for
financial products and to further
develop the voluntary Swiss Climate
Scores (the SCS), which were
introduced in 2022.
The SCS
provide investors
with information
about the
extent to
which their
financial investments
are compatible
with
climate goals. The updated SCS, which will apply from 1 January 2025, will continue to prescribe disclosures by financial
institutions
on
climate
alignment
and
climate
change
mitigation
characteristics
of
financial
products
and
will
newly
prescribe disclosure of exposures to renewable energy. UBS
has committed to the voluntary use of the SCS.
In October
2023, the
Federal
Reserve
Board, the
OCC and
the FDIC
approved guidance
on the
principles for
climate-
related
financial
risk
management.
The
final
principles
describe
how
climate-related
risks
can
be
addressed
in
the
management
of
traditional
financial
risks.
The
principles
cover
six
areas:
governance;
policies,
procedures
and
limits;
strategic planning; risk management; data, risk measurement and reporting; and scenario analysis. The guidance applies
to our US-based operations. UBS is evaluating the guidance to ensure the principles are addressed by the relevant Group
practices.
In June 2023,
the International Sustainability Standards
Board (the ISSB)
finalized its first
set of requirements
for corporate
disclosures
regarding
sustainability
matters:
IFRS S1
and
IFRS S2.
IFRS S1
addresses
the
disclosure
of
a
company’s
sustainability-related risks and
opportunities. IFRS S2 addresses the
disclosures for the
governance processes, controls
and
procedures an
entity uses
to monitor,
manage and oversee
climate-related risks and
opportunities and
the entity’s strategy
for managing
risks and
opportunities.
The
standards
incorporate
the recommendations
of the
Task
Force
on Climate-
related Financial
Disclosures (the
TCFD). These
ISSB standards
have been
available for
use from
January 2024
onward.
UBS’s
implementation
of
the
standards
will
depend,
among
other
factors,
on
whether
the
standards
are
adopted
in
jurisdictions in which UBS files financial reports.
In October
2023, the
EU finalized
the first
set of
cross-sectoral
European Sustainability
Reporting Standards
(the ESRS)
under the Corporate Sustainability Reporting Directive. In addition to
general disclosures and requirements,
the ESRS
set
out
disclosure
requirements,
which
are
subject
to
a
materiality
assessment
that
is
contingent
on
external
assurance,
effectively allowing companies
to focus
on reporting
sustainability factors that
are material
to their
businesses. Companies
that were previously subject to the Non-Financial Reporting Directive and
large non-EU listed companies with more than
500 employees, including UBS, are
required to begin reporting under the
ESRS for the 2024 financial year,
with the first
reports to
be published
in 2025.
The European
Commission will
develop and
adopt additional
sector-specific reporting
standards by June 2026.
In March 2024, the
US Securities and
Exchange Commission (the
SEC) released the
final rules regarding
climate-related
disclosures
for
investors.
The
rules
will
require
certain
firms,
including
UBS,
to
disclose
qualitative
and
quantitative
information on the firm’s exposures
to climate-related risks and
risk management practices. The
rules are anticipated to
be effective for filings for the 2025 financial year.
Annual Report 2023 |
Our business model and environment |
Regulatory and legal developments
21
Other developments in Switzerland
In June 2023, the Swiss electorate voted in favor of the introduction of a minimum corporate tax rate of 15% applicable
to companies with a consolidated turnover of
more than EUR 750m, as stipulated by
the Global Anti-Base Erosion Model
Rules (Pillar Two) of
the Organisation for Economic Co-operation and
Development. In December 2023, the
Swiss Federal
Council decided on a partial adoption in Switzerland, by way of
an ordinance, and, as a result, a domestic minimum top-
up
tax
regime
became
effective
from
1 January
2024,
ensuring
a
Swiss
local
minimal
tax
burden
of
at
least
15%.
Switzerland will not implement any top-up tax regime in 2024 with respect to
non-Swiss taxation below 15%. The Swiss
Federal Council will
further observe
international developments
and decide at
a later stage
if and when
any top-up tax
with respect
to non-Swiss
taxation below
15% will
be introduced
in Switzerland. UBS
does not
expect the
implementation
of global minimum taxation in Switzerland to materially
impact its effective tax rate.
In
August
2023,
the
Swiss
Federal
Council
launched
a
consultation
on
a
bill
to
strengthen
the
Swiss
anti-money-
laundering framework,
with the
aim of
reinforcing the
integrity and
competitiveness
of Switzerland
as a
financial and
business location.
The measures
aim to
comply with
the international
standards of
the Financial
Action Task
Force (the
FATF). Among other matters, key elements of the proposal include the introduction of a
non-public register managed by
the Federal Department of Justice
and Police containing information about
the beneficial owners of
companies and other
legal
entities
in
Switzerland,
as
well
as
due
diligence
requirements
for
activities
with
an
increased
risk
of
money
laundering. In the context of the Swiss anti-money-laundering framework, the FATF also acknowledged in October 2023
the progress made
by Switzerland, especially
with the revision
of the Anti-Money
Laundering Act adopted
in March 2021.
In November
2023, the
Swiss Federal
Council adopted
an amendment
to the
Financial Market
Infrastructure
Act that
enacts a measure aimed at protecting
the Swiss stock exchange infrastructure
into Swiss law with effect
from 1 January
2024. This ruling
followed the
EU’s decision to
withdraw equivalence
for the Swiss
stock exchange regulation
in 2019.
The protective measure enables
EU firms to
trade Swiss shares on
the Swiss trading venues,
even without EU equivalence.
In the event of equivalence recognition by the EU, the
measure may be deactivated at any time.
In the first
quarter of 2023,
the Swiss Federal
Council implemented the
remaining measures of
the 9th and
10th sanctions
packages imposed
by the
EU against
Russia in
December 2022
and February
2023, respectively.
The measures
include
additional export restrictions and more detailed reporting
obligations with regard to frozen assets.
In August 2023,
the Swiss Federal
Council adopted the
EU’s 11th package
of sanctions against
Russia, which was
partially
adopted by Switzerland in June 2023 by expanding the sanction lists. As part
of the 11th sanctions package, the EU has
created a specific legal
basis for an instrument to
prevent the evasion of sanctions.
The Swiss Federal Council emphasized
its determination
to take
effective action
against the
evasion of
sanctions and
will examine
the implementation
of this
instrument in the event
of its actual application
by the EU. In
addition, Switzerland joined
the EU in imposing
sanctions
at Moldova’s
request and
against Belarus,
in view
of its
continued involvement
in Russia’s
ongoing military
aggression
against Ukraine.
In September 2023,
the Swiss Federal Council
issued sanctions measures in
connection with the
delivery of Iranian drones
to Russia. The sale,
supply, export and
transit of components
used in the construction
and production of
drones is now
prohibited. In January 2024,
the Swiss Federal Council
adopted the measures of
the EU’s 12th sanctions
package relevant
to Switzerland
,
following the
expansion of
the sanction
lists by
Switzerland
in December
2023. The
measures include
import bans
on certain
goods
that generate
significant revenue
for Russia,
as well
as certain
bans in
the financial
and
services
sectors.
In
February
2024,
the
Federal
Department
of
Economic
Affairs,
Education
and
Research
adopted
measures of
the EU’s
13th sanctions
package, which
target, among
others, individuals,
entities and
organizations that
are
operating
in
Russia’s
military-industrial
complex
and
that
are
involved
in
supplying
defense
equipment
from
the
Democratic People’s Republic of Korea, as well as officials from
the occupied territories of Ukraine.
UBS’s sanctions
programs are
designed to
comply with
sanctions across
multiple jurisdictions,
including those
imposed
by the United Nations, Switzerland, the EU, the UK and the
US.
The revised
Swiss Federal
Data Protection
Act and
the corresponding
Data Protection
Ordinance entered
into force
on
1 September 2023. The revised law represents a fundamental reform that strengthens the rights of consumers regarding
their data by
enhancing the transparency and
accountability rules for
companies processing data, among
other measures.
In addition, it seeks to
align Swiss data protection law with
the EU General Data Protection Regulation,
in order to ensure
continued cross-border transmission of data with EU Member
States.
Other developments in the US
In October 2023, the Federal Reserve Board,
the FDIC and the OCC adopted revisions
to their regulations implementing
the Community Reinvestment Act (the CRA). The CRA encourages banks to meet the credit needs of the communities
in
which they do business, with a focus on low- and moderate-income communities. The final rule will implement separate
evaluations
for
retail
lending,
retail
services
and
products,
community
development
financing,
and
community
development services
for banks
with over
USD 2bn in
total assets.
For large
banks with
over USD 10bn
in total
assets,
the evaluation of retail services
and products will cover
digital delivery systems. The final
rule also updates requirements
on the reporting of exposures. The rule has an implementation date of
1 April 2024, with additional phase-in periods for
general
provisions
and
reporting
that
extend
out
to
April
2027.
UBS
Bank
USA
expects
a
modest
level
of
increased
monitoring and reporting requirements
.
Annual Report 2023 |
Our business model and environment |
Regulatory and legal developments
22
In
October
2022,
the
SEC
adopted
rules
requiring
US
national
securities
exchanges,
including
the
New
York
Stock
Exchange (the NYSE) and Nasdaq, to adopt listing standards that require issuers to adopt and enforce a policy to recover
from
executive
officers
incentive
compensation
received
based
on
attainment
of
a
financial
reporting
measure
in
the
event
that
the
issuer
is
required
to
prepare
an
accounting
restatement
of
financial
statements
due
to
material
non-
compliance with financial reporting requirements. The SEC approved the listing standards promulgated by the NYSE and
Nasdaq in
June 2023
and the
clawback policy
requirement came
into effect
as of
1 December 2023.
Under the
listing
standards, an issuer
must recover the
amount of incentive-based
compensation that would
not have been
received if it
had been
determined based
on the
restated financial
information. UBS
Group AG, UBS
AG and
Credit Suisse AG
each
have securities listed on US national securities exchanges and have adopted a
policy to comply with the listing standards.
In
September
2023,
the
new
rules
from
the
SEC
to
enhance
and
standardize
disclosure
requirements
related
to
cybersecurity
incidents
and
cybersecurity
risk
management,
strategy
and
governance
became
effective.
Among
other
changes, the
rules require
foreign private
issuers, including
UBS Group AG,
UBS AG and
Credit Suisse AG,
to annually
report material information
regarding their cybersecurity
risk management, strategy
and governance on
Form 20-F. The
Form 20-F disclosures are applicable with annual reports for
fiscal years ending on or after 15 December 2023.
Other developments in Europe
US securities markets will
transition to one business day
after the trade date (T+1)
settlement of most transactions in
May
2024. In
October 2023, the
European Securities and
Markets
Authority (ESMA) launched
a call
for evidence on
shortening
the standard settlement cycle for securities transactions from two business days after
the trade date (T+2) to T+1. ESMA
aims to
perform an
assessment of
the costs
and benefits
linked to
the potential
reduction
of the
securities settlement
cycle in the EU and
intends to submit the results of
its assessment to the European Commission and publish
a final report
in the fourth quarter of 2024, at the latest. The UK Treasury has also established an Accelerated Settlement
Taskforce
to
consider
whether
the
UK
should
follow
the
US
and
transition
to
a
T+1
settlement.
The
UK
task
force
is expected
to
publish
its
findings
in
2024,
with
further
work
expected
during
2024.
UBS
is
implementing
and
testing
required
enhancements based
on the
US rules
and will
prepare
for further
implementation
according to
the evolving
rules and
market practice in the UK, the EU and Switzerland.
In May
2023, the
European Commission
presented draft
legislative proposals
aimed at
empowering retail
investors to
make investment
decisions that
are aligned
with their
needs and
preferences and
ensuring that
they are
treated fairly
and duly
protected.
The
proposals
also
aim
to encourage
greater
participation in
EU
capital
markets
and to
enable
a
greater volume of funds to
flow more easily into EU capital
markets. The package revises EU capital
markets rules, which,
once agreed and in
force, could have significant
implications and require significant
implementation efforts by UBS across
business divisions.
In
June
2023,
legislators
in
the
EU
reached
a
provisional
agreement
on
amendments
to
the
Capital
Requirements
Regulation and
the Capital Requirements
Directive. The provisional
agreement includes, alongside
measures to
implement
the remaining
elements
of the
Basel III standard,
a framework
that would
require non-EU
firms to
establish a
physical
presence within
the EU
when
providing certain
banking services
to EU-domiciled
clients
and counterparties
(including
deposit-taking and commercial
lending), unless they
are subject to
an exemption. The
changes will affect
the cross-border
provision of certain banking services
and will require UBS to adapt
its approaches to providing such
services to clients in
the EU.
The requirement
is expected to
become effective in
late 2026,
with grandfathering provisions
for contracts already
in existence at the date of introduction.
In December 2023, the
Swiss Confederation and
the UK signed a
mutual recognition agreement
(an MRA) for financial
services
to
facilitate
cross-border
financial
activities.
The
MRA
is
supplemented
by
measures
to
enhance
supervisory
cooperation and coordination.
The MRA envisages
a memorandum
of understanding
between FINMA and
the Bank of
England on resolution arrangements,
and it is
expected to enable Swiss
banks to provide cross-border
investment services
to high net worth UK-domiciled clients and to broadly
allow UK and Swiss over-the-counter derivatives counterparties to
choose whether
to rely
on Swiss
or UK
risk mitigation
rules (except
for physically
settled foreign
exchange swaps
and
forwards). The
agreement is
expected to
apply from
2026, depending
on the
completion of
parliamentary approval
in
both countries.
Annual Report 2023 |
Our business model and environment |
Risk factors
23
Risk factors
Certain risks,
including those
described below,
may affect
our ability
to execute
our strategy
or our
business activities,
financial condition, results of operations and prospects. We
are inherently exposed to multiple risks, many of which may
become apparent only with the benefit of hindsight.
As a result, risks that we do
not consider to be material, or
of which
we are
not currently
aware, could also
adversely affect
us. Within each category,
the risks that
we consider to
be most
material are presented first.
Strategy, management and operational risks
UBS’s acquisition of Credit Suisse Group AG exposes us to heightened
litigation risk and regulatory scrutiny and entails
significant additional costs, liabilities and business integration risks
that affect UBS AG
UBS acquired
Credit Suisse
Group AG
under exceptional
circumstances of
volatile financial
markets and
the continued
outflows and deteriorating overall financial
position of Credit Suisse, in
order to avert a failure
of Credit Suisse and thus
damage to the Swiss
financial center and
to global financial
stability.
The acquisition was
effected through
a merger of
Credit Suisse
Group AG
with and
into UBS Group
AG, with UBS
Group AG
succeeding to all
assets and all
liabilities of
Credit Suisse Group
AG, becoming the direct
or indirect shareholder
of the former Credit
Suisse Group AG‘s
direct and
indirect subsidiaries. Therefore,
on a consolidated basis, all assets, risks and liabilities of the
Credit Suisse Group became
a part of UBS. This includes all ongoing and future litigation, regulatory and similar matters arising out of the business of
the Credit Suisse Group, thereby materially increasing UBS‘s exposure to litigation and investigation risks, as described in
further detail below.
We
have incurred
substantial
transaction fees
and costs
in connection
with the
transaction and
will continue
to incur
substantial integration
and restructuring
costs. In
addition, we
may not
realize all
of the
expected cost
reductions and
other
benefits
of
the
transaction.
We
may
not
be
able
to
successfully
execute
our
strategic
plans
or
to
achieve
the
expected
benefits
of the
acquisition
of
the
Credit
Suisse
Group.
The
success
of the
transaction,
including
anticipated
benefits and cost savings, will depend, in part, on the
ability to successfully integrate the operations of both firms rapidly
and effectively, while maintaining
stability of
operations and
high levels
of service
to customers
of the
combined franchise.
Our ability to successfully
integrate Credit
Suisse will depend on
a number of factors,
some of which are
outside of our
control, including our ability to:
–
combine the operations of the two firms in a
manner that preserves client service, simplifies infrastructure
and results
in operating cost savings;
–
reverse
outflows of
deposits
and client
invested assets
at
Credit Suisse,
particularly
in its
Wealth
Management
and
Switzerland and to attract additional deposits and other
client assets to the combined firm;
–
achieve cost reductions at the levels and in the timeframe
we plan;
–
enhance, integrate,
and, where
necessary, remediate
risk management
and financial
control and
other systems
and
frameworks, including to remediate the material weakness in Credit Suisse’s internal controls over financial reporting;
–
simplify the
legal structure
of the
combined firm
in an
expedited manner,
through the
planned mergers
of UBS
AG
and Credit Suisse
AG and of
UBS Switzerland
AG and Credit
Suisse (Schweiz)
AG, as well
as the creation
of a single
intermediate holding
company (IHC)
for the
combined firm
in the U.S.,
other entity
mergers and
consolidations and
asset dispositions, including obtaining regulatory approvals and
licenses required to implement such changes;
–
retain staff and to reverse attrition of staff in certain of Credit
Suisse’s business areas;
–
successfully execute the wind-down of the assets
and liabilities in its Non-core and Legacy
division and release capital
and resources for other purposes;
and
–
resolve outstanding litigation, regulatory and similar matters, including matters relating to Credit
Suisse, on terms that
are
not
significantly
adverse
to
the
UBS
Group,
as
well
as
to
successfully
remediate
outstanding
regulatory
and
supervisory matters and meet other regulatory commitments.
Further
investigation
and
planning
for
integration
is
taking
place,
and
risks
that
we
do
not
currently
consider
to
be
material, or of which we are not currently
aware, could also adversely affect
us.
The
level
of
success
in
the
absorption
of
Credit
Suisse,
in
the
integration
of
the
two
groups
and
their
businesses,
particularly in the area of
the Swiss domestic bank, as well as domestic
and international wealth management business,
and in the
execution of
the planned
strategy regarding
cost reduction
and divestment
of any
non-core assets,
and the
level of resulting
impairments and write-downs,
may impact the operational
results, share
price and the credit
rating of
UBS entities. The
past financial performance
of each of
UBS Group AG
and Credit Suisse
may not be
indicative of their
future
financial
performance.
The
combined
group
will
be
required
to
devote
significant
management
attention
and
resources to
integrating its business
practices and support
functions. The diversion
of management’s attention
and any
delays
or
difficulties
encountered
in
connection
with
the
transaction
and
the
coordination
of
the
two
companies’
operations could
have an
adverse effect
on the
business, financial
results, financial
condition or
the share
price of
the
combined
group
following
the
transaction.
The
coordination
process
may
also
result
in
additional
and
unforeseen
expenses.
Annual Report 2023 |
Our business model and environment |
Risk factors
24
Our reputation is critical to our success
Our reputation is critical to the success of our strategic plans, business and prospects. Reputational damage is difficult to
reverse,
and
improvements
tend
to
be
slow
and
difficult
to
measure.
In
the
past,
our
reputation
has
been
adversely
affected
by our
losses during
the financial
crisis, investigations
into our
cross-border
private banking
services, criminal
resolutions of LIBOR-related and
foreign exchange matters,
as well
as other matters.
We believe that
reputational damage
as
a
result
of
these
events
was
an
important
factor
in
our
loss
of
clients
and
client
assets
across
our
asset-gathering
businesses. The Credit
Suisse Group
has more
recently been
subject to significant
litigation and regulatory
matters and
to financial losses
that adversely affected
its reputation and
the confidence of
clients, which played
a significant role
in
the failure of the Credit Suisse Group in March 2023. These events,
or new events that cause reputational damage could
have a
material adverse
effect on
our results
of operation
and financial
condition, as
well as
our ability
to achieve
our
strategic goals and financial targets.
Operational risks affect our business
Our
businesses
depend
on
our
ability
to
process
a
large
number
of
transactions,
many
of
which
are
complex,
across
multiple and diverse markets in different currencies,
to comply with requirements of many different
legal and regulatory
regimes
to
which
we
are
subject
and
to
prevent,
or
promptly
detect
and
stop,
unauthorized,
fictitious
or
fraudulent
transactions. We also rely on access to, and
on the functioning of, systems maintained by
third parties, including clearing
systems, exchanges,
information processors
and central
counterparties. Any
failure of
our or
third-party
systems could
have
an
adverse
effect
on
us.
These
risks
may
be
greater
as
we
deploy
newer
technologies,
such
as
blockchain,
or
processes, platforms or products
that rely on these technologies.
Our operational risk management
and control systems
and processes
are
designed
to help
ensure
that
the
risks
associated
with
our
activities
–
including
those
arising
from
process error,
failed execution,
misconduct, unauthorized
trading, fraud,
system failures,
financial crime,
cyberattacks,
breaches of information security,
inadequate or ineffective access controls and failure of security and physical protection
– are
appropriately controlled.
If our
internal controls
fail or
prove ineffective
in identifying
and remedying
these risks,
we could suffer operational failures that might result in material losses, such as the substantial loss we incurred from the
unauthorized trading
incident announced
in September
2011. The
acquisition of
the Credit
Suisse Group
may elevate
these
risks,
particularly
during
the
first
phases
of
integration,
as
the
firms
have
historically
operated
under
different
procedures, IT systems, risk policies and structures
of governance.
As a significant proportion of our staff have been and will continue working from outside the office, we have faced, and
will
continue
to
face,
new
challenges
and
operational
risks,
including
maintenance
of
supervisory
and
surveillance
controls, as well as
increased fraud and
data security risks. While
we have taken
measures to manage
these risks, these
measures could prove not to be effective.
We use automation
as part of
our efforts to
improve efficiency, reduce the risk of error
and improve our
client experience.
We intend
to expand
the use
of robotic
processing,
machine learning
and artificial
intelligence to
further these
goals.
Use of these
tools presents
their own
risks, including
the need
for effective
design and
testing; the
quality of
the data
used
for
development
and
operation
of
machine
learning
and
artificial
intelligence
tools
may
adversely
affect
their
functioning and result in errors and
other operational risks.
Financial services
firms have
increasingly been
subject to
breaches of
security and
to cyber-
and other
forms of
attack,
some of
which are
sophisticated
and targeted
attacks intended
to gain
access to
confidential information
or systems,
disrupt service or steal or destroy data, which may result in business
disruption or the corruption or loss of data at UBS’s
locations or those of
third parties. Cyberattacks by hackers, terrorists,
criminal organizations, nation states and extremists
have
also
increased
in
frequency
and
sophistication.
Current
geopolitical
tensions
have
also
led
to
increased
risk
of
cyberattack from foreign state actors. In particular, the Russia–Ukraine war and
the imposition of significant sanctions on
Russia by Switzerland,
the US,
the EU, the
UK and others
has resulted
and may continue
to result
in an increase
in the
risk of cyberattacks. Such attacks may occur on our own systems or on the systems that
are operated by external service
providers, may be attempted
through the introduction of
ransomware, viruses or malware,
phishing and other forms of
social engineering,
distributed
denial of
service attacks
and other
means. These
attempts
may occur
directly,
or using
equipment or security
passwords of
our employees, third
-party service
providers or
other users. Cybersecurity
risks also
have
increased
due
to
the
widespread
use
of
digital
technologies,
cloud
computing
and
mobile
devices
to
conduct
financial
business
and
transactions,
as well
as
due
to
generative
AI, which
increases
the
capabilities
of adversaries
to
mount
sophisticated
phishing
attacks,
for
example,
through
the
use
of
deepfake
technologies,
and
presents
new
challenges to
the protection
of our systems
and networks
and the
confidentiality and
integrity of
our data.
During the
first quarter of 2023, a third-party
vendor, ION XTP, suffered a ransomware
attack, which resulted in some disruption
to
our exchange-traded derivatives clearing activities, although we restored our services within 36 hours, using an available
alternative solution.
In addition
to external
attacks, we
have experienced
loss of
client data
from failure
by employees
and others to follow internal policies and procedures and
from misappropriation of our data by employees and others.
Annual Report 2023 |
Our business model and environment |
Risk factors
25
We may not be able to anticipate, detect or recognize threats to our systems
or data and our preventative measures may
not
be
effective
to
prevent
an
attack
or
a
security
breach.
In
the
event
of
a
security
breach,
notwithstanding
our
preventative measures, we may not immediately detect a particular breach or attack. The acquisition of the Credit Suisse
Group may elevate
and intensify these
risks as would
-be attackers
have a larger
potential target
in the combined
bank
and
differences
in
systems,
policies,
and
platforms
could
make
threat
detection
more
difficult.
In
addition,
the
implementation
of
the
large-scale
technological
change
program
that
is
necessary
to
integrate
the
combined
bank’s
systems at pace
may also result
in increased risks.
Once a particular
attack is detected, time
may be required
to investigate
and assess the nature and extent of the attack,
and to restore and test systems and data.
If a successful attack occurs at
a service provider, as we have
recently experienced, we may be
dependent on the service provider’s
ability to detect the
attack, investigate
and assess
the attack
and successfully
restore the
relevant systems
and data.
A successful
breach or
circumvention of security of our or a service provider’s systems
or data could have significant negative consequences
for
us,
including
disruption
of
our
operations,
misappropriation
of
confidential
information
concerning
us
or
our
clients,
damage to our
systems, financial losses for
us or our
clients, violations of data
privacy and similar laws,
litigation exposure
and damage to our reputation. We may be subject to enforcement actions as regulatory focus on
cybersecurity increases
and regulators
have announced new
rules, guidance and
initiatives on
ransomware and other
cybersecurity-related issues.
We are subject to complex and frequently changing laws
and regulations governing the protection of client
and personal
data, such as the EU General Data
Protection Regulation. Ensuring that
we comply with applicable laws and regulations
when we collect, use and transfer personal information
requires substantial resources
and may affect the ways in which
we conduct our business. In
the event that we fail
to comply with applicable laws,
we may be exposed to
regulatory fines
and penalties and
other sanctions.
We may also
incur such penalties
if our vendors
or other service
providers or
clients
or counterparties fail to comply with these laws or to maintain appropriate controls over protected data. In addition, any
loss or exposure of client or other data may adversely
damage our reputation and adversely affect
our business.
A major focus of US and other countries’ governmental policies
relating to financial institutions in recent
years has been
on fighting
money
laundering
and
terrorist
financing.
We
are
required
to
maintain
effective
policies,
procedures
and
controls to detect,
prevent and report
money laundering and
terrorist financing, and
to verify the identity
of our clients
under the
laws of
many of
the countries
in which
we operate.
We are
also subject
to laws
and regulations
related
to
corrupt and illegal payments to government officials by others, such as the
US Foreign Corrupt Practices Act and the UK
Bribery Act. We have implemented policies, procedures and internal controls that are designed to comply with such laws
and regulations. Notwithstanding this, US
regulators have found deficiencies
in the design and operation of anti-money
laundering
programs
in
our
US
operations.
We
have
undertaken
a
significant
program
to
address
these
regulatory
findings with the objective of fully meeting regulatory expectations for our programs. Failure to maintain and implement
adequate
programs
to
combat
money
laundering,
terrorist
financing
or corruption,
or any
failure
of our
programs
in
these areas, could have
serious consequences both from
legal enforcement action
and from damage
to our reputation.
Frequent changes in
sanctions imposed and
increasingly complex sanctions
imposed on countries,
entities and individuals,
as exemplified by the breadth and scope
of the sanctions imposed in relation to
the war in Ukraine, increase our
cost of
monitoring and complying with sanctions requirements and increase the risk that we will not identify in a timely manner
client activity that is subject to a sanction.
As a
result
of
new
and
changed
regulatory
requirements
and
the
changes
we
have
made
in
our
legal
structure,
the
volume, frequency
and complexity
of our
regulatory
and other
reporting
has remained
elevated. Regulators
have also
significantly
increased
expectations
regarding
our
internal
reporting
and
data
aggregation,
as
well
as
management
reporting.
We
have
incurred,
and
continue
to
incur,
significant
costs
to
implement
infrastructure
to
meet
these
requirements.
Failure
to
meet
external
reporting
requirements
accurately
and
in
a
timely
manner
or
failure
to
meet
regulatory expectations of
internal reporting, data aggregation
and management reporting
could result in enforcement
action or other adverse consequences for us.
In addition, despite
the contingency plans
that we have
in place, our
ability to conduct
business may be
adversely affected
by a
disruption in
the infrastructure
that supports
our businesses
and the
communities in
which we
operate. This
may
include
a
disruption
due
to
natural
disasters,
pandemics,
civil
unrest,
war
or
terrorism
and
involve
electrical,
communications, transportation
or other services
that we
use or that
are used
by third
parties with whom
we conduct
business.
We depend on our risk management and control processes to avoid
or limit potential losses in our businesses
Controlled risk-taking
is a
major part
of the
business of
a financial
services firm.
Some losses
from risk-taking
activities
are inevitable, but
to be successful
over time, we
must balance the
risks we take
against the returns
generated. Therefore,
we must diligently identify,
assess, manage and control
our risks, not only
in normal market
conditions but also as
they
might develop under more extreme,
stressed conditions, when concentrations of exposures
can lead to severe losses.
We have
not always
been able
to prevent
serious losses
arising from
risk management
failures and
extreme or
sudden
market
events.
We
recorded
substantial
losses
on
fixed-income
trading
positions
in
the
2008
financial
crisis,
in
the
unauthorized trading incident in
2011 and, more recently,
positions resulting from
the default of a US
prime brokerage
client. In
the recent
past, the
Credit Suisse
Group has
suffered
very significant
losses from
the default
of the
US prime
brokerage client,
the losses in
supply-chain finance
funds managed by
it, as well
as other matters.
As a result
of these,
Credit Suisse
is subject
to significant
regulatory
remediation obligations
to address
deficiencies in
its risk
management
and controls systems, that continue following the
merger.
Annual Report 2023 |
Our business model and environment |
Risk factors
26
We
regularly
revise
and
strengthen
our
risk
management
and
control
frameworks
to
seek
to
address
identified
shortcomings. Nonetheless, we could suffer further
losses in the future if, for example:
–
we do not fully identify the risks in our portfolio, in particular
risk concentrations and correlated risks;
–
our
assessment
of
the
risks
identified,
or
our
response
to
negative
trends,
proves
to
be
untimely,
inadequate,
insufficient or incorrect;
–
our risk models prove insufficient to predict the scale of financial
risks the bank faces;
–
markets
move in
ways that
we do
not expect
– in
terms of
their speed,
direction,
severity
or correlation
– and
our
ability to manage risks in the resulting environment is, therefore,
affected;
–
third parties
to whom
we have
credit exposure
or whose
securities we
hold are
severely affected
by events
and we
suffer defaults and impairments beyond the level implied
by our risk assessment; or
–
collateral or other
security provided by
our counterparties
and clients proves
inadequate to
cover their obligations
at
the time of default.
We also hold legacy risk positions, primarily in Non-core and Legacy, that, in many cases, are illiquid and may deteriorate
in value.
The acquisition
of the
Credit Suisse
Group, and
the planned
integration of
UBS AG
with Credit
Suisse AG,
is
increasing,
materially,
the
portfolio
of
business
that
are
outside
of
our
risk
appetite
and
subject
to
exit
that
will
be
managed in the Non-core and Legacy segment.
We also manage
risk on behalf
of our clients.
The performance of assets
we hold for
our clients may
be adversely affected
by the same aforementioned
factors. If clients suffer
losses or the performance
of their assets held
with us is not
in line
with relevant benchmarks against
which clients assess investment
performance, we may suffer
reduced fee income and
a decline in assets under management, or withdrawal of mandates.
Investment positions, such
as equity investments
made as part
of strategic initiatives
and seed investments
made at the
inception of funds that we
manage, may also be affected
by market risk factors. These
investments are often not
liquid
and generally
are intended
or required
to be
held beyond
a normal
trading horizon.
Deteriorations in
the fair
value of
these positions would have a negative effect on our earnings.
We may be unable to identify or capture revenue or competitive
opportunities, or retain and attract qualified
employees
The financial
services industry
is characterized
by intense
competition, continuous
innovation, restrictive,
detailed, and
sometimes
fragmented
regulation
and
ongoing
consolidation.
We
face
competition
at
the
level
of
local
markets
and
individual business lines, and from global financial institutions
that are comparable to us in
their size and breadth, as well
as competition from
new technology-based market
entrants, which may not
be subject to the
same level of regulation.
Barriers to entry in individual markets and pricing levels are being eroded
by new technology. We
expect these trends to
continue and competition
to increase.
Our competitive
strength and
market position
could be eroded
if we are
unable
to
identify
market
trends
and
developments,
do
not
respond
to
such
trends
and
developments
by
devising
and
implementing adequate
business strategies,
do not adequately
develop or update
our technology,
including our
digital
channels and tools, or are unable to attract
or retain the qualified people needed.
The
amount
and
structure
of
our
employee
compensation
is
affected
not
only
by
our
business
results,
but
also
by
competitive factors and regulatory considerations.
In response
to the
demands of
various stakeholders,
including regulatory
authorities and
shareholders, and
in order
to
better
align
the
interests
of
our
staff
with
other
stakeholders,
we
have
increased
average
deferral
periods
for
stock
awards, expanded forfeiture provisions and, to a more limited extent, introduced clawback
provisions for certain awards
linked to business
performance. We
have also
introduced individual
caps on the
proportion of
fixed to variable
pay for
the Executive Board (EB) members, as well as certain other employees. We will also be required to introduce and enforce
provisions
requiring
UBS
to
recover
from
EB
members
and
certain
other
executives
a
portion
of
performance-based
incentive compensation
in the
event that
UBS Group
or another
entity with
securities listed
on a
US national
securities
exchange, is required to restate
its financial statements as a result of a material error.
Constraints on the
amount or structure of
employee compensation, higher levels
of deferral, performance conditions
and
other circumstances triggering the forfeiture of unvested awards may adversely affect our
ability to retain and attract key
employees, particularly where we compete with companies that are not subject to
these constraints. The loss of key staff
and the inability to
attract qualified replacements
could seriously compromise
our ability to execute
our strategy and to
successfully
improve
our
operating
and
control
environment,
and
could
affect
our
business
performance.
This
risk
is
intensified by
elevated levels
of attrition
among Credit
Suisse employees.
Swiss law
requires that
shareholders approve
the compensation of the
UBS Group AG Board
of Directors (the
Group Board) and
the UBS Group
AG Group Executive
Board (GEB) each
year. If UBS Group AG’s
shareholders fail to
approve the compensation for
the GEB or
the Group Board,
this could have an adverse effect on our ability to retain
experienced directors and our senior management.
Annual Report 2023 |
Our business model and environment |
Risk factors
27
Our operating results, financial condition and ability to pay
our obligations in the future may be affected by funding,
dividends and other distributions received directly or indirectly
from its subsidiaries, which may be subject to restrictions
UBS AG’s ability to pay
its obligations in the future will depend
on the level of funding, dividends
and other distributions,
if
any,
received
from
UBS
Switzerland
AG
and
other
subsidiaries.
The
ability
of
such
subsidiaries
to
make
loans
or
distributions,
directly
or indirectly,
to UBS
AG
may
be restricted
as a
result
of
several
factors,
including
restrictions
in
financing agreements
and the
requirements
of applicable
law and
regulatory,
fiscal or
other restrictions.
In particular,
UBS AG’s direct and indirect subsidiaries, including UBS Switzerland
AG, UBS Americas Holding LLC and UBS Europe SE,
are subject
to laws and
regulations require
the entities to
maintain minimum
levels of capital
and liquidity,
that restrict
dividend payments, authorize regulatory bodies to block or reduce
the flow of funds from those subsidiaries to UBS AG,
or could affect
their ability to
repay any
loans made to,
or other investments
in, such subsidiary
by UBS AG
or another
member of the Group. For
example, in the early stages of
the COVID-19 pandemic, the European
Central Bank ordered
all banks under its supervision to cease dividend distributions and
the Board of Governors of the Federal Reserve
System
limited capital distributions by bank holding companies and intermediate holding companies. Restrictions and regulatory
actions
could
impede
access
to
funds
that
UBS
AG
may
need
to
meet
its
obligations.
In
addition,
UBS
AG’s
right
to
participate in a distribution
of assets upon a subsidiary’s
liquidation or reorganization
is subject to all
prior claims of the
subsidiary’s creditors.
Furthermore, UBS AG
may guarantee some
of the payment
obligations of certain
of the Group’s subsidiaries
from time
to time. These guarantees may
require UBS AG to provide substantial
funds or assets to subsidiaries
or their creditors or
counterparties at a time when UBS AG is in need of liquidity
to fund its own obligations.
Market, credit and macroeconomic risks
Performance in the financial services industry is affected
by market conditions and the macroeconomic climate
Our
businesses
are
materially
affected
by
market
and
macroeconomic
conditions.
A
market
downturn
and
weak
macroeconomic conditions can be
precipitated by a
number of
factors, including geopolitical
events, such as
international
armed conflicts,
war,
or acts
of terrorism,
the imposition
of sanctions,
global trade
or global
supply chain
disruptions,
including
energy
shortages
and
food
insecurity,
changes
in
monetary
or
fiscal
policy,
changes
in
trade
policies
or
international trade
disputes, significant
inflationary or deflationary
price changes,
disruptions in
one or
more concentrated
economic
sectors,
natural
disasters,
pandemics
or
local
and
regional
civil
unrest.
Such
developments
can
have
unpredictable and destabilizing effects.
Adverse changes in interest rates,
credit spreads, securities prices, market
volatility and liquidity, foreign exchange
rates,
commodity prices, and
other market fluctuations,
as well as changes
in investor sentiment,
can affect our earnings
and
ultimately our financial
and capital positions. As
financial markets are global
and highly interconnected, local
and regional
events
can
have
widespread
effects
well
beyond
the
countries
in
which
they
occur.
Any
of
these
developments
may
adversely affect our business or financial results.
As a
result of
significant volatility
in the
market, our
businesses
may experience
a decrease
in client
activity levels
and
market
volumes,
which
would
adversely
affect
our
ability
to
generate
transaction
fees,
commissions
and
margins,
particularly in Global Wealth Management and
the Investment Bank. A market downturn
would likely reduce the volume
and valuation of
assets that
we manage on
behalf of clients,
which would reduce
recurring fee
income that is
charged
based on invested assets, primarily in Global Wealth Management and Asset Management, and performance-based fees
in Asset Management.
Such a downturn
could also cause
a decline in the
value of assets that
we own and account
for
as investments or trading positions. In addition, reduced market
liquidity or volatility may limit trading opportunities and
therefore may reduce transaction-based income and may also
impede our ability to manage risks.
Health emergencies, including
pandemics and measures
taken by governmental authorities
to manage them,
may have
effects
such
as
labor
market
displacements,
supply
chain
disruptions,
and
inflationary
pressures,
and
adversely
affect
global
and
regional
economic
conditions,
resulting
in
contraction
in
the
global
economy,
substantial
volatility
in
the
financial markets, crises
in markets for
goods and services, disruptions
in real estate
markets, increased unemployment,
increased
credit
and
counterparty
risk,
and
operational
challenges,
as
we
saw
with
the
COVID-19
pandemic.
Such
economic or market disruptions,
including inflationary pressures, may lead
to reduced levels of
client activity and demand
for
our
products
and
services,
increased
utilization
of
lending
commitments,
significantly
increased
client
defaults,
continued
and
increasing
credit
and
valuation
losses
in
our
loan
portfolios,
loan
commitments
and
other
assets,
and
impairments of
other financial
assets.
A fall
in equity
markets
and a
consequent decline
in invested
assets would
also
reduce recurring fee income in our Global Wealth Management and Asset Management businesses, as UBS experienced
in the second
quarter of 2022. These
factors and other
consequences of a
health emergency may
negatively affect
our
financial condition, including possible constraints on capital and liquidity,
as well as a higher cost of capital, and possible
downgrades to our credit ratings.
Annual Report 2023 |
Our business model and environment |
Risk factors
28
Geopolitical events:
Ukraine war,
may have
significant impacts on
global markets,
exacerbate global
inflationary pressures,
and slow
global
growth.
In
addition,
the
ongoing
conflicts
may
continue
to
cause
significant
population
displacement,
and
lead
to
shortages of vital commodities, including energy shortages and food insecurity outside the areas immediately involved in
armed
conflict.
Governmental
responses
to
the
armed
conflicts,
including,
with
respect
to
the
Russia/Ukraine
war,
coordinated successive
sets of
sanctions on
Russia and
Belarus, and
Russian and
Belarusian entities
and nationals,
and
the uncertainty
as to
whether the
ongoing conflicts
will widen
and intensify,
may continue
to have
significant adverse
effects on the
market and macroeconomic
conditions, including in
ways that cannot
be anticipated.
If individual countries
impose restrictions
on cross-border
payments or
trade, or
other exchange
or capital
controls, or
change their
currency
(for example, if one
or more countries should
leave the Eurozone, as
a result of
the imposition of sanctions on
individuals,
entities or countries, or escalation of trade restrictions and other
actions between the US, or other countries, and China),
we could suffer adverse effects on our business, losses from enforced
default by counterparties, be unable to access our
own assets or be unable to effectively manage our risks.
We could
be materially
affected
if a
crisis develops,
regionally or
globally, as
a result
of disruptions
in markets
due to
macroeconomic or political developments, trade
restrictions, or the failure of a major
market participant. Over time, our
strategic plans have
become more heavily
dependent on our
ability to generate
growth and
revenue in emerging
markets,
including China, causing us to be more exposed to the risks
associated with such markets.
Global Wealth Management derives revenues from all the principal regions, but has a greater concentration in Asia than
many peers and a
substantial presence in
the US, unlike
many European peers.
The Investment Bank’s
business is more
heavily weighted to Europe and Asia than our peers, while its derivatives business is more heavily weighted to structured
products
for
wealth
management
clients,
in
particular
with
European
and
Asian
underlyings.
Our
performance
may
therefore be more affected
by political, economic and
market developments in these
regions and businesses than
some
other financial service providers.
The extent to which ongoing conflicts, current inflationary pressures
and related adverse economic conditions affect our
businesses, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend
on future
developments,
including the
effects
of the
current
conditions on
our clients,
counterparties, employees
and
third-party service providers.
Our credit risk exposure to clients, trading counterparties
and other financial institutions would increase under adverse
or other economic conditions
Credit risk is an integral part of many of our activities,
including lending, underwriting and derivatives activities. Adverse
economic or market conditions, or the imposition of sanctions or other
restrictions on clients, counterparties or financial
institutions, may lead
to impairments and
defaults on these
credit exposures.
Losses may be
exacerbated by declines
in
the value
of collateral
securing loans and
other exposures. In
our prime
brokerage, securities finance
and Lombard lending
businesses,
we
extend
substantial
amounts
of
credit
against
securities
collateral,
the
value
or
liquidity
of
which
may
decline
rapidly.
Market
closures
and
the
imposition
of
exchange
controls,
sanctions
or
other
measures
may
limit
our
ability to
settle existing
transactions or
to realize
on collateral,
which may
result in
unexpected increases
in exposures.
Our Swiss mortgage
and corporate
lending portfolios are
a large part
of our overall
lending. We are
therefore exposed
to the
risk of adverse
economic developments
in Switzerland,
including property
valuations in the
housing market,
the
strength of the Swiss franc and its effect on Swiss exports, return to negative interest rates applied by the Swiss National
Bank, economic
conditions within
the Eurozone
or the
EU, and the
evolution of
agreements
between Switzerland
and
the EU or EEA, which represent
Switzerland’s largest export market.
We have exposures
related to real
estate in various
countries, including a substantial Swiss mortgage portfolio. Although we believe this portfolio is prudently managed, we
could nevertheless be exposed to losses if a substantial deterioration
in the Swiss real estate market were
to occur.
As
we
experienced
in
2020,
under
the
International
Financial
Reporting
Standards
(IFRS) 9
expected
credit
loss
(ECL)
regime, credit
loss expenses
may increase
rapidly at
the onset
of an
economic downturn
as a
result of
higher levels
of
credit
impairments
(stage 3),
as
well
as
higher
ECL
from
stages 1
and
2.
Substantial
increases
in
ECL
could
exceed
expected loss for regulatory capital purposes and
adversely affect our common equity tier 1 (CET1) capital
and regulatory
capital ratios.
Interest rate trends and changes could negatively affect our
financial results
UBS’s businesses
are sensitive
to changes
in interest
rate trends.
A prolonged
period of
low or
negative interest
rates,
particularly in Switzerland
and the Eurozone,
adversely affected
the net interest
income generated by
UBS’s Personal &
Corporate Banking and Global Wealth Management businesses prior to 2022. Actions that UBS
took to mitigate adverse
effects on income, such as
the introduction of
selective deposit fees or minimum
lending rates, contributed to
outflows
of customer
deposits (a
key source
of funding
for
UBS), net
new money
outflows and
a declining
market
share
in its
Swiss lending business.
Annual Report 2023 |
Our business model and environment |
Risk factors
29
During 2022, interest
rates increased sharply in
the US and most
other markets, including a
shift from negative
to positive
central bank policy rates in the Eurozone and Switzerland, as central
banks responded to higher inflation. Higher interest
rates
generally
benefit
UBS’s
net
interest
income.
However,
as returns
on
alternatives
to deposits
increase
with
rising
interest rates, such
as returns on
money market
funds, UBS experienced
outflows from customer
deposits and shifts
of
deposits from lower
-interest account types
to accounts
bearing higher interest
rates, such as
savings and certificates
of
deposit, starting
with effects
in the
US, where
rates had
rapidly increased.
In addition,
higher for
longer rates,
such as
those experienced
in 2023,
have led similar
shifts in euro
and Swiss Franc
deposits. Sustained
higher interest rates
also
may
adversely
affect
our
credit
counterparties.
Customer
deposit
outflows
could
require
UBS
to
obtain
alternative
funding, which would likely be more costly than customer
deposits.
Currency
fluctuation may have an adverse effect
on our profits, balance sheet and regulatory capital
We
are
subject
to
currency
fluctuation
risks
as
a
substantial
portion
of
our
assets
and
liabilities
are
denominated
in
currencies
other than
our UBS
AG presentation
currency,
the US
dollar.
In order
to hedge
our CET1
capital ratio,
our
CET1 capital must
have foreign currency exposure, which
leads to currency sensitivity. As a
consequence, it is
not possible
to simultaneously
fully hedge
both CET1
capital and
the CET1
capital ratio.
Accordingly,
changes in
foreign
exchange
rates may adversely affect our profits, balance
sheet, and capital, leverage and liquidity coverage
ratios.
Regulatory and legal risks
Material legal and regulatory risks arise in the conduct of
our business
As a global
financial services
firm operating
in more
than 50 countries,
we are
subject to many
different legal,
tax and
regulatory regimes,
including extensive regulatory
oversight, and are
exposed to significant
liability risk. We
are subject
to a large number of claims,
disputes, legal proceedings and government investigations, and
we expect that our ongoing
business activities will
continue to give
rise to such
matters in the
future. In addition, as
noted above, UBS
Group inherited
claims against
Credit Suisse
entities as
part of
the acquisition,
including matters
that may
be material
to the
operating
results of
the combined
group such
as the
ongoing supply
chain finance
funds (SCFF)
matter.
This will
affect
UBS AG
upon
the
planned
merger
with
Credit
Suisse
AG.
The
extent
of
our
financial
exposure
to
these
and
other
matters
is
material and could
substantially exceed the
level of provisions
that we have
established. We
are not able
to predict
the
financial and non-financial consequences these matters may
have when resolved.
We may be subject to adverse preliminary determinations or court decisions that may negatively affect public perception
and our
reputation,
result
in prudential
actions from
regulators, and
cause us
to record
additional
provisions
for
such
matters even when we believe we have substantial
defenses and expect to ultimately achieve a more
favorable outcome.
This risk
is illustrated
by the
award of
aggregate penalties
and damages
of EUR 4.5bn
by the
court of
first instance
in
France.
This
award
was
reduced
to an
aggregate
of EUR
1.8bn
by the
Court
of
Appeal,
and
in
a
further
appeal,
the
French Supreme Court referred the case back to the
Paris Court of Appeal to reconsider the amount after
a new trial.
Litigation,
regulatory
and
similar
matters
may
also
result
in
non-monetary
penalties
and consequences.
Among
other
things,
a
guilty
plea
to,
or
conviction
of,
a
crime
(including
as
a
result
of
termination
of
the
Deferred
Prosecution
Agreement Credit Suisse
entered into with
the United States
Department of Justice
in 2021 to
resolve its Mozambique
matter) could have material consequences for UBS.
Resolution of regulatory proceedings has required us to obtain waivers of regulatory disqualifications to maintain certain
operations, may entitle
regulatory authorities
to limit, suspend
or terminate licenses
and regulatory authorizations,
and
may
permit
financial
market
utilities
to
limit,
suspend
or
terminate
our
participation
in
them.
Failure
to
obtain
such
waivers,
or any
limitation,
suspension
or termination
of
licenses,
authorizations
or
participations,
could
have
material
adverse consequences for us.
Our settlements
with governmental
authorities
in connection
with foreign
exchange,
London Interbank
Offered Rates
(LIBOR) and other benchmark interest
rates starkly illustrate the significantly increased
level of financial and reputational
risk now associated with regulatory matters in major jurisdictions. In connection with investigations related to LIBOR and
other benchmark rates
and to foreign
exchange and precious
metals, very large
fines and disgorgement
amounts were
assessed against
us, and
we were
required to enter
guilty pleas despite
our full cooperation
with the
authorities in
the
investigations,
and
despite
our receipt
of conditional
leniency
or conditional
immunity
from
anti-trust
authorities
in a
number of jurisdictions, including the US and Switzerland.
For a number of years, we
have been,
and we continue
to be, subject
to a very
high level of
regulatory scrutiny
and to
certain regulatory
measures that
constrain our
strategic flexibility.
We believe we
have remediated
the deficiencies
that
led to significant losses in the past
and made substantial changes in our controls and
conduct risk frameworks to address
the issues highlighted
by the LIBOR-related,
foreign exchange and
precious metals regulatory
resolutions. We have
also
undertaken extensive efforts to implement new regulatory
requirements and meet heightened expectations.
Credit Suisse and UBS
have become the target of
lawsuits, and may become
the target of further
litigation, in connection
with the merger transaction and/or the regulatory and other actions taken in connection with
the merger transaction, all
of which could result in substantial costs.
We continue
to be
in active
dialogue with
regulators concerning
the actions
we are
taking to
improve our
operational
risk management, risk control, anti-money laundering,
data management and other frameworks, and
otherwise seek to
meet supervisory expectations, but there can be no assurance that our efforts will have the desired effects. As a result of
this history, our level of risk with respect to regulatory enforcement
may be greater than that of some of our peers.
Annual Report 2023 |
Our business model and environment |
Risk factors
30
Substantial changes in regulation may adversely affect our
businesses and our ability to execute our strategic plans
Since the
financial crisis
of 2008,
we have
been subject
to significant
regulatory
requirements,
including recovery
and
resolution planning,
changes in
capital and
prudential standards,
changes in
taxation regimes
as a
result of
changes in
governmental administrations,
new and
revised market
standards and
fiduciary duties,
as well
as new
and developing
environmental,
social
and
governance
(ESG)
standards
and
requirements.
Notwithstanding
attempts
by
regulators
to
align
their
efforts,
the
measures
adopted
or
proposed
for
banking
regulation
differ
significantly
across
the
major
jurisdictions, making
it increasingly
difficult to
manage a
global institution.
Regulatory reviews
of the
events leading
to
the failures
of US
banks and
the acquisition
of Credit
Suisse by
UBS Group
in 2023,
as well
as regulatory
measures to
complete the implementation of the Basel
3 standards, may increase capital, liquidity
and other requirements applicable
to banks,
including UBS
AG. In
addition, Swiss
regulatory
changes with
regard
to such
matters as
capital and
liquidity
have often
proceeded
more
quickly
than those
in other
major jurisdictions,
and Switzerland’s
requirements
for
major
international banks are
among the strictest
of the major
financial centers. This
could put Swiss
banks, such as
UBS AG,
at a disadvantage when
competing with peer financial institutions
subject to more lenient regulation or
with unregulated
non-bank competitors.
Our
implementation
of
additional
regulatory
requirements
and
changes
in
supervisory
standards,
as
well
as
our
compliance with
existing laws
and regulations,
continue to
receive heightened
scrutiny from
supervisors. If
we do
not
meet supervisory expectations in relation to these or other
matters, or if additional supervisory or regulatory issues arise,
we would
likely be
subject to
further regulatory
scrutiny,
as well
as measures
that may
further constrain
our strategic
flexibility.
Resolvability and
resolution
and recovery
planning:
We have
moved significant
operations into
subsidiaries to
improve
resolvability and meet other regulatory requirements, and this
has resulted in substantial implementation costs, increased
our
capital
and
funding
costs
and
reduced
operational
flexibility.
For
example,
we
have
transferred
all
of
our
US
subsidiaries
under
a
US
intermediate
holding
company
to
meet
US
regulatory
requirements,
and
have
transferred
substantially all the operations of Personal & Corporate Banking and Global Wealth Management booked in Switzerland
to UBS Switzerland AG to improve resolvability.
These
changes
create
operational,
capital,
liquidity,
funding
and
tax
inefficiencies.
Our
operations
in
subsidiaries
are
subject
to
local
capital,
liquidity,
stable
funding,
capital
planning
and
stress
testing
requirements.
These
requirements
have resulted in increased capital and liquidity requirements in
affected subsidiaries, which limit our operational flexibility
and negatively affect our
ability to benefit
from synergies between business
units and to
distribute earnings to
the Group.
Under the Swiss too-big-to-fail (TBTF) framework, we are required to put in place viable emergency plans to
preserve the
operation
of
systemically
important
functions
in
the
event
of
a
failure.
Moreover,
under
this
framework
and
similar
regulations in
the US,
the UK,
the EU
and other
jurisdictions in
which we
operate, we
are required
to prepare
credible
recovery and resolution
plans detailing the
measures that would
be taken to recover
in a significant adverse
event or in
the event of winding down the Group or the operations
in a host country through resolution or insolvency
proceedings.
If a recovery or resolution plan that we produce is determined by the relevant authority to be inadequate or not credible,
relevant regulation may permit the authority
to place limitations on the scope or
size of our business in that jurisdiction,
or oblige us to hold higher amounts of capital or liquidity or to change our legal structure or business in order to remove
the relevant impediments to resolution.
The
authorities
in
Switzerland
and
internationally
are
working
on
lessons
learned
from
the
Credit
Suisse
and
the
US
regional bank failures, which might result
in additional requirements regarding resolution planning and early
intervention
tools for authorities.
Capital and prudential standards: As an internationally active Swiss systemically relevant bank (an SRB),
we are subject to
capital and total loss-absorbing capacity (TLAC) requirements that are among the most stringent in the world. Moreover,
many
of
our
subsidiaries
must
comply
with
minimum
capital,
liquidity
and
similar
requirements
and,
as
a
result,
UBS
Group AG
and UBS
AG have
contributed a
significant portion
of their
capital and
provide substantial
liquidity to
these
subsidiaries. These funds are available to meet funding and collateral needs in the relevant entities, but are generally not
readily available for use by the Group as a whole.
We
expect
our
risk-weighted
assets
(RWA)
to
further
increase
as
the
effective
date
for
additional
capital
standards
promulgated by the Basel
Committee on Banking Supervision
(the BCBS) draws nearer. In
connection with the acquisition
of the Credit Suisse
Group, FINMA has permitted
Credit Suisse entities to
continue to apply certain
prior interpretations
and has
provided supervisory
rulings on
the treatment
of certain
items for
RWA or
capital purposes.
In general,
these
interpretations require that UBS phase out the treatment over the next several
years. In addition, FINMA has agreed that
additional
capital
requirement
applicable
to
Swiss
systemically
relevant
banks,
which
is
based
on
market
share
in
Switzerland and leverage
ratio denominator (LRD), will
not increase as a
result of acquisition of
the Credit Suisse Group
before the end of 2025. The
phase-out or end of these periods
will likely increase our overall
capital requirements upon
the planned merger with Credit Suisse AG, which increase
may be substantial.
Increases in capital and liquidity standards could significantly
curtail our ability to pursue strategic opportunities.
Annual Report 2023 |
Our business model and environment |
Risk factors
31
Market regulation and fiduciary standards:
Our wealth and asset management
businesses operate in an environment
of
increasing regulatory scrutiny and changing standards
with respect to fiduciary and
other standards of care and
the focus
on mitigating
or eliminating
conflicts of
interest between
a manager
or advisor
and the
client, which
require effective
implementation
across
the
global systems
and
processes
of investment
managers
and
other
industry
participants.
For
example, we
have made
material changes
to our
business processes,
policies and
the terms
on which we
interact with
these clients in order to comply with SEC Regulation Best Interest, which is intended to enhance and clarify the duties of
brokers and
investment advisers
to retail
customers, the
Volcker Rule,
which limits
our ability
to engage
in proprietary
trading, as
well as
changes in
European and
Swiss market
conduct regulation.
Future changes
in the
regulation of
our
duties to customers may require us to make further changes to our businesses, which would result in additional expense
and may adversely affect our
business. We may also become
subject to other similar regulations
substantively limiting the
types of activities in which we may engage or the way
we conduct our operations.
In many
instances, we provide
services on
a cross-border basis,
and we
are therefore sensitive
to barriers restricting
market
access for
third-country firms.
In particular,
efforts in
the EU
to harmonize
the regime
for third-country
firms to
access
the European market may have the effect of creating new barriers that adversely affect our ability to conduct business in
these
jurisdictions
from
Switzerland.
In
addition,
a
number
of
jurisdictions
are
increasingly
regulating
cross-border
activities based on
determinations of equivalence of
home country regulation,
substituted compliance or
similar principles
of
comity.
A
negative
determination
with
respect
to
Swiss
equivalence
could
limit
our
access
to
the
market
in
those
jurisdictions and
may negatively
influence our
ability to
act as a
global firm. For
example, the
EU declined to
extend its
equivalence determination for Swiss exchanges, which lapsed as
of 30 June 2019.
UBS
AG
Group
experienced
cross-border
outflows
over
a
number
of
years
as
a
result
of
heightened
focus
by
fiscal
authorities on cross-border investment and
fiscal amnesty programs, in anticipation of
the implementation in Switzerland
of the global
automatic exchange
of tax information,
and as a
result of the
measures UBS AG
Group has implemented
in response
to these
changes. Further
changes in
local tax
laws or
regulations and
their enforcement,
additional cross-
border tax
information exchange
regimes, national
tax amnesty
or enforcement
programs or
similar actions
may affect
our clients’ ability or willingness to do business with us and
could result in additional cross-border outflows.
If we experience financial difficulties, FINMA has the power
to open restructuring or liquidation proceedings or impose
protective measures in relation to UBS Group AG, UBS AG
or UBS Switzerland AG, and such proceedings or measures
may have a material adverse effect on our shareholders
and creditors
Under the
Swiss Banking
Act, FINMA
is able
to exercise
broad statutory
powers with
respect to
Swiss banks
and Swiss
parent
companies
of
financial
groups,
such
as
UBS
Group
AG,
UBS
AG
and
UBS Switzerland AG,
if
there
is
justified
concern that the entity
is over-indebted, has
serious liquidity problems
or,
after the expiration
of any relevant
deadline,
no
longer
fulfills
capital
adequacy
requirements.
Such
powers
include
ordering
protective
measures,
instituting
restructuring
proceedings
(and
exercising
any
Swiss
resolution
powers
in
connection
therewith),
and
instituting
liquidation proceedings,
all of
which may
have a
material adverse
effect on
shareholders and
creditors or
may prevent
UBS Group AG, UBS AG or UBS Switzerland AG from
paying dividends or making payments on debt obligations.
UBS would
have limited
ability
to challenge
any such
protective
measures,
and creditors
and shareholders
would
also
have limited ability under Swiss
law or in Swiss courts
to reject them, seek their suspension,
or challenge their imposition,
including measures that require
or result in the deferment of payments.
If restructuring proceedings
are opened with respect
to UBS Group
AG, UBS AG or
UBS Switzerland AG,
the resolution
powers that FINMA may exercise include the
power to: (i) transfer all or some
of the assets, debt and other
liabilities, and
contracts
of the
entity
subject
to proceedings
to another
entity;
(ii) stay
for
a
maximum
of two
business
days
(a) the
termination of,
or the
exercise of
rights to
terminate, netting
rights, (b)
rights to
enforce or
dispose of
certain types
of
collateral
or
(c)
rights
to
transfer
claims,
liabilities
or
certain
collateral,
under
contracts
to
which
the
entity
subject
to
proceedings is a party; and / or (iii) partially or fully write down the equity capital and regulatory capital instruments and,
if such regulatory capital is fully
written down, write down or convert into
equity the other debt instruments of the entity
subject
to
proceedings.
Shareholders
and
creditors
would
have
no
right
to
reject,
or
to
seek
the
suspension
of,
any
restructuring
plan
pursuant
to
which
such
resolution
powers
are
exercised.
They
would
have
only
limited
rights
to
challenge
any
decision
to
exercise
resolution
powers
or to
have
that
decision
reviewed
by
a
judicial
or
administrative
process or otherwise.
Upon full
or partial
write-down
of the
equity and
regulatory
capital
instruments
of the
entity
subject to
restructuring
proceedings, the relevant shareholders
and creditors would receive
no payment in respect of the equity
and debt that is
written
down,
the
write-down
would
be
permanent,
and
the
investors
would
likely
not,
at
such
time
or
at
any
time
thereafter,
receive any
shares or other
participation rights,
or be entitled
to any write-up
or any other
compensation in
the event of a potential subsequent
recovery of the debtor.
If FINMA orders the conversion
of debt of the entity subject
to restructuring proceedings
into equity,
the securities received by
the investors may be worth significantly
less than the
original debt and may have a
significantly different risk profile. In addition, creditors receiving equity would be effectively
subordinated to all creditors of the restructured entity in the event
of a subsequent winding up, liquidation
or dissolution
of the restructured entity,
which would increase the risk that investors would
lose all or some of their investment.
Annual Report 2023 |
Our business model and environment |
Risk factors
32
FINMA has significant discretion in the exercise of its powers in connection with restructuring proceedings. Furthermore,
certain categories of debt obligations, such as certain types of
deposits, are subject to preferential treatment. As a result,
holders of obligations
of an entity
subject to a
Swiss restructuring
proceeding may
have their obligations
written down
or converted
into equity even
though obligations ranking
on par
with such obligations
are not written
down or
converted.
Developments in sustainability, climate, environmental and social
standards and regulations may affect our business and
impact our ability to fully realize our goals
We have set
ambitious goals for
ESG matters. These
goals include our
ambitions for environmental
sustainability in our
operations, including carbon
emissions, in the
business we do
with clients and
in products that
we offer. They also include
goals
or
aspirations
for
diversity
in
our
workforce
and
supply
chain,
and
support
for
the
United
Nations
Sustainable
Development Goals. There is substantial
uncertainty as to the scope of actions that
may be required of us, governments
and others to
achieve the goals
we have set,
and many of
our goals
and objectives are only
achievable with a
combination
of government
and private action.
National and
international standards and
expectations, industry and
scientific practices,
and regulatory
taxonomies and
disclosure obligations
addressing these
matters are
relatively immature
and are
rapidly
evolving.
In
addition,
there
are
significant
limitations
in
the
data
available
to
measure
our
climate
and
other
goals.
Although we have
defined and disclosed
our goals based
on the standards
existing at the
time of disclosure,
there can
be no assurance
(i) that the
various ESG
regulatory and
disclosure regimes
under which
we operate
will not come
into
conflict with
one another,
(ii) that the
current
standards
will not
be interpreted
differently
than our
understanding
or
change in a manner that substantially increases
the cost or effort for us to achieve such goals
or (iii) that additional data
or
methods,
whether
voluntary
or
required
by
regulation,
may
substantially
change
our
calculation
of
our
goals
and
ambitions. It
is possible that
such goals
may prove
to be considerably
more difficult
or even impossible
to achieve.
The
evolving
standards
may
also
require
us
to
substantially
change
the
stated
goals
and
ambitions.
If
we
are
not able
to
achieve the goals we
have set, or
can only do
so at significant
expense to our
business, we may
fail to meet
regulatory
expectations, incur damage to our reputation or be exposed
to an increased risk of litigation or other adverse
action.
While ESG regulatory regimes and
international standards are being developed, including
to require consideration of ESG
risks in investment decisions,
some jurisdictions, notably in
the US, have developed rules
restricting the consideration
of
ESG factors in investment
and business decisions. Under
these anti-ESG rules, companies
that are perceived
as boycotting
or discriminating against certain industries may be
restricted from doing business with certain governmental
entities. Our
businesses
may
be
adversely
affected
if
UBS
is
considered
as
discriminating
against
companies
based
on
ESG
considerations, or if further anti-ESG rules are developed
or broadened.
Material weakness of Credit Suisse controls over financial
reporting
The Credit Suisse Group delayed its reporting for the year ending 2022 stating
that it had identified material weaknesses
in its internal controls over
financial reporting as a
result of which the Credit
Suisse Group management
had concluded
that, as of 31 December 2022, its internal controls over financial reporting were not effective, and for the same reasons,
it reached
the same conclusion
regarding
31 December
2021. A material
weakness is
a deficiency
or a combination
of
deficiencies
in
internal
controls
over
financial
reporting
such
that
there
is
a
reasonable
possibility
that
a
material
misstatement of a registrant’s financial statements will
not be prevented or detected on
a timely basis. There is a
risk that
a
material
error
may
not
be
detected
by
UBS
Group
AG’s
internal
control
structure
that
could
result
in
a
material
misstatement to Credit Suisse’s reported financial results, which are consolidated with UBS Group AG’s results. Since the
acquisition, UBS Group AG has undertaken a review of the processes and systems giving rise to the material weaknesses
and
the
remediation
program
undertaken.
This
review
is
ongoing,
and
UBS
expects
to
adopt
and
implement
further
controls
and
procedures
following
the
completion
of
such
review
and
discussions
with
regulators.
Based
on
this
assessment,
management
believes
that,
as of
31
December
2023,
UBS’s
internal control
over
financial
reporting
was
effective.
Management
has
excluded
Credit
Suisse,
which
UBS
Group
AG
acquired
in
2023,
from
the
scope
of
its
assessment of internal control
over financial reporting,
as permitted by
SEC guidance for
acquired businesses. This
may
affect the UBS AG Group upon the planned
merger with Credit Suisse AG.
Our financial results may be negatively affected by changes
to assumptions and valuations, as well as changes to
accounting standards
We prepare our consolidated financial statements
in accordance with IFRS.
The application of
these accounting standards
requires the
use of
judgment based
on estimates
and assumptions
that may
involve significant
uncertainty at
the time
they are made. This is the
case, for example, with respect
to the measurement of fair value
of financial instruments, the
recognition
of
deferred
tax
assets
(DTAs),
the
assessment
of
the
impairment
of
goodwill,
expected
credit
losses
and
estimation of provisions for litigation, regulatory and similar
matters. Such judgments, including the underlying
estimates
and
assumptions,
which
encompass
historical
experience,
expectations
of
the
future
and
other
factors,
are
regularly
evaluated to determine their continuing relevance based on current conditions.
Using different assumptions could cause
the reported results
to differ. Changes in assumptions,
or failure to
make the changes
necessary to
reflect evolving market
conditions, may
have a
significant effect
on the
financial statements
in the
periods when
changes occur.
Estimates of
provisions
may be
subject
to a
wide range
of potential
outcomes and
significant uncertainty.
For example,
the
broad
range
of potential
outcomes
in our
legal proceedings
in
France
and in
a
number
of Credit
Suisse’s
legal proceedings
increase the uncertainty
associated with assessing
the appropriate
provision. If the
estimates and assumptions
in future
periods deviate from the current
outlook, our financial results may also be negatively
affected.
Annual Report 2023 |
Our business model and environment |
Risk factors
33
Changes to IFRS or interpretations thereof may cause future reported results and financial position to differ from current
expectations, or
historical results
to differ
from those
previously reported
due to the
adoption of
accounting standards
on a retrospective basis. Such changes may also affect our regulatory capital and ratios. For example, the introduction of
the
ECL
regime
under
IFRS 9
in
2018
fundamentally
changed
how
credit
risk
arising
from
loans,
loan
commitments,
guarantees
and
certain
revocable
facilities
is accounted
for.
Under
the
ECL
regime,
credit
loss
expenses
may
increase
rapidly at the onset
of an economic downturn
as a result of
higher levels of credit
impairments (stage 3), as well as
higher
ECL from stages 1 and 2, only gradually diminishing once
the economic outlook improves. As we observed in 2020, this
effect
may
be more
pronounced
in
a
deteriorating
economic
environment.
Substantial
increases
in
ECL
could
exceed
expected loss for regulatory capital purposes and adversely
affect our CET1 capital and regulatory capital ratios.
We may be unable to maintain our capital strength
Capital
strength
enables
us
to grow
our
businesses
and
absorb
increases
in
regulatory
and
capital
requirements.
Our
ability to
maintain our
capital
ratios is
subject to
numerous risks,
including the
financial results
of our
businesses,
the
effect of changes to
capital standards, methodologies and interpretations that may
adversely affect the calculation of our
capital
ratios, the
imposition
of risk
add-ons
or capital
buffers,
and the
application
of additional
capital,
liquidity
and
similar requirements to subsidiaries. Our capital and leverage ratios are driven primarily by RWA, LRD and eligible capital,
all of
which may
fluctuate based
on a
number of
factors, some
of which
are outside
of our control.
The results
of our
businesses may
be adversely
affected by
events arising from
other risk
factors described
herein. In
some cases,
such as
litigation and regulatory risk and operational risk events, losses
may be sudden and large.
Our eligible capital may be
reduced by losses recognized within net
profit or other comprehensive income.
Eligible capital
may also
be reduced
for other
reasons, including
acquisitions that
change the
level of
goodwill, changes
in temporary
differences
related
to
DTAs
included
in
capital,
adverse
currency
movements
affecting
the
value
of
equity,
prudential
adjustments that may
be required due
to the valuation
uncertainty associated with
certain types of
positions, and changes
in the value
of certain pension
fund assets and
liabilities or in
the interest rate
and other assumptions
used to calculate
the changes in our net defined benefit obligation recognized
in other comprehensive income.
RWA
are
driven
by
our
business
activities,
by
changes
in
the
risk
profile
of
our
exposures,
by
changes
in
our
foreign
currency exposures and foreign exchange rates, and by regulation.
For instance, substantial market volatility, a widening
of credit spreads,
adverse currency movements,
increased counterparty
risk, deterioration in the
economic environment
or increased
operational risk
could result
in an
increase in
RWA. Changes
in the
calculation of
RWA, the
imposition of
additional
supplemental RWA
charges or
multipliers applied
to certain
exposures and
other methodology
changes,
as
well as the
finalization of the Basel
III framework and
Fundamental Review of the
Trading Book promulgated by
the BCBS,
which are expected to increase our RWA.
The
leverage
ratio
is
a
balance
sheet-driven
measure
and
therefore
limits
balance
sheet-intensive
activities,
such
as
lending, more
than activities
that are
less balance
sheet intensive,
and it
may constrain
our business
even if
we satisfy
other
risk-based
capital
requirements.
Our
LRD
is
driven
by,
among
other
things,
the
level
of
client
activity,
including
deposits and loans,
foreign exchange
rates, interest rates,
other market
factors and changes
in required liquidity.
Many
of these factors are wholly or partly outside of our control.
The effect of taxes on our financial results is significantly
influenced by tax law changes and reassessments of our
deferred tax assets and, also, operating losses of certain entities with
no associated tax benefit
Our
effective
tax
rate
is highly
sensitive
to
our
performance,
our
expectation
of
future
profitability
and
any
potential
increases or
decreases in
statutory tax
rates, such as
any potential
increase or
decrease in
the US
federal corporate
tax
rate.
Furthermore,
based
on
prior
years’
tax
losses
and
deductible
temporary
differences,
we
have
recognized
DTAs
reflecting
the
probable
recoverable
level
based
on
future
taxable
profit
as
informed
by
our
business
plans.
If
our
performance is expected to produce diminished taxable
profit in future years, particularly in the US, we
may be required
to write down
all or a
portion of the
currently recognized
DTAs
through the
income statement
in excess of
anticipated
amortization. This
would have
the effect
of increasing
our
effective
tax rate
in the
year in
which any
write-downs are
taken.
Conversely,
if
we
expect
the
performance
of
entities
in
which
we
have
unrecognized
tax
losses
to
improve,
particularly
in
the
US or
the
UK, we
could potentially
recognize
additional
DTAs.
The
effect
of doing
so
would
be to
reduce our
effective tax
rate in
years in
which additional
DTAs
are recognized
and to
increase our
effective
tax rate
in
future years. Our
effective tax rate
is also sensitive to
any future reductions
in statutory tax
rates, particularly in
the US,
which would cause
the expected
future tax
benefit from
items such as
tax loss carry
-forwards in
the affected
locations
to
diminish
in
value.
This,
in
turn,
would
cause
a
write-down
of
the
associated
DTAs.
Conversely,
an
increase
in
US
corporate tax rates would result in an increase
in the Group’s DTAs.
We generally revalue our
DTAs in the
fourth quarter of the financial year
based on a reassessment of future
profitability
taking into
account our
updated
business plans.
We
consider
the performance
of our
businesses and
the accuracy
of
historical forecasts,
tax rates and
other factors in
evaluating the recoverability
of our DTAs,
including the remaining
tax
loss carry-forward
period and our assessment
of expected future
taxable profits over
the life of DTAs.
Estimating future
profitability is
inherently subjective
and is particularly
sensitive to future
economic, market
and other conditions,
which
are difficult to predict.
Annual Report 2023 |
Our business model and environment |
Risk factors
34
Our results
in past
years have
demonstrated that
changes in
the recognition
of DTAs
can have
a very
significant effect
on our
reported
results.
Any
future
change in
the manner
in which
UBS AG
remeasures
DTAs
could affect
UBS AG’s
effective tax rate, particularly in the year in which
the change is made.
Our
full-year
effective
tax
rate
would
be
impacted
if
aggregate
tax
expenses
in
respect
of
profits
from
branches
and
subsidiaries without
loss coverage
differ from
what is
expected, or
if certain
branches and
subsidiaries incur
operating
losses that we cannot benefit
from through the income
statement. In particular, operating
losses at entities or branches
that cannot
offset
for tax
purposes
taxable
profits
in other
Group entities,
and which
do not
result in
additional
DTA
recognition, would increase our effective tax rate. In addition, tax laws or the tax
authorities in countries where we have
undertaken
legal structure
changes
may cause
entities to
be subject
to taxation
as
permanent
establishments
or may
prevent the transfer
of tax losses incurred
in one legal entity
to newly organized
or reorganized subsidiaries
or affiliates
or may impose limitations
on the utilization
of tax losses that
relate to businesses formerly
conducted by the transferor.
Were
this
to
occur
in
situations
where
there
were
also
limited
planning
opportunities
to
utilize
the
tax
losses
in
the
originating entity,
the
DTAs
associated with
such tax
losses
may be
required to
be written
down through
the
income
statement.
Changes in
tax law
may materially
affect our
effective tax rate,
and, in
some cases,
may substantially affect
the profitability
of certain activities. In addition, statutory and regulatory changes, as well as changes
to the way in which courts and tax
authorities interpret tax laws, including
assertions that we are required
to pay taxes in
a jurisdiction as a
result of activities
connected to that
jurisdiction constituting a
permanent establishment
or similar theory,
and changes in
our assessment
of
uncertain
tax
positions,
could
cause
the
amount
of
taxes
we
ultimately
pay
to
materially
differ
from
the
amount
accrued.
We may incur material future tax liabilities in connection
with the Credit Suisse Group’s merger with the UBS Group
In the past, the Credit Suisse Group has made significant impairments of the tax value of its participations in subsidiaries
below their tax acquisition costs. Following the
acquisition of the Credit Suisse Group
by UBS Group AG, tax acquisition
costs of certain
participations held by
Credit Suisse Group AG
and its subsidiaries
will be transferred to
the UBS AG
Group
as a result of further company mergers and restructurings.
UBS AG and its subsidiaries may become subject to
additional
Swiss tax on future reversals of such
impairments for Swiss tax purposes. Reversals of
prior impairments may occur to the
extent that the net asset
value of the previously impaired
subsidiary increases, e.g., as
a result of an increase
in retained
earnings.
Although
it
is
difficult
to
quantify
this
additional
future
tax
exposure,
as
various
potential
mitigants
(e.g.,
transfers of assets and
liabilities, business activities, subsidiary investments, as
well as other restructuring measures within
the combined Group in the course of the integration)
exist, it may be material.
Liquidity and funding risk
Liquidity and funding management are critical to our ongoing
performance
The viability
of our
business depends
on the
availability of
funding sources,
and our
success depends
on our
ability to
obtain funding
at times,
in amounts,
for tenors
and at
rates that
enable us
to efficiently
support our
asset base
in all
market conditions. Our
funding sources
have generally been
stable, but could
change in the
future because
of, among
other things,
general market
disruptions or
widening credit
spreads, which
could also
influence the
cost of
funding. A
substantial part of our liquidity
and funding requirements are met using short-term unsecured funding
sources, including
retail and wholesale
deposits and the regular
issuance of money market
securities. A change in the
availability of short-
term funding could occur quickly.
The addition
of loss-absorbing
debt as
a component
of capital
requirements,
the regulatory
requirements
to maintain
minimum TLAC at UBS’s holding company and at certain
of its subsidiaries, as well as the
power of resolution authorities
to bail in TLAC instruments and other debt obligations, and uncertainty as to how such powers will be exercised, caused
and may
still cause
further increase
of our cost
of funding,
and could
potentially increase
the total
amount of funding
required, in the absence of other changes
in our business.
Reductions in our credit ratings
may adversely affect the market value
of the securities and
other obligations and increase
our funding costs,
in particular with
regard to funding from
wholesale unsecured sources, and could
affect the availability
of certain kinds of funding. In addition,
as experienced in connection with Moody’s
Investors Service Ltd. downgrade
of
UBS AG’s
long-term debt
rating in
June 2012,
rating downgrades
can require
us to
post additional
collateral or
make
additional
cash
payments
under
trading
agreements.
Our
credit
ratings,
together
with
our
capital
strength
and
reputation, also contribute to
maintaining client and counterparty confidence,
and it is
possible that rating changes
could
influence the performance of some of our businesses. The acquisition of the Credit Suisse Group has elevated these risks
and
may
cause
these
risks
to
intensify.
Upon
the
close
the
acquisition
in
June
2023,
Fitch
Ratings
Ireland
Limited
downgraded the
Long-Term Issuer Default Ratings (IDRs) of
UBS AG
to “A+” from
“AA-“. Fitch
Ratings Ltd also
upgraded
Credit Suisse AG’s Long-Term
IDR to “A+” from “BBB+”.
Annual Report 2023 |
Our business model and environment |
Risk factors
35
The requirement
to maintain a
liquidity coverage ratio
of high-quality liquid
assets to estimated
stressed short-term
net
cash outflows, and other similar liquidity and funding requirements,
oblige us to maintain high levels of overall liquidity,
limit our
ability to
optimize interest
income and
expense, make
certain lines
of business
less attractive
and reduce
our
overall ability to generate
profits. The liquidity coverage
ratio and net stable funding
ratio requirements are
intended to
ensure that
we are
not overly
reliant on
short-term
funding and
that we
have sufficient
long-term funding
for illiquid
assets. The relevant calculations make assumptions about the relative likelihood and amount of outflows of funding and
available sources
of additional
funding
in market
-wide and
firm-specific
stress
situations. In
an actual
stress
situation,
however,
our funding
outflows
could exceed
the
assumed amounts.
Further,
UBS AG
is subject
to increased
liquidity
requirements
related
to
too-big-to-fail
(TBTF)
measures
under
the
direction
of
FINMA,
which
became
effective
on
1
January 2024.
Annual Report 2023 |
Financial and operating performance | Accounting
and financial reporting
36
Financial and operating
performance
Management report
Accounting and financial reporting
Critical accounting estimates and judgments
In
preparing
our
financial
statements
in
accordance
with
IFRS
Accounting
Standards,
as
issued
by
the
International
Accounting
Standards
Board
(the
IASB),
we
apply
judgment
and
make
estimates
and
assumptions
that
may
involve
significant
uncertainty
at
the
time
they
are
made.
We
regularly
reassess
those
estimates
and
assumptions,
which
encompass historical
experience, expectations
of the
future and
other pertinent
factors, to
determine their
continuing
relevance based on current conditions, and
update them as necessary.
Changes in estimates and assumptions may have
significant
effects
on the
financial
statements.
Furthermore,
actual
results
may
differ
significantly from
our estimates,
which could result in significant losses to the Group,
beyond what we expected or provided for.
Key
areas
involving
a
high
degree
of
judgment
and
areas
where
estimates
and
assumptions
are
significant
to
the
consolidated financial statements include
the following (note references below
are found in the “Consolidated financial
statements” section of this report):
–
expected credit loss measurement (refer to “Note 19 Expected
credit loss measurement”);
–
fair value measurement (refer to “Note 20 Fair value measurement”);
–
income taxes (refer to “Note 8 Income taxes”);
–
provisions and contingent liabilities (refer to “Note 17 Provisions
and contingent liabilities”);
–
post-employment benefit plans (refer to “Note 26 Post-employment
benefit plans”);
–
goodwill (refer to Note 12 Goodwill and intangible assets”); and
–
consolidation of structured entities (refer to “Note 28 Interests
in subsidiaries and other entities”).
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report and to
the “Risk factors” section of this report for more information
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
37
UBS AG consolidated performance
Income statement
For the year ended
% change from
USD m
31.12.23
31.12.22
31.12.21
31.12.22
Net interest income
Other net income from financial instruments measured
at fair value through profit or loss
Net fee and commission income
Other income
Total revenues
Credit loss expense / (release)
Personnel expenses
General and administrative expenses
Depreciation, amortization and impairment of non-financial
assets
Operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
Comprehensive income
Total comprehensive income
Total comprehensive income attributable to non-controlling interests
Total comprehensive income attributable to shareholders
Integration-related expenses by business division and Group Items
For the year ended
USD m
31.12.23
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
1
Group Items
1
Total net integration-related expenses
of which: personnel expenses
of which: general and administrative expenses
of which: depreciation, amortization and impairment of non-financial
assets
1 During 2023, Non-core
and Legacy (previously reported
within Group Functions) became
a separate reportable segment
and Group Functions has
been renamed Group Items.
Prior periods have been
restated to
reflect these changes.
2023 compared with 2022
Results
In 2023,
net profit
attributable to
shareholders decreased
by USD 3,794m,
or 54%,
to USD 3,290m,
which included
a
net tax expense of USD 1,206m.
Operating profit before tax
decreased by USD 4,439m, or 50%, to USD 4,521m, reflecting
higher operating expenses,
lower total revenues
and higher net
credit loss expenses.
Operating expenses increased
by USD 3,084m,
or 12%, to
USD 29,011m
and
included
USD 1,392m
of
integration-related
expenses.
This
increase
was
mainly
driven
by
a
USD 2,117m
increase
in
general
and
administrative
expenses.
Personnel
expenses
increased
by
USD 575m
and
depreciation, amortization
and impairment
of non-financial
assets increased
by USD 393m.
Net credit
loss expenses
were
USD 143m,
compared
with
USD 29m
in
2022.
Total
revenues
decreased
by
USD 1,240m,
or
4%,
to
USD 33,675m, mainly driven by other income,
which decreased by USD 1,316m, largely attributable to
the prior year
including
a gain
of USD 848m
in Asset
Management
on the sale
of our shareholding
in our Japanese
real estate
joint
venture,
Mitsubishi
Corp.-UBS
Realty
Inc.
Total
combined
net
interest
income
and
other
net
income
from
financial
instruments
measured
at
fair
value
through
profit
and
loss
increased
by
USD 489m,
partly
offset
by
a
USD 413m
decrease in net fee and commission income.
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
38
Integration
-related expenses primarily
included higher consulting
fees and higher
real estate costs
in general, as well
as
administrative
expenses
and
higher
personnel
expenses,
which
were
mainly
due
to
salaries
and
variable
compensation
,
related
to
the
integration
of
Credit
Suisse.
Integration-related
expenses
reflected
in
depreciation,
amortization and impairment of non-financial assets were mainly in relation to leasehold improvements and internally
developed software.
Integration
-related
expenses
are
defined
as
expenses
that
are
temporary,
incremental
and
directly
related
to
the
integration
of
Credit
Suisse
into
UBS,
including
costs
of
internal
staff
and
contractors
substantially
dedicated
to
integration activities, retention awards, redundancy costs, incremental expenses from the shortening of useful lives of
property,
equipment
and
software,
and
impairment
charges
relating
to
these
assets.
Classification
as
integration-
related expenses
does not
affect the
timing of
recognition and
measurement of
those expenses
or the
presentation
thereof in the income statement.
Total revenues
Net interest income and other net income from financial instruments
measured at fair value through profit or loss
Total
combined
net
interest
income
and other
net
income
from
financial
instruments
measured
at
fair
value
through
profit or loss increased by USD 489m to
USD 14,500m.
Personal
&
Corporate
Banking
increased
by
USD 955m
to
USD 3,641m,
predominantly
driven
by
an
increase
in
net
interest
income,
mainly
driven
by
higher
deposit
margins,
which
resulted
from
higher
interest
rates,
and
higher
loan
revenues,
partly
offset
by lower
deposit fees.
The
prior
year
included a
benefit
from
the
Swiss
National
Bank
deposit
exemption.
Global Wealth Management increased by
USD 250m to USD 6,607m, predominantly due
to higher net interest income,
mainly driven by higher
deposit margins, resulting from
higher interest rates, partly offset
by the effects of
shifts to lower-
margin deposit products.
The Investment Bank decreased
by USD 773m
to USD 4,997m, mainly
reflecting a USD 1,127m
decrease in revenues in
Derivatives
&
Solutions,
largely
driven
by Equity
Derivatives,
Rates
and Foreign
Exchange,
due to
lower
levels
of
both
volatility and client activity.
This decrease was partly
offset by a USD 185m
increase in Financing,
reflecting higher client
balances.
In addition
,
there
was a
USD 142m
increase
in Global
Banking,
mainly
due to
higher revenues
in
both Risk
Management and Leveraged Capital Markets,
reflecting an improvement in mark-to-market.
›
Refer to “Note 3 Net interest income and other
net income from financial instruments measured at fair value through profit or
loss” in the “Consolidated financial statements”
section of this report for more information
Net interest income and other net income from financial instruments measured at fair value through profit or loss
For the year ended
% change from
USD m
31.12.23
31.12.22
31.12.21
31.12.22
Net interest income from financial instruments measured
at amortized cost and fair value through other
comprehensive income
Net interest income from financial instruments measured
at fair value through profit or loss and other
Other net income from financial instruments measured
at fair value through profit or loss
Total
Global Wealth Management
of which: net interest income
of which: transaction-based income from foreign exchange and other
intermediary activity
Personal & Corporate Banking
of which: net interest income
of which: transaction-based income from foreign exchange and other
intermediary activity
Asset Management
Investment Bank
2
Global Banking
Global Markets
Non-core and Legacy
Group Items
1 Mainly includes spread-related income in connection with client-driven transactions,
foreign currency translation effects and income and expenses from precious metals,
which are included in the income statement
line Other net income from financial instruments measured
at fair value through profit or loss.
The amounts reported on this
line are one component of Transaction
-based income in the management discussion and
analysis of
Global Wealth
Management and
Personal &
Corporate Banking
in the
“Global Wealth
Management” and
“Personal &
Corporate Banking”
sections of
this report,
respectively.
2 Investment Bank
information is provided at the
business line level rather than by
financial statement reporting line in
order to reflect the underlying
business activities, which is consistent with the
structure of the management discussion
and analysis in the “Investment Bank” section of this report.
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
39
Net fee and commission income
Net fee and commission income decreased by USD
413m to USD 18,610m.
Investment
fund
fees
decreased
by
USD 212m
to
USD 4,730m,
driven
by
Global
Wealth
Management
and
Asset
Management, mainly reflecting negative market performance.
Net brokerage
fees decreased
by USD 206m
to USD 3,079m,
driven
by lower
levels of
client activity
in Global
Wealth
Management and lower market volumes of cash equities
in Execution Services in the Investment Bank.
M&A and corporate finance fees decreased
by USD 135m to USD 669m, primarily reflecting lower
revenues from merger
and acquisition transactions in Global Banking in the Investment
Bank.
›
Refer to “Note 4 Net fee and commission
income” in the “Consolidated financial statements”
section of this report for more
information
Other income
Other income decreased by USD 1,316m to
USD 566m, largely due to USD 255m of losses relating
to our investment in
SIX Group.
These losses reflected UBS AG’s share of impairments
taken by SIX Group on its investment in Worldline and
on goodwill related to its Bolsas y Mercados
Españoles (BME) subsidiary.
In contrast, 2022 included gains from disposals
of associates
and subsidiaries, largely
reflecting a gain
of USD 848m
in Asset
Management on
the sale
of our
shareholding
in
our
Japanese
real
estate
joint venture,
Mitsubishi
Corp.-UBS
Realty
Inc.
In
addition,
2022
included
gains
in
Global
Wealth Management of USD 133m on the sale of our domestic wealth management business in
Spain, USD 86m on the
sale
of
UBS
Swiss
Financial
Advisers AG
and
USD 41m
on
the
sale
of
our
US
alternative
investments
administration
business.
›
Refer to “Note 5 Other income” in the “Consolidated
financial statements”
section of this report for more information
›
Refer to “Note 29 Changes in organization and
acquisitions and disposals of subsidiaries and businesses”
in the “Consolidated
financial statements”
section of this report for more information about the
gains from disposals of associates and subsidiaries
Credit loss expense / release
Total
net credit
loss expenses
were USD 143m,
compared with
USD 29m in
2022, reflecting
net expenses
of USD 23m
related to stage 1 and 2 positions and USD 120m
related to credit-impaired stage
3 positions.
›
Refer to “Note 9 Financial assets at amortized
cost and other positions in scope of expected credit loss
measurement” and
“Note 19 Expected credit loss measurement” in the “Consolidated
financial statements” section of this report for more
information about credit loss expenses / releases
›
Refer to the “Risk factors” section of this report for
more information
Credit loss expense / (release)
Performing positions
Credit-impaired positions
USD m
Stages 1 and 2
Stage 3
Total
For the year ended 31.12.23
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.22
2
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.21
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
1 Starting with the third quarter of 2023, Non-core and Legacy became a separate reportable segment and Group Functions has been renamed Group Items. Prior periods have been restated to reflect these changes.
2 Certain prior-period
figures as of
or for the
quarter ended 30
June 2023 have
been restated due
to effects of
measurement period adjustments
in relation to
the acquisition of
the Credit Suisse
Group. Refer
to
“Note 2 Accounting for the acquisition of the Credit Suisse Group” for more information.
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
40
Operating expenses
Personnel expenses
Personnel expenses
increased by
USD 575m to
USD 15,655m and
included integration-related
expenses of USD
626m.
Salaries increased
by USD 370m as
a result of
the integration and
also due to
salary adjustments, as
well as the
impact
of foreign currency translation effects.
Social security costs also increased by USD 105m
.
›
Refer to “Note 6 Personnel expenses,” “Note 26
Post-employment benefit plans” and “Note 27
Employee benefits: variable
compensation” in the “Consolidated financial statements”
section of this report for more information
General and administrative expenses
General
and
administrative
expenses
increased
by
USD 2,117m
to
USD 11,118m,
which
included
integration-related
expenses of USD 491m,
largely reflected
in higher consulting
and real
estate costs.
In addition, there
was a USD 939m
increase
in
shared
services
costs
charged
by
other
subsidiaries
of
UBS
Group AG,
as
well
as
a
USD 468m
increase
in
expenses for litigation, regulatory and similar matters,
driven by a USD 665m increase in
provisions recognized in the first
quarter of 2023 related to the US residential mortgage-backed securities litigation matter. Technology costs increased by
USD 56m.
We
believe
that
the
industry
continues
to
operate
in
an
environment
in
which
expenses
associated
with
litigation,
regulatory and
similar matters will
remain elevated for
the foreseeable
future, and
we continue to
be exposed
to a
number
of significant claims and regulatory
matters. The outcome of
many of these matters,
the timing of a resolution,
and the
potential effects
of resolutions
on our
future business,
financial results
or financial
condition
are extremely
difficult to
predict.
›
Refer to “Note 7 General and administrative expenses”
and “Note 17 Provisions and contingent liabilities” in
the “Consolidated
financial statements” section of this report for more information
Depreciation, amortization and impairment of non-financial
assets
Depreciation, amortization and impairment of non-financial assets increased by USD 393m to USD 2,238m
and included
integration-related expenses of USD 274m, primarily relating to
a USD 214m impairment of software projects
in progress
resulting
from
a
reprioritization
of
software
development
activity
in
the
context
of
the
integration
of
Credit
Suisse.
Excluding the aforementioned
effects,
depreciation of internally developed
software increased
by USD 143m, reflecting
a higher level of capitalized costs.
Operating expenses
For the year ended
% change from
USD m
31.12.23
31.12.22
31.12.21
31.12.22
Personnel expenses
of which: salaries
of which: variable compensation
of which: performance awards
of which: financial advisors
1
of which: other
of which: other personnel expenses
2
General and administrative expenses
of which: net expenses for litigation, regulatory and similar
matters
of which: other general and administrative expenses
Depreciation, amortization and impairment of non-financial
assets
Total operating expenses
1 Consists of cash and deferred compensation awards and
is based on compensable revenues and firm tenure
using a formulaic approach. It also includes expenses
related to compensation commitments with financial
advisors entered into at the time of recruitment that are subject to vesting requirements.
2 Consists of expenses related to contractors, social security, 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.
Tax
Income tax expenses of USD 1,206m were
recognized for UBS AG in 2023, representing
an effective tax rate of 26.7%,
compared with
USD 1,844m for
2022, which represented
an effective
tax rate
of 20.6%. The
income tax expenses
for
2023 included Swiss tax expenses of USD 849m and non-Swiss
tax expenses of USD 356m.
The Swiss tax expenses
included current tax
expenses of USD 810m
in respect of taxable
profits of UBS Switzerland
AG
and other Swiss entities and deferred tax expenses of USD 39m.
The non-Swiss tax expenses included
current tax expenses of USD
618m that related to expenses
of USD 100m in
respect
of
US
corporate
alternative
minimum
tax
(CAMT)
and
USD
518m
in
respect
of
other
taxable
profits
of
non-Swiss
subsidiaries and branches. These were partly offset by a net deferred tax benefit of USD 262m that primarily related to a
benefit of USD 274m
in respect of an
increase in deferred tax assets
(DTAs) that resulted from an
increase in the expected
value of
future tax
deductions for
deferred compensation
awards due
to an
increase in
the Group’s
share price
during
the year. In addition, the
net deferred tax benefit included
a benefit of USD 100m
in respect of the recognition
of DTAs
for tax credits carried forward in
respect of CAMT. These benefits were partly offset
by a net deferred tax expense
of USD
112m that primarily related to the amortization of DTAs
previously recognized in relation to tax losses carried forward.
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
41
Excluding any potential
effects from the
remeasurement of
DTAs in connection
with the business
planning process and
any material
jurisdictional statutory
tax rate
changes that
could be
enacted,
we expect
a tax
rate for
2024 of
around
24%.
›
Refer to “Note 8 Income taxes”
in the “Consolidated financial statements”
section of this report for more information
›
Refer to the “Risk factors” section of this report for
more information
Total comprehensive income attributable to shareholders
In 2023, total comprehensive income attributable to shareholders was USD 4,598m, reflecting net profit of USD 3,290m
and other comprehensive income (OCI), net of tax,
of USD 1,308m.
OCI
related
to
cash
flow
hedges
was
USD 1,400m,
mainly
reflecting
net
losses
on
hedging
instruments
that
were
reclassified from OCI to the income statement.
Foreign currency
translation OCI
was USD 849m,
mainly due
to the
significant strengthening
of the
Swiss franc
(10%)
and the euro (3%) against the US dollar.
OCI
related
to
own
credit
on
financial
liabilities
designated
at
fair
value
was
negative
USD 790m,
primarily
due
to
a
tightening of our own credit spreads.
Defined benefit
plan OCI,
net of
tax, was
negative USD 136m.
Total net
pre-tax OCI
related to
the Swiss
pension plan
was negative USD 56m. This reflected losses of USD
1,901m
from the defined benefit obligation (DBO) remeasurement,
largely offset by an
increase in the plan
assets of USD 513m
and a decrease in
the effect of
the asset ceiling under
IFRS
Accounting Standards of USD 1,332m. Total pre-tax OCI related to our non-Swiss pension plans was negative USD 47m,
mostly driven by the UK pension plan, which recorded negative net
pre-tax OCI of USD 31m. The negative OCI in the UK
pension plan reflected a loss from the remeasurement of the DBO of USD 96m, partly
offset by a positive return on plan
assets of USD 65m.
›
Refer to “Statement of comprehensive income” in the
“Consolidated financial statements” section of this
report for more
information
›
Refer to “Note 20 Fair value measurement” in the “Consolidated
financial statements” section of this report for more information
about own credit on financial liabilities designated at
fair value
›
Refer to “Note 25 Hedge accounting”
in the “Consolidated financial statements”
section of this report for more information about
cash flow hedges of forecast transactions
›
Refer to “Note 26 Post-employment benefit plans”
in the “Consolidated financial statements” section
of this report for more
information about OCI related to defined benefit plans
Sensitivity to interest rate movements
As of 31 December 2023, we estimated
that a parallel shift in
yield curves by +100 basis points
could lead to a combined
increase in annual net
interest income from
our banking book of
approximately USD 1.2bn
in the first year
after such a
shift. Of this
increase, approximately
USD 0.8bn, USD 0.2bn
and USD 0.1bn
would result
from changes
in Swiss
franc,
US dollar and
euro interest rates, respectively. A parallel
shift in yield
curves by –100
basis points could
lead to a
combined
decrease
in annual
net interest
income of
approximately
USD 1.2bn in
the first
year after
such a
shift, showing
similar
currency contributions as for the aforementioned
increase in rates.
These estimates are based on a
hypothetical scenario of an immediate change
in interest rates, equal across all
currencies
and relative
to
implied
forward
rates
as of
31 December
2023 applied
to
our
banking
book.
These
estimates
further
assume no change
to balance
sheet size
and product
mix, stable
foreign exchange
rates, and
no specific management
action. These estimates do not represent
a forecast of net interest income variability
.
Seasonal characteristics
Our revenues
may show
seasonal patterns,
notably in
the Investment
Bank and
transaction-based revenues
for Global
Wealth Management, and
typically reflect the
highest client
activity levels in
the first quarter, with lower
levels throughout
the rest of the year,
especially during the summer months and the end-of-year
holiday season.
Key figures
Below we provide an overview of selected key figures of UBS AG consolidated. For further information about key figures
related to capital management, refer
to the “Capital, liquidity and funding, and balance sheet” section
of this report.
Cost / income ratio
The cost
/ income
ratio was
86.2%, compared
with 74.3%,
mainly reflecting
an increase
in operating
expenses and
a
decrease in total revenues.
Return on common equity tier 1 capital
The
annualized
return
on
our
common
equity
tier 1
(CET1)
capital
was
7.6%,
compared
with
16.8%,
reflecting
a
USD 3,794m
decrease in net profit attributable to
shareholders and a USD 1.3bn increase
in average CET1 capital.
Annual Report 2023 |
Financial and operating performance | UBS
AG consolidated performance
42
CET1 capital
CET1
capital
increased
by
USD 1.2bn
to
USD 44.1bn
as
of
31 December
2023,
mainly
as
a
result
of
operating
profit
before tax of USD 4.5bn, with associated current tax expenses
of USD 1.4bn, positive foreign currency translation effects
of
USD 0.9bn,
and
a
net
increase
of
USD 0.2bn
in
eligible
DTAs
on
temporary
differences,
partly
offset
by
dividend
accruals of USD 3.0bn.
Risk-weighted assets
Risk-weighted assets (RWA) increased
by USD 16.2bn to USD 334.0bn, primarily
driven by increases of USD 12.7bn
due
to asset size and other movements and USD 8.0bn due to currency effects, partly offset by a decrease of USD 4.6bn due
to model updates and methodology changes.
CET1 capital ratio
Our CET1 capital
ratio decreased
to 13.2% from
13.5%, reflecting
a USD 16.2bn increase
in RWA,
partly offset by
the
aforementioned increase in CET1 capital
.
Leverage ratio denominator
The leverage ratio denominator (the LRD) increased by USD 74.8bn to
USD 1,104.4bn, primarily driven by increases from
asset size and other movements of USD 37.5bn and currency
effects of USD 37.3bn.
CET1 leverage ratio
Our CET1 leverage ratio decreased to 4.0% from
4.2%, due to the aforementioned increase
in the LRD, partly offset by
the increase in CET1 capital.
Personnel
The number
of personnel
employed was
53,925 (workforce
count) as
of 31 December
2023, a
net decrease
of 1,013
compared with
31 December 2022.
The number
of internal personnel
employed as
of 31 December
2023 was
47,590
(full-time equivalents), a
net decrease
of 38 compared
with 31 December 2022.
The number of
core external
staff was
6,335 (workforce count), a net decrease
of 974 compared with 31 December 2022.
Equity, CET1 capital and returns
As of or for the year ended
USD m, except where indicated
31.12.23
31.12.22
31.12.21
Net profit
Net profit attributable to shareholders
Equity
Equity attributable to shareholders
Less: goodwill and intangible assets
Tangible equity attributable to shareholders
Less: other CET1 deductions
CET1 capital
Return on equity
Return on equity (%)
Return on tangible equity (%)
Return on CET1 capital (%)
Annual Report 2023 |
Financial and operating performance | Global
Wealth Management
43
Global Wealth Management
Global Wealth Management
1
As of or for the year ended
% change from
USD m, except where indicated
31.12.23
31.12.22
31.12.22
Results
Net interest income
5,436
5,274
3
Recurring net fee income
2
10,143
10,282
(1)
Transaction-based income
2
3,079
3,137
(2)
Other income
(28)
270
Total revenues
18,631
18,963
(2)
Credit loss expense / (release)
25
0
Operating expenses
14,900
14,069
6
Business division operating profit / (loss) before tax
3,705
4,894
(24)
Performance measures and other information
Pre-tax profit growth (year-on-year, %)
2
(24.3)
4.0
Cost / income ratio (%)
2
80.0
74.2
Financial advisor compensation
3
4,548
4,508
1
Net new money (USD bn)
2
75.0
40.5
Invested assets (USD bn)
2
3,187
2,815
13
Loans, gross (USD bn)
4
218.3
225.0
(3)
Customer deposits (USD bn)
4
355.3
348.2
2
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)
2,5
0.3
0.3
Advisors (full-time equivalents)
8,838
9,215
(4)
1 Comparatives may differ as a result of adjustments following organizational changes, restatements due to the retrospective
adoption of new accounting standards or changes in accounting policies, and events after
the reporting period.
2 Refer to “Alternative performance measures” in the appendix to
this report for the definition
and calculation method.
3 Relates to licensed professionals with the
ability to provide investment
advice to
clients in
the Americas.
Consists of
cash and
deferred compensation
awards and
is based
on compensable
revenues and
firm tenure
using a
formulaic approach.
It also
includes expenses
related to
compensation commitments with financial advisors entered into at the time of
recruitment that are subject to vesting requirements. Recruitment loans to financial advisors
were USD 1,754m as of 31 December 2023.
4 Loans and Customer deposits
in this table include
customer brokerage receivables and payables, respectively, which are
presented in a separate reporting
line on the balance
sheet.
5 Refer to the “Risk
management
and control” section of this report for more information about (credit-)impaired exposures. Excludes loans to financial advisors.
2023 compared with 2022
Results
Profit before
tax decreased
by USD 1,189m,
or 24%,
to USD 3,705m,
mainly driven
by higher operating
expenses and
lower total revenues.
Total revenues
Total
revenues
decreased
by
USD 332m,
or
2%,
to
USD 18,631m,
with
decreases
in
other
income,
recurring
net
fee
income and transaction-based income, partly offset
by increases in net interest income.
Net interest income increased by USD 162m,
or 3%, to USD 5,436m, mainly driven
by higher deposit margins, resulting
from higher interest rates, partly offset by the effects
of shifts to lower-margin deposit products.
Recurring
net
fee
income
decreased
by
USD 139m,
or
1%,
to
USD 10,143m,
primarily
driven
by
negative
market
performance.
Transaction
-based income decreased by
USD 58m, or 2%,
to USD 3,079m, mainly driven by
lower levels of
client activity,
particularly in Americas and Asia Pacific.
Other income
was negative
USD 28m, compared
with positive
other income
of USD 270m,
as 2023
included losses
of
USD 64m related to our
investment in SIX Group. The
prior year included a
USD 133m gain from the sale
of our domestic
wealth
management
business
in
Spain,
an
USD 86m
gain
from
the
sale
of
UBS
Swiss
Financial
Advisers
AG
and
a
USD 41m gain from the sale of our US alternative investments
administration business.
Credit loss expense / release
Net credit loss
expenses were USD
25m, primarily related
to stage 3 positions,
compared with
net expenses of
USD 0m
in 2022.
Annual Report 2023 |
Financial and operating performance | Global
Wealth Management
44
Operating expenses
Operating
expenses
increased
by
USD 831m,
or
6%,
to
USD 14,900m,
mostly
driven
by
integration-related
expenses
associated
with the
acquisition
of the
Credit
Suisse
Group,
higher
technology
expenses
and
adverse
foreign
currency
effects. These
increases were
partly offset
by lower provisions
for litigation,
regulatory and
similar matters.
In addition,
2023
included
a
charge
of
USD 60m
for
the
special
assessment
by
the
US
Federal
Deposit
Insurance
Corporation
to
recover losses incurred by the Deposit Insurance Fund
in connection with the failures of
Silicon Valley Bank and Signature
Bank.
Pre-tax profit growth
Pre-tax profit growth was negative
24.3%, compared with positive 4.0% in 2022.
Cost / income ratio
The
cost
/
income
ratio
increased
to
80.0%
from
74.2%,
reflecting
both
higher
operating
expenses
and
lower
total
revenues.
Invested assets
Invested
assets
increased
by
USD 372bn,
or
13%,
to
USD 3,187bn,
mainly
driven
by
positive
market
performance
of
USD 279bn, net new money inflows of USD 75.0bn and
positive foreign currency effects
of USD 31bn.
Loans
Loans decreased by USD 6.7bn to USD 218.3bn,
mainly driven by net new loan outflows of USD 12.6bn, partly offset by
positive foreign currency effects
.
›
Refer to the “Risk management and control” section of this
report for more information
Customer deposits
Customer deposits increased
by USD 7.1bn to
USD 355.3bn, mainly
driven by positive
foreign currency
effects and
net
inflows into
fixed-term
deposit products.
This was
partly offset
by continued
shifts
into money
market
funds and
US-
government securities.
Personal & Corporate Banking
Personal & Corporate Banking – in Swiss francs
1
As of or for the year ended
% change from
CHF m, except where indicated
31.12.23
31.12.22
31.12.22
Results
Net interest income
2,804
2,088
34
Recurring net fee income
2
851
812
5
Transaction-based income
2
1,179
1,155
2
Other income
(83)
47
Total revenues
4,751
4,101
16
Credit loss expense / (release)
46
36
27
Operating expenses
2,589
2,359
10
Business division operating profit / (loss) before tax
2,116
1,706
24
Performance measures and other information
Pre-tax profit growth (year-on-year, %)
2
24.1
7.8
Cost / income ratio (%)
2
54.5
57.5
Net interest margin (bps)
2
192
147
Fee and trading income for Corporate & Institutional Clients
2
847
810
4
Investment products for Personal Banking (CHF bn)
2
24.4
21.6
13
Net new investment products for Personal Banking (CHF bn)
2
1.81
1.99
(9)
Active Digital Banking clients in Personal Banking (%)
2,3
77.9
74.3
Active Mobile Banking clients in Personal Banking (%)
2
65.0
56.5
Active Digital Banking clients in Corporate & Institutional
Clients (%)
2
81.2
80.0
Loans, gross (CHF bn)
146.8
143.0
3
Customer deposits (CHF bn)
169.6
168.0
1
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)
2,4
0.9
0.8
1 Comparatives may differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after
the reporting period.
2 Refer to “Alternative
performance measures” in the
appendix to this report
for the definition and
calculation method.
3 In 2023,
88.6% of clients of
Personal Banking were
“activated
users” of Digital Banking (i.e., clients who
had logged into Digital Banking at least once in
the course of their relationship with UBS).
4 Refer to the “Risk management and control” section of
this report for more
information about (credit-)impaired exposures.
Annual Report 2023 |
Financial and operating performance | Personal
& Corporate Banking
45
2023 compared with 2022
Results
Profit before tax
increased by CHF 410m, or
24%, to CHF 2,116m, mainly
reflecting higher total revenues,
partly offset
by higher operating expenses.
Total revenues
Total
revenues
increased
by
CHF 650m,
or
16%,
to
CHF 4,751m,
reflecting
increases
across
almost
all
income
lines,
predominantly in net interest income.
Net interest
income increased
by CHF 716m
to CHF 2,804m,
mainly driven
by higher
deposit margins,
which resulted
from higher interest rates, and higher loan
revenues, partly offset by lower deposit fees. The
prior year included a benefit
from the Swiss National Bank deposit exemption.
Recurring
net
fee
income
increased
by
CHF 39m
to
CHF 851m,
mainly
reflecting
higher
revenues
from
account
and
custody fees.
Transaction-based
income
increased
by
CHF 24m
to
CHF 1,179m,
mainly
driven
by
higher
income
from
Corporate
&
Institutional Clients.
Other
income
was
negative
CHF 83m,
compared
with
positive
other
income
of
CHF 47m,
mainly
reflecting
losses
of
CHF 161m related to our investment in SIX Group.
Credit loss expense / release
Net credit loss expenses were CHF 46m, primarily
related to stage 3 positions, compared
with net expenses of CHF 36m
in 2022.
Operating expenses
Operating
expenses
increased
by
CHF 230m,
or
10%,
to
CHF 2,589m,
mainly
driven
by
integration-related
expenses
associated with the
acquisition of the
Credit Suisse Group, as
well as higher
technology expenses and
accruals for variable
compensation.
Cost / income ratio
The cost / income
ratio decreased
to 54.5% from
57.5%, as an increase
in total revenues
more than offset
an increase
in operating expenses.
Personal & Corporate Banking – in US dollars
1
As of or for the year ended
% change from
USD m, except where indicated
31.12.23
31.12.22
31.12.22
Results
Net interest income
3,128
2,192
43
Recurring net fee income
2
949
852
11
Transaction-based income
2
1,314
1,212
8
Other income
(105)
48
Total revenues
5,285
4,304
23
Credit loss expense / (release)
50
39
30
Operating expenses
2,889
2,475
17
Business division operating profit / (loss) before tax
2,346
1,790
31
Performance measures and other information
Pre-tax profit growth (year-on-year, %)
2
31.1
3.7
Cost / income ratio (%)
2
54.7
57.5
Net interest margin (bps)
2
194
146
Fee and trading income for Corporate & Institutional Clients
2
943
851
11
Investment products for Personal Banking (USD bn)
2
29.0
23.4
24
Net new investment products for Personal Banking (USD bn)
2
2.00
2.11
(5)
Active Digital Banking clients in Personal Banking (%)
2,3
77.9
74.3
Active Mobile Banking clients in Personal Banking (%)
2
65.0
56.5
Active Digital Banking clients in Corporate & Institutional
Clients (%)
2
81.2
80.0
Loans, gross (USD bn)
174.4
154.7
13
Customer deposits (USD bn)
201.5
181.8
11
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)
2,4
0.9
0.8
1 Comparatives may differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting
standards or changes in accounting policies, and events after
the reporting period.
2 Refer to “Alternative
performance measures” in the
appendix to this report
for the definition and
calculation method.
3 In 2023, 88.6%
of clients of Personal
Banking were “activated
users” of Digital Banking (i.e., clients who
had logged into Digital Banking at least once in the course of
their relationship with UBS).
4 Refer to the “Risk management and control” section of
this report for more
information about (credit-)impaired exposures.
Annual Report 2023 |
Financial and operating performance | Asset
Management
46
Asset Management
Asset Management
1
As of or for the year ended
% change from
USD m, except where indicated
31.12.23
31.12.22
31.12.22
Results
Net management fees
2
1,976
2,049
(4)
Performance fees
70
64
9
Net gain from disposals
23
848
Total revenues
2,069
2,961
(30)
Credit loss expense / (release)
(1)
0
Operating expenses
1,706
1,565
9
Business division operating profit / (loss) before tax
364
1,396
(74)
Performance measures and other information
Pre-tax profit growth (year-on-year, %)
3
(73.9)
36.5
Cost / income ratio (%)
3
82.4
52.9
Gross margin on invested assets (bps)
3,4
18
27
Information by business line / asset
class
Net new money (USD bn)
3
Equities
0.2
(12.8)
Fixed Income
29.5
36.5
of which: money market
23.6
26.3
Multi-asset & Solutions
3.3
(1.3)
Hedge Fund Businesses
(3.9)
2.3
Real Estate & Private Markets
2.7
0.2
Total net new money excluding associates
31.8
24.8
of which: net new money excluding money market
8.1
(1.6)
Associates
5
0.5
7.7
Total net new money
4
32.3
32.5
Invested assets (USD bn)
3
Equities
539
456
18
Fixed Income
323
296
9
of which: money market
131
119
10
Multi-asset & Solutions
180
155
16
Hedge Fund Businesses
54
55
(3)
Real Estate & Private Markets
102
102
0
Total invested assets excluding associates
1,199
1,064
13
of which: passive strategies
540
443
22
Associates
5
24
24
0
Total invested assets
4
1,222
1,088
12
Information by region
Invested assets (USD bn)
3
Americas
350
298
17
Asia Pacific
4
153
173
(11)
Europe, Middle East and Africa (excluding Switzerland)
314
263
19
Switzerland
405
354
15
Total invested assets
4
1,222
1,088
12
Information by channel
Invested assets (USD bn)
3
Third-party institutional
659
606
9
Third-party wholesale
126
116
8
UBS’s wealth management businesses
414
342
21
Associates
5
24
24
0
Total invested assets
4
1,222
1,088
12
1 Comparatives may differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after
the reporting period.
2 Net management fees include
transaction fees, fund administration
revenues (including net interest and trading
income from lending activities and foreign-exchange
hedging as part of the
fund services offering), distribution fees, incremental fund-related expenses, gains or losses from seed money and co-investments, funding costs, the negative pass-through impact of third-party performance fees, and
other items that are not Asset Management’s performance fees.
3 Refer to “Alternative performance measures” in the appendix to this report for the definition and calculation method.
4 Starting with the second
quarter of 2023, net new money and invested assets include net new money and invested assets from associates, to better reflect the business strategy.
Comparative figures have been restated to reflect this change.
5 The invested assets and net new money amounts reported for associates are prepared in accordance with their local regulator
y
requirements and practices.
Annual Report 2023 |
Financial and operating performance | Asset
Management
47
2023 compared with 2022
Results
Profit before tax decreased by USD 1,032m, or 74%, to
USD 364m, primarily due to 2022 including a
gain of USD 848m
from the sale of our shareholding in the Mitsubishi
Corp.-UBS Realty Inc. joint venture.
Total revenues
Total
revenues decreased
by USD 892m, or
30%, to USD 2,069m,
primarily due to
2022 including the aforementioned
gain of USD 848m.
Net management fees
decreased by USD
73m, or 4%,
to USD 1,976m,
mainly reflecting negative
market performance
and the impact of continued margin compression, partly
offset by positive foreign currency effects.
Performance fees increased by USD 6m, or 9%, to USD
70m.
Operating expenses
Operating expenses increased by USD 141m, or 9%, to USD 1,706m, mainly reflecting integration-related
expenses and
adverse foreign currency effects, as well as increases in technology expenses,
control function expenses,
and outsourcing
costs, partly offset by lower personnel expenses.
Cost / income ratio
The
cost
/
income
ratio
increased
to
82.4%
from
52.9%,
reflecting
both
lower
total
revenues
and
higher
operating
expenses.
Invested assets
Invested assets increased by USD 134bn, or 12%, to
USD 1,222bn, reflecting positive market performance of USD 97bn,
net
new
money
generation
of
USD 32bn
and
foreign
currency
effects
of
USD 31bn,
partly
offset
by
a
reduction
of
USD 26bn, mainly related to the sale of UBS Hana Asset Management Co., Ltd. Excluding money market flows, net new
money (excluding associates) was USD 8bn.
Investment Bank
Investment Bank
1
As of or for the year ended
% change from
USD m, except where indicated
31.12.23
31.12.22
31.12.22
Results
Advisory
604
733
(18)
Capital Markets
1,001
854
17
Global Banking
1,605
1,587
1
Execution Services
1,561
1,643
(5)
Derivatives & Solutions
2,612
3,665
(29)
Financing
1,981
1,822
9
Global Markets
6,154
7,129
(14)
of which: Equities
4,459
4,970
(10)
of which: Foreign Exchange, Rates and Credit
1,694
2,160
(22)
Total revenues
7,759
8,717
(11)
Credit loss expense / (release)
67
(12)
Operating expenses
7,588
6,890
10
Business division operating profit / (loss) before tax
104
1,839
(94)
Performance measures and other information
Pre-tax profit growth (year-on-year, %)
2
(94.3)
(29.0)
Cost / income ratio (%)
2
97.8
79.0
Average VaR (1-day, 95% confidence, 5 years of historical data)
14
10
36
1 Comparatives may differ as a result of adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after
the reporting period.
2 Refer to “Alternative performance measures” in the appendix
to this report for the definition and calculation method.
Annual Report 2023 |
Financial and operating performance | Investment
Bank
48
2023 compared with 2022
Results
Profit before
tax decreased
by USD 1,735m,
or 94%,
to USD 104m,
mainly reflecting
lower total
revenues and
higher
operating expenses.
Total revenues
Total
revenues
decreased
by USD 958m,
or 11%,
to USD 7,759m,
reflecting
lower revenues
in Global
Markets,
partly
offset by higher revenues in Global Banking
.
Global Banking
Global Banking revenues
increased by USD 18m,
or 1%, to
USD 1,605m, as higher
Capital Markets revenues
were almost
entirely
offset
by
lower
Advisory
revenues.
Fee-pool-comparable
revenues
1
decrease in the overall global fee pool.
2
Advisory
revenues
decreased
by
USD 129m,
or
18%,
to
USD 604m,
mostly
due
to
lower
merger
and
acquisition
transaction revenues, which decreased by USD 125m, or 19%, compared with
a 25% decrease in the relevant global fee
pool.
2
Capital Markets
revenues increased
by USD 147m,
or 17%,
to USD 1,001m,
mainly
due to
prior-year
mark-to-market
losses of USD 86m in Leveraged Capital Markets,
which did not recur, and lower mark-to-market losses on a portfolio of
instruments
used
to
hedge
credit
exposure
in
the
Investment
Bank’s
lending
and
leveraged
loan
portfolios.
Capital
Markets fee-pool-comparable revenues
1
fee pool.
2
Global Markets
Global Markets revenues decreased by USD 975m, or 14%, to USD 6,154m, driven by lower Derivatives & Solutions and
Execution Services revenues, partly offset
by higher Financing revenues.
Execution
Services
revenues
decreased
by
USD 82m,
or
5%,
to
USD 1,561m,
due
to
lower
market
volumes
in
Cash
Equities, partly offset by higher revenues from foreign exchange
products that are traded over electronic platforms.
Derivatives & Solutions
revenues decreased by USD 1,053m,
or 29%, to
USD 2,612m, mostly driven by
Equity Derivatives,
Rates and Foreign Exchange, due to lower levels of both volatility
and client activity.
Financing revenues increased by USD 159m, or 9%, to USD 1,981m,
reflecting higher client balances.
Equities
Global
Markets
Equities
revenues
decreased
by
USD 511m,
or
10%,
to
USD 4,459m,
mainly
driven
by
lower
Equity
Derivatives and Cash Equities revenues.
Foreign Exchange, Rates and Credit
Global Markets Foreign
Exchange, Rates and
Credit revenues decreased by
USD 466m, or 22%,
to USD 1,694m, primarily
driven by lower Foreign Exchange and Rates revenues
.
Credit loss expense / release
Net credit loss expenses were USD 67
m, primarily related to stage 3 positions, compared
with net releases of USD 12m.
Operating expenses
Operating
expenses
increased
by
USD 698m,
or
10%,
to
USD 7,588m,
mainly
driven
by
integration-related
expenses
associated with the acquisition of the Credit Suisse
Group and higher technology expenses
.
Cost / income ratio
The
cost
/
income
ratio
increased
to
97.8%
from
79.0%,
reflecting
both
lower
total
revenues
and
higher
operating
expenses.
1
market movements on loan portfolios; and Debt Capital Markets,
excluding revenues related to debt underwriting of UBS instruments.
2
Annual Report 2023 |
Financial and operating performance | Non-core
and Legacy
49
Non-core and Legacy
Non-core and Legacy
1
As of or for the year ended
% change from
USD m
31.12.23
31.12.22
31.12.22
Results
Total revenues
59
237
(75)
Credit loss expense / (release)
1
2
Operating expenses
1,010
104
867
Operating profit / (loss) before tax
(952)
131
1 Starting with the third quarter of 2023, Non-core and Legacy represents a separate reportable segment, which includes Non-core and Legacy Portfolio previously reported within Group Functions. Prior periods have
been revised to reflect this presentational change.
Additionally, a small amount of exposure of
pre-integration UBS business divisions was included in
Non-core and Legacy starting with the third quarter
of 2023, as
it was assessed as not strategic in light of the acquisition of the Credit Suisse Group.
2023 compared with 2022
Results
Loss before tax was USD 952m, compared with a profit
before tax of USD 131m.
Total revenues
Total
revenues decreased
by USD 178m, or
75%, to
USD 59m, mainly
due to
a USD 112m
decrease in
valuation gains
on our portfolios of auction
rate securities, US real
estate finance and residential
mortgage-backed securities, as well
as
a USD 36m write-down
on legacy inflation-linked assets
due to a
leasehold reform bill. In
addition, 2022 included income
of USD 62m related to a legacy litigation settlement.
Operating expenses
Operating expenses
increased
by USD 906m
to USD 1,010m,
largely reflecting
an increase
of USD 665m
in provisions
related to the US residential mortgage-backed securities
litigation matter,
integration-related expenses of USD 225m and
a USD 24m increase in personnel expenses.
Group Items
Group Items
1
As of or for the year ended
% change from
USD m
31.12.23
31.12.22
31.12.22
Results
Total revenues
(128)
(267)
(52)
Credit loss expense / (release)
1
0
Operating expenses
919
823
12
Operating profit / (loss) before tax
(1,048)
(1,091)
(4)
1 Starting with the third quarter of 2023,
Group Functions has been renamed Group Items,
and Non-core and Legacy Portfolio,
which was previously reported within Group
Functions, was included in Non-core
and
Legacy, which represents a separate reportable segment. Prior periods have been revised to reflect
these presentational changes.
2023 compared with 2022
Results
Loss before tax was USD 1,048m, compared
with a loss of USD 1,091m.
Income
from
Group
hedging
and
own
debt,
including
hedge
accounting
ineffectiveness,
was
net
positive
USD 2m,
compared with net negative
income of USD 471m.
Income related to centralized
Group Treasury risk
management was
positive USD 107m, compared with negative USD 41m
in 2022.
In addition,
2023 included integration-related expenses of USD 289m associated with the
acquisition of the Credit Suisse
Group, an increase of USD 273m in funding costs related to deferred tax assets and a USD 17m decrease in net gains on
properties held for sale.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet
50
Risk, capital, liquidity and
funding, and balance sheet
Management report
Audited information according to IFRS 7 and IAS 1
Risk and capital disclosures
provided in line with
the requirements of
IFRS 7,
Financial Instruments: Disclosures,
and IAS 1,
Presentation
of
Financial
Statements,
form
part
of
the
financial
statements
included
in
the
“Consolidated
financial
statements” section of
this report and
are audited by the
independent registered public
accounting firm Ernst
& Young
Ltd, Basel. This information is marked as “Audited” within
this section of the report.
Signposts
The
Audited |
signpost that is displayed at the beginning
of a section, table or chart indicates that
those items have been audited. A triangle
symbol –
p
indicates the end of the audited section, table
or chart.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
51
Risk management and control
Table of contents
52
53
54
55
55
58
58
59
62
77
85
88
88
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
52
Risk management and control
Overview of risks arising from our business activities
Key risks by business division and Group Items
Business divisions and Group Items
Key financial risks arising from business activities
Global Wealth Management
Credit risk
investors’ uncalled capital commitments,
and residential and commercial real estate, as well as from
derivatives trading.
Market risk
banking book related to Global Wealth Management
is transferred to and managed by Group Treasury.
Personal & Corporate Banking
Credit risk
lending, commodity trade finance, trade and
export finance, and lending to banks
and other regulated
clients, as well as a small amount of derivatives
trading activity.
Minimal contribution to
market risk
. Interest rate risk in the banking book related to
Personal
&
Corporate Banking is transferred to and managed
by Group Treasury.
Asset Management
Credit risk
market risk
management and performance fees and cause
heightened fund outflows, liquidity risk
and losses on our
seed capital and co-investments.
Small amounts of credit and market risk for on-balance
sheet items.
Investment Bank
Credit risk
trading and securities financing.
Market risk
Non-core and Legacy
Credit risk
market risk
and derivatives, as well as residual exposures to securitized
products.
Group Items
Credit
market risk
liquidity portfolios.
Structural risk arising from asset and liability management
and liquidity and funding risk (managed by
Group Treasury).
Non-financial risks
and information-security risks), legal risks and
reputational risks. These are an inevitable consequence
of being in business and can arise as a result of
our past
and current business activities across all business divisions
and Group Items.
›
Refer to “Risk categories” in this section for
more information about other financial and non-financial
risks relevant to UBS AG
Key risk developments
Upon legal close of the acquisition of the Credit Suisse Group by UBS Group, UBS has applied prudent risk management
practices to the material risks of the
combined organization, and continued to apply these practices at the
UBS AG entity
level. UBS AG’s risk
management and control
practices and frameworks
remained in line
with those of
the UBS Group.
UBS AG’s risk governance continued to operate along our three
lines of defense.
2023
was
a
challenging
year
for
the
global
economy
and
most
markets,
stage
3
net
expenses
of
USD 120m
were
recognized in a number of defaulted
positions across our business divisions and
a USD 0.5bn increase in credit-impaired
exposure to USD 3.0bn
was observed.
Overall,
we saw a
USD 48bn increase in
banking product exposure driven
by Group
Items
and
Personal
&
Corporate
Banking
while
exposure
in
Global
Wealth
Management
decreased.
Traded
product
exposures saw an increase
of USD 1.4bn across
our business divisions.
Market risk remained
at low levels, as
a result of
our continued focus on managing tail risks.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
53
Risk categories
UBS AG categorizes
the risk exposures of the business divisions
and Group Items in line with
the UBS Group as outlined
in the table below. The risk
appetite framework is designed to capture all risk categories.
›
Refer to “Risk appetite framework” in this
section for more information
Risk managed by
Independent
oversight by
Financial risks
Audited |
Credit risk:
the risk of loss resulting from the failure of a client or counterparty
to meet its
contractual obligations toward UBS AG.
This includes settlement risk, loan underwriting
risk and step-in
risk.
Settlement risk:
security versus cash) where we must deliver without
first being able to determine with certainty
that
we will receive the consideration.
Loan underwriting risk:
that are intended for further distribution.
Step-in risk:
entity that is facing stress in the absence of, or in
excess of, any contractual obligations to provide
such support.
p
Business divisions
Risk Control
Audited |
Market risk
market variables. Market variables include observable
variables, such as interest rates, foreign exchange
rates, equity prices, credit spreads and commodity (including
precious metal) prices, as well as variables
that may be unobservable or only indirectly observable,
such as volatilities and correlations. Market risk
includes issuer risk and investment risk.
Issuer risk:
the risk of loss that would occur if an issuer to
which we are exposed through tradable
securities or derivatives referencing the issuer was subject to
a credit-related event.
Investment risk:
p
Business divisions and
Group Treasury
Risk Control
Country risk:
default and also transfer risk, which involves
a country’s authorities preventing or restricting the
payment of an obligation, as well as systemic
risk events arising from country-specific political
or
macroeconomic developments.
Business divisions
Risk Control
Sustainability and climate risk:
change, natural capital, human rights, and
other environmental, social and governance
matters. Climate
risks can arise from either changing climate conditions
(physical risks) or from efforts to mitigate climate
change (transition risks). Sustainability and climate
risks may manifest as credit, market, liquidity,
business and non-financial risks for UBS AG,
resulting in potential adverse financial, liability
and
reputational impacts. These risks extend to the value
of investments and may also affect the value
of
collateral (e.g., real estate).
Business divisions
Risk Control
Treasury risk:
positions, as well as structural exposures including
pension risks.
Group Treasury
Risk Control
Audited |
Liquidity risk:
unexpected current and forecast cash flows and collateral
needs without affecting either daily
operations or the financial condition of the
firm.
p
Audited |
Funding risk:
the market on an unsecured (or even secured) basis at
an acceptable price to fund actual or
proposed commitments, i.e., the risk that UBS AG’s
funding capacity is not sufficient to support
the
firm’s current business and desired strategy.
p
Interest rate risk in the banking book:
the risk to the firm’s capital and earnings
arising from the
adverse effects of interest rate movements on the firm’s banking
book positions. The risk is
transferred from the originating business divisions, i.e.,
Global Wealth Management and Personal &
Corporate Banking,
to Group Treasury to risk manage this centrally and benefit from firm-wide
netting while leaving the business units
with margin management.
Structural foreign exchange risk:
exchange rates with an adverse translation
effect on capital held in currencies other than the
US dollar.
Pension risk:
from decreases in the fair value of assets held in defined
benefit pension funds and / or changes in
the value of defined benefit pension obligations
due to changes in actuarial assumptions (e.g.,
discount rate, life expectancy, rate of pension increase) and / or changes to
plan designs.
Group Treasury and
Human Resources
Risk Control
and Finance
Business risk:
and / or margins, to the extent they are not offset by a decrease
in expenses. For example, changes in
the competitive landscape, client behavior
or market conditions can potentially have a negative
impact.
Business divisions
Risk Control
and Finance
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
54
Risk managed by
Independent
oversight by
Non-financial risks
Compliance risk:
procedures, and the firm’s Code of Conduct and Ethics.
Business divisions
Group Compliance,
Regulatory &
Governance (GCRG)
Employment risk:
human resources policies governing employment
practices, discrimination, compensation and
employee-related taxes and benefits.
Human Resources
Conduct risk:
counterparties, undermines the integrity of the
financial system or impairs effective competition
to
the detriment of consumers.
GCRG
Financial crime risk:
financing, sanctions or embargo violations,
internal and external fraud,
bribery, and corruption).
Business divisions and
Financial Crime
Prevention
GCRG
Operational risk:
from external causes (deliberate, accidental
or natural).
Business divisions
GCRG
Cybersecurity and information security risk:
failure of IT hardware or software, or human error, leading to a material impact on confidentiality,
integrity or availability of UBS AG’s data or information
systems.
Business divisions and
the Group Operations
and Technology Office
GCRG
Model risk:
loss, biased business decisions, or reputational damage)
resulting from decisions based on incorrect /
inadequate or misused model outputs and
reports.
Model owner
Risk Control
Legal risk:
held liable for a breach of contractual or other legal
obligations; (iii) an inability or failure to enforce or
protect contractual rights or non-contractual rights
sufficiently to protect UBS AG’s interests; and
(iv) being party to a claim or investigated
by an external regulator or authority in respect
of any of the
above (and the risk of loss of attorney–client
privilege in the context of any such claim).
Business divisions
Legal
Reputational risk:
from the point of view of clients, shareholders, regulators,
employees or the general public, which
may
lead to potential financial loss and / or loss of
market share.
All businesses and
functions
All control functions
Top and emerging risks
The top and emerging risks disclosed below reflect those that we currently think have the potential to materialize within
one year and which could significantly affect UBS AG. Investors should also carefully review all information set out in the
“Risk factors”
section of
this report,
where
we discuss
these and
other material
risks that
we consider
could have
an
effect on our
ability to
execute our strategy
and may
affect our
business activities,
financial condition, results
of operations
and business prospects.
–
UBS AG remains watchful of
a range of geopolitical developments
and political changes in a
number of countries, as
well as
international tensions
arising from
the Russia–Ukraine
war, conflicts
in the
Middle East
and US–China
trade
relations. Geopolitical tensions will continue to create uncertainty and complicate the energy price outlook. UBS AG is
closely watching elections in several key markets in 2024.
–
Inflation
has abated
to
some
extent
in
major
Western
economies,
though
there
are
still
concerns
regarding
future
developments,
and central
banks’ monetary
policy is
in
the spotlight.
The potential
for “higher-for-longer”
interest
rates raises
the prospect
of a
global recession,
particularly as
the growth
of China’s
economy has
been muted.
This
combination of factors translates into a more uncertain and volatile
environment, which increases the risk of financial
market disruption.
–
UBS AG is exposed to a number of macroeconomic issues, as well as general market conditions. As noted in “Market,
credit
and
macroeconomic
risks”
in
the
“Risk
factors”
section
of
this
report,
these
external
pressures
may
have
a
significant adverse effect on
our business activities and
related financial results, primarily through
reduced margins and
revenues,
asset
impairments
and
other
valuation
adjustments.
Accordingly,
these
macroeconomic
factors
are
considered in the development of stress-testing scenari
os for our ongoing risk management activities.
–
UBS AG
is monitoring
the downturn
in the
commercial real
estate sector.
Adverse effects
on valuations
from higher
interest rates and structural decline in demand for office and retail space may trigger broader impacts given bank
and
non-bank lenders’ material balance sheet exposure to the
sector.
–
We are
exposed to
substantial changes
in the regulation
of our businesses
that could
have a
material adverse
effect
on our
business, as
discussed in
the “Regulatory
and legal
developments” section
of this
report and
in “Regulatory
and legal risks” in the “Risk factors” section of this report.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
55
–
As a
global financial
services firm,
we are
subject to
many different
legal, tax
and regulatory
regimes and
extensive
regulatory oversight.
We are
exposed to
significant liability
risk, and we
are subject
to various
claims, disputes,
legal
proceedings and government
investigations, as noted
in “Regulatory and
legal risks” in the
“Risk factors” section
of
this report. Information about litigation, regulatory and
similar matters we consider significant is
disclosed in “Note 17
Provisions and contingent liabilities” in the “Consolidated
financial statements” section of this report.
–
Global
geopolitical
trends
increase
the
likelihood
of
external
state-driven
cyber
activity.
Alongside
a
general
trend
toward more sophisticated
forms of ransomware
and other cyber threats,
there is a risk of
business disruption or
the
corruption
or
loss
of
data.
Additionally,
as
a
result
of
the
dynamic
and
material
nature
of
recent
geopolitical
and
environmental events and the operational complexity
of all our businesses, we are continually
exposed to operational
resilience scenarios such as process error, failed execution,
system failures and fraud.
–
Conduct risks are inherent
in our businesses. Achieving
fair outcomes for our
clients, upholding market
integrity and
cultivating the highest standards
of employee conduct are
of critical importance to us.
Management of conduct risks
is an integral part of our risk management framework.
–
Financial crime
(including
money laundering,
terrorist
financing,
sanctions
violations,
fraud,
bribery
and corruption)
presents significant risk. Heightened regulatory
expectations and attention require investment
in people and systems,
while
emerging
technologies
and
changing
geopolitical
risks
further
increase
the
complexity
of
identifying
and
preventing financial crime.
›
Refer to “Non-financial risk” in this section
and “Strategy, management and operational risks” in the “Risk factors”
section of this
report for more information
–
Sustainability and climate
risks continue to be
in the focus of
regulators and stakeholders,
with further emphasis
put
on measurement
of nature-related
risk and management
of greenwashing
risks in 2023.
To address
these emerging
risks, UBS has enhanced its nature-related risk methodology and
established guidelines for sustainable lending, bonds
and greenhouse gas emissions trading to address potential
greenwashing risks.
›
Refer to “Sustainability and climate risk” in the
“Risk management and control” section of the UBS
Group Annual Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for more information
›
Refer to the UBS Group Sustainability Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for a full description
of our sustainability and climate risk policy
framework
–
In
addition,
industry
guidelines
and
regulations
are
emerging
simultaneously
in
various
jurisdictions,
leading
to
an
increased risk of divergence, which in turn increases the risk that
UBS may not comply with all relevant regulations.
›
section of the UBS Group Annual Report 2023, available
under “Annual reporting” at
ubs.com/investors
–
New risks continue to emerge. For example, client demand for distributed ledger technology, blockchain-based
assets
and virtual
currencies creates
new risks,
to which
we currently
have limited
exposure and
for which
relevant control
frameworks are continuously enhanced and implemented.
Risk governance
The risk
governance of
UBS AG
is modeled
on that
of UBS
Group AG,
with the
same three
lines of defense
and equal
governance structure in terms of key roles and responsibility for
risk management.
›
Refer to “Risk governance” in the “Risk
management and control” section of the UBS Group Annual Report
2023, available under
“Annual reporting” at
ubs.com/investors,
Risk appetite framework
UBS AG manages
its risk
appetite in
line with
the UBS Group
framework, covering
financial and
non-financial
risk types,
via
a complementary set of qualitative and quantitative risk appetite statements.
The UBS Group framework is reviewed and
recalibrated
annually and presented
to the Board of
Directors (the
BoD) for approval.
Our risk
appetite is
defined at
the aggregate
Group level
and reflects
the risk
that we
are willing
to accept
or wish
to
avoid. It is set via complementary qualitative and quantitative risk appetite statements defined at a firm-wide level and is
embedded throughout our business divisions and legal entities by
Group, business division and legal entity policies, limits
and authorities. Our risk appetite is reviewed and recalibrated annually, with the aim of ensuring that risk-taking at every
level of
the organization
is in
line with
our strategic
priorities, our
capital and
liquidity plans,
our
Pillars, Principles
and
Behaviors
, and minimum regulatory
requirements. The
“Risk appetite framework”
chart below shows the
key elements
of the framework, which is described in detail in this section.
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56
Qualitative
risk
appetite
statements
aim
to
ensure
we
maintain
the
desired
risk
culture.
Quantitative
risk
appetite
objectives are
designed
to enhance
the Group’s,
including UBS
AG’s, resilience
against the
effects
of potential
severe
adverse
economic
or
geopolitical
events.
These
risk
appetite
objectives
cover
minimum
capital
and
leverage
ratios,
solvency,
earnings,
liquidity
and
funding,
and
are
subject
to
periodic
review,
including
the
yearly
business
planning
process. These
objectives are
complemented by
a standardized
set of
quantitative firm-wide
non-financial risk
appetite
objectives. Non-financial risk events exceeding
predetermined risk tolerances, expressed as
percentages of UBS AG’s
total
operating income, must be escalated as per the firm-wide
escalation framework.
The quantitative
risk appetite
objectives are
supported by
a comprehensive
suite of
risk limits
set at
a portfolio
level to
monitor specific portfolios and to identify potential risk concentrations.
Our risk
appetite framework
is governed
by a
single overarching policy
and conforms
to the
Financial Stability Board’s
Principles
for an Effective
Risk Appetite
Framework.
Risk principles and risk culture
Maintaining
a
strong
risk
culture
is a
prerequisite
for
success
in today’s
highly
complex
operating
environment
and a
source of sustainable competitive advantage.
Our risk appetite
framework combines
all the important
elements of our
risk culture,
expressed in our
Pillars, Principles
and
Behaviors
,
our
risk
management
and
control
principles,
our
Code
of
Conduct
and
Ethics,
and
our
Total
Reward
Principles. They
help to
create a
solid foundation
for promoting
risk awareness,
leading to
appropriate risk-taking
and
the establishing of robust
risk management and control processes. These
principles are supported by
a range of initiatives
covering employees at
all levels, for
example the
UBS House View
on Leadership
, which is
a set of
explicit expectations
that establishes consistent leadership standards across UBS, and our Principles of
Good Supervision, which establish clear
expectations of
managers and
employees regarding supervisory
responsibilities, specifically: to
take responsibility;
to know
and organize their business; to know their employees and what they do; to create a good risk culture; and to respond to
and resolve issues.
›
Refer to “Employees” in the “How we create value
for our stakeholders” section in the UBS Group Annual
Report 2023 for more
information about our Pillars, Principles and Behaviors
›
Refer to the Code of Conduct and Ethics of
UBS at
ubs.com/code
Risk management and control principles
Protection of financial strength
Protecting UBS AG’s financial strength by controlling our risk
exposure and avoiding potential risk
concentrations at individual exposure levels,
at specific portfolio levels and at an aggregate firm-wide
level across all risk types.
Protection of reputation
Protecting our reputation through a sound risk culture characterized
by a holistic and integrated view of
risk, performance and reward, and through full compliance
with our standards and principles, particularly
our Code of Conduct and Ethics.
Business management accountability
Maintaining management accountability, whereby business management owns
all risks assumed
throughout UBS AG and is responsible for the continuous
and active management of all risk exposures
to
provide for balanced risk and return.
Independent controls
Independent control functions that monitor the
effectiveness of the businesses’ risk management
and
oversee risk-taking activities.
Risk disclosure
Disclosure of risks to senior management, the BoD,
investors, regulators, credit rating agencies
and other
stakeholders with an appropriate level of comprehensiveness
and transparency.
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Whistleblowing policies and procedures exist to
encourage an environment where staff are comfortable raising
concerns.
There
are
multiple channels
via which
individuals
may,
either
openly or
anonymously,
escalate
suspected
breaches
of
laws, regulations,
rules and other
legal requirements,
our Code of
Conduct and Ethics,
policies or relevant
professional
standards.
We
are
committed
to
ensuring
there
is
appropriate
training
and
communication
to
staff
and
legal
entity
representatives, including information abo
ut new regulatory requirements.
Mandatory training programs
cover various compliance-related
and risk-related topics,
including operational risk
and anti-
money laundering. Additional specialized training is
provided depending on employees’ specific roles
and responsibilities,
e.g., credit risk and market risk training for those working
in trading areas.
Quantitative risk appetite objectives
Our
quantitative
risk
appetite
objectives
aim
to
ensure
that
our
aggregate
risk
exposure
remains
within
desired
risk
capacity, based on capital
and business
plans. The
specific definition of
risk capacity
for each
objective is
aimed at
ensuring
we
have
sufficient
capital,
earnings,
funding
and
liquidity
to
protect
our
businesses
and
exceed
minimum
regulatory
requirements under a severe stress event. The risk appetite
objectives are evaluated during the annual business planning
process and approved by
the BoD. The comparison of
risk exposure with risk
capacity is a key consideration in
decisions
on potential adjustments to the business strategy,
risk profile,
and the level of capital returns to shareholders.
In the annual
business planning process
,
UBS’s business strategy
,
including that of
UBS AG, is
reviewed, the risk
profile
that our operations and activities result in is assessed,
and that risk profile is stressed. We use both scenario-based
stress
tests and economic capital risk measurement techniques to assess the effects of severe stress events at a firm-wide level.
These complementary frameworks capture exposures to material
risks across our business divisions and Group Item
s.
For 2023, the following risk appetite objectives were applied to
UBS AG.
›
Refer to “Risk measurement” in this section for
more information about our stress-testing and economic capital
measures
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Our risk
capacity is
underpinned by performance
targets and capital
guidance as per
our business
plan. When
determining
our risk capacity in
case of a severe stress event,
we estimate projected earnings under
stress, factoring in lower expected
income and
expenses. We
also consider
capital impacts
under stress
from deferred
tax assets,
pension plan
assets and
liabilities, and accruals for capital returns to shareholders.
Risk appetite objectives define the aggregate risk exposure acceptable
at the firm-wide level, given our risk capacity. The
maximum acceptable risk
exposure is
supported by
a full set
of risk
limits, which
are cascaded to
businesses and portfolios.
These limits aim to ensure that our risks remain in line with
risk appetite.
Risk appetite statements at the business division level are derived from
the firm-wide risk appetite. They may also include
division-specific strategic goals
related to that
division’s activities and
risks. Risk
appetite statements are
also set
for certain
legal entities,
which must
be consistent
with the
firm-wide risk
appetite framework
and approved
in accordance
with
Group and legal entity regulations. Differences may exist that reflect the specific nature, size, complexity and regulations
applicable to the relevant legal entity.
Internal risk reporting
Comprehensive
and transparent
reporting of
risks is
central to
our risk
governance framework’s
control and
oversight
responsibilities and required by
our risk management
and control principles.
Accordingly, risks are reported at a
frequency
and level
of detail
commensurate
with the
extent
and
variability of
the
risk and
the
needs of
the various
governance
bodies, regulators and risk authority holders.
The
UBS AG
Risk
Report
(formerly
the
Group
Risk
Report)
provides
a
detailed
qualitative
and
quantitative
monthly
overview of developments in
financial and non-financial risks
at the firm-wide
level. The UBS AG Risk
Report is distributed
internally to the BoD and the
Executive Board (EB), and senior
members of Risk Control and
Group Internal Audit (GIA).
Risk
reports
are
also
produced
for
significant
UBS AG
entities
(entities
subject
to
enhanced
standards
of
corporate
governance) and significant branches.
Granular divisional risk reports are
provided to the respective
business division CROs and business
division Presidents. This
monthly
reporting
is
supplemented
with
daily
or weekly
reports,
at
various
levels
of
granularity,
covering
market
and
credit risks for the
business divisions to enable
risk officers and senior
management to monitor
and control the Group’s
risk profile, including that of UBS AG.
Our internal risk reporting
covers financial and non-financial
risks and is supported by risk data
and measurement systems
that are
also used
for external
disclosure
and regulatory
reporting.
Dedicated units
within Risk
Control assume
responsibility
for measurement, analysis and reporting of risk
and for overseeing the
quality and integrity of risk-related data. Our risk
data and measurement
systems are subject
to periodic review
by GIA, following
a risk-based audit
approach.
Model risk management
Introduction
We rely
on models to
inform risk management
and control
decisions, to measure
risks or exposures,
value instruments
or positions, conduct
stress testing, assess
adequacy of
capital, and manage
clients’ assets and
our own assets.
Models
may also be
used to measure
and monitor compliance
with rules and
regulations, for
surveillance activities,
or to meet
financial or regulatory reporting requirements.
Model risk
is defined
as the
risk of
adverse consequences
(e.g., financial
losses or
reputational damage)
resulting from
incorrect or misused models.
Model governance framework
Our model governance
framework establishes requirements for
identifying, measuring, monitoring, reporting,
controlling
and mitigating model risk. All
the models that we use
are subject to governance and
controls throughout their life cycles,
with rigor,
depth and
frequency determined
by the
model’s materiality
and complexity.
This is designed
to ensure
that
risks arising from model use are identified, understood, managed, monitored, controlled
and reported on both a model-
specific and an
aggregated level. Before they can
be granted approval
for use, all
our models are independently
validated.
Once validated and approved for use,
a model is subject to ongoing model
monitoring and regular model confirmation,
ensuring that the model is only used if it continues
to be found fit for purpose. All models
are subject to periodic model
re-validation.
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Our
model
risk
governance
framework
follows
our
overarching
risk
governance
framework,
with
the
three
lines
of
defense (LoD) assigned as follows.
–
First LoD:
individuals responsible
for development,
maintenance and
appropriate use
of the
models, within
business
units and Group functions.
–
Second LoD: individuals responsible
for independent review of
and effective challenge to
the models, the Model
Risk
Management & Control function headed by the Chief Model
Risk Officer.
–
Third LoD: Group Internal Audit
An important difference
as compared
with how LoD
are usually
defined in financial
and non-financial
risk is that
some
models are owned by traditionally second LoD functions,
such as Risk Control, Finance or Compliance.
Model risk appetite framework and statement
The model risk appetite framework sets out the
model risk appetite statement, defines the relevant
metrics and lays out
how appropriate adherence is assessed.
Model oversight
Model
oversight
committees
and
forums
ensure
that
model
risk
is
overseen
at
different
levels
of
the
organization,
appropriate model risk management and control
actions are taken and, where
necessary,
escalated to the next level.
The Group Model Governance Committee is our most
senior oversight and escalation body for
all models in scope of our
model governance framework. It is co-chaired by the Group CRO
and the Group CFO and is responsible for: (i) reviewing
and approving changes to the framework;
(ii) approving the model risk appetite statement;
(iii) overseeing adherence to
the UBS model risk governance framework; and (iv) monitoring
model risk at a firm-wide level.
Risk measurement
Audited |
We apply a
variety of methodologies
and measurements
to quantify the
risks of our
portfolios and potential
risk
concentrations. Risks that are
not fully reflected within standard
measures are subject to
additional controls, which may
include
preapproval
of
specific
transactions
and
the
application
of
specific
restrictions.
Models
to
quantify
risk
are
generally developed by dedicated units within control
functions and are subject to independent validation.
p
›
Refer to “Credit risk,” “Market risk” and “Non-financial
risk” in this section for more information about model
confirmation
procedures
The text below describes the
scenario-based stress testing and
economic capital measures of
UBS AG on a consolidated
basis during 2023.
Stress testing
We perform stress testing to
estimate losses that could
result from extreme yet plausible macroeconomic and
geopolitical
stress events to
identify, better understand and
manage our potential
vulnerabilities and risk
concentrations. Stress testing
has a
key
role
in
our
limits
framework
at the
firm-wide,
business
division,
legal entity
and portfolio
levels.
Stress-test
results are
regularly reported
to the
BoD and
the EB.
As described
in “Risk
appetite framework,”
stress testing,
along
with economic capital measures, has a central role
in our risk appetite and business planning processes.
Our stress-testing
framework has
three pillars:
(i) combined stress
tests; (ii) an
extensive set
of portfolio-
and risk-type-
specific stress tests; and (iii) reverse stress testing.
The
combined stress-testing (CST)
result
from
various
potential
global
systemic
events.
The
framework
captures
all
material
risks,
as
covered
in
“Risk
categories.” Scenarios
are forward-looking
and encompass
macroeconomic and
geopolitical stress
events calibrated
to
different
levels
of
severity.
We
implement
each
scenario
through
the
expected
evolution
of
market
indicators
and
economic variables under
that scenario
and then estimate
the overall loss
and capital
implications were the
scenario to
occur. Following the
existing UBS AG scenario
governance, at least
once a year,
the Risk Committee
approves the most
relevant
scenario,
known
as
the
binding
scenario,
for
use
as
the
main
scenario
for
regular
CST
reporting
and
for
monitoring
risk
exposure
against
our
minimum
capital,
earnings
and
leverage
ratio
objectives
in
our
risk
appetite
framework.
We provide
detailed stress
loss analyses
to the
Swiss Financial
Market Supervisory
Authority (FINMA)
and regulators
of
our legal entities in accordance with their requirements.
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The Enterprise-wide Stress
Forum (the
ESF) aims
to ensure the
consistency and adequacy
of the
assumptions and scenarios
used for
firm-wide
stress
measures.
As part
of its
responsibilities,
the ESF,
with input
from the
Think Tank,
a panel
of
senior representatives
from the
business divisions,
Risk Control
and Economic
Research, seeks
to ensure that
the set of
stress
scenarios
adequately
reflects
current
and
potential
developments
in
the
macroeconomic
and
geopolitical
environment, current and planned business activities,
and actual or potential risk
concentrations and vulnerabilities in our
portfolios.
Each
scenario
captures
a
wide
range
of macroeconomic
variables,
including
GDP,
equity prices,
interest
rates,
foreign
exchange
rates,
commodity
prices,
property
prices
and
unemployment.
We
use
assumed
changes
in
these
macroeconomic and market variables in each scenario to stress the key risk drivers of our portfolios. We also capture the
business risk resulting from lower fee, interest and trading income net of lower
expenses. These effects are measured for
all businesses and
material risk types
to calculate the
aggregate estimated effect
of the scenario on
profit or loss,
other
comprehensive income, risk-weighted assets, the leverage ratio denominator and, ultimately, capital and leverage
ratios.
The assumed
changes in
macroeconomic variables
are updated
periodically to
account for
changes in
the current
and
possible future market environment.
In 2023,
the binding
scenario for
CST was
the internal
stagflationary geopolitical
crisis scenario.
This scenario
assumes
that a geopolitical event leads
to economic regionalization and fears
of prolonged stagflation. Central banks signal
a firm
commitment
to
price
stability
and
continue
to
tighten
monetary
policy,
triggering
a
broad
rise
in
interest
rates
and
impacting economic activity and asset values.
As part of the CST framework, we routinely monitored three
additional stress scenarios throughout 2023:
–
The
global crisis
Combined with political, solvency and liquidity concerns, this results in a sharp sell-off
of emerging markets sovereign
debt and some emerging markets
default. The macroeconomic and market impacts
amplify concerns about peripheral
European sovereign debt, causing Greece and Cyprus to
default.
–
The
global depression
concerns
around
emerging
markets
sovereign
debt,
causing
several
large
emerging
markets
to
default.
Several
European
economies
also
default,
and
some
leave
the
Eurozone.
A
negative
feedback
loop
between
collapsing
demand,
declining
asset
values
and
commodity
prices,
and
disruption
in
the
banking
system
leads
to
a
deep
and
prolonged recession across the globe.
–
The
US
monetary
crisis
scenario
explores
a
loss
of
confidence
in
the
US,
which
leads
to
a
sell-off
of
US
dollar-
denominated assets,
sparking an
abrupt and
substantial depreciation
of the
US dollar.
The US
economy is
hit hard,
financial markets enter a period of high volatility and other industrialized countries replicate the cyclical pattern of the
US. Regional
inflation
trends
diverge
as the
US experiences
significant
inflationary
pressures
while
other
developed
markets experience deflation.
Portfolio-specific stress tests
derived
from
data
on
past
events,
but
also
include
forward-looking
elements
(e.g.,
we
derive
the
expected
market
movements in our liquidity-adjusted stress metric using a combination
of historical market behavior, based on an analysis
of historical events, and
forward-looking analysis, including consideration of defined scenarios
that have never occurred).
Results
of
portfolio-specific
stress
tests
may
be
subject
to
limits
to
explicitly
control
risk-taking
or
may
be
monitored
without limits to identify vulnerabilities.
Reverse stress testing
shortfall
or
a
breach
of
minimum
capital
ratios)
and
works
backward
to
identify
macroeconomic
scenarios
and
/
or
idiosyncratic
events
that
could
result
in
such
an
outcome.
As
such,
reverse
stress
testing
is
intended
to
complement
scenario-based stress
tests by
assuming “what
if” outcomes
that could
extend beyond
the range
normally considered,
and thereby potentially challenge assumptions regarding
severity and plausibility.
We also routinely
analyze the effect of
increases or decreases in
interest rates and changes
in the structure of
yield curves.
Within Group Treasury, we
also perform stress testing
to determine the
optimal asset and liability
structure, enabling us
to maintain an appropriately balanced liquidity and funding position under various scenarios. These scenarios differ from
those
outlined
above,
because
they
focus
on
specific
situations
that
could
generate
liquidity
and
funding
stress,
as
opposed to the scenarios used in the CST framework,
which focus on the effect on profit or loss and capital.
›
Refer to “Credit risk” and “Market risk” in this section
for more information about stress loss measures
›
Refer to the “Capital, liquidity and funding,
and balance sheet” section of this report for more information
about stress testing
›
Refer to “Note 19 Expected credit loss measurement”
in the “Consolidated financial statements” section
of this report for more
information about scenarios used for expected
credit loss measurement
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61
Economic capital measures
We complement the
scenario-based CST measures with
economic capital stress
measures to calculate
and aggregate risks
using statistical techniques to derive stress events at chosen
confidence levels.
This framework
is
used
to derive
a
loss
distribution,
considering
effects
on
both
income
and
expenses,
based
on
the
simulation of historically observed financial and economic risk factors in combination with the firm’s actual earnings and
relevant risk exposures. From that, we
determine earnings-at-risk (EaR), measuring the potential shortfall
in earnings (i.e.,
the deviation from forecast
earnings) at a 95%
confidence level and
evaluated over a
one-year horizon. EaR
is used for
the assessment of the earnings objectives in our risk appetite
framework.
We
extend
the
EaR
measure,
incorporating
the
effects
of
gains
and
losses
recognized
through
other
comprehensive
income, to
derive a
distribution of potential
effects of
stress events on
common equity tier 1
capital. From
this distribution,
we derive our capital-at-risk (CaR) buffer measure
at a 95% confidence level to assess our capital
and leverage ratio risk
appetite objectives, and derive our
CaR solvency measure at a
99.9% confidence level to
assess our solvency risk
appetite
objective.
We use the CaR solvency measure
as a basis for deriving the
contributions of the business divisions
to risk-based capital
(RBC). RBC measures the potential capital impairment from
an extreme stress event at a 99.9% confidence level.
Portfolio and position limits
UBS maintains
a comprehensive
set of
risk limits
across its
major risk
portfolios. These
portfolio limits
are set
based on
our risk appetite and periodically reviewed and adjusted
as part of the business planning process.
Firm-wide
stress and
statistical metrics
are complemented
by more
granular
portfolio
and position
limits, triggers
and
targets.
Combining
these
measures
provides
a
comprehensive
framework
for
control
of
the
key
risks
of
our
business
divisions, as well as significant legal entities.
UBS AG applies limits to a variety
of exposures at the portfolio level, using statistical
and stress-based measures, such as
value-at-risk,
liquidity-adjusted
stress,
loan
underwriting
limits,
economic
value
sensitivity
and
portfolio
default
simulations for
loan books.
These are
complemented with
a set
of controls for
net interest
income sensitivity,
mark-to-
market losses on
available-for-sale portfolios, and the
effect of foreign exchange
movements on capital and
capital ratios.
Portfolio measures are
supplemented with counterparty-
and position-level controls.
Risk measures for position
controls
are
based
on
market
risk
sensitivities
and
counterparty-level
credit
risk
exposures.
Market
risk
sensitivities
include
sensitivities to changes in general market
risk factors (e.g., equity indices, foreign exchange
rates and interest rates) and
sensitivities
to
issuer-specific
factors
(e.g.,
changes
in
an
issuer’s
credit
spread
or default
risk).
We
monitor
numerous
market
and
treasury
risk
controls
on
a
daily
basis.
Counterparty
measures
capture
the
current
and
potential
future
exposure to an individual counterparty, considering collateral
and legally enforceable netting agreements.
›
Refer to “Credit risk” in this section for more information about
counterparty limits
›
Refer to “Risk appetite framework” in this section
for more information about the risk appetite framework
Risk concentrations
Audited |
Risk concentrations may exist where one or several positions within
or across different
risk categories could result
in
significant
losses
relative
to
UBS
AG’s
financial
strength.
Identifying
such
risk
concentrations
and
assessing
their
potential impact is a critical component of our risk management
and control process.
For financial risks, we consider a number of elements, such
as shared characteristics of positions, the size of the portfolio
and the sensitivity of positions to changes in the underlying risk factors. Also
important in our assessment is the liquidity
of the markets
where the positions
are traded,
as well as
the availability and
effectiveness of hedges
or other potential
risk-mitigating factors. This includes an
assessment of, for example, the
provider of the hedge and
market liquidity where
the hedge might be traded. Particular
attention is given to identification of
wrong-way risk and risk on risk.
Wrong-way
risk is defined as a positive correlation between the size of the exposure and the likelihood of a loss. Risk on risk is when
a position and its risk mitigation can be impacted by the same
event.
For non-financial risks, risk concentrations may result from, for example, a single operational risk issue that is large on its
own (i.e., it has
the potential to
produce a single high-impact
loss or a number
of losses that together
are high impact)
or related risk issues that may link together to create
a high impact.
Risk
concentrations
are
subject
to
increased
oversight
by
Group
Risk
Control
and
Group
Compliance,
Regulatory
&
Governance, and assessed
to determine whether they
should be reduced
or mitigated, depending on
the available means
to do
so. It is
possible that
material losses
could occur
on financial
or non-financial
risks, particularly
if the
correlations
that emerge in a stressed environment differ markedly from those
envisaged by risk models.
p
›
Refer to “Credit risk” and “Market risk” in this
section for more information about the composition
of our portfolios
›
Refer to the “Risk factors”
section of this report for more information
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
62
Credit risk
Audited |
Main sources of credit risk
–
Global Wealth Management credit risk
arises from collateralized lending primarily against
securities, private equity and
hedge fund
interest, investors’
uncalled capital
commitments, and
residential and
commercial real
estate, as
well as
from derivatives trading.
–
A substantial
portion
of lending
exposure arises
from Personal
& Corporate
Banking, which
offers mortgage
loans,
secured
mainly
by
owner-occupied
properties
and
income-producing
real
estate,
as
well
as
corporate
loans,
and
therefore depends on the performance of the Swiss economy and
real estate market.
–
The
Investment
Bank’s
credit
exposure
arises
mainly
from
lending,
derivatives
trading
and
securities
financing.
Derivatives trading and securities financing are
mainly investment grade. Loan underwriting activity
can be lower rated
and give rise to temporary concentrated exposure.
–
Credit risk
within Non-core
and Legacy
relates to
exposures in
auction rate
preferred securities,
public finance
loans
and derivatives, and residual exposures to securitized products.
p
Credit loss expense / release
Total net credit loss expenses were USD
143m in 2023, reflecting net credit loss expenses of USD 23m related to stage 1
and 2 positions and net credit loss expenses of USD
120m related to credit-impaired
(stage 3) positions.
Stage 3
net
expenses
of
USD 120m
were
recognized
across
a
number
of
defaulted
positions,
with
net
expenses
of
USD 56m
in
the
Investment
Bank,
USD 37m
in
Personal
&
Corporate
Banking
and
USD 27m
in
Global
Wealth
Management.
›
Refer to “Note 1 Summary of material accounting
policies,” “Note 9 Financial assets at amortized
cost and other positions in scope
of expected credit loss measurement” and “Note 19 Expected
credit loss measurement” in the “Consolidated financial
statements”
section of this report for more information about IFRS 9 and
expected credit losses
Credit loss expense / (release)
Performing positions
Credit-impaired positions
USD m
Stages 1 and 2
Stage 3
Total
For the year ended 31.12.23
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.22
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.21
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
1
Total
1 Starting with the third quarter of 2023, Non-core and Legacy became a separate reportable segment and Group Functions has been renamed Group Items. Prior periods have been restated to reflect these changes.
Audited |
Overview of measurement, monitoring and management
techniques
–
Credit risk
from transactions
with individual
counterparties
is based
on our
estimates of
probability of
default (PD),
exposure at default (EAD) and loss given default (LGD). Limits are established for individual counterparties and groups
of
related
counterparties
covering
banking
and
traded
products,
and
for
settlement
amounts.
Risk
authorities
are
approved by the Board of Directors and
are delegated to the Group CEO, the
Group Chief Risk Officer (the CRO)
and
divisional CROs, based on risk exposure amounts, internal credit rating
and potential for losses.
–
Limits apply not only to the current outstanding
amount but also to contingent commitments and the potential future
exposure of traded products.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
63
–
The Investment Bank monitoring, measurement and limit framework distinguishes between
exposures intended to be
held to maturity (take-and-hold exposures) and those intended
for distribution or risk transfer (temporary exposures).
–
We use models to derive portfolio credit risk measures of expected loss, statistical loss and stress loss at firm-wide and
business division levels, and to establish portfolio limits.
–
Credit risk concentrations can arise if clients are engaged
in similar activities, located in the same geographical
region
or have
comparable economic
characteristics,
e.g., if
their ability
to meet
contractual obligations
would be
similarly
affected by changes in economic, political or other conditions. To avoid credit risk concentrations, we establish limits /
operational
controls
that
constrain
risk
concentrations
at
portfolio,
sub-portfolio
or
counterparty
levels
for
sector
exposure, country risk and specific product exposures.
p
Credit risk profile of UBS AG
The exposures
detailed in
this section
are based
on management’s
view of
credit risk,
which differs
in certain
respects
from the ECL measurement requirements
of IFRS Accounting Standards.
Internally,
credit
risk
exposures
are
put
into
two
broad
categories:
banking
products
and
traded
products.
Banking
products include drawn loans,
guarantees and loan commitments,
amounts due from banks,
balances at central banks,
and other
financial assets at
amortized cost. Traded
products include over-the-counter (OTC)
derivatives, exchange-traded
derivatives
(ETDs)
and
securities
financing
transactions
(SFTs),
consisting
of
securities
borrowing
and
lending,
and
repurchase and reverse repurchase agreements.
Banking and traded products exposure in our business divisions and Group Items
31.12.23
USD m
Global
Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core
and Legacy
Group
Items
Total
Banking products
1,2
Gross exposure
of which: loans and advances to customers (on-balance sheet)
of which: guarantees and loan commitments (off-balance sheet)
Traded products
2,3
Gross exposure
of which: over-the-counter derivatives
of which: securities financing transactions
of which: exchange-traded derivatives
Other credit lines, gross
4
Total credit-impaired exposure, gross (stage 3)
1
Total allowances and provisions for expected credit losses
of which: stage 1
of which: stage 2
of which: stage 3
31.12.22
USD m
Global
Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core
and Legacy
Group
Items
Total
Banking products
1,2
Gross exposure
of which: loans and advances to customers (on-balance sheet)
of which: guarantees and loan commitments (off-balance sheet)
Traded products
2,3
Gross exposure
of which: over-the-counter derivatives
of which: securities financing transactions
of which: exchange-traded derivatives
Other credit lines, gross
4
Total credit-impaired exposure, gross (stage 3)
1
Total allowances and provisions for expected credit losses
of which: stage 1
of which: stage 2
of which: stage 3
1 IFRS 9 gross exposure
for banking products includes the following
financial assets in scope of expected
credit loss measurement: balances at central banks, amounts
due from banks, loans and advances to
customers,
other financial assets at amortized
cost, guarantees and irrevocable loan commitments.
2 Internal management view of
credit risk, which differs in
certain respects from IFRS Accounting
Standards.
3 As counterparty
risk for traded products
is managed at counterparty
level, no further split
between exposures in
the Investment Bank, Non-core
and Legacy, and
Group Items is provided.
4 Unconditionally revocable
committed
credit lines.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
64
Banking products
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report for
more information about our accounting policy for allowances
and provisions for ECL
›
Refer to “Note 9 Financial assets at amortized
cost and other positions in scope of expected credit
loss measurement” and
“Note 19 Expected credit loss measurement” in the “Consolidated
financial statements” section of this report for more
information about ECL measurement requirements under IFRS Accounting
Standards
›
Refer to “Note 13 Other assets” in the “Consolidated
financial statements” section of this report for
more details
Global Wealth Management
Gross banking products exposure
within Global Wealth Management decreased
by USD 20bn to USD 315bn.
Our Global
Wealth Management
loan portfolio
is mainly
secured
by securities
(Lombard loans)
and by
residential
real estate.
Most of our USD
139bn of Lombard
loans, including
traded products
collateralized
by securities,
were of high quality,
with
91% rated as investment grade based
on our internal ratings.
Moreover, Lombard loans
are typically uncommitted,
short-
term in nature
and can be canceled
immediately if
the collateral
quality deteriorates
and margin calls
are not met. Lending
values
in the
Lombard
book
are
derived
by
applying
discounts
to the
pledged
collateral’s
market
value
in
line
with a
possible adverse change
in market value
over a given close
-out period and
confidence level. Less
liquid or more
volatile
collateral will typically
have larger haircuts.
In 2023,
the Lombard
book, including
traded
products,
decreased
approximately
10%,
mainly driven by the US,
from a larger amount
of clients paying down
as a result of the repricing
of loans at current
rates,
and Asia Pacific,
where deleveraging
already started
in the second half
of 2021 and had
slowed by the end
of 2023.
The share
of non-standard
Lombard loans,
for example
those with
less liquid
or concentrated
collateral,
slightly
increased
to
7% from 5% of
the total Lombard
book.
The mortgage
book
(residential
and commercial
real
estate)
increased
by approximately
9%, mainly
driven
by higher
volumes
of mortgage
loans within
the Swiss and
the US residential
and commercial
real estate portfolios.
Other financings
represent approximately
8% of the total banking
products exposures
and are consolidated
in a corporate
and other
portfolio
that increased
17% in 2023,
mainly through
the private
equity subscription
facilities portfolio
in the US.
›
Refer to “Lending secured by real estate” and “Lombard lending”
in this section for further information on these types
of lending
Collateralization of Loans and advances to customers
1
Global Wealth Management
Personal & Corporate Banking
USD m, except where indicated
31.12.23
31.12.22
31.12.23
31.12.22
Secured by collateral
Residential real estate
Commercial / industrial real estate
Cash
Equity and debt instruments
Other collateral
2
Subject to guarantees
Uncollateralized and not subject to guarantees
Total loans and advances to customers, gross
Allowances
Total loans and advances to customers, net of allowances
Collateralized loans and advances to customers in % of total loans
and advances to customers, gross (%)
1 Collateral arrangements
generally incorporate a
range of collateral,
including cash, securities,
real estate and other
collateral. For
the purpose of this
disclosure, UBS applies
a risk-based approach
that generally
prioritizes collateral according to
its liquidity profile.
2 Includes but is not
limited to life insurance
contracts, rights in
respect of subscription or
capital commitments from fund
partners, inventory,
gold and other
commodities.
Personal & Corporate Banking
Gross
banking
products
exposure
within
Personal
&
Corporate
Banking
increased
to
USD 255bn,
compared
with
USD 237bn in 2022. Net banking products
exposure (excluding exposure
reallocated from Group
Treasury)
increased to
USD 205bn
(CHF 173bn),
of
which
approximately
65%
was
classified
as
investment
grade,
broadly
unchanged
from
2022. Around
48% of
the exposure
is categorized
in the
lowest LGD
bucket, i.e.,
0–25%, unchanged
compared
with
2022.
Personal &
Corporate
Banking’s
gross loan
portfolio
was USD 174bn
(CHF 147bn)
compared with
USD 155bn (CHF
143bn)
in 2022.
This portfolio
is predominantly
denominated
in Swiss francs
and the increase
in US dollar
terms was largely
due to
the effect
of the Swiss
franc appreciating.
As of 31
December 2023,
90% of this
portfolio
was secured
by collateral,
mainly
residential and
commercial property. Of the
total unsecured
amount, 86%
related to cash
flow-based lending
to corporate
counterparties
and 3% related to lending to public authorities. Based on our internal
ratings, 57% of the unsecured loan
portfolio was
rated as investment
grade, compared
with 53% in 2022.
Our Swiss
corporate
banking products
take-and-hold
portfolio,
which was
USD 38bn
(CHF 32bn)
and increased
by USD
2bn
compared with 2022, consists
of loans, guarantees
and loan commitments
to multi-national and domestic
counterparties.
The
small
and
medium-sized
entity
(SME)
portfolio,
in
particular,
is
well
diversified
across
industries.
However,
such
companies are
reliant on the
domestic economy
and the economies
to which they
export, in particular
the EU and the
US.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
65
Our commodity
trade finance
portfolio
focuses on
energy and
base-metal
trading companies,
where the
related
commodity
price risk
is hedged
to a
large extent by
the commodity trader.
The majority of
limits in
this business are
uncommitted,
transactional
and short-term
in nature.
Our portfolio
size was
USD 6bn (CHF
5bn) as
of 31 December
2023, compared
with
USD 7bn (CHF
7bn) in 2022,
with a considerable
part of the exposure
correlating
with commodity
prices.
Our exposure
to banks
consists
primarily
of contingent
claims and
was
USD 4bn
(CHF 3bn),
compared
with
USD 5bn
(CHF 5bn) in 2022.
Despite volatile energy prices,
raised higher interest rates,
a strong Swiss franc,
and the effect of
the sanctions imposed
on Russia
and Russian
entities, and
conflicts in
the Middle
East, stage
3 credit
losses in
2023 were
only slightly
higher
compared with
2022. The
delinquency ratio
was 0.1% for
the corporate
portfolio, compared with
0.2% at
the end of
2022.
›
Refer to “Credit risk models” in this section for
more information about loss given default, rating
grades and rating agency
mappings
Swiss mortgage loan portfolio
UBS AG’s Swiss mortgage loan portfolio secured by residential and commercial
real estate in Switzerland continues to be
its largest loan portfolio.
These mortgage loans (excluding
loans on self-used commercial real estate),
totaling USD 193bn
(CHF 162bn), mainly
originate from
Personal &
Corporate Banking,
but
also
from
Global Wealth
Management Region
Switzerland. Of these
mortgage loans,
USD 174bn (CHF 146bn) related
to residential
properties that the
borrower was
either
occupying
or
renting
out,
with
full
recourse
to
the
borrower.
Of
this
USD 174bn
(CHF 146bn),
USD 125bn
(CHF 105bn) is
related to properties
occupied by the
borrower, with an average LTV ratio of 50%, compared
with 51% as
of 31 December
2022.
The average
LTV for newly
originated
loans
for this
portfolio
was 64%,
compared
with 63%
in 2022.
The remaining USD 49bn (CHF 41bn) of the Swiss residential mortgage loan portfolio related to properties rented out by
the borrower and
the average LTV of that portfolio
was 50%, compared
with 51% as of 31 December
2022. The average
LTV for newly originated Swiss residential mortgage
loans for properties rented out by the
borrower was 50%, compared
with 54% in
2022.
As
illustrated
in
the
“Swiss
mortgages:
distribution
of
exposure
across
exposure
segments
and
loan-to-value
(LTV)
buckets” table below,
99.9% of the
aggregate amount of
Swiss residential mortgage
loans would continue
to be covered
by the
real
estate
collateral
even
if the
value
assigned
to
that
collateral
were
to decrease
20%, and
more
than
99%
would remain covered by the real estate collateral
even if the value assigned to that collateral were to decrease
30%.
Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings and loss given
default (LGD) buckets
1
USD m, except where indicated
31.12.23
31.12.22
LGD buckets
Weighted
average
LGD (%)
Weighted
average
LGD (%)
Internal UBS rating
2
Exposure
0–25%
26–50%
51–75%
76–100%
Exposure
Investment grade
134,095
72,290
47,689
9,707
4,408
28
123,358
28
Sub-investment grade
70,081
26,759
28,328
11,360
3,634
34
62,219
35
of which: 6−9
63,357
24,467
25,390
10,285
3,215
34
56,774
35
of which: 10−13
6,724
2,293
2,938
1,074
419
36
5,445
36
Defaulted / Credit-impaired
1,698
17
1,389
276
15
42
1,380
42
Total exposure before deduction of allowances and provisions
205,873
99,067
77,406
21,343
8,058
30
186,957
30
Less: allowances and provisions
(742)
(664)
Net banking products exposure
1
205,131
186,293
1 Excluding balances at central banks and Group Treasury
reallocations.
2 The ratings of the major credit rating agencies,
and their mapping to our internal rating scale, are shown in
the “Internal UBS rating scale
and mapping of external ratings” table in this section.
Personal & Corporate Banking: loans uncollateralized and not subject to guarantees, by industry sector
31.12.23
31.12.22
USD m
%
USD m
%
Construction
153
1.1
172
1.3
Financial institutions
3,842
26.6
3,980
30.3
Hotels and restaurants
148
1.0
135
1.0
Manufacturing
2,029
14.0
1,715
13.1
Private households
1,641
11.4
1,473
11.2
Public authorities
382
2.6
416
3.2
Real estate and rentals
1,013
7.0
547
4.2
Retail and wholesale
1,801
12.5
2,230
17.0
Services
3,129
21.7
2,242
17.1
Other
303
2.1
226
1.7
Exposure, gross
14,441
100.0
13,136
100.0
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
66
Swiss mortgages: distribution of exposure across exposure segments and loan-to-value (LTV)
buckets
1
USD bn, except where indicated
31.12.23
31.12.22
2
LTV buckets
Exposure segment
≤30%
31–50%
51–60%
61–70%
71–80%
81–100%
>100%
Total
Total
Residential mortgages
Exposure
103.9
42.7
10.3
4.2
1.1
0.2
0.1
162.4
144.0
as a % of row total
64
26
6
3
1
0
0
100
100
Income-producing real estate
Exposure
17.0
6.5
1.3
0.5
0.1
0.0
0.0
25.5
21.9
as a % of row total
67
26
5
2
0
0
0
100
100
Corporates
Exposure
7.9
2.9
0.7
0.4
0.2
0.1
0.0
12.2
10.6
as a % of row total
65
24
6
3
1
1
0
100
100
Other segments
Exposure
0.8
0.3
0.1
0.0
0.0
0.0
0.0
1.1
1.0
as a % of row total
67
23
6
2
1
1
0
100
100
Mortgage-covered exposure
Exposure
129.5
52.4
12.4
5.1
1.4
0.3
0.1
201.1
177.5
as a % of total
64
26
6
3
1
0
0
100
100
Mortgage-covered exposure 31.12.22
2
Exposure
113.2
46.7
11.4
4.7
1.2
0.3
0.1
177.5
as a % of total
64
26
6
3
1
0
0
100
1 The amount of each mortgage loan is allocated across the LTV
buckets to indicate the portion at risk at the various
value levels shown; for example, a loan of 75 with an
LTV ratio of 75% (i.e.,
a collateral value of
100) would result in allocations of 30 in the less-than-or-equal-to-30% LTV bucket,
20 in the 31–50% bucket, 10 in the 51–60% bucket, 10 in the 61–70% bucket and 5 in the 71–80% bucket.
2 Comparative
period has been restated to reflect a change in the measure used to disclose Swiss mortgages exposures.
Investment Bank
The Investment
Bank’s lending
activities are
largely associated
with corporate
and non-bank
financial institutions.
The
business is broadly diversified across industry
sectors, but concentrated in North America.
Gross
banking
products
exposure
decreased
to
USD 70bn
as
of
31 December
2023,
compared
with
USD 77bn
as
of
31 December 2022, mostly
driven by balances
at central banks
allocated to the
business division. Excluding
balances at
central banks and Group Treasury reallocations,
gross banking products exposure increased to USD 37bn from
USD 32bn
in 2022, mostly driven by an increase
in irrevocable loan commitments. Based on
our internal ratings, 49% of this gross
banking products exposure was classified as investment grade. The vast majority of the gross banking products exposure
had an estimated LGD below 50%.
In
the
Investment
Bank,
mandated
temporary
loan
underwriting
exposure
as
of
the
end
of
2023
was
USD 2.1bn,
compared
with
USD 2.6bn
at
the
end
of
the
prior
year.
USD 50m
of
commitments
had
not
yet
been
distributed
as
originally
planned
as
of
31 December
2023.
Loan
underwriting
exposures
are
classified
as
held
for
trading,
with
fair
values reflecting market conditions at the end of 2023.
›
Refer to “Credit risk models” in this section for
more information about LGD, rating grades and rating agency
mappings
Investment Bank: distribution of banking products exposure across internal UBS ratings and loss given default (LGD)
buckets
1
USD m, except where indicated
31.12.23
31.12.22
LGD buckets
Weighted
average
LGD (%)
Weighted
average
LGD (%)
Internal UBS rating
2
Exposure
0–25%
26–50%
51–75%
76–100%
Exposure
Investment grade
17,954
4,448
8,652
2,424
2,430
39
15,878
37
Sub-investment grade
18,306
4,838
7,215
6,023
229
22
15,529
23
of which: 6−9
11,644
2,689
2,883
5,874
198
15
9,181
17
of which: 10−13
6,662
2,149
4,332
149
31
33
6,348
32
Defaulted / Credit-impaired
331
286
28
14
4
24
312
21
Banking products exposure
1
36,591
9,572
15,895
8,461
2,663
30
31,719
30
1 Excluding balances at central banks and Group Treasury
reallocations.
2 The ratings of the major credit rating agencies,
and their mapping to our internal rating scale, are shown in the “Internal
UBS rating scale
and mapping of external ratings” table in this section.
Investment Bank: banking products exposure, by geographical region
1
31.12.23
31.12.22
USD m
%
USD m
%
Asia Pacific
4,618
12.6
4,766
15.0
Latin America
745
2.0
1,209
3.8
Middle East and Africa
249
0.7
183
0.6
North America
19,901
54.4
15,409
48.6
Switzerland
135
0.4
461
1.5
Rest of Europe
10,943
29.9
9,692
30.6
Exposure
1
36,591
100.0
31,719
100.0
1 Excluding balances at central banks and Group Treasury reallocations.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
67
Investment Bank: banking products exposure, by industry sector
1
31.12.23
31.12.22
USD m
%
USD m
%
Banks
5,092
13.9
4,409
13.9
Chemicals
587
1.6
583
1.8
Electricity, gas, water supply
359
1.0
363
1.1
Financial institutions, excluding banks
15,562
42.5
14,595
46.0
Manufacturing
1,889
5.2
1,361
4.3
Mining
894
2.4
878
2.8
Public authorities
258
0.7
259
0.8
Real estate and construction
1,718
4.7
1,685
5.3
Retail and wholesale
2,945
8.0
1,654
5.2
Technology and communications
2,033
5.6
2,324
7.3
Transport and storage
341
0.9
499
1.6
Other
4,913
13.4
3,109
9.8
Exposure
1
36,591
100.0
31,719
100.0
1 Excluding balances at central banks and Group Treasury reallocations.
Non-core and Legacy
Gross banking
products exposure
increased by
USD 3bn to
USD 4bn in
2023 due
to smaller
amounts of
assets of
UBS
AG business divisions that were assessed as not
strategic in light of the acquisition of the Credit Suisse
Group.
›
Refer to “Balance sheet assets” in the “Capital,
liquidity and funding, and balance sheet” section
of this report for more
information
›
Refer to the "Our Business" in the "Our
strategy, business model and environment" section of this report for more information
›
Refer to the "Non-core and Legacy" in the "Financial
and operating performance" section of this
report for more information
about Non-core and Legacy scope differences between the UBS Group AG and
UBS AG
Group Items
Gross
banking
products
exposure
within
Group
Items,
which
arises
primarily
in
connection
with
treasury
activities,
increased
by USD 54bn
to USD 94
bn, mainly
from
Group
Treasury
reflecting
higher levels
of high-quality
liquid assets
(HQLA) held, funding provided to Credit Suisse
and an increase in sponsored repo
clearing.
›
Refer to “Balance sheet assets” in the “Capital,
liquidity and funding, and balance sheet” section
of this report for more
information
›
Refer to the “Group items” section of this report
for more information
Traded products
Audited |
Counterparty credit
risk (CCR)
arising from
traded products,
which include
OTC derivatives,
ETD exposures
and
SFTs,
originating in
the Investment
Bank, Non-core
and Legacy,
and Group
Treasury,
is generally
managed on
a close-
out basis.
This takes
into account
possible effects
of market
movements on
the exposure
and any
associated collateral
over the
time it
would take to
close out our
positions. Limits are
applied to the
potential future exposure per
counterparty,
with
the
size
of
the
limit
dependent
on
the
counterparty’s
creditworthiness
(as
determined
by
Risk
Control).
Limit
frameworks are also used to control overall exposure to specific sectors.
Such portfolio limits are monitored and reported
to senior management.
Trading in OTC derivatives
is conducted through central
counterparties where practicable.
Where central counterparties
are not used, we have clearly defined
policies and processes for trading on a
bilateral basis. Trading is typically conducted
under bilateral
International
Swaps
and Derivatives
Association
or similar
master
netting agreements,
which generally
allow for
close-out and
netting of
transactions in
case of
default, subject
to applicable
law. For
certain counterparties,
initial margin is taken to cover some or all
of the calculated close-out exposure. This is in addition to the
variation margin
taken
to
settle
changes
in
market
value
of
transactions.
For
most
major
market
participant
counterparties,
two-way
collateral agreements
under which
either party
can be
required to
provide collateral
in the
form of
cash or
marketable
securities
are
used
when
the
exposure
exceeds
specified
levels.
Non-cash
collateral
typically
consists
of
well-rated
government debt or other
collateral acceptable to
Risk Control and permitted
by applicable regulations. Regulations
on
margining uncleared OTC
derivatives have generally
expanded the scope
of bilateral derivatives
activity subject to
initial
margining
and
increased
the
amounts
of
initial
margin
received
from,
and
posted
to,
certain
bilateral
trading
counterparties, resulting in lower close-out risk over time.
p
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
68
In
the
tables
below,
OTC
derivatives
exposures
are
generally
presented
as
net
positive
replacement
values
after
the
application
of
legally
enforceable
netting
agreements
and
the
deduction
of
cash
and
marketable
securities
held
as
collateral.
SFT
exposures
are
reported
taking
into
account
collateral
received,
and
ETD
exposures
take
into
account
collateral margin calls.
›
Refer to “Note 10 Derivative instruments” in the “Consolidated financial statements” section of this report for more information
about OTC derivatives settled through central counterparties
›
Refer to “Note 21 Offsetting financial assets and financial
liabilities” in the “Consolidated financial statements” section of this report
for more information about the effect of netting and collateral
arrangements on derivative exposures
Investment Bank, Non-core and Legacy,
and Group Treasury:
traded products exposure
USD m
OTC derivatives
SFTs
ETDs
Total
Total
31.12.23
31.12.22
Total exposure, before deduction of credit valuation adjustments and hedges
8,124
16,792
9,796
34,712
34,370
Less: credit valuation adjustments and allowances
(24)
(1)
0
(24)
(35)
Less: credit protection bought (credit default swaps, notional)
(83)
0
0
(83)
(109)
Net exposure after credit valuation adjustments, allowances and hedges
8,017
16,792
9,796
34,605
34,226
Investment Bank, Non-core and Legacy,
and Group Treasury:
distribution of net OTC derivatives and SFT exposure
across internal UBS ratings and loss given default (LGD) buckets
USD m, except where indicated
31.12.23
31.12.22
LGD buckets
Weighted
average
LGD (%)
Weighted
average
LGD (%)
Internal UBS rating
1
Exposure
0–25%
26–50%
51–75%
76–100%
Exposure
Net OTC derivatives exposure
Investment grade
7,307
152
5,681
285
1,189
48
10,757
48
Sub-investment grade
711
43
203
15
450
77
318
72
of which: 6−9
701
39
203
12
448
77
285
76
of which: 10−12
3
2
0
0
1
53
28
41
of which: 13 and defaulted
6
3
0
3
0
31
5
23
Total net OTC derivatives exposure, after credit valuation adjustments
and hedges
8,017
195
5,884
299
1,639
51
11,075
49
Net SFT exposure
Investment grade
16,631
200
15,245
597
590
41
16,682
40
Sub-investment grade
162
0
43
28
91
80
373
71
Total net SFT exposure
16,792
200
15,288
624
680
42
17,055
41
1 The ratings of the major credit rating agencies, and
their mapping to our internal rating scale, are shown in the “Internal UBS rating
scale and mapping of external ratings” table in this section.
Investment Bank, Non-core and Legacy,
and Group Treasury:
net OTC derivatives and SFT exposure, by geographical
region
Net OTC derivatives exposure
Net SFT exposure
31.12.23
31.12.22
31.12.23
31.12.22
USD m
%
USD m
%
USD m
%
USD m
%
Asia Pacific
970
12.1
1,249
11.3
2,510
14.9
4,906
28.8
Latin America
93
1.2
117
1.1
0
0.0
34
0.2
Middle East and Africa
232
2.9
615
5.6
414
2.5
483
2.8
North America
3,118
38.9
2,200
19.9
3,044
18.1
3,177
18.6
Switzerland
900
11.2
1,055
9.5
499
3.0
466
2.7
Rest of Europe
2,704
33.7
5,839
52.7
10,324
61.5
7,988
46.8
Exposure
8,017
100.0
11,075
100.0
16,792
100.0
17,055
100.0
Investment Bank, Non-core and Legacy,
and Group Treasury:
net OTC derivatives and SFT exposure, by industry sector
Net OTC derivatives exposure
Net SFT exposure
31.12.23
31.12.22
31.12.23
31.12.22
USD m
%
USD m
%
USD m
%
USD m
%
Banks
1,544
19.3
1,288
11.6
1,200
7.1
869
5.1
Chemicals
17
0.2
71
0.6
0
0.0
0
0.0
Electricity, gas, water supply
111
1.4
118
1.1
0
0.0
0
0.0
Financial institutions, excluding banks
5,721
71.4
8,614
77.8
15,093
89.9
14,865
87.2
Manufacturing
29
0.4
97
0.9
0
0.0
0
0.0
Mining
0
0.0
20
0.2
0
0.0
0
0.0
Public authorities
441
5.5
655
5.9
496
3.0
1,320
7.7
Retail and wholesale
18
0.2
29
0.3
0
0.0
0
0.0
Transport, storage and communication
74
0.9
115
1.0
3
0.0
0
0.0
Other
63
0.8
69
0.6
0
0.0
0
0.0
Exposure
8,017
100.0
11,075
100.0
16,792
100.0
17,055
100.0
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
69
Credit risk mitigation
Audited |
UBS AG actively
manages credit
risk in its
portfolios by taking
collateral against
exposures and
by utilizing credit
hedging.
p
Lending secured by real estate
Audited |
UBS AG uses a scoring model as part of a
standardized front-to-back process for credit decisions on originating or
modifying Swiss mortgage loans. The model’s two key factors
are the LTV
ratio and an affordability calculation.
p
The calculation of affordability takes
into account interest payments, minimum amortization
requirements and potential
property maintenance
costs in relation
to gross income
or rental income
for rental properties.
The interest
rate is set
at
5% per annum in the context of the current environment.
For residential properties
occupied by the
borrower, the maximum LTV
for the standard
approval process is 80%.
For IPRE,
the maximum LTV allowed
within the standard approval
process ranges from 30%
to 75%, depending on
the type and
age of the property, and the amount of renovation work needed.
Audited |
The value assigned to each
property is based on the
lowest value determined from model-derived
valuations, the
purchase
price,
an
asset
value
for
income-producing
real
estate
(IPRE),
and,
in
some
cases,
an
additional
external
valuation.
p
Separate models provided by
a market-leading external vendor
are used to derive
property valuations for owner-occupied
residential
properties
(ORPs)
and IPRE.
We
estimate
the
current
value
of an
ORP
using a
regression
model
(a
hedonic
model)
based
on
statistical
comparison
against
current
transaction
data.
The
value
of
a
property
is
derived
from
the
characteristics of the real estate
itself, as well as those of
its location. In addition to the
initial valuation, values for
ORPs
are updated regularly over the lifetime of
the loan using region-specific real estate price indices
or hedonic valuation. The
price
indices are
sourced
from
an external
vendor
and subject
to internal
validation
and benchmarking.
UBS AG
uses
these valuations
regularly to
compute indexed
LTV for
all ORPs.
A portfolio-specific
monitoring system
considers these
along with other risk measures (e.g., rating and behavioral
information) to identify higher-risk loans.
For IPRE, the capitalization
rate model is used
to determine the
property valuation by discounting
estimated sustainable
future
income
using
a
capitalization
rate
based
on
various
attributes.
These
attributes
consider
regional
and
specific
property characteristics, such as market and location data (e.g., vacancy rates), benchmarks (e.g., for running costs), and
certain
other
standardized
input
parameters
(e.g.,
property
condition).
Updated
information
regarding
rental
income
from IPRE is requested
from the client
at least once every
three years. Our portfolio-specific
monitoring system alerts
us
to changes in rental income and other risk measures (e.g., LTV, rating,
behavioral information).
To take market developments into account for these models, the external vendor regularly updates the parameters and /
or refines
the
architecture
for
each model.
Model
changes and
parameter
updates are
subject to
the
same validation
procedures as our internally developed models.
Audited |
UBS AG similarly applies underwriting guidelines
for our Global Wealth Management
Region Americas mortgage
loan portfolio, taking
into account loan
affordability and collateral
sufficiency. LTV standards
are defined for the
various
mortgage types, such
as residential mortgages
or investment properties,
based on
associated risk factors,
such as
property
type, loan size, and
purpose. The maximum
LTV allowed within
the standard approval
process ranges from
%.
In addition to LTV,
other credit risk metrics,
such as debt-to-income
ratios, credit scores
and required client reserves,
are
also part of our underwriting guidelines.
A risk limit framework is applied to
the Global Wealth Management Region Americas mortgage loan portfolio. Limits are
set
to
govern
exposures
within
LTV
categories,
geographic
concentrations,
portfolio
growth
and
high-risk
mortgage
segments, such
as interest-only loans.
These limits
are monitored by
a specialized
credit risk
monitoring team and
reported
to senior
management. Supplementing
this limit
framework is
a real
estate lending
policy and
procedures framework,
set up to
govern real estate
lending activities. Quality
assurance and quality
control programs monitor
compliance with
mortgage underwriting and documentation requirements.
For
UBS AG’s
mortgage
loan
portfolio
in
the
Global
Wealth
Management
regions
of
EMEA
and
Asia
Pacific,
global
underwriting guidelines with
regional variations are applied
to allow for regulatory
and market differentials.
As in other
regions, the underwriting guidelines
take into account affordability
and collateral sufficiency.
Affordability is assessed at
a stressed
interest rate
using, for
residential real
estate, the
borrowers’ sustainable
income and
declared liabilities,
and
for commercial real
estate the quality
and sustainability of
rental income. For
interest-only loans, a
declared and evidenced
repayment strategy
must be in
place. The applicable
LTV for each
mortgage is based
on the quality
and liquidity
of the
property
and assessed
against
valuations
from bank-appointed
third-party
valuers.
Maximum
LTV
varies
from
% to
%, depending on the type
and location of the property, as well
as other factors. Collateral sufficiency is
often further
supported by personal guarantees
from related third parties. The
overall portfolio is centrally assessed
against a number
of stress scenarios to ensure that exposures remain within predefined
stress limits.
p
›
Refer to “Swiss mortgage loan portfolio” in this
section for more information about LTV in our Swiss mortgage portfolio
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
70
Lombard lending
Audited |
Lombard loans are
secured by pledges
of marketable securities, guarantees and
other forms of
collateral. Eligible
financial securities are primarily
liquid and actively
traded transferable securities (such as
bonds and equities),
and other
transferable securities, such as approved
structured products for
which regular prices
are available and
the issuer of
the
security provides
a market. To a lesser degree, less
liquid collateral
is also used.
Lending values
are derived
by applying
discounts (haircuts)
to the pledged
collateral’s
market value.
Haircuts
for marketable
securities are calculated to cover a possible adverse change in market value over a given close-out period and confidence
level. Less
liquid or more
volatile collateral
will typically
have larger haircuts.
Concentration and correlation risks across collateral posted
are assessed at
a counterparty level, and
at a
divisional level
across counterparties. Targeted
firm-wide reviews
of
concentration are
performed. Concentration of
collateral in
single
securities, issuers or issuer groups, industry sectors, countries, regions or currencies may result in higher risk and reduced
liquidity. In
such cases, the
lending value
of the collateral,
margin call
and close-out levels
are adjusted accordingly.
p
Exposures
and collateral
market values
are monitored
daily, with
the aim
of ensuring
that the
credit
exposure
is always
within
the established risk
tolerance. A shortfall
occurs when the lending value
drops below the exposure; if it
exceeds a defined
trigger level,
a margin call
is initiated,
requiring the
client to provide
additional collateral,
reduce the
exposure or
take other
action to
bring exposure in
line with
the agreed
lending value of
the collateral. If
a shortfall is
not corrected within
the
required period,
a
close-out is
initiated, through which
collateral is
liquidated, open
derivative positions are
closed and
guarantees are
called.
Stress testing
of collateralized
exposures
to simulate
market events
that reduce
market collateral
value, increase
exposure of
traded products, or do both,
is conducted. For certain classes of counterparties,
limits on such calculated stress exposures
are applied and controlled at
a counterparty level. Also, portfolio limits are applied across
certain businesses or collateral
types.
›
Refer to “Stress loss” in this section for more information
about our stress testing
Credit hedging
Audited
|
UBS AG
uses
single-name
credit
default
swaps
(CDSs),
credit-index
CDSs,
bespoke
protection
and
other
instruments to actively
manage credit risk. The
aim is
to reduce concentrations of
risk from specific
counterparties, sectors
or portfolios and, for CCR, the profit or loss effect
arising from changes in credit valuation adjustments.
We have strict guidelines
with regard to taking
credit hedges into
account for credit
risk mitigation
purposes. For example,
when monitoring
exposures against
counterparty limits,
we do not usually
apply certain
credit risk mitigants,
such as proxy
hedges
(credit
protection
on a
correlated
but different
name)
or credit-index
CDSs,
to reduce
counterparty
exposures.
Buying
credit protection also creates
credit exposure with
regard to
the protection provider. We
monitor and limit
exposures to
credit protection
providers,
and also
monitor the
effectiveness
of credit
hedges as
part of our
overall credit
exposures to
the
relevant counterparties,
which are typically collateralized. For credit protection purchased to hedge the
lending portfolio,
this includes
monitoring
mismatches
between
the maturity
of credit
protection
purchased
and the
maturity
of the
associated
loan.
Such mismatches
result
in basis
risk and
may reduce
the effectiveness
of the
credit
protection.
Mismatches
are routinely
reported to
credit officers
and mitigating
actions are taken
when necessary.
p
›
Refer to “Note 10 Derivative instruments”
in the “Consolidated financial statements”
section of this report for more information
Mitigation of settlement risk
To
mitigate settlement risk, actual settlement
volumes are reduced
by using multi-lateral and bi-lateral
agreements with
counterparties, including
payment netting.
In relation to
the exchange of
cash or securities,
transactions can
be settled
on a delivery-versus-payment basis.
Foreign exchange transactions are our most
significant source of settlement risk. We
are a member of Continuous Linked
Settlement (CLS),
an industry
utility that
provides a multi
-lateral framework
to settle transactions
on a payment-versus-
payment
basis,
thus
reducing
foreign-exchange-related
settlement
risk
relative
to
the
volume
of
business.
However,
mitigation
of
settlement
risk
through
CLS
and
other
means
does
not
fully
eliminate
credit
risk
in
foreign
exchange
transactions resulting from changes in exchange rates prior to settlement, which is managed as
part of our overall credit
risk management of OTC derivatives.
Credit risk models
Basel III – A-IRB credit risk models
Audited |
UBS
AG
has
developed
tools
and
models
to
estimate
future
credit
losses
that
may
be
implicit
in
our
current
portfolio.
Exposures to individual counterparties are measured using three generally accepted parameters: PD, EAD and LGD. For a
given credit facility, the product of these three parameters results
in the expected loss (the EL). These parameters
are the
basis for the
majority of our
internal measures of
credit risk, and
key inputs for
regulatory capital
calculation under
the
advanced internal ratings-based
(A-IRB) approach of the
Basel III framework. We also
use models to derive the
portfolio
credit risk measures of EL, statistical loss and stress loss.
p
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
for more information
about the regulatory capital calculation under the advanced
internal ratings-based approach
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
71
Key features of UBS AG’s main credit risk models
Portfolio in scope
Major asset classes
Model
approach
Number of
main models
Main drivers
Number of
years of loss
data
Probability of
default
Sovereigns and central banks
Central governments and
central banks
Scorecard
1
Political, institutional and economic indicators
including qualitative factors
>15
Banks and other financial
institutions
Banks & Securities dealer,
Corporates: other lending
Scorecard
3
Financial data including balance sheet ratios, profit
and loss data and qualitative factors
>15
Funds
Corporates: other lending
Scorecard
3
Financial data and ratios constructed from it (such as
net asset value, volatility of returns), qualitative
factors
>15
Large corporates and
internationals
Corporates: other lending
Scorecard,
market data
2
Financial data including balance sheet ratios and
profit and loss, market data and qualitative factors
>15
Enterprises in Switzerland
Corporates: other lending
Scorecard
1
Financial data including balance sheet ratios and
profit and loss, and behavioral data
>25
Commodity traders
Corporates: specialized
lending
Scorecard
1
Financial data including balance sheet ratios and
profit and loss, as well as non-financial criteria
>20
Owner-occupied mortgages &
other wealth-management
financing
Retail: residential
mortgages, Corporates:
other lending
Scorecard
3
Behavioral data, affordability relative to income,
property type, loan-to-value, assets and qualitative
factors
>10
Income producing real estate
mortgages
Retail: residential
mortgages, Corporates:
specialized lending
Scorecard
1
Loan-to-value, debt-service-coverage, financial data
(for large corporates only), behavioral data and
qualitative factors
>25
Lombard lending and
concentrated equity based
lending (CEL)
Retail: other retail,
Corporates: other lending
(CEL)
Simulation
approach
based on
historical
returns
2
Lending value ratio, collateral asset class, historical
asset returns, counterparty factors
>10
Credit cards in Switzerland
Retail: qualifying
revolving retail and other
retail, Corporates: other
lending
Scorecard
1
Client type and characteristics and behavioral data
>15
Other portfolios
Corporates: other
lending,
Public sector entities and
Multilateral development
banks, Corporates:
specialized lending
Scorecard,
pooled rating
approach,
rating
template
6
Financial data including balance sheet ratios and
profit and loss, market data and qualitative factors.
Separate models for Commercial Real Estate loans,
Debt REITs, Mortgage originators, Public sector
entities and Multilateral development
banks/Supranationals
>15
Loss given default
Investment Bank – all
counterparties
Across the asset classes
Statistical
model
3
Counterparty and facility specific, including industry
segment, region, collateral, seniority, legal
environment, bankruptcy procedures and macro-
economic factors
>20
Swiss corporate and mortgage
lending portfolios
Retail: residential
mortgages, Corporates:
other lending,
Corporates: specialized
lending
Statistical
model
2
Collateral type and client segment, Loan-to-value,
time since last valuation, location indicator
>10
International residential
mortgages & other wealth-
management financing
Retail: residential
mortgages, Corporates:
other lending
Statistical
model
2
Loan-to-value, market value shock
>10
Lombard lending and
concentrated equity based
lending (CEL)
Retail: other retail,
Corporates: other lending
(CEL)
Simulation
approach
based on
historical
returns
2
Loan-to-value, collateral asset class and liquidity,
historical asset returns, counterparty factors
>10
Credit cards in Switzerland
Retail: qualifying
revolving retail and other
retail, Corporates: other
lending
Statistical
model
1
Collateral, accrued interests, client characteristics
>15
Exposure at default
Banking products
Across the asset classes
Statistical
model
4
Facility type and product type, commitment type,
headroom, and client characteristics
>10
Traded products
Across the asset classes
Statistical
model
2
Product specific market drivers, e.g. interest rates.
Separate models for OTC/ETD and SFT that generate
the simulation of risk factors used for the credit
exposure measure
n/a
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
72
Audited |
Internal UBS rating scale and mapping of external ratings
Internal UBS rating
1-year PD range in %
Description
Moody’s Investors
Service mapping
S&P mapping
Fitch mapping
0 and 1
0.00–0.02
Investment grade
Aaa
AAA
AAA
2
0.02–0.05
Aa1 to Aa3
AA+ to AA–
AA+ to AA–
3
0.05–0.12
A1 to A3
A+ to A–
A+ to A–
4
0.12–0.25
Baa1 to Baa2
BBB+ to BBB
BBB+ to BBB
5
0.25–0.50
Baa3
BBB–
BBB–
6
0.50–0.80
Sub-investment grade
Ba1
BB+
BB+
7
0.80–1.30
Ba2
BB
BB
8
1.30–2.10
Ba3
BB–
BB–
9
2.10–3.50
B1
B+
B+
10
3.50–6.00
B2
B
B
11
6.00–10.00
B3
B–
B–
12
10.00–17.00
Caa1 to Caa2
CCC+ to CCC
CCC+ to CCC
13
>17
Caa3 to C
CCC- to C
CCC- to C
Counterparty is in default
Default
Defaulted
D
D
p
Probability of default
PD estimates the
likelihood of a
counterparty defaulting on
its contractual obligations over
the next
12 months,
and is
assessed using rating
tools tailored to the
various categories of counterparties.
The “Key features of
UBS AG’s main
credit
risk models”
table above
gives an
overview
of the
approaches
used for
our main
asset classes
and presents
the main
drivers of the PD.
The ratings of major credit rating agencies, and their mapping to the UBS masterscale and internal PD bands, are shown
in the
“Internal UBS
rating scale
and mapping
of external
ratings” table
above. For
Moody’s and
S&P, the
mapping is
based on the
long-term average of
one-year default rates
available from these
rating agencies, with
Fitch ratings being
mapped to the equivalent
S&P ratings. For each
external rating category,
the average default rate
is compared with our
internal PD bands to derive a periodically reviewed mapping
to our internal rating scale.
Exposure at default
EAD is the amount we expect to be owed by a counterparty at the time of possible default. We derive EAD from current
exposure to the counterparty and possible future
exposure development.
The EAD of an on-balance
sheet loan is its
notional amount,
while for off-balance
sheet commitments
that are not drawn,
credit conversion
factors (CCFs)
are used in order
to obtain an
expected on-balance
sheet amount.
For traded products,
we derive EAD
by modeling
the range of
possible exposure
outcomes at various
points in
time using a
simulation based on a scenario-consistent technique. UBS AG assesses the net amount
that may be
owed to it
or that it
may owe to others,
taking into account
the effect of market
movements over
the potential time
it would take to
close out
positions.
Exposures where
there is
a material
correlation between
the factors
driving the
credit quality
of the
counterparty
and
those driving the potential
future value of UBS AG’s
traded products exposure (wrong-way risk) are
assessed, and specific
controls to mitigate such risks have been established.
Loss given default
LGD is
the magnitude
of the
likely loss
if there
is a
default. Our
LGD estimates,
which consider
downturn conditions,
include loss of principal, interest and
other amounts less recovered amounts. UBS AG determines
LGD based on the likely
recovery
rate
of
claims
against
defaulted
counterparties,
which
depends
on
the
type
of
counterparty
and
any
credit
mitigation
due
to
collateral
or
guarantees.
UBS
AG’s
estimates
are
supported
by
internal
loss
data
and
external
information, where
available. If collateral
is held, such
as marketable
securities or a
mortgage on a
property,
LTV
ratios
are typically a key parameter in determining LGD. For risk-weighted asset (RWA) calculation, floors are applied to LGD in
line with regulation.
Expected loss
UBS AG uses the
concept of
expected loss
to quantify
future credit
losses that
may be implicit
in our current
portfolio.
The expected loss for a given
credit facility is a product of the three components
described above, i.e., PD, EAD and LGD.
We aggregate the expected loss for individual
counterparties to derive expected portfolio credit
losses.
Annual Report 2023 |
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73
IFRS 9 – ECL credit risk models
Expected credit loss
Expected
credit
loss (ECL)
is
defined
as
the
difference
between
contractual
cash
flows
and
those
UBS
AG
expects
to
receive, discounted
at the
effective
interest rate
(EIR). For
loan commitments
and other
credit facilities
in scope
of ECL
requirements, expected cash shortfalls are determined by considering expected future drawdowns. Rather than focusing
on an
average
through-the-cycle
(TTC)
expected
annual loss,
the
purpose
of ECL
is
to estimate
the
amount of
losses
inherent in
a portfolio
based on
current conditions
and future
outlook (a
point-in-time (PIT)
measure), whereby
such a
forecast
has to
include all
information available
without
undue cost
and effort,
and address
multiple scenarios
where
there is perceived
non-linearity between changes
in economic conditions and
their effect on credit
losses. From a
credit
risk modeling perspective, ECL parameters are
generally derivations of the factors assessed for regulatory
Basel III EL.
Comparison of Basel III EL and IFRS 9 ECL credit risk models
The IFRS 9 ECL concept has a number
of key differences from
our Basel III credit risk
models, both in the loss estimation
process
and
the
result
thereof.
Most
notably,
regulatory
Basel III
EL
parameters
are
TTC
/ downturn
estimates,
which
might
include
a
margin
of
conservatism,
while
IFRS 9
ECL
parameters
are
typically
PIT,
reflecting
current
economic
conditions and future
outlook. The
table below summarizes
the main differences.
Stage 1 and 2
ECL expenses in
2023
were USD 23m
and respective
allowances and
provisions as
of 31 December
2023 were
USD 580m. This
included ECL
allowances and
provisions of
USD 522m related
to positions under
the Basel III
advanced internal ratings-based
(A-IRB)
approach. Basel III EL for non-defaulted positions
increased by USD 96m to USD 1,052m.
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report for
more information about our accounting policy for allowances
and provisions for ECL including key definitions
relevant for the ECL
calculation under IFRS 9
The table below shows the main differences between the
two expected loss measures.
Basel III EL (advanced internal
ratings-based approach)
IFRS 9 ECL
Scope
The Basel III A-IRB approach applies to most credit risk
exposures. It includes transactions measured at amortized
cost, at fair value through profit or loss and at fair value
through OCI, including loan commitments and
financial
guarantees.
The IFRS 9 ECL calculation mainly applies to financial
assets
measured at amortized cost and debt instruments
measured at fair
value through OCI, as well as loan commitments
and financial
guarantees not at fair value through profit or loss.
12-month versus
lifetime expected
loss
The Basel III A-IRB approach takes into account expected
losses resulting from expected default events occurring
within the next 12 months.
In the absence of a significant increase in credit risk
(an SICR), a
maximum 12-month ECL is recognized to reflect lifetime
cash
shortfalls that will result if a default event occurs
in the 12 months
after the reporting date (or a shorter period if the
expected lifetime
is less). Once an SICR event has occurred, a lifetime
ECL is
recognized considering expected default events
over the life of the
transaction.
Exposure at default
(EAD)
EAD is the amount we expect a counterparty
to owe us at
the time of a possible default. For banking products,
EAD
equals the book value as of the reporting date;
for traded
products, the vast majority of EAD is modeled. For
lending,
EAD is expected to remain constant over a 12-month
period.
For loan commitments, a credit conversion factor
is applied
to model expected future drawdowns over the
12-month
period, irrespective of the actual maturity of a particular
transaction. The credit conversion factor includes
downturn
adjustments.
EAD is generally calculated on the basis of the
cash flows that are
expected to be outstanding at the individual
points in time during
the life of the transaction. For loan commitments,
a credit
conversion factor is applied to model expected
future drawdowns
over the life of the transaction without including
downturn
assumptions. In both cases, the time period
is capped at 12
months, unless an SICR has occurred.
Probability of
default
(PD)
PD estimates are determined on a through-the-cycle
(TTC)
basis. They represent historical average PDs, taking into
account observed losses over a prolonged historical
period,
and therefore are less sensitive to movements in the
underlying economy.
PD estimates will be determined on a point-in-time
(PIT) basis,
based on current conditions and incorporating forecasts
for future
economic conditions at the reporting date.
Loss given default
(LGD)
LGD includes prudential adjustments, such
as downturn LGD
assumptions and floors. Similar to PD, LGD
is determined on
a TTC basis.
LGD should reflect the losses that are reasonably expected
and
prudential adjustments should therefore not be applied.
Similar to
PD, LGD is determined on the basis of a PIT
approach.
Use of scenarios
n / a
Multiple forward-looking scenarios have to be taken
into account
to determine a probability-weighted ECL.
Annual Report 2023 |
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balance sheet | Risk management and control
74
Further key aspects of credit risk models
Stress loss
We complement our statistical modeling approach with
scenario-based stress loss measures. Stress tests are run regularly
to monitor potential effects
of extreme, but nevertheless
plausible, events on our portfolios,
under which key credit
risk
parameters are assumed to deteriorate substantially.
Where we consider it appropriate,
we apply limits on this basis.
Stress scenarios and methodologies are tailored to portfolios’
natures, ranging from regionally focused to global systemic
events, and varying in time horizon.
›
Refer to “Stress testing” in this section for more information
about our stress testing framework
Credit risk model confirmation
UBS AG’s
approach
to
model
confirmation
involves
both
quantitative
methods,
such
as
monitoring
compositional
changes
in
portfolios
and
results
of
backtesting,
and
qualitative
assessments,
such
as
feedback
from
users
on
model
output as
a practical
indicator of
a model’s
performance and
reliability.
In addition,
changes in
market, regulatory
and
business practices are assessed.
Material changes
in portfolio
composition may
invalidate the
conceptual soundness
of a
model. We
therefore perform
regular analyses of the evolution of portfolios to identify
such changes in the structure and credit quality of portfolios.
›
Refer to “Model risk management” in this section
for more information
Backtesting
UBS AG monitors
the performance of models by backtesting
and benchmarking them, with model outcomes
compared
with actual
results, based
on our
internal experience
and externally observed
results. To
assess the
predictive power
of
credit exposure models for
traded products, such as OTC
derivatives and ETD
products, we statistically compare predicted
future exposure distributions at different
forecast horizons with realized values.
For PD, we derive a predicted distribution of the number of defaults. The observed number of defaults is compared with
the upper tail of the predicted distribution. If the observed number
of defaults is higher than a given upper tail quantile,
we conclude
there is
evidence
that the
model may
underpredict
the number
of defaults.
Based on
historical
long-run
average
default rates
and, if
required, additional
margin
of conservatism,
we
also
derive
PD calibration
targets
and a
lower boundary. As a general
rule, follow-up actions, such as
a recalibration of the rating
tool, are defined if
the portfolio
average PD lies below the derived lower boundary.
For LGD, backtesting statistically
tests whether the mean
difference between the observed
and predicted LGD is
zero. If
the test fails, there is evidence that
our predicted LGD is too low. In such
cases, and where these differences are
outside
expectations,
follow-up actions, such as a recalibration of the models, are
taken.
CCFs,
used
for
the
calculation
of
EAD
for
undrawn
facilities,
are
dependent
on
several
credit
facility
contractual
dimensions.
We
compare
the
predicted
amount
drawn
with
observed
historical
use
of
such
facilities
by
defaulted
counterparties. If
any statistically
significant deviation
is observed,
follow-up actions,
such as an
update of
the relevant
CCFs, are performed.
Changes to models and model parameters during the period
As
part
of
our
continuous
efforts
to
enhance
models
to
reflect
market
developments
and
newly
available
data,
we
updated several models in 2023.
In Personal
& Corporate
Banking and
Global Wealth
Management models,
we recalibrated
the risk
parameters for
the
income-producing
real estate
mortgages in
Switzerland
and implemented
a model
update for
the Swiss
corporate
PD
model. In addition, we recalibrated the PD and LGD
models for the commodity trade finance business within
Personal &
Corporate
Banking
and
updated
the
LGD
model
for
corporate
clients
and
financial
institutions.
In
Global
Wealth
Management, we also implemented a model update
for the standard Lombard model.
In the Investment
Bank, new PD models,
corporations, insurance companies
and managed funds
went live. In addition,
certain RWA multipliers were recalibrated as a result of improvements
to models.
Where required, changes to models and model parameters
were approved by FINMA before being made.
›
Refer to “Risk-weighted assets” in the “Capital,
liquidity and funding, and balance sheet” section
of this report for more
information about the effect of the changes to models
and model parameters on credit risk RWA
Annual Report 2023 |
Risk, capital, liquidity and funding, and
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75
Future credit risk-related regulatory capital developments
In December
2017, the
Basel Committee
on Banking
Supervision (the
BCBS) announced
the finalization
of the
Basel III
framework.
In November
2023, the
Swiss Federal
Council published
the
national implementation
of the
final
Basel III
standards, which is expected to
enter into force by January
2025. The updated framework makes
a number of revisions
to the
internal ratings-based
(IRB) approaches,
namely: (i)
removing the
option of
using the
A-IRB approach
for certain
asset classes (including large and
medium-sized corporate clients, and
banks and other financial institutions);
(ii) placing
floors on certain
model inputs
under the
IRB approach,
e.g., PD and
LGD; and
(iii) introducing
various requirements
to
reduce RWA
variability (e.g.,
for LGD).
In addition,
revisions to
the credit
valuation adjustment
(CVA)
framework were
published
in
November
2023,
including
the
removal
of
the
advanced
CVA
approach.
UBS
has
a
close
dialogue
with
FINMA to discuss
in detail
the implementation
objectives and
prepare
for a
smooth transition
of the
capital regime
for
credit risk.
›
Refer to “Capital management objectives, planning
and activities” in the “Capital, liquidity and
funding, and balance sheet”
section of this report for more information about the development
of RWA
›
Refer to “Risk measurement” in this section for
more information about our approach to model confirmation procedures
›
Refer to the “Regulatory and legal developments”
and “Risk factors” sections of this report for
more information
Credit policies for distressed assets
Non-performing
Audited |
In line with the
regulatory definition,
we report a
claim as non-performing
when: (i) it is
more than 90
days past
due; (ii) it is subject to restructuring proceedings, where
preferential conditions concerning interest
rates, subordination,
tenor,
etc. have been granted in order to avoid default of the counterparty (forbearance);
(iii) the counterparty is subject
to
bankruptcy
/
enforced
liquidation
proceedings
in
any
form,
even
if
there
is
sufficient
collateral
to
cover
the
due
payment; or (iv) there is other evidence that payment
obligations will not be fully met without recourse to collateral.
Default and credit-impaired
UBS AG uses a
single definition of default
for classifying assets
and determining the PD
of its obligors for
risk modeling
purposes.
The
definition
of
default
is
based
on
quantitative
and
qualitative
criteria.
A
counterparty
is
classified
as
defaulted when
material payments
of interest,
principal or
fees are
overdue for
more than
90 days,
or more
than 180
days for certain exposures in
relation to loans to private
and commercial clients in Personal
& Corporate Banking and to
private
clients
of
Global
Wealth
Management
Region
Switzerland.
UBS
AG
does
not
consider
the
general
90-day
presumption
for
default
recognition
appropriate
for
those
portfolios,
given
the
cure
rates,
which
show
that
strict
application of the 90-day criterion would not accurately reflect
the inherent credit risk. Counterparties are
also classified
as defaulted when: bankruptcy, insolvency proceedings
or enforced liquidation have commenced; obligations have been
restructured on preferential terms (forbearance); or there is other evidence that payment obligations will not be
fully met
without recourse
to collateral.
The
latter
may
be the
case even
if, to
date,
all contractual
payments
have
been made
when due. If
one claim against
a counterparty
is defaulted on,
generally all claims
against the counterparty
are treated
as defaulted.
An
instrument
is
classified
as
credit
impaired
if
the
counterparty
is
classified
as
defaulted
and
/
or
the
instrument
is
identified
as
purchased
credit
impaired
(PCI).
An
instrument
is PCI
if
it
has
been
purchased
at
a
deep
discount
to
its
carrying amount following a risk event of the issuer or originated with a defaulted counterparty. Once a financial asset is
classified as defaulted / credit impaired
(except PCI), it is reported as
a stage 3 instrument and remains as
such unless all
past due
amounts have
been rectified,
additional
payments
have been
made on
time, the
position is
not classified
as
credit-restructured, and there is
general evidence of credit
recovery. A three-month probation
period is applied before
a
transfer back to stages 1 or 2 can be triggered. However,
most instruments remain in stage 3 for a longer period.
p
Forbearance (credit restructuring)
Audited |
If payment default is
imminent or default has
already occurred, we may grant
concessions to borrowers in
financial
difficulties that we would otherwise
not consider in the normal course
of business, such as offering
preferential interest
rates,
extending
maturity,
modifying
the
schedule
of
repayments,
debt
/
equity
swap,
subordination,
etc.
When
a
forbearance measure takes
place, each
case is
considered individually and
the exposure is
generally classified as
defaulted.
Forbearance
classification
remains
until the
loan
is repaid
or written
off,
non-preferential
conditions
are
granted
that
supersede the preferential conditions,
or the counterparty
has recovered and the
preferential conditions no longer
exceed
our risk tolerance.
Contractual
adjustments
when
there
is
no
evidence
of
imminent
payment
default,
or
where
changes
to
terms
and
conditions are within our usual risk tolerance, are not considered
to be forborne.
p
Annual Report 2023 |
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76
Loss history statistics
An
instrument
is
classified
as
credit
impaired
if
the
counterparty
has
defaulted.
This
also
includes
credit-impaired
exposures for which no loss
has occurred or for which
no allowance has been recognized (e.g.,
we expect to fully recover
the exposures via collateral held).
Coverage
ratios
are
calculated
by
taking
ECL
allowances
and
provisions
divided
by
the
gross
carrying
amount
of
the
exposures. Core loan exposure is defined
as the sum of Loans
and advances to customers and Loans
to financial advisors.
The total
combined on-
and off-balance
sheet coverage
ratio was
at 22 basis
points as
of 31 December
2023, 1 basis
point lower than on 31 December 2022. The combined stage 1 and 2 ratio of 10 basis points was unchanged compared
with 31 December 2022; the stage 3 ratio was 22%, materially
unchanged compared with 31 December 2022.
›
The majority of the credit-impaired exposure relates to loans and advances
in our Swiss domestic business. Refer to
“Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement” and “Note 19
Expected credit
loss measurement” in the “Consolidated financial statements”
section of this report for more information about ECL
measurement
and the calculation of the coverage ratio
›
Refer to “Note 13 Other assets” in the “Consolidated
financial statements” section of this report for
more details
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
77
Loss history statistics
USD m, except where indicated
31.12.23
31.12.22
1
31.12.21
1
31.12.20
1
31.12.19
1
Banking products, core exposure and off-balance sheet, gross
2
562,095
509,024
3
517,866
3
497,313
3
423,771
3
of which: amounts due from banks and loans and advances to customers
(gross)
434,780
402,801
414,099
396,049
340,003
Credit-impaired exposure, gross (stage 3)
2,966
2,455
2,610
3,778
3,113
of which: credit-impaired amounts due from banks and loans
and advances to customers (stage 3)
2,586
2,012
2,150
2,945
2,309
Non-performing amounts due from banks and loans and
advances to customers
2,793
2,333
2,387
3,176
2,466
ECL allowances and provisions for credit losses
4
1,244
1,091
1,165
1,468
1,029
of which: core loan exposure (all stages)
1,172
1,043
1,132
1,426
987
of which: amounts due from banks and loans and advances to customers
(all stages)
942
789
857
1,076
770
of which: amounts due from banks and loans and advances to customers
(stage 3)
377
474
572
703
559
Write-offs (stage 3)
77
95
137
356
142
of which: write-offs for amounts due from banks and loans
and advances to customers
62
74
118
348
122
Credit loss expense / (release)
5
143
29
(148)
694
78
Ratios
Credit-impaired amounts due from banks and loans and advances
to customers as a percentage of amounts
due from banks and loans and advances to customers (gross)
0.6
0.5
0.5
0.7
0.7
Non-performing amounts due from banks and loans and
advances to customers as a percentage of amounts
due from banks and loans and advances to customer (gross)
0.6
0.6
0.6
0.8
0.7
ECL allowances for amounts due from banks and loans and
advances to customers as a percentage of amounts
due from banks and loans and advances to customer (gross)
0.2
0.2
0.2
0.3
0.2
Write-offs as a percentage of average amounts due from banks and loans
and advances to customers (gross)
outstanding during the period
0.0
0.0
0.0
0.1
0.0
1 Prior-period numbers are based
on pre-acquisition UBS values.
2 Includes amounts due from
banks, core loan exposure (Loans
and advances to customers and
Loans to financial advisors) and off
balance sheet
items defined as guarantees and loan commitments.
3 Comparatives have been restated to
include amounts due from banks.
4 Includes provisions for ECL of guarantees
and loan commitments and allowances
for securities financing transactions.
5 Includes credit loss expense / (release) for other financial assets at amortized cost, guarantees,
loan commitments, and securities financing transactions.
Market risk
Audited |
Main sources of market risk
Market risks arise from both trading and non-trading
business activities.
–
Trading market
risks are
mainly connected
with primary
debt and
equity underwriting
and securities
and derivatives
trading for
market-making and
client facilitation
in our
Investment Bank,
as well
as the
remaining positions
in Non-
core and Legacy and our municipal securities trading business
in Global Wealth Management.
–
Non-trading market
risks arise predominantly
in the form
of interest rate
and foreign exchange
risks connected
with
personal banking and lending in our wealth management
businesses, the Swiss business of our Personal & Corporate
Banking business division,
the Investment Bank’s lending business, and treasury
activities.
–
Group Treasury assumes market risks
in the process of
managing interest rate risk, structural foreign
exchange risk and
the Group’s liquidity and funding profile, including high-quality
liquid assets (HQLA).
–
Equity and
debt
investments
can
also give
rise to
market
risks, as
can
some aspects
of employee
benefits,
such
as
defined benefit pension schemes.
p
Audited |
Overview of measurement, monitoring and management techniques
–
Market
risk limits
are
set for
the Group,
the
business
divisions and
Group
Treasury
at granular
levels in
the various
business lines, reflecting the nature and magnitude of the
market risks.
–
Management value-at-risk (VaR) measures exposures under
the market risk framework, including trading market risks
and some
non-trading market risks.
Non-trading market risks
not included
in VaR
are also
covered in
the risks
controlled
by Market and Treasury Risk Control functions.
–
Our primary portfolio measures of market risk are liquidity-adjusted stress
loss and VaR. Both are subject to limits that
are approved by the Board of Directors (the BoD).
–
These measures are
complemented by
concentration and
granular limits for
general and specific
market risk factors.
Our trading businesses are subject
to multiple market risk limits, which
take into account the extent of
market liquidity
and volatility,
available
operational capacity,
valuation uncertainty,
and, for
our single-name
exposures, issuer
credit
quality.
–
Trading
market
risks
are
managed
at
portfolio
level.
As
risk
factor
sensitivities
change
due
to
new
transactions,
transaction expiries or changes
in market levels, risk
factors are dynamically
rehedged to remain
within limits. We
do
not generally seek to distinguish in the trading portfolio between
specific positions and associated hedges.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
78
–
Issuer risk is controlled by limits applied at the business division level based on jump-to-zero measures, which estimate
maximum default exposure (the default event loss assuming
zero recovery).
–
Non-trading
foreign
exchange
risks
are
managed
under
market
risk
limits,
with
the
exception
of
Group
Treasury
management of consolidated capital activity.
Our CRO Treasury function applies a holistic risk framework, setting the appetite for treasury-related risk-taking activities
across UBS AG.
Key elements of
the framework include
an overarching economic
value sensitivity limit,
set by the BoD,
and the sensitivity
of net interest
income to changes
in interest
rates targets,
set by the
CEO. Limits are
also set by
the
BoD to balance the effect of foreign exchange movements
on our common equity tier 1 (CET1) capital and CET1 capital
ratio. Non-trading interest rate and foreign exchange risks are included in firm-wide statistical and stress
-testing metrics,
which flow into our risk appetite framework.
Equity and debt investments are
subject to a range
of risk controls, including preapproval of
new investments by business
management and Risk Control
and regular monitoring
and reporting. They are
also included in firm-wide
statistical and
stress-testing metrics.
p
›
Refer to “Currency management” in the “Capital, liquidity
and funding, and balance sheet” section of
this report for more
information about Group Treasury’s management of foreign exchange risks
›
Refer to the “Capital, liquidity and funding,
and balance sheet” section of this report for more information
about the sensitivity
of our CET1 capital and CET1 capital ratio to currency
movements
Market risk stress loss
The
measurement
and
management
of
market
risks
include
an
extensive
set
of
stress
tests
and
scenario
analyses,
continuously evaluated to
ensure that losses
resulting from an
extreme yet plausible
event do
not exceed
our risk
appetite.
Liquidity-adjusted stress
Liquidity-adjusted stress is
UBS AG’s primary stress
loss measure
for firm-wide market
risk. The framework
captures the
economic
losses
that
could
arise
under
specified
stress
scenarios.
Shocks
are
applied
to
positions
based
on
expected
market movements in the liquidity-adjusted holding periods
resulting from the specified scenario.
The holding periods used for
liquidity-adjusted stress are calibrated to reflect
the time needed to reduce
or hedge the risk
of positions in each major risk factor in a stressed environment.
UBS AG applies minimum holding periods, regardless
of
observed liquidity levels, as identification of and reaction
to a crisis may not always be immediate.
The expected market movements are derived using historical market behavior (based on analysis of
historical events) and
forward-looking analysis including consideration of defined
scenarios that have not occurred in the past.
Stress-based limits apply at several
levels of the organizational hierarchy. Liquidity
-adjusted stress is also the core
market
risk component of our combined stress test framework and
therefore integral to our overall risk appetite framework.
›
Refer to “Risk appetite framework” in this
section for more information
›
Refer to “Stress testing” in this section for more information
about our stress testing framework
Value-at-risk
VaR definition
Audited |
VaR
is a
statistical
measure
of market
risk, quantifying
the potential
market risk
losses over
a
set time
horizon
(holding period) at an established level of confidence. VaR assumes no change in UBS AG’s trading
positions over the set
time horizon.
UBS AG
calculates
VaR daily.
The profit
or loss
distribution
from which
VaR is
estimated
is derived
from our
internally
developed VaR model, which simulates returns over the holding period
for risk factors our trading positions are sensitive
to, and
subsequently quantifies
the profit
/ loss
effect of
these risk
factor returns
on our
trading positions.
Systematic
commodity,
credit,
equity,
foreign
exchange
rate
and
interest
rate
risk
factor
returns
are
based
on
a
pure
historical
simulation approach. UBS AG uses an unweighted five-year look-back window.
Modeling idiosyncratic and
specific risks
for equity
and credit
risk factors
using historical
simulation is
challenging,
due to
the limited
availability of
continuous
good-quality historical data.
UBS AG relies
upon factor models
to distinguish systematic
and idiosyncratic
returns.
UBS AG
simulates idiosyncratic returns through
a Monte Carlo
simulation, aggregating the sum of systematic and residual returns
in such a way that systematic and residual risk are consistently captured. When modeling risk factor returns, we consider
the stationarity properties of the historical time series of risk
factor changes. Depending on the stationarity properties
of
the
risk
factors
within
a
given
factor
class,
the
factor
returns
are
modeled
using
absolute
returns,
proportional
or
logarithmic returns. Risk factor return distributions are updated
fortnightly.
Risk factor
returns are
converted into
profit or
loss values
via sensitivities
and full
revaluation grids
sourced from front-
office systems, enabling us to capture material non-linear
effects.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
79
UBS AG uses a single
VaR model for internal management purposes
and for determining market risk
risk-weighted assets
(RWA),
although
the
two
cases
consider
different
confidence
levels
and
time
horizons.
For
internal
management
purposes, risk limits are
established and exposures measured
using VaR at a
% confidence level with
a 1-day holding
period, aligned to the way we consider the risks associated with our trading activities. The regulatory measure of market
risk
used
to
underpin
the
market
risk
capital
requirement
under
Basel III
involves
a
measure
equivalent
to
a
%
confidence
level
using
a
10-day
holding
period.
To
calculate
a
10-day
holding
period
VaR,
we
use
10-day
risk
factor
returns.
Additionally, the portfolio populations
for management and regulatory
VaR are slightly different.
The one for regulatory
VaR
meets
regulatory
requirements
for
inclusion
in
regulatory
VaR.
Management
VaR
includes
a
broader
range
of
positions. For
example, regulatory
VaR excludes
credit spread
risks from
the securitization
portfolio, which
are treated
instead under the securitization approach for regulatory
purposes.
We also
use stressed
VaR (SVaR)
for the
calculation of
market risk
RWA. SVaR
uses broadly
the same
methodology as
regulatory
VaR and
is calculated
using the
same
population,
holding
period (10-day)
and confidence
level (
%). For
SVaR,
UBS AG
identifies
the
most significant
one-year
period of
financial
stress
from
a
historical
dataset
covering the
period from 1 January 2007 to the present. SVaR is computed
weekly at a minimum.
p
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
for more information
about the regulatory capital calculation under the advanced
internal ratings-based approach
Management VaR for the period
UBS AG continued to maintain management VaR at low levels, with average VaR
increasing to USD 15m from USD 11m
in 2023, mainly driven by the Investment Bank’s Global
Markets business.
Audited |
Management value-at-risk (1-day, 95% confidence, 5 years of historical data) of UBS AG business divisions and Group
Items by general market risk type
1
For the year ended 31.12.23
USD m
Equity
Interest
rates
Credit
spreads
Foreign
exchange
Commodities
Min.
Max.
Average
31.12.23
Total management VaR
Average (per business division and risk type)
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Non-core and Legacy
Group Items
Diversification effect
2,3
(
6
)
(
6
)
(
1
)
(
4
)
(
4
)
(
1
)
For the year ended 31.12.22
4
USD m
Equity
Interest
rates
Credit
spreads
Foreign
exchange
Commodities
Min.
Max.
Average
31.12.22
Total management VaR
Average (per business division and risk type)
Global Wealth Management
Personal & Corporate Banking
Asset Management
Investment Bank
Group Functions (including Non-core and Legacy Portfolio)
Diversification effect
2,3
(
5
)
(
5
)
(
1
)
(
3
)
(
4
)
(
1
)
1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures.
The minima and maxima for each level may occur on different
days, and, likewise, the value
-at-risk (VaR) for each
business line or risk type, being driven
by the extreme loss tail of the corresponding distribution of
simulated profits and losses for that business line
or risk type, may well be driven by
different days in the historical
time series, rendering invalid the simple summation of figures to arrive at the aggregate total.
2 The difference between the sum of the standalone VaR for the business divisions and Group Items and the total VaR.
3 As the minima and
maxima for different
business divisions and Group
Items occur on different
days, it is
not meaningful to calculate a
portfolio diversification effect.
4 Prior-period numbers
are based on pre-
acquisition UBS values as the risk profile compared with UBS AG does not materially differ.
p
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
80
VaR limitations
Audited |
Actual realized market risk losses may differ
from those implied by VaR
for a variety of reasons.
–
VaR is calibrated to a specified level of confidence and
may not indicate potential losses beyond this confidence
level.
–
The
1-day
time horizon
used
for
VaR for
internal
management
purposes
(10-day
for
regulatory
VaR) may
not
fully
capture market risk of positions that cannot be closed out
or hedged within the specified period.
–
In
some
cases,
VaR
calculations
approximate
the
effect
of
changes
in
risk
factors
on
the
values
of
positions
and
portfolios.
–
Effects
of
extreme
market
movements
are
subject
to
estimation
errors,
which
may
result
from
non-linear
risk
sensitivities,
and
the
potential
for
actual
volatility
and
correlation
levels
to
differ
from
assumptions
implicit
in
VaR
calculations.
–
The choice of a
longer historical window means
sudden increases in market
volatility will tend not
to increase VaR as
quickly as
the use
of shorter
historical observation
periods, but
such increases
will affect
VaR for
a longer
period of
time. Similarly, after periods
of increased volatility, as markets
stabilize, VaR predictions will remain
more conservative
for a period of time influenced by the length of the historical
observation period.
SVaR is
subject to the limitations
noted for VaR
above, but the
use of one-year
datasets avoids the
smoothing effect of
longer datasets
used for VaR.
In addition,
the ability to
select a one-year
period outside of
recent market
history allows
for a
wider variety
of potential
loss events.
Therefore,
although the
significant period
of stress
during the
2007–2009
financial crisis is
no longer contained in
the look-back window used
for management and regulatory VaR, SVaR continues
to use that data. This approach
aims to reduce the procyclicality of the
regulatory capital requirements
for market risks.
UBS AG recognizes that
no single measure can
encompass all risks associated
with a position or
portfolio. We use
a set
of metrics with
both overlapping
and complementary
characteristics to
create a holistic
framework that
aims to ensure
material completeness of risk
identification and measurement. As
a statistical aggregate
risk measure, VaR supplements
our comprehensive stress testing framework.
We also have a framework to identify and quantify potential
risks not fully captured by our VaR model and refer
to such
risks as risks not in VaR. The framework underpins these potential
risks with additional regulatory capital.
p
Backtesting of VaR
VaR backtesting
is a performance
measurement process
in which a
1-day VaR
prediction is
compared with
the realized
1-day profit or loss
(P&L). We compute
backtesting VaR
using a 99% confidence
level and 1-day holding
period for the
regulatory
VaR
population.
Since
99%
VaR
is
defined
as
a
risk
measure
that
operates
on
the
lower
tail
of
the
P&L
distribution,
99% backtesting
VaR
is a
negative number.
Backtesting revenues
exclude non-trading
revenues,
such as
valuation reserves, fees and commissions,
and revenues from intraday trading, so
as to provide a like-for-like comparison.
A backtesting exception occurs when backtesting revenues
are lower than the previous day’s backtesting
VaR.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
81
Statistically, given the 99% confidence level,
two or three backtesting exceptions a
year can be expected. More than
four
exceptions could
indicate that
the VaR
model is not
performing appropriately,
as could too
few exceptions
over a
long
period. However,
as noted
for VaR
limitations above,
a sudden
increase (or
decrease) in
market volatility
relative to
the
volatility observed
in the
look-back window could
lead to
a higher
(or lower)
number of
exceptions. Therefore, backtesting
exceptions are investigated, as are exceptional positive backtesting revenues, with the results reported to senior business
management and regulators.
The number
of negative
backtesting exceptions
within a
250-business-day window
decreased to
zero from
one by
the
end
of
2023.
The
Swiss
Financial
Market
Supervisory
Authority
(FINMA)
VaR
multiplier
derived
from
backtesting
exceptions for market risk RWA was unchanged compared
with the prior year, at 3.0.
VaR model confirmation
In addition
to the
for-regulatory-purposes
backtesting described
above, we
conduct extended
backtesting for
internal
model confirmation purposes. This includes observing model performance across the entire P&L distribution (not just the
tails) and at multiple levels within the business division hierarchies.
›
Refer to “Risk measurement” in this section for
more information about our approach to model confirmation
procedures
VaR model developments in 2023
Audited |
No material changes were made to the UBS AG VaR
model in 2023.
p
Future market risk-related regulatory capital developments
In January 2019, the Basel Committee on Banking Supervision (the BCBS) published the final standards on the minimum
capital requirements
for market risk
(the Fundamental Review of
the Trading
Book). In December 2022,
the Swiss State
Secretariat for
International Finance changed
the expected
date on
which the
final Basel
III guidelines
are to
enter into
force,
from
1
July
2024
to
1
January
2025.
As
a
result,
the
Swiss
implementation
timeline
would
be
aligned
to
the
currently
expected
implementation
timeline
in
the
EU.
In
November
2023,
the
Swiss
Federal
Council
adopted
amendments to the Capital Adequacy Ordinance (the CAO) for banks
to incorporate the final Basel III standards adopted
by the BCBS in
Swiss law. The Federal Department of Finance (FDF)
will inform the Federal Council
again about the status
of international implementation by the end of July 2024.
Key elements of the revised market
risk framework include: (i) changes to the
internal model-based approach, including
changes to the model
approval and performance
measurement process; (ii) changes
to the standardized
approach with
the aim of
it being a
credible fallback method for
an internal model-based approach;
and (iii) a revised
boundary between
the
trading
book
and
the
banking
book.
UBS
maintains
a
close
dialogue
with
FINMA
to
discuss
the
implementation
objectives in more detail and to provide a smooth transition of the
capital regime for market risk.
In September 2021, FINMA mandated UBS to hold an RWA add-on for the omission of time decay in regulatory VaR and
SVaR. The add-on reflects the outcome of
discussions with FINMA regarding our regulatory
VaR model, which started in
late 2019. The integration of time decay into the regulatory
VaR model went live in January 2024.
›
Refer to “Risk-weighted assets” in the “Capital,
liquidity and funding, and balance sheet” section
of this report for more
information about the development of RWA including the regulatory add-on
›
Refer to “Risk measurement” in this section for
more information about our approach to model confirmation
procedures
›
Refer to the “Regulatory and legal developments”
and “Risk factors” sections of this report for
more information
Interest rate risk in the banking book
Sources of interest rate risk in the banking book
Audited |
IRRBB arises
from
balance sheet
positions such
as amounts
due from
banks, Loans
and advances
to customers,
Financial assets at fair
value not held for
trading, Financial assets
measured at amortized
cost, Customer deposits,
Debt
issued measured at
amortized cost, and
derivatives, including those
subject to hedge
accounting. Fair value
changes to
these positions may affect
other comprehensive income
(OCI) or the income
statement, depending on
their accounting
treatment.
UBS AG’s
largest
banking
book
interest
rate
exposures
arise
from
customer
deposits
and
lending
products
in
Global
Wealth Management and Personal & Corporate Banking, as well
as from debt issuance, liquidity buffers and interest rate
hedges in
Group Treasury.
The inherent
interest rate
risks stemming
from Global
Wealth Management
and Personal
&
Corporate Banking
are generally
transferred
to Group
Treasury, to
manage them
centrally
together
with our
modeled
interest rate
duration assigned
to equity,
goodwill
and real
estate.
This makes
the
netting of
interest
rate
risks
across
different sources
possible, while
leaving the
originating businesses
with commercial
margin and
volume management.
The residual
interest rate
risk is
mainly hedged
with interest
rate swaps,
to the
vast majority
of which
we apply
hedge
accounting. Short-term
exposures and
HQLA classified
as Financial
assets at
fair value
not held
for trading
are hedged
with
derivatives
accounted
for
on
a
mark-to-market
basis.
Long-term
fixed-rate
debt
issued
and
HQLA
hedged
with
external interest rate swaps are designated in fair value hedge accounting
relationships.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
82
Risk management and governance
IRRBB is measured using several metrics, the most
relevant of which are the following.
–
EVE sensitivity
to yield
curve moves
is calculated
as changes
in the
present value
of future
cash flows
irrespective of
accounting treatment.
These yield curve
moves are also
the key
risk factors for
statistical and stress-based
measures,
e.g., VaR and stress scenarios, as well as the regulatory interest rate scenarios. These are measured and reported daily.
The regulatory IRRBB
EVE exposure is
the most adverse
regulatory interest rate scenario
that is netted
across currencies.
It excludes the sensitivity from additional tier 1 (AT1) capital instruments (as per
specific FINMA requirements) and the
modeled
interest
rate
duration
assigned
to
equity,
goodwill
and
real
estate.
UBS AG
also
applies
granular
internal
interest rate shock scenarios to its banking book positions
to monitor its specific risk profile.
–
Net
interest
income
(NII) sensitivities
to yield
curve
moves
are
calculated
as changes
of baseline
NII over
a
set time
horizon, which we
internally compute
by assuming interest
rates in all
currencies develop
according to their
market-
implied forward rates and assuming constant business
volumes and product mix and no specific management actions.
The sensitivities are measured and reported monthly.
UBS AG actively manages
IRRBB, with the
aim of reducing
the volatility of
NII subject to
limits and triggers
for EVE
and
NII exposure at consolidated and significant legal entity levels.
The
Group
Asset
and
Liability
Committee
(the
ALCO)
and,
where
relevant,
ALCOs
at
a
legal
entity
level
perform
independent
oversight
over
the
management
of
IRRBB,
which
is
also
subject
to
Group
Internal
Audit
and
model
governance.
›
Refer to “Risk measurement” in this section for
more information
Key modeling assumptions
The cash
flows from
customer deposits
and lending
products used
in calculation
of EVE
sensitivity exclude
commercial
margins and
other spread
components, are
aggregated
by daily
time buckets
and are
discounted using
risk-free
rates.
Our external issuances are discounted using UBS’s senior debt curve, and
capital instruments are modeled to the first call
date. NII
sensitivity,
which includes
commercial margins,
is calculated
over a
one-year time
horizon, assuming
constant
balance sheet structure and volumes, and considers
embedded interest rate options.
The average repricing
maturity of non-maturing
deposits and
loans is
determined via
target replication
portfolios designed
to protect
product margins. Optimal
replicating portfolios are
determined at granular
currency- and product-specific
levels
by simulating and applying a real-world market rate
model to historically calibrated client rate and volume models.
UBS AG uses an
econometric prepayment model
to forecast prepayment
rates on US
mortgage loans in
UBS Bank USA
and
agency
mortgage-backed
securities
(MBSs)
held
in
various
liquidity
portfolios
of
UBS
Americas
Holding
LLC
consolidated.
These
prepayment
rates
are
used
to
forecast
both
mortgage
loan
and
MBS
balances
under
various
macroeconomic
scenarios.
The
prepayment
model
is
used
for
a
variety
of
purposes,
including
risk
management
and
regulatory
stress
testing.
Swiss
mortgages
and
fixed-term
deposits
generally
do
not
carry
similar
optionality,
due
to
prepayment and early redemption penalties.
p
Effect of interest rate changes on shareholders’ equity and
CET1 capital
The “Accounting and
capital effect
of changes in
interest rates” table
below shows the
effects on shareholders’
equity
and CET1
capital of gains
and losses from
changes in interest
rates in
the main
banking book positions.
We use derivatives
to hedge
interest
rate risks
in the
banking book
and these
reflect changes
in interest
rates as
an immediate
fair value
gain or loss, recognized either in the income statement or through OCI.
Where hedged items are accrual accounted, we
aim to minimize accounting asymmetries by applying hedge
accounting to reflect the economic hedge relation
ship.
In a rising
rate scenario, we
would have an
initial decrease in
shareholders’ equity as
a result of
fair value losses
on our
derivatives recognized
in OCI
while we
would expect
higher NII
over time
as rates
increase. The
effect on
CET1 capital
would be much lower as gains
and losses on interest rate
swaps designated as cash flow hedges
are not recognized for
regulatory capital purposes.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
83
Accounting and capital effect of changes in interest rates
1
Recognition
Shareholders’ equity
CET1 capital
Timing
Income statement / OCI
Gains
Losses
Gains
Losses
Loans and deposits at amortized cost
2,3
Gradual
Income statement
l
l
l
l
Other financial assets and liabilities measured at amortized
cost
2
Gradual
Income statement
l
l
l
l
Debt issued measured at amortized cost
2,3
Gradual
Income statement
l
l
l
l
Receivables and payables from securities financing transactions
2
Gradual
Income statement
l
l
l
l
Financial assets at fair value not held for trading
Immediate
Income statement
l
l
l
l
Financial assets at fair value through other comprehensive income
Immediate
OCI
l
l
l
Derivatives designated as cash flow hedges
Immediate
OCI
4
l
l
Derivatives designated as fair value hedges
5
Immediate
Income statement
l
l
l
l
Derivatives transacted as economic hedges
Immediate
Income statement
l
l
l
l
1 Refer to the “Reconciliation
of equity under IFRS
Accounting Standards to Swiss SRB
common equity tier 1
capital” table in the “Capital,
liquidity and funding, and
balance sheet” section of
this report for more
information about the differences between shareholders’ equity
and CET1 capital.
2 For fixed-rate financial instruments,
changes in interest rates affect the income
statement when these instruments roll over and
reprice.
3 For hedge-accounted
items, a fair
value adjustment
is applied in
line with the
treatment of the
hedging derivatives.
4 Excluding hedge
ineffectiveness that is
recognized in the
income statement in
accordance with IFRS Accounting Standards.
5 The fair value of
the derivatives is offset by
the fair value adjustment of
the hedged items. Under
the fair value hedge program
applied to cross-currency swaps and
foreign currency debt, the foreign currency basis spread is excluded from the hedge designation and accounted for through OCI,
which is included in CET1.
Economic value of equity sensitivity
Audited |
The EVE sensitivity
in the banking
book to a
+1-basis-point parallel shift
in yield curves
was negative USD
m
as of 31 December 2023,
compared with negative
USD
m as of 31 December
2022. This excludes the
sensitivity of
USD
m from AT1
capital instruments (as per specific FINMA requirements)
in contrast to general BCBS guidance.
The majority of
our interest
rate risk in
the banking
book is a
reflection of
the net asset
duration that
we run to
offset
our modeled
sensitivity of
net USD
m (31 December
2022: USD
m) assigned
to our
equity,
goodwill and
real
estate, with the aim of generating a
stable NII contribution. Of this, USD
m and USD
m are attributable to the US
dollar and the Swiss franc portfolios, respectively
(31 December 2022: USD
m and USD
m, respectively).
In addition
to the
sensitivity mentioned
above, we
calculate the
six interest
rate shock
scenarios prescribed
by FINMA.
The “Parallel
up” scenario,
assuming all
positions were
fair valued,
was the
most severe
and would
have resulted
in a
change in EVE of negative USD
bn, or
%, of our tier 1 capital (31 December 2022: negative USD
bn, or
%),
which is well below the
% threshold as per the BCBS
supervisory outlier test for high levels
of interest rate risk in the
banking book.
The immediate effect on UBS AG’s tier 1 capital in the “Parallel up” scenario
as of 31 December 2023 would have been
a decrease of
USD
bn, or
% (31 December
2022: USD
bn, or
%), reflecting the
fact that the
vast majority
of our banking book
is accrual accounted or
subject to hedge accounting.
The “Parallel up” scenario
would subsequently
have a positive effect on NII, assuming a constant balance
sheet.
UBS AG also applies granular internal interest rate shock
scenarios to its banking book positions to monitor the banking
book’s specific risk profile.
Net interest income sensitivity
The main NII
sensitivity in the
banking book resides
in Global Wealth
Management and Personal
& Corporate
Banking.
We
assign a
target
duration
to our
investment
of equity
portfolio,
and
Group
Treasury
actively
manages
the
residual
IRRBB. This
sensitivity is
assessed using
a number
of scenarios
assuming parallel
and non-parallel
shifts in
yield curves,
with various
degrees
of
severity,
and we
have
set
and
monitor
thresholds
for
the
NII sensitivity
to
immediate
parallel
shocks of –200 and +200 basis points under the assumption
of constant balance sheet volume and structure.
p
›
Refer to the “UBS AG consolidated performance”
section for more information about sensitivity
to interest rate movements
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
84
Audited |
Interest rate risk – banking book
31.12.23
USD m
Effect on EVE
1
Effect on EVE
1
Scenarios
CHF
EUR
GBP
USD
Other
Total
Additional tier 1 (AT1) capital
instruments
Total
+1 bp
(
4.3
)
(
0.7
)
(
23.1
)
(
28.1
)
(
23.3
)
Parallel up
2
(
608.9
)
(
142.9
)
(
4,522.3
)
(
15.0
)
(
5,287.0
)
(
4,398.7
)
Parallel down
2
(
11.8
)
(
1,028.0
)
Steepener
3
(
335.2
)
(
16.0
)
(
13.1
)
(
973.6
)
(
23.0
)
(
1,361.0
)
(
1,265.1
)
Flattener
4
(
6.8
)
(
94.1
)
Short-term up
5
(
38.5
)
(
48.4
)
(
1,909.8
)
(
1,976.3
)
(
1,498.9
)
Short-term down
6
(
14.3
)
(
10.0
)
(
498.9
)
31.12.22
USD m
Effect on EVE
1
Effect on EVE
1
Scenarios
CHF
EUR
GBP
USD
Other
Total
Additional tier 1 (AT1) capital
instruments
Total
+1 bp
(
4.1
)
(
0.6
)
(
20.4
)
(
0.1
)
(
25.0
)
(
21.5
)
Parallel up
2
(
576.5
)
(
111.6
)
(
3,936.5
)
(
26.3
)
(
4,617.2
)
(
3,964.7
)
Parallel down
2
(
45.7
)
(
702.8
)
Steepener
3
(
256.7
)
(
93.2
)
(
28.2
)
(
1,026.7
)
(
3.3
)
(
1,408.2
)
(
47.3
)
(
1,455.5
)
Flattener
4
(
2.6
)
Short-term up
5
(
84.1
)
(
1,514.7
)
(
13.9
)
(
1,532.9
)
(
1,092.2
)
Short-term down
6
(
36.1
)
(
42.6
)
(
457.8
)
1 Economic value
of equity.
2 Rates across
all tenors move
by ±150 bps
for Swiss franc,
±200 bps for
euro and US
dollar, and
±250 bps for
pound sterling.
3 Short-term rates
decrease and long-term
rates
increase.
4 Short-term rates increase and long-term rates decrease.
5 Short-term rates increase more than long-term rates.
6 Short-term rates decrease more than long-term rates.
p
Other market risk exposures
Own credit
We
are
exposed to
changes in
UBS AG’s
own credit
reflected
in the
valuation of
financial liabilities
designated
at fair
value when
our own
credit risk
would be
considered
by market
participants, except
for fully
collateralized liabilities
or
other obligations for which it is established market practice
to not include an own-credit component.
›
Refer to “Note 20 Fair value measurement” in the “Consolidated
financial statements” section of this report for more information
about own credit
Structural foreign exchange risk
Upon consolidation,
assets and
liabilities held
in foreign
operations are
translated into
US dollars
at the
closing foreign
exchange rate on the
balance sheet date. Value changes (in US
dollars) of non-US dollar assets or
liabilities due to foreign
exchange
movements are recognized in OCI and
therefore affect
shareholders’ equity and CET1 capital.
Group
Treasury
uses
strategies
to
manage
this
foreign
currency
exposure,
including
matched
funding
of
assets
and
liabilities and net investment hedging.
›
Refer to the “Capital, liquidity and funding,
and balance sheet” section of this report for more information
about our exposure to
and management of structural foreign exchange risk
›
Refer to “Note 10 Derivative instruments”
in the “Consolidated financial statements” section
of this report for more information
about our hedges of net investments in foreign operations
Equity investments and investment fund units
Audited |
UBS
AG
makes
direct
investments
in
a
variety
of
entities
and
buys
equity
holdings
in
both
listed
and
unlisted
companies,
with
the
aim
of
supporting
our
business
activities
and
delivering
strategic
value
to
UBS.
This
includes
investments in
exchange and
clearing house
memberships,
as well
as minority
investments in
early-stage fintechs
and
technology companies via
UBS Next. We
may also make investments
in funds that we
manage in order
to fund or seed
them at
inception or
to demonstrate
that our
interests
align with
those of
investors. We
also buy,
and are
sometimes
required by agreement to buy,
securities and units from funds that we have
sold to clients.
The
fair
value
of
equity
investments
tends
to
be
influenced
by
factors
specific
to
the
individual
investments.
Equity
investments are generally intended
to be held for the
medium or long term
and may be subject
to lock-up agreements.
For these reasons,
we generally do
not control these
exposures by using
market risk measures
applied to trading
activities.
However, such equity investments are subject to a different
range of controls, including preapproval of new investments
by business management
and Risk Control,
portfolio and concentration
limits, and regular
monitoring and reporting
to
senior management. They are also included
in our firm-wide statistical and stress-testing metrics,
which flow into our risk
appetite framework.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
85
As of
31 December 2023, we
held equity
investments and investment
fund units
totaling USD
bn, of
which USD
bn
was classified as Financial assets at fair value not held for
trading and USD
bn as Investments in associates
.
p
›
Refer to “Note 20 Fair value measurement” and “Note 28
Interests in subsidiaries and other entities”
in the “Consolidated
financial statements”
section of this report for more information
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report for
more information about the classification of financial instruments
Debt investments
Audited |
Debt investments classified
as Financial assets
measured at
fair value through
other comprehensive
income as of
31 December 2023 were measured
at fair value with changes in fair
value recorded through
Equity,
and can broadly be
categorized as money market instruments and debt securities primarily held for statutory,
regulatory or liquidity reasons.
The risk control framework applied to
debt instruments classified as Financial assets measured at fair
value through other
comprehensive
income
depends
on
the
nature
of
the
instruments
and
the
purpose
for
which
we
hold
them.
Our
exposures may be included
in market risk limits or
be subject to specific monitoring
and interest rate sensitivity analysis.
They are also included in our
firm-wide statistical and stress-testing metrics, which flow into
our risk appetite framework.
Debt instruments
classified
as Financial
assets
measured
at fair
value through
other
comprehensive
income
had a
fair
value of USD
bn as of 31 December 2023, compared with USD
bn as of 31 December 2022.
p
›
Refer to “Note 20 Fair value measurement” in the “Consolidated
financial statements”
section of this report for more information
›
Refer to “Economic value of equity sensitivity”
in this section for more information
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report for
more information about the classification of financial instruments
Pension risk
We provide a number of pension plans for past and current
employees, some classified as defined benefit pension plans
under IFRS Accounting Standards,
which can have a material effect
on our equity under IFRS Accounting Standards
and
CET1 capital.
Pension risk is the risk that defined benefit plans’ funded status
might decrease, negatively affecting our capital. This can
result from
falls in
the value
of a
plan’s assets
or in
the investment
returns, increases
in defined
benefit obligations,
or
combinations of the above.
Important risk factors affecting the fair
value of pension plans’ assets include equity
market returns, interest rates, bond
yields,
and
real
estate
prices.
Important
risk
factors
affecting
the
present
value
of
expected
future
benefit
payments
include high-grade bond yields, interest rates, inflation rates,
and life expectancy.
Pension risk is
included in our
firm-wide statistical and
stress-testing metrics, which flow
into our risk
appetite framework.
The potential effects are thus captured in the post-stress
capital ratio calculations.
›
Refer to “Note 1 Summary of material accounting
policies” and “Note 26 Post-employment benefit plans”
in the “Consolidated
financial statements” section of this report for more information
about defined benefit plans
Country risk
Country risk framework
Country risk includes all country-specific events occurring
in a sovereign jurisdiction that may lead to
impairment of UBS
AG’s exposures. It may take the form of: (i) sovereign
risk, which is the ability and willingness of a government to
honor
its
financial
commitments;
(ii) transfer
risk,
which
arises
if
a
counterparty
or
issuer
cannot
acquire
foreign
currencies
following a
moratorium by
a central
bank on
foreign exchange
transfers; or
(iii) “other” country
risk. “Other”
country
risk may manifest itself
through, on the
one hand, increased
and multiple counterparty
and issuer default risk
(systemic
risk)
and,
on
the
other
hand,
events
that
may
affect
a
country’s
standing,
such
as
adverse
shocks
affecting
political
stability or
institutional and
/ or
legal frameworks.
UBS AG has
a well-established
risk control
framework to
assess the
risk profiles of all countries where
we have exposure.
Annual Report 2023 |
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balance sheet | Risk management and control
86
We assign
a country
rating to
each country,
which reflects
our view
of its
creditworthiness
and of
the probability
of a
country risk
event occurring.
Country ratings
are mapped
to statistically
derived
default probabilities,
described
under
“Probability of default” in this section.
We use this internal analysis
to set the credit ratings of
governments and central
banks, estimate
the probability
of a transfer
event occurring,
and establish
rules on how
aspects of country
risk should
be incorporated in counterparty ratings of non-sovereign
entities domiciled in the respective country.
Country
ratings
are
also
used
to
define
UBS AG’s
risk
appetite
regarding
foreign
countries.
A
country
risk
limit
(i.e.,
maximum aggregate exposure) applies to exposures to counterparties or issuers of securities and financial investments in
the
given
foreign
country.
UBS AG
may
limit
the
extension
of
credit,
transactions
in
traded
products
or
positions
in
securities based on a country risk ceiling even if its exposure
to a counterparty is otherwise acceptable.
For internal
measurement and
control of
country risk,
UBS AG also
considers
the financial
effect of
market disruptions
arising prior to, during
and after a
country crisis. These may
take the form of
a severe deterioration in a
country’s debt,
equity or other
asset markets,
or a sharp
depreciation of
its currency.
We use stress
testing to assess
potential financial
effects of severe country or sovereign crises.
This involves the developing of plausible stress scenarios for combined stress
testing and the
identification of countries
that may
potentially be subject
to a crisis
event, determining
potential losses
and making assumptions about recovery rates depending on
the types of credit transactions involved and their
economic
importance to the affected countries.
Country risk exposure
Country risk exposure measure
The presentation of country risk follows
our internal risk view, where
the basis for measuring exposures depends
on the
product category in which we classify the exposures.
In addition to the classification of exposures into
banking products
and traded products, covered in “Credit risk profile of UBS AG” in this section, in the trading inventory UBS AG
classifies
issuer risk
on securities
such as
bonds and
equities, as
well as risk
relating to
underlying reference
assets for
derivative
positions.
The trading inventory is managed on a net basis, and the value of long positions is netted against that of short
positions
with the
same underlying
issuer. Net
exposures are,
however, floored
at zero
per issuer
in the
figures presented
in the
following tables.
As a
result, potentially
offsetting benefits
of certain
hedges and
short positions
across issuers
are not
recognized.
We do not recognize any expected recovery values when reporting country exposures as
exposure before hedges, except
for
risk-reducing
effects
of
master
netting
agreements
and
collateral
held
in
either
cash
or
portfolios
of
diversified
marketable
securities,
which
we
deduct
from
the
potential
exposure
values.
Within
banking
products
and
traded
products, risk-reducing effects of credit
protection are generally taken
into account on
a notional basis
when determining
the net of hedge exposures.
Country risk exposure allocation
In general, exposures
are shown against
the country of
domicile of the
contractual counterparty or
the issuer of
the
security.
For
some
counterparties
whose
economic
substance
in
terms
of
assets
or
source
of
revenues
is
primarily
located in a different country, the exposure is allocated to
the risk domicile of those assets or revenues.
We apply
a specific approach
for banking
products exposures
to branches
of banks
that are
located in a
country other
than
the
legal
entity’s
domicile.
In
such
cases,
exposures
are
recorded
in
full
against
the
country
of
domicile
of
the
counterparty and additionally in full against the country
where the branch is located.
In the case of derivatives,
we show the counterparty
’s risk potential exposure
against the counterparty’s
country of risk
(presented
within
traded
products).
In
addition,
risk
associated
with
an
instantaneous
fall
in
value
of
underlying
reference assets
to zero (assuming
no recovery) is
shown against the
country of risk
of the issuer
of the reference
asset
(presented within trading inventory). This approach allows us to capture both counterparty and, where applicable, issuer
elements
of risk
arising
from
derivatives
and
applies
comprehensively
for
all
derivatives,
including
single-name
credit
default swaps (CDSs)
and other credit
derivatives.
CDSs are primarily
bought and
sold in
relation to
our trading
businesses, and,
to a
much lesser
degree, used
to hedge
credit
valuation
adjustments.
Holding
CDSs
for
credit
default
protection
does
not
necessarily
protect
the
buyer
of
protection against losses, as contracts only pay out under certain scenarios. The effectiveness of
our CDS protection as a
hedge
of
default
risk
is
influenced
by
several
factors,
including
the
contractual
terms
under
which
a
given
CDS
was
written. Generally, only
the occurrence of
credit events
as defined
by the
CDS contract’s terms
(which may
include, among
other
events,
failure
to
pay,
restructuring
or
bankruptcy)
results
in
payments
under
the
purchased
credit
protection
contracts.
For
CDS
contracts
on
sovereign
obligations,
repudiation
can
also
be
deemed
as
a
default
event.
The
determination
as to
whether
a
credit event
has occurred
is made
by the
relevant
International Swaps
and Derivatives
Association (ISDA) determination committees
(composed of various ISDA member
firms) based on the terms of
the CDS
and the facts and circumstances surrounding the event.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
87
Top 20 country risk exposures
The
table
below
shows
UBS
AG’s
20
largest
country
exposures
by
product
type,
excluding
our
home
country,
as
of
31 December 2023 compared with 31 December
2022.
Compared
with
the
prior
year,
UBS
AG’s
net
exposure
to
the
US
increased
by
USD 26.7bn,
driven
by
central
bank
exposures due to
treasury activities, as
well as loans
to corporates. Net
exposure to the
UK increased by
USD 8.7bn, driven
by central bank exposures due to treasury activities.
Based on the
sovereign rating categories, as
of 31 December 2023, 88%
of UBS AG’s emerging
market country exposure
was rated investment grade, compared with 87% as of 31
December 2022.
Israel
As
of
31 December
2023,
UBS
AG’s
direct
country
risk
exposure
to
Israel
was
USD 289m,
mainly
from
lending
and
collateralized
OTC
derivatives
exposure
within
the
Investment
Bank.
UBS
AG’s
direct
exposure
to
Gulf
Cooperation
Council countries was USD 2.5bn.
The direct exposure to Egypt,
Jordan and Lebanon is
limited,
and UBS AG has
no direct
exposure to Iran, Iraq or Syria.
Russia
UBS
AG’s
direct
country
risk
exposure
to
Russia
contributed
USD 66m
to
our
total
emerging
market
exposure
of
USD 22.0bn as of 31 December 2023,
compared with a contribution of USD 98m
as of 31 December 2022. This
includes
nostro accounts balances, and issuer risk on trading
inventory within the Investment Bank.
UBS AG had no material direct country risk exposures
to Belarus or to Ukraine as of 31 December
2023 and no material
reliance on Russian, Belarusian or Ukrainian collateral.
Top
20 country risk net exposures, by product type
USD m
Total
Banking products
(loans, guarantees, loan
commitments)
Traded products
(counterparty risk from derivatives
and securities financing)
after master netting agreements
and net of collateral
Trading inventory
(securities and potential
benefits / remaining
exposure from derivatives)
Net of hedges
1
Net of hedges
1
Net of hedges
Net long per issuer
31.12.23
31.12.22
2
31.12.23
31.12.22
2
31.12.23
31.12.22
2
31.12.23
31.12.22
2
United States
165,639
138,924
104,845
81,875
27,463
27,550
33,331
29,499
United Kingdom
40,836
32,104
22,248
10,828
16,922
19,786
1,666
1,490
Germany
20,864
20,115
7,212
8,255
7,533
6,959
6,118
4,901
Japan
18,328
22,221
13,300
13,251
4,457
8,559
571
410
Singapore
10,310
12,137
2,122
3,038
3,362
3,767
4,827
5,332
France
9,125
10,641
1,466
2,056
3,206
3,980
4,453
4,605
Canada
8,722
7,832
550
274
2,741
3,730
5,431
3,827
Australia
8,446
8,895
1,964
1,365
4,443
5,834
2,038
1,696
China
4,993
4,709
1,015
1,347
835
1,379
3,144
1,983
South Korea
4,312
3,896
437
388
647
1,042
3,228
2,466
Luxembourg
3,947
3,423
3,212
2,717
566
280
169
427
Netherlands
3,804
5,964
812
1,074
2,051
3,767
941
1,123
Sweden
3,259
2,283
225
158
1,545
1,322
1,490
803
Hong Kong SAR
2,776
3,666
884
938
885
1,843
1,007
885
Norway
2,114
2,417
58
80
530
1,137
1,526
1,200
Italy
1,459
1,492
751
628
470
703
238
161
Austria
1,323
1,526
137
285
572
450
615
792
Spain
1,316
1,032
669
630
321
201
325
200
Monaco
1,204
1,021
1,191
1,001
13
20
0
0
Finland
1,185
1,185
44
62
341
432
800
691
Total top 20
3
313,962
285,483
163,142
130,250
78,903
92,741
71,918
62,491
1 Before
deduction of
IFRS 9
ECL allowances
and provisions.
2 Comparative
period has
been restated
to reflect
a change
in the
measure used
to disclose
country risk
exposures.
3 Excluding
Switzerland,
supranationals and global funds.
Emerging markets¹ net exposure², by internal UBS country rating category
USD m
31.12.23
31.12.22
3
Investment grade
19,328
21,900
Sub-investment grade
2,697
3,173
Total
22,025
25,073
1 UBS AG classifies countries as emerging
markets based on per capita
GDP, historical
real GDP growth, alignment with international
institutions (such as BIS, World
Bank, IMF,
MSCI) and other factors.
2 Net of
credit hedges (for banking products and for traded products); net long per issuer (for trading inventory). Before deduction of IFRS 9 ECL allowances and provisions.
3 Comparative period has been restated to reflect
a change in the measure used to disclose country risk exposures.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
88
Sustainability and climate risk
Our climate
strategy
and governance
are determined
and overseen
at
the
UBS Group
level. Similarly,
we identify
and
manage climate
risks, including
climate-related
financial risks,
in our
own operations,
balance sheet,
client assets
and
supply chain on the UBS Group level.
Climate-related metrics for UBS AG are presented in the
UBS Group Annual Report 2023.
›
Refer to “Sustainability and climate risk” in the
“Risk management and control” section of the UBS
Group Annual Report 2023,
available under “Annual reporting” at
ubs.com/investors
, for more information
›
Refer to the “Our sustainability and impact strategy”
section of the UBS Group Sustainability Report 2023, available
under
“Annual reporting” at
ubs.com/investors
, for more information
Non-financial risk
Non-financial
risk
is
the
risk
of
undue
monetary
loss
and
/
or
non-monetary
adverse
consequences
resulting
from
inadequate or failed internal processes, people and / or systems, failure to comply with laws
and regulations and internal
policies and
procedures, or
external events
(deliberate, accidental
or natural)
that have
an impact
on UBS, its
clients or
its markets.
Key developments
We have identified nine non-financial risk themes as
being currently key to us. These are:
–
governance and legal structure integration;
–
financial and regulatory reporting;
–
operational resilience,
stability and cybersecurity;
–
data life cycle;
–
investor protection and market interaction;
–
strategic growth initiatives and cross-divisional interaction
;
–
the evolving
nature of
anti-money laundering
(AML), know
your client
(KYC), sanctions,
anti-bribery and
corruption
(ABC), and fraud;
–
employee conduct, capacity and culture; and
–
environmental, social and governance (ESG) risks.
UBS
continues
to
actively
manage
the
non-financial
risks
emerging
from
the
acquisition
of
the
Credit
Suisse
Group,
including
the
current
operation
of
dual
corporate
structures,
and
the
scale,
pace
and
complexity
of
the
required
integration activities. These
activities continue to be
managed by the
program run by our
Group Integration Office.
The
integration of Credit Suisse
requires data to be
migrated into the UBS
environment and we
aim to ensure that
we have
robust controls to preserve data
integrity, quality and availability to mitigate
data migration risks and to meet
regulatory
expectations.
Through this period of change,
we place an increased focus on maintaining and enhancing our control environment and
continue
to
cooperate
with
regulators
in
relation
to
the
submission
and
execution
of
implementation
plans
to
meet
regulatory
expectations,
including
remediation
requirements
applicable
to
Credit
Suisse AG.
In
addition,
the
Group
is
closely monitoring non-financial risk indicators to detect
any potential for adverse impacts on the control environment
.
There is an
increased risk
of cyber-related
operational disruption to
business activities
at our locations
and / or
those of
third-party suppliers due
to operating an
enlarged group of
entities. This is
combined with the
increasingly dynamic threat
environment,
which
is
intensified
by
current
geopolitical
factors
and
evidenced
by
the
increased
volumes
and
sophistication of cyberattacks against financial institutions
globally.
Cyberattacks on third-party vendors have affected our operations in the past and continue to be a source of residual risk
to our
business.
We
remain
on
heightened
alert
to respond
to
and
mitigate
elevated
cyber-
and
information-security
threats. During the first quarter
of 2023, a third-party vendor, ION XTP,
suffered a ransomware attack,
which resulted in
some disruption to our
exchange-traded derivatives clearing activities, although we
restored our services within
36 hours,
using an available alternative solution. Following a post-incident review,
we are improving our frameworks for managing
third parties that
support our
important business services
and are taking
actions to enhance
our cyber-risk assessments
and controls over third-party vendors. We continue
to invest in improving our technology infrastructure and
information-
security governance to improve our defense, detection and response
capabilities against cyberattacks.
In
addition,
we
are
working
to
enhance
our
operational
resilience
to
address
these
heightened
risks
and
to
meet
regulatory
deadlines
through
2026.
We
are
implementing
a
global
framework
designed
to
drive
enhancements
in
operational
resilience
across
all
business
divisions
and
relevant
jurisdictions,
as
well
as working
with
the
third
parties,
including
vendors,
that
are
of
critical
importance
to
our
operations
to
assess
their
operational
resilience
against
our
standards.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
89
The increasing
interest in
data-driven advisory
processes, and
use of
artificial intelligence
(AI) and
machine learning,
is
opening up new questions related to the fairness of AI algorithms, data life-cycle management, data ethics, data privacy
and security,
and records
management.
In addition,
new risks
continue to
emerge, such
as those
that result
from the
demand from our
clients for
distributed ledger
technology, blockchain-based
assets and
cryptocurrencies; however,
we
currently have limited
exposure to such
risks, and relevant
control frameworks for
them are implemented
and reviewed
on a regular basis as they evolve.
Competition to find new business opportunities,
products and services across the financial services sector, both for
firms
and for customers, is
increasing, particularly during periods
of market volatility and
economic uncertainty.
Thus, suitability
risk,
product
selection,
cross-divisional
service
offerings,
quality
of
advice
and
price
transparency
remain
areas
of
heightened focus for UBS and for the industry as a whole.
Evolving ESG regulations
and major legislation, such as the Consumer Duty regulation
in the United Kingdom, the Swiss
Financial Services
Act (FIDLEG)
in Switzerland,
Regulation Best
Interest (Reg
BI) in
the US
and the
Markets in
Financial
Instruments Directive II
(MiFID II) in
the EU, all
significantly affect
the industry and
have required adjustments
to control
processes.
Cross-border
risk
(including
unintended
permanent
establishment)
remains
an
area
of
regulatory
attention
for
global
financial institutions, including
a focus on
market access, such
as third-country market
access into
the European Economic
Area, and taxation of US persons.
We maintain a series of controls designed to
address these risks, and we are increasing
the number of controls that are automated.
Financial
crime,
including
money
laundering,
terrorist
financing,
sanctions
violations,
fraud,
bribery
and
corruption,
continues to present a
major risk, as technological
innovation and geopolitical
developments increase the
complexity of
doing business and heightened regulatory
attention continues. An effective financial crime
prevention program therefore
remains essential,
and we continue to
focus on strategic enhancements to
our global AML, KYC
and sanctions programs.
Money
laundering
and
financial
fraud
techniques
are
becoming
increasingly
sophisticated,
and
geopolitical
volatility
makes the sanctions
landscape more complex.
The extensive and continuously
evolving sanctions arising from
the Russia–
Ukraine war require constant attention to prevent
circumvention risks, while the conflicts in
the Middle East may increase
terrorist-financing risks.
In the US,
UBS AG entered
into a Consent
Order with the
Office of the
Comptroller of the
Currency (the
OCC) in
May
2018 relating to
our US branch
AML and KYC
programs. In response,
we have
introduced significant
improvements to
our framework for the purpose of ensuring sustainable remediation
of US-relevant Bank Secrecy Act / AML issues across
all our US legal entities.
Achieving fair
outcomes for
our clients,
upholding market
integrity and
cultivating
the highest
standards of
employee
conduct are of
critical importance
to us. We
maintain a conduct
risk framework
across our activities,
which is designed
to align our standards and conduct with these objectives
and to retain momentum on fostering a strong culture.
In
September
2022,
the
US
Securities
and
Exchange
Commission
(the
SEC)
and
the
Commodity
Futures
Trading
Commission
(the
CFTC)
issued
settlement
orders
relating
to
communications
recordkeeping
requirements
in
our
US
broker-dealers
and our
registered
swap
dealers.
In response
to shortcomings
identified
in that
context,
we
continued
work on a global remediation program started in 2022.
Non-financial risk framework
We follow a Group-wide non-financial risk framework that establishes requirements for identifying, managing, assessing
and mitigating operational,
compliance and financial
crime risks to achieve
an agreed balance between
risk and return.
It is built on the following pillars:
–
classifying inherent risks through 19 non-financial risk taxonomies,
which define the universe of material non-financial
risks that can arise as a consequence of our business activities
and external factors;
–
performing
control
assurance
activities,
including
self-assessing
the
design
and
operating
effectiveness
of
controls,
first- and second-line-of-defense control reviews and
independent control testing;
–
defining
the
non-financial
risk
appetite
(including
a
financial
risk
appetite
statement
at
the
Group,
UBS AG
and
business
division
levels
for
non-financial
risk
events)
through
quantitative
metrics
and
thresholds
and
qualitative
measures, and assessing risk exposure against appetite;
–
assessing inherent
and residual risk
through risk
assessment processes and
determining whether additional
remediation
plans are required to address identified deficiencies;
and
–
proactively and sustainably remediating identified control deficiencies.
Divisional Presidents
are accountable
for the
effectiveness of
non-financial risk
management and
for the
robustness of
the front-to-back control
environment within their
business divisions, and
legal-entity-responsible executives are in
charge
of non-financial
risk management
within their
legal entities.
Group function
heads are
accountable for
supporting the
divisional Presidents and legal
-entity-responsible executives of
our legal entities in
the discharge of this
responsibility, by
confirming completeness
and effectiveness
of the control
environment and non-financial
risk management
within their
Group functions. Collectively,
divisional Presidents, central
Group function heads
and legal-entity-responsible executives
are in charge of implementing the non-financial risk framework.
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Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
90
Compliance & Operational
Risk Control (C&ORC)
is responsible for
providing an independent
and objective view
of the
adequacy of non-financial risk management across
the Group, and ensuring that
compliance risk, financial crime risk and
operational risk are
understood, owned and
managed in accordance
with our risk
appetite. C&ORC business-
or function-
aligned
teams
sit
within
the
Group
Compliance,
Regulatory
&
Governance
function,
reporting
to
the
Group
Chief
Compliance and Governance Officer, who is a member
of the Group Executive Board.
The non-financial risk
framework forms the
common basis for
managing and assessing
compliance risk, financial
crime
risk
and
operational
risk,
and
there
are
additional
C&ORC
activities
intended
to
ensure
we
are
able
to
demonstrate
compliance with applicable laws, rules and regulations.
In 2023, we successfully executed
on the framework enhancements
designed in 2022, with, for
example, several cycles
of risk appetite
assessments performed
on the basis
of the Group-wide
non-financial risk appetite
statements across all
taxonomies. We focused on improving effectiveness by simplifying and digitalizing
the non-financial risk framework and
respective processes.
All functions
within UBS
are required
to periodically
assess the
design and
operating effectiveness
of key
internal non-
financial risk
controls. The
output of
these reviews
supports the
assessment and
testing scope
of internal
controls over
financial reporting as required by the Sarbanes–Oxley Act,
Section 404 (SOX 404).
Key control deficiencies identified during the internal control and risk
assessment processes must be reported in the non-
financial
risk
inventory,
and
sustainable
remediation
must
be
defined
and
executed.
These
control
deficiencies
are
assigned to
owners at
senior management
level and
the remediation
progress is
reflected
in the
respective managers’
annual performance
measurement and
objectives. To
assist with
prioritizing the
most material
control deficiencies
and
measuring aggregated risk exposure, irrespective of origin, a
common rating methodology is applied across
all three lines
of defense, as well as by external audit.
Cybersecurity
Cybersecurity for UBS AG is integrated into the UBS Group risk control
framework.
Risk management and strategy
Cyber-
and information
security risk
is the
risk that
a
malicious
internal or
external act,
or a
failure
of IT
hardware
or
software,
or
human
error
may
have
a
material
impact
on
confidentiality,
integrity,
or
availability
of
UBS’s
data
or
information systems.
Cybersecurity is a key operational risk facing UBS
and we devote considerable resources to establishing
and maintaining
processes for assessing, identifying
and managing cybersecurity
risk through our global workforce
and cyber-operations
centers around the world.
›
Refer to “Risk governance” in this section
for information about our approach to risk management,
including our risk governance
framework
Governance
In line
with our
overall non-financial
risk management
framework,
we take
a cross-functional
approach to
addressing
cybersecurity
risk,
with
the
Group
Operations
and
Technology
Office
(GOTO),
business
divisions,
Group
Compliance,
Regulatory & Governance (GCRG), Group
Risk Control, Group Legal,
and Group Internal Audit all playing
key roles. Our
risk control framework follows the three-lines-of-defense model. GOTO establishes the policies and
procedures designed
to
safeguard
our
information
systems
and
the
information
those
systems
collect
and
process.
The
business
divisions,
together
with GOTO,
are
then responsible
for
implementing
those
policies
and
procedures
as part
of the
first line
of
defense.
Group
Compliance,
Regulatory
&
Governance
(GCRG)
leads
the
second
line
of
defense,
by
convening
and
consulting with additional
control functions to provide independent
oversight, and challenges
the first line’s
cybersecurity
framework and
implementation. As
the third
line of
defense, Group
Internal Audit
conducts independent
reviews and
validates the first-line and second-line processes and
functions.
The Cyber- and
Information Security
Committee (the
CIS-C) is the
primary decision-making
body with oversight
of and
accountability for the Group-wide cyber- and information security
(CIS) program. The committee is jointly chaired by the
Group
Chief Operations
and Technology
Officer and
the
Group
Chief Compliance
and Governance
Officer.
The
Head
Group Internal Audit
is a
standing guest. The committee
meets on a
monthly basis and
serves as a
platform for interaction
across all
business divisions, Group
functions and the
three lines of
defense for the
identification and effective
governance
of CIS
strategy, risks
and regulatory obligations.
The CIS-C governance
structure is
intended to
streamline decision-making
and, where
necessary, escalation
to the
Board of
Directors (the
BoD) and
Group Executive
Board (GEB),
who maintain
overall responsibility for overseeing UBS.
Because Credit Suisse and
UBS still have separate
digital platforms, Credit Suisse
maintained much of its
pre-acquisition
cyber- and
information security
governance during
2023, but
was increasingly
aligned to
the UBS
CIS risk
governance
framework. Credit Suisse’s CIS program is led by the Credit Suisse Chief
Information Security Officer, who reports to the
Credit
Suisse
Chief
Technology
Officer
and
the
UBS
Group
Chief
Information
Security
Officer
(the
Group
CISO).
In
addition, the Credit Suisse Chief Technology Officer and Credit
Suisse Chief Operations Officer report to the Group Chief
Operations and Technology Officer.
›
Refer to “Cybersecurity governance” in “Board
of Directors”
in the “Corporate governance” section of
this report for more
information
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
91
Our cyber- and information security program
Our CIS program is led by the Group CISO, who
reports both to the Group Chief Operations and Technology Officer and
the
Group
Chief
Compliance
and
Governance
Officer.
The
CIS
program
is
designed
to
identify,
prevent,
detect
and
respond to CIS events, with the goal of
maintaining the integrity and availability of our technology infrastructure and the
confidentiality
and
integrity
of
our
information.
Our
Group
CISO,
senior
management
within
GOTO,
as
well
as
management
personnel overseeing
the CIS
program,
all have
substantial relevant
expertise
in the
areas
of cyber-
and
information security.
Our CIS program includes the following elements:
–
Threat intelligence:
cyber-threat
intelligence
team
analyzes
such
information
and
uses
it
to
enhance
existing
defense
capabilities,
to
respond to identified threats and to adjust our cybersecurity
strategy where needed.
–
Preventative and detection
controls:
include system hardening, firewalls, intrusion prevention
and detection systems, and other controls. External
network
connections are identified
and recorded in
an inventory. Access
rights are defined
for information assets,
and IT systems
and
applications
enforce
authentication.
We
maintain
access
controls
and
approval
processes
designed
to
prevent
unauthorized access.
–
Cyber-defense
and
incident
response
capabilities
:
The
Cybersecurity
Operations
Center
is responsible
for
providing
24/7/365
real-time
monitoring,
detection
and
response
capabilities
for
cybersecurity
threats
and
attacks.
Incidents
assessed
as
having
the
potential
to
adversely
affect
our
critical
operations
are
subject
to
mandatory
management
notification.
If
assessed
as
potentially
significant,
cybersecurity
and
data
incidents
are
managed
under
our
crisis
management framework.
–
Education and
training:
All UBS
staff, including
the external
workforce,
receive appropriate
CIS awareness
training,
commensurate with their roles and responsibilities.
–
Third-party risk:
and our ability to maintain our
business services. We follow a risk-based approach to
assess and mitigate cybersecurity
risks related to third parties. Third-party services
and processes are monitored and checked
on an ongoing basis, with
appropriate
supervision
from
the
CIS-C.
This
is
a
key
component
of
our
third-party
risk
management
program,
notwithstanding the
challenges we
face in
imposing the
same levels
of protection
to the
systems and
data of
third
parties that we rely on ourselves.
–
Monitoring
and
testing:
vulnerability assessments, penetration
and testing
engagements based
on specific
threat scenarios
that simulate
tactics,
techniques
and
procedures
that
might
be
used
against
our
systems,
as
mandated
by
our
policy
regulations.
This
includes testing
by internal
and external
red teams.
Actual security-related
events are
directly correlated
with threat
scenarios to monitor and
detect potential threats, such
as network-intrusion and malware-driven events.
Our deployed
security measures are designed with
the objective to isolate and
contain threats that are detected to
allow for effective
incident response and analysis.
Our cybersecurity assessment framework
Our cybersecurity
assessment
framework
includes internal
and external
cybersecurity
risk assessments
for applications
and bank processes
alongside a
structured risk
assessment process
of third-party
service providers.
These processes
are
designed, along with our security capabilities, to support
business objectives and priorities.
We
conduct
assessments
to
evaluate
and
test
our
cybersecurity
program,
and
provide
guidance
on
operating
and
improving
the
CIS
program,
including
the
design
and
operational
effectiveness
of
the
security
and
resiliency
of
our
information systems.
Our assessments,
along with
our threat
intelligence capabilities,
are used
to assess
and prioritize
programs to
improve our
security, our
incident response
capabilities and
our operational
resilience. As
the cyber-threat
landscape evolves at an increasing
pace, we seek to enhance
our cybersecurity controls to
meet developing threats. We
have
ongoing
programs
that
are
intended to
increase
our
cybersecurity
maturity
across
various
dimensions,
including
governance, identification,
protection and
detection, as
well as cyberattack
response and recovery,
and risk from
third-
party service providers.
We recognize
that we
will never
be able
to completely
eliminate the
risk of
a future
cyberattack, but,
by using
a risk-
based approach, we
work toward reducing
the likelihood of
a successful attack
and toward mitigation
of the potential
business impact of such an attack.
The BoD, its Risk Committee and the GEB receive regular presentations and reports throughout the year from our Group
Chief
Operations
and
Technology
Officer
and
our
Group
CISO
on
internal
and
external
cybersecurity
developments,
threats
and
risks.
In
addition,
on
a
quarterly
basis,
the
BoD receives
reports
on
the
performance
of
cybersecurity
risk
appetite
metrics,
including
metrics
on
vulnerabilities
and
third-party
cybersecurity
risks
and
incidents,
and
is
notified
promptly if
a Board-level
cybersecurity risk
limit is
breached. The
Risk Committee
of the
BoD and
the GEB
also receive
regular updates on CIS strategy, risks and alignment with
regulatory requirements.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Risk management and control
92
Operational resilience and incident response
Our business
continuity and
resilience
framework
is designed
to limit
the disruption
cybersecurity events
cause to
our
business activities.
In accordance
with the
firm’s cyber-incident
response
framework,
the CIS-C,
including the
incident
response
team,
tracks,
documents,
responds
to
and
analyzes
cybersecurity
threats
and
incidents,
including
those
experienced by
the firm’s
third-party
service providers
that may
impact the
firm. Additionally,
we maintain
established
procedures
for responding
to, and
escalating, cybersecurity
and other
system availability
incidents. These
are
regularly
practiced, including tabletop exercises up to and
including the GEB and BoD levels.
Our cybersecurity and
data confidentiality contingency plans
include event playbooks and
escalation procedures designed
to support a structured
assessment of potential
incidents and timely
escalation and reporting
of incidents based
on the
assessed potential impact.
Incidents assessed to
have the potential to
adversely affect our
critical operations are
subject
to
mandatory
management
notification.
If
assessed
as
potentially
significant,
cybersecurity
and
data
incidents
are
managed
under
our
crisis
management
framework,
which
provides
pre-established
cross-functional
task
forces
to
manage the incident, ensure appropriate
and timely regulatory, market
and client communications and robust oversight
by management, with escalation frameworks to inform and
ensure oversight by the GEB and the BoD.
›
Refer to “Crisis management framework” in the
“Regulation and supervision” section of this
report for more information about
our crisis management framework
Advanced measurement approach model
The non-financial risk
framework outlined above
underpins the calculation
of regulatory capital
for operational
risk, which
enables us to quantify operational risk
and define effective risk-mitigating management
incentives as part of the related
operational risk capital allocation approach to the business divisions.
We
measure
Group
operational
risk
exposure
and
calculate
operational
risk
regulatory
capital
using
the
advanced
measurement
approach
(AMA)
in
accordance
with
Swiss
Financial
Market
Supervisory
Authority
(FINMA)
and
international requirements.
In 2023,
we introduced
an aggregation
of the
AMAs for
UBS AG and
Credit Suisse AG
to
report on total operational
-risk-related risk-weighted
assets (RWA) for the
UBS Group. The related
diversification effect,
agreed with
FINMA, resulted
in a
USD 10bn reduction
for reported
RWA from
the second
quarter of
2023 onward,
of
which USD 4.9bn was recognized for UBS AG.
An
entity-specific
AMA
model
has
been
applied
for
UBS
Switzerland AG,
while
for
other
regulated
entities
the
basic
indicators or
standardized approaches
are adopted
for regulatory
capital in
agreement
with local
regulators. Also,
the
methodology of the UBS AMA is leveraged for entity-specific
internal capital adequacy assessment processes.
Currently, the model includes 18 AMA
units of measure (UoM), which are
aligned with our non-financial risk
taxonomy.
Frequency and severity distributions
are calibrated for each
of the model’s UoM.
The modeled distribution functions
for
both frequency and severity are used
to generate the annual loss distribution.
The resulting 99.9% quantile of the
overall
annual operational risk
loss distribution across
all UoM determines
the required regulatory
capital. Currently, we
do not
reflect mitigation through insurance or any other risk transfer
mechanism in our AMA model.
AMA model calibration and review
A
key
assumption
when
calibrating
data-driven
frequency
and
severity
distributions
is
that
historical
losses
form
a
reasonable proxy
for future
events. In
line with
regulatory
expectations, the
AMA methodology
utilizes both
historical
internal losses and external losses suffered by the broader
industry for model calibration purposes.
Initial model outputs driven by the loss
history are reviewed and adjusted to reflect fast-changing external developments,
such as
new regulations, geopolitical
change, volatile market
and economic
conditions, and internal
factors (e.g., changes
in busines
s
strategy
and control
framework
enhancements).
The
resulting baseline
data-driven
frequency
and severity
distributions
are
reviewed
by
subject
matter
experts
and
where
necessary
adjusted
based
on
a
review
of
qualitative
information about
the business
environment and
internal control
factors, as
well as
expert judgment,
with the
aim of
forecasting losses.
Our model is reviewed
regularly to maintain risk
sensitivity and recalibrated
at least annually. Any
changes to regulatory
capital
as
a
result
of
a
recalibration
or
methodology
changes
are
presented
to
FINMA
for
approval
prior
to
use
for
disclosure purposes.
The
Group-
and
entity-specific
AMA
models
are
subject
to
an
independent
validation
performed
by
Model
Risk
Management & Control in line with the Group’s model risk management
framework.
The AMA is expected to
be replaced by the
standardized approach for regulatory
capital determination purposes
in line
with the relevant Basel Committee for Banking Supervision Basel III capital regulations. UBS
is interacting closely with the
relevant Swiss authorities to discuss the implementation
details and related implementation timeline.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet
93
Capital, liquidity and funding, and balance sheet
Table of contents
94
94
94
97
101
102
104
104
104
105
106
106
106
107
107
110
112
113
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
94
Capital management
Capital management objectives, planning and activities
Capital management objectives
Audited |
An adequate level of
common equity tier 1
(CET1) capital and total
loss-absorbing capacity (TLAC)
meeting both
internal assessment and regulatory requirements
is a prerequisite for conducting our
business activities.
p
We
are
therefore
committed
to
maintaining
a
strong
CET1
capital
and
TLAC
position
at
all
times,
in
order
to
meet
regulatory capital requirements and our target capital ratios,
and to support the growth of our businesses.
As of 31 December 2023, CET1 capital ratio
was 13.2% and CET1 leverage ratio 4.0%, each
above the requirements for
Swiss systemically relevant
banks (SRBs) and the
Basel Committee on
Banking Supervision (the
BCBS) requirements. We
believe that
our capital
strength, consistent
with our
capital
guidance,
is a
source of
confidence for
our stakeholders,
contributes to our sound credit ratings and is one of the
foundations of our success.
›
Refer to “We may be unable to maintain our capital
strength” in the “Risk factors” section of this report for
more information
about capital ratio-related risks
›
Refer to “Capital and capital ratios of our significant
regulated subsidiaries” in this section for more information
›
Refer to “Economic
capital measures”
in the
“Risk management and control” section of this report for
more information about
capital-at-risk
Swiss SRB total loss-absorbing capacity framework
The disclosures
in this section
are provided
for UBS AG
on a consolidated
basis and
focus on key
developments during
the reporting period and information in accordance
with the Basel III framework, as applicable to Swiss
SRBs.
Additional
regulatory
disclosures
for
UBS AG
on
a
consolidated
basis
are
provided
in
the
31 December
2023
Pillar 3
Report, available under “Pillar 3 disclosures” at
ubs.com/investors
.
Capital and other regulatory information
for UBS Group AG consolidated in
accordance with the Basel III framework,
as
applicable
to
Swiss
SRBs,
is
provided
in
the
UBS
Group
Annual
Report
2023,
available
under
“Annual
reporting”
at
ubs.com/investors
.
Regulatory framework
The
Basel III
framework
came
into
effect
in
Switzerland
on
1 January
2013
and
is
embedded
in
the
Swiss
Capital
Adequacy Ordinance (the CAO). The CAO also includes
the too-big-to-fail provisions applicable to Swiss SRBs
.
Under the Swiss
SRB framework, going and
gone concern requirements represent the
UBS AG’s TLAC requirement. TLAC
encompasses regulatory
capital, such as
CET1, loss-absorbing
additional tier 1
(AT1) and tier 2
capital instruments,
and
liabilities
that
can
be
written
down
or
converted
into
equity
in
case
of
resolution
or
for
the
purpose
of
restructuring
measures.
Capital and other instruments contributing to total loss-absorbing
capacity
In addition to CET1 capital, the following instruments contribute
to loss-absorbing capacity:
–
loss-absorbing
AT1 capital instruments
(high-
and low-trigger);
–
non-Basel III-compliant tier 2 capital instruments; and
–
TLAC-eligible unsecured debt instruments.
Under the Swiss SRB rules, going concern capital includes CET1 and high-trigger loss-absorbing AT1 capital instruments.
Existing outstanding low-trigger
loss-absorbing AT1 capital
instruments are available
to meet the
going concern capital
requirements until their first call
date. As of their first call
date, these instruments are eligible
to meet the gone concern
requirements.
Outstanding
high-
and
low-trigger
loss-absorbing
tier 2
capital
instruments,
non-Basel III-compliant
tier 2
capital
instruments and TLAC-eligible unsecured debt instruments are
eligible to meet gone concern
requirements until one year
before
maturity.
A
maximum
of
25%
of
the
gone
concern
requirements
can
be
met
with
instruments
that
have
a
remaining maturity of between one
and two years (i.e., are in the
last year of eligibility). However,
once at least 75% of
the gone concern requirement has been met with instruments that have a remaining maturity of greater than two years,
all instruments that have a
remaining maturity of between
one and two years remain eligible
to be included in the
total
gone concern capital.
›
Refer to “Bondholder information,” available at
ubs.com/investors,
and terms and conditions of capital instruments
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
95
Total loss-absorbing capacity and leverage ratio requirements
Going concern capital requirements
Under
the
Swiss
SRB
requirements,
total
going
concern
minimum
requirements
for
all
Swiss
SRBs
are
a
capital
ratio
requirement of 12.86% of RWA and a leverage ratio requirement
of 4.5%. In addition to these minimum requirements,
an add-on
reflecting the degree of
systemic importance is
applied, based on
market share and
LRD. The applicable
market
share add-on and
LRD requirements
for UBS AG were
both unchanged at
0.72% of RWA
and 0.25% of LRD,
resulting
in add-ons of 1.44% of RWA and
0.50% of LRD.
The
Swiss
countercyclical
capital
buffer,
at
a
maximum
level
of
2.5%
on
risk-weighted
positions
that
are
directly
or
indirectly backed
by residential
properties in
Switzerland,
increased the
minimum CET1
capital requirement
by 32 basis
points as
of 31 December 2023.
We also
continued to apply
countercyclical buffer requirements introduced
in other BCBS
member jurisdictions,
which
resulted
in an
additional
buffer
requirement
of 13 basis
points as
of 31 December
2023.
Overall,
countercyclical
capital
buffers
contributed
45 basis
points
to
the
minimum
CET1
capital
requirement
as
of
31 December 2023.
The
total
going
concern
capital
requirements
applicable
are
14.75%
of
RWA
(including
countercyclical
buffer
requirements) and
5.00% of
LRD. Furthermore,
of the
total going
concern capital
requirement of
14.75% of
RWA, at
least 10.45%
must be
met with
CET1 capital,
while a
maximum of
4.3% can
be met
with high-trigger
loss-absorbing
AT1 capital instruments
(and our existing
outstanding low-trigger
AT1 capital instruments,
which qualify until
their first
call date as mentioned above).
Similarly, of the total going concern leverage ratio requirement
of 5.00%, at least 3.5% must be met with CET1 capital,
while
a
maximum
of
1.5%
can
be
met
with
high-trigger
loss-absorbing
AT1
capital
instruments
(and
our
existing
outstanding low-trigger AT1 capital instruments, which qualify until
their first call date as mentioned above).
Gone concern loss-absorbing capacity requirements
As an internationally active Swiss SRB, UBS AG is
also subject to gone concern loss-absorbing capacity requirements. The
gone concern requirements also include add-ons for
market share and LRD.
In
November
2022, the
Swiss
Federal
Council
adopted
amendments
to
the
Banking
Act and
the
Banking
Ordinance,
which entered into force as of 1 January 2023.
The amendments replaced the resolvability discount on the gone concern
capital
requirements
for
systemically
important
banks
(SIBs),
including
UBS,
with
reduced
base
gone
concern
capital
requirements equivalent to 75%
of the total going
concern requirements (excluding countercyclical buffer requirements).
In addition, as of
July 2024, the Swiss
Financial Market Supervisory Authority
(FINMA) will have the
authority to impose
a surcharge of up to 25% of the total going concern requirements
(excluding countercyclical buffer requirements) based
on obstacles to
an SIB’s resolvability
identified in future
resolvability assessments.
Our total gone
concern requirements
remained substantially unchanged in 2023.
Our
gone
concern
requirements
can
be
reduced
when
higher
quality
capital
instruments
(CET1
capital,
low-trigger
loss-absorbing AT1 or certain
low-trigger tier 2 capital
instruments)
are used to meet
gone concern requirements.
As of
31 December 2023, UBS did not use any higher quality capital
instruments to fulfill gone concern requirements.
From 1 January 2022
onward, the gone
concern requirement
after the potential
reduction for the
use of higher
quality
capital instruments has been floored at 10.0% and 3.75%
for the RWA- and LRD-based requirements, respectively.
In
this
report,
we
refer
to
the
RWA-based
gone
concern
requirements
as
gone
concern
loss-absorbing
capacity
requirements and the RWA-based gone concern ratio is
referred to as the gone concern loss-absorbing capacity ratio.
The table below provides the RWA- and LRD-based requirements
and information as of 31 December 2023.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
96
Swiss SRB going and gone concern requirements and information
As of 31.12.23
RWA
LRD
USD m, except where indicated
in %
in %
Required going concern capital
Total going concern capital
1
1
Common equity tier 1 capital
2
of which: minimum capital
of which: buffer capital
of which: countercyclical buffer
Maximum additional tier 1 capital
of which: additional tier 1 capital
of which: additional tier 1 buffer capital
Eligible going concern capital
Total going concern capital
Common equity tier 1 capital
Total loss-absorbing additional tier 1 capital
3
of which: high-trigger loss-absorbing additional tier 1 capital
of which: low-trigger loss-absorbing additional tier 1 capital
3
0.36
1,212
Required gone concern capital
Total gone concern loss-absorbing capacity
4,5,6
of which: base requirement including add-ons for market share and LRD
7
7
Eligible gone concern capital
Total gone concern loss-absorbing capacity
Total tier 2 capital
of which: non-Basel III-compliant tier 2 capital
TLAC-eligible unsecured debt
Total loss-absorbing capacity
Required total loss-absorbing capacity
Eligible total loss-absorbing capacity
Risk-weighted assets / leverage ratio denominator
Risk-weighted assets
Leverage ratio denominator
1 Includes
applicable add-ons
of 1.44%
for risk-weighted
assets (RWA)
and 0.50%
for leverage
ratio denominator
(LRD).
2 Our
minimum CET1
leverage ratio
requirement of
3.5% consists
of a
1.5% base
requirement, a 1.5%
base buffer capital
requirement, a 0.25% LRD
add-on requirement and
a 0.25% market
share add-on requirement
based on our
Swiss credit business.
3 Existing outstanding
low-trigger
additional tier 1 capital instruments qualify as going
concern capital at the UBS AG consolidated
level, as agreed with the Swiss Financial
Market Supervisory Authority (FINMA), until
their first call date. As
of their
first call date, these instruments are eligible to meet the
gone concern requirements.
4 A maximum of 25% of the gone
concern requirements can be met with instruments that
have a remaining maturity of between
one and two years.
Once at least 75%
of the minimum gone
concern requirement has
been met with instruments
that have a remaining
maturity of greater than
two years, all
instruments that have
a remaining
maturity of between one and two years remain eligible to be included in the total gone concern capital.
5 From 1 January 2023, the resolvability discount
on the gone concern capital requirements for systemically
important banks (SIBs) has been replaced with reduced
base gone concern capital requirements equivalent to 75%
of the total going concern requirements (excluding countercyclical buffer
requirements).
6 As of
July 2024, FINMA will have the authority to impose a surcharge of up to 25% of the total
going concern capital requirements should obstacles to an SIB’s resolvability be identified in future resolvability assessments.
7 Includes applicable add-ons of 1.08% for RWA and 0.38% for LRD.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
97
Total loss-absorbing capacity
Swiss SRB going and gone concern information
USD m, except where indicated
31.12.23
31.12.22
Eligible going concern capital
Total going concern capital
Total tier 1 capital
Common equity tier 1 capital
Total loss-absorbing additional tier 1 capital
of which: high-trigger loss-absorbing additional tier 1 capital
of which: low-trigger loss-absorbing additional tier 1 capital
Eligible gone concern capital
Total gone concern loss-absorbing capacity
Total tier 2 capital
of which: low-trigger loss-absorbing tier 2 capital
of which: non-Basel III-compliant tier 2 capital
TLAC-eligible unsecured debt
Total loss-absorbing capacity
Total loss-absorbing capacity
Risk-weighted assets / leverage ratio denominator
Risk-weighted assets
Leverage ratio denominator
Capital and loss-absorbing capacity ratios (%)
Going concern capital ratio
of which: common equity tier 1 capital ratio
Gone concern loss-absorbing capacity ratio
Total loss-absorbing capacity ratio
Leverage ratios (%)
Going concern leverage ratio
of which: common equity tier 1 leverage ratio
Gone concern leverage ratio
Total loss-absorbing capacity leverage ratio
Audited |
Reconciliation of equity under IFRS Accounting Standards to Swiss SRB common equity tier 1 capital
USD m
31.12.23
31.12.22
Total equity under IFRS Accounting Standards
Equity attributable to non-controlling interests
(
335
)
(
342
)
Defined benefit plans, net of tax
(
336
)
(
311
)
Deferred tax assets recognized for tax loss carry-forwards
(
3,004
)
(
4,077
)
Deferred tax assets for unused tax credits
(
97
)
Deferred tax assets on temporary differences, excess over threshold
(
1,233
)
(
262
)
Goodwill, net of tax
1
(
5,750
)
(
5,754
)
Intangible assets, net of tax
(
146
)
(
150
)
Expected losses on advanced internal ratings-based portfolio less provisions
(
532
)
(
471
)
Unrealized (gains) / losses from cash flow hedges, net of tax
Own credit related to (gains) / losses on financial liabilities
measured at fair value that existed at the balance sheet date, net of tax
(
523
)
Own credit related to (gains) / losses on derivative financial instruments
that existed at the balance sheet date
(
63
)
(
105
)
Prudential valuation adjustments
(
177
)
(
201
)
Accruals for dividends to shareholders
(
3,000
)
(
6,000
)
Other
(
39
)
(
51
)
Total common equity tier 1 capital
1 Includes goodwill related to significant investments in financial institutions of USD
m as of 31 December 2023 (31 December 2022: USD
m) presented on the balance sheet line Investments in associates.
p
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
98
Total loss-absorbing capacity and movement
Total
loss-absorbing capacity increased by USD 9.3bn
to USD 111.1bn as of 31 December 2023.
Going concern capital and movement
Audited |
CET1 capital mainly consists of: share capital; share premium, which primarily consists of additional paid-in capital
related to
shares issued;
and retained
earnings.
A detailed
reconciliation
of equity
under IFRS
Accounting
Standards to
CET1
capital is provided
in the
“Reconciliation of equity under IFRS
Accounting Standards to Swiss
SRB common equity
tier 1
capital” table.
CET1
capital
increased
by
USD
bn
to
USD
bn
as
of
31 December
2023,
mainly
as
a
result
of
operating
profit
before tax of USD
bn, with associated current tax expenses of USD
bn, positive foreign currency translation effects
of USD
bn and a
net increase
of USD
bn in eligible
deferred tax
assets on temporary
differences, partly
offset by
dividend accruals of USD
bn.
Loss-absorbing AT1 capital
issued by the Group
and on-lent to
UBS AG increased
by USD
bn to USD
bn, mainly
driven by two
issuances of
AT1 capital instruments
denominated in
US dollars
of USD
bn and positive
impacts from
interest risk hedge, foreign currency translation and other effects. These increases were partly offset by a USD
bn AT1
capital instrument that ceased to be eligible
as going concern capital when UBS Group AG
issued a notice of redemption
of the instrument. In addition, high-trigger loss-absorbing AT1
capital instruments of USD
bn equivalent previously on
lent from the Group to UBS AG were transferred to Credit
Suisse AG.
p
AT1 capital
instruments
issued from
the
beginning
of the
fourth
quarter
of 2023
are currently
subject to
write-down
upon occurrence of
a trigger event
or a
viability event.
The notes provide,
however, that, following
approval of a
minimum
amount of
conversion capital by
UBS Group AG‘s
shareholders at the
2024 Annual
General Meeting, upon
the occurrence
of a trigger event
or a viability
event, the notes will
be converted into
UBS Group AG ordinary
shares rather than
being
subject to a write-down. The corresponding on-lends to
UBS AG contain the same provision.
Gone concern loss-absorbing capacity and movement
Audited |
Total
gone concern loss-absorbing capacity
increased
by USD
bn to
USD
bn as of
31 December 2023 and
included USD
bn of TLAC-eligible
unsecured debt issued
by the Group and
on-lent to UBS
AG.
p
The increase
of USD 7.5bn
mainly reflect
ed new
issuances of
USD 13.4bn equivalent
of TLAC-eligible
unsecured
debt
instruments,
as well
as positive
impacts from
interest risk
hedge, foreign
currency translation
and other
effects.
These
increases were
partly offset
by the
redemption of
USD 4.0bn
equivalent of
TLAC-eligible unsecured
debt instruments,
amortization of a USD 0.8bn
unsecured debt instrument
that ceased to be
TLAC-eligible as its residual
time to maturity
fell below one
year,
and a
partial repurchase
of two
TLAC-eligible unsecured
debt instruments
under a
tender offer
(in
light of the acquisition of the
Credit Suisse Group, UBS announced
on 22 March 2023 a tender
offer to repurchase two
TLAC-eligible
unsecured
debt
instruments,
both
issued
on
17 March
2023,
with
an
initial
nominal
amount
totaling
EUR 2.8bn, at their respective
re-offer prices; the nominal
amounts of the two
instruments bought back under
the tender
offer totaled an
equivalent of USD 0.8bn).
In addition,
a USD 2.4bn low-trigger
loss-absorbing tier 2
capital instrument
ceased to be eligible as gone concern capital as it had less than
one year to maturity.
Loss-absorbing capacity and leverage ratios
Our CET1
capital ratio
decreased
to 13.2%
from
13.5%, reflecting
a USD
16.2bn increase
in RWA
,
partly offset
by a
USD 1.2bn increase in CET1 capital.
Our CET1
leverage ratio
decreased to
4.0% from
4.2%, due
to a
USD 74.8bn increase
in the LRD,
partly offset
by the
aforementioned increase in CET1 capital.
Our gone
concern loss-absorbing
capacity ratio
increased to
16.3% from
14.8%, due
to an
increase in
gone concern
loss-absorbing capacity of USD 7.5bn, partly offset by the
aforementioned increase in RWA.
Our gone concern leverage ratio increased to
4.9% from 4.6%, driven by the aforementioned
increase in gone concern
loss-absorbing capacity, partly offset by the increase in the
LRD.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
99
Swiss SRB total loss-absorbing capacity movement
USD m
Going concern capital
Swiss SRB
Common equity tier 1 capital as of 31.12.22
Operating profit before tax
Current tax (expense) / benefit
Foreign currency translation effects, before tax
Eligible deferred tax assets on temporary differences
Accruals for proposed dividends to shareholders
Other
Common equity tier 1 capital as of 31.12.23
Loss-absorbing additional tier 1 capital as of 31.12.22
Issuance of high-trigger loss-absorbing additional tier 1 capital
Call of high-trigger loss-absorbing additional tier 1 capital
High-trigger loss-absorbing additional tier 1 capital transferred
to Credit Suisse AG
Interest rate risk hedge, foreign currency translation and other effects
Loss-absorbing additional tier 1 capital as of 31.12.23
Total going concern capital as of 31.12.22
Total going concern capital as of 31.12.23
Gone concern loss-absorbing capacity
Tier 2 capital as of 31.12.22
Debt no longer eligible as gone concern loss-absorbing capacity
due to residual tenor falling to below one year
Interest rate risk hedge, foreign currency translation and other effects
Tier 2 capital as of 31.12.23
TLAC-eligible unsecured debt as of 31.12.22
Issuance of TLAC-eligible unsecured debt
Call of TLAC-eligible unsecured debt
Debt no longer eligible as gone concern loss-absorbing capacity
due to residual tenor falling to below one year
Debt bought back under the tender offer
Interest rate risk hedge, foreign currency translation and other effects
TLAC-eligible unsecured debt as of 31.12.23
Total gone concern loss-absorbing capacity as of 31.12.22
Total gone concern loss-absorbing capacity as of 31.12.23
Total loss-absorbing capacity
Total loss-absorbing capacity as of 31.12.22
Total loss-absorbing capacity as of 31.12.23
Additional information
Active management of sensitivity to foreign exchange movements
Group
Treasury
is mandated
to
minimize
adverse
effects
from
changes
in
foreign
currency
rates
on our
CET1
capital
and / or CET1 capital
ratio of UBS
AG consolidated.
A significant portion
of our CET1
capital and RWA
is denominated
in Swiss francs, euro, pounds
sterling and other currencies.
In order to hedge the CET1
capital ratio, CET1 capital needs
to have foreign currency exposure,
leading to foreign currency
rates sensitivity of CET1 capital.
Consequently,
it is not possible to simultaneously
fully hedge CET1 capital and the
CET1 capital ratio. As the proportion
of
RWA
denominated
in
currencies
other
than
the
US
dollar
outweighs
CET1
capital
in
such
currencies,
a
significant
appreciation of the
US dollar against
such currencies could
benefit our capital
ratios, while a
significant depreciation
of
the US dollar against these currencies could adversely affect
our capital ratios.
The UBS AG
Asset and Liability
Committee has mandated
Group Treasury to
adjust the currency
mix of CET1
capital of
UBS AG consolidated,
within limits set
by the Board of
Directors, to balance the
effect of foreign
exchange movements
on CET1 capital and
the CET1 capital ratio. Limits
are in place for
the sensitivity of both CET1
capital and the CET1 capital
ratio to an appreciation or depreciation of 10% in the value
of the US dollar against other currencies.
Sensitivity to currency movements
Risk-weighted assets
We estimate that
a 10% depreciation
of the US dollar
against other currencies
would have increased
our RWA
by USD
15bn
and
our
CET1
capital
by
USD 1.5bn
as
of
31
December
2023
(31
December
2022:
USD 13bn
and
USD 1.4bn,
respectively) and decreased our CET1 capital
ratio by 12 basis points (31 December 2022: 12 basis points).
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
100
Conversely, a 10%
appreciation of the
US dollar against
other currencies would
have decreased our
RWA by USD 13bn
and our
CET1 capital
by USD 1.4bn
(31 December
2022: USD 12bn
and USD 1.2bn,
respectively) and
increased our
CET1 capital ratio by 12 basis points (31 December 2022:
12 basis points).
Leverage ratio denominator
Our leverage ratio is also sensitive to
foreign exchange movements as a result of the currency mix of our capital
and LRD.
When adjusting the currency mix in capital,
potential effects on the going concern leverage
ratio are taken into account
and the sensitivity of the
going concern leverage ratio to
an appreciation or depreciation
of 10% in the value
of the US
dollar against other currencies is actively monitored.
We
estimate
that
a
10%
depreciation
of
the
US
dollar
against
other
currencies
would
have
increased
our
LRD
by
USD 69bn as of 31 December
2023 (31 December 2022: USD 62bn)
and decreased our CET1 leverage
ratio by 10 basis
points (31
December 2022:
11 basis points).
Conversely, a
10% appreciation
of the
US dollar
against other
currencies
would have decreased our
LRD by USD 62bn (31
December 2022: USD 57bn)
and increased our
CET1 leverage ratio by
11 basis points (31 December 2022: 12 basis points).
The aforementioned sensitivities
do not
consider foreign currency
translation effects related
to defined
benefit plans other
than those related to the currency translation of the net
equity of foreign operations.
Estimated effect on capital from litigation, regulatory and
similar matters subject to provisions and contingent liabilities
We have estimated the loss in capital that we could incur as a result of the risks associated with the matters described in
“Note 17 Provisions and contingent liabilities”
in the “Consolidated financial statements”
section of this report. We have
employed for
this purpose
the advanced
measurement
approach (AMA)
methodology
that we
use when
determining
the capital requirements associated with operational risks, based on a 99.9% confidence level over a 12-month horizon.
The methodology takes into consideration UBS and
industry experience for the AMA operational risk categories
to which
those matters correspond, as well
as the external environment
affecting risks of these
types, in isolation
from other areas.
On this
basis, we
estimate the
maximum loss
in capital
that we
could incur
over a
12-month period
as a
result of
our
risks associated with these operational risk categories
at USD 4.0bn as of 31 December 2023. This estimate is
not related
to and does
not take into account
any provisions recognized for any of
these matters and
does not constitute a
subjective
assessment of our actual exposure in any of these
matters.
›
Refer to “Non-financial risk” in the “Risk management
and control” section of this report for more information
›
Refer to “Note 17 Provisions and contingent liabilities”
in the “Consolidated financial statements”
section of this report for more
information
Capital and capital ratios of our significant regulated
subsidiaries
UBS AG has contributed a
significant portion of capital
to, and provided
substantial liquidity to its
subsidiaries. Many of
these
subsidiaries
are
subject
to
regulations
requiring
compliance
with
minimum
capital,
liquidity
and
similar
requirements. Regulatory capital components
and capital ratios
of our
significant regulated subsidiaries
determined under
the regulatory framework of each subsidiary’s home jurisdiction are provided in the “Financial and regulatory key figures
for our significant regulated subsidiaries and
sub-groups” section of the UBS Group Annual
Report 2023, available under
“Annual
reporting”
at
ubs.com/investors
.
Supervisory
authorities
generally
have
discretion
to
impose
higher
requirements,
or
to
otherwise
limit
the
activities
of
subsidiaries.
Supervisory
authorities
also
may
require
entities
to
measure capital and leverage
ratios on a stressed basis and
may limit the ability of the
entity to engage in new activities
or take capital actions based on the results of those tests.
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors
,
for more capital and
other regulatory information about our significant regulated
subsidiaries and sub-groups
Joint liability of UBS AG and UBS Switzerland AG
In June
2015, upon the
transfer of the
Personal & Corporate
Banking and Global
Wealth Management businesses booked
in
Switzerland
from
UBS AG
to
UBS
Switzerland
AG,
UBS AG
and
UBS
Switzerland
AG
assumed
joint
liability
for
obligations
transferred
to UBS
Switzerland
AG and
existing
at
UBS AG,
respectively.
Under certain
circumstances,
the
Swiss
Banking
Act
and
FINMA’s
Banking
Insolvency
Ordinance
authorize
FINMA
to
modify,
extinguish
or
convert
to
common equity liabilities of a bank in connection with a reso
lution or insolvency of such bank.
The joint liability amounts have declined
as obligations matured, terminated or were novated following
the transfer date.
As
of
31 December
2023,
the
liability
of
UBS
Switzerland
AG
amounted
to
CHF 2.8bn
(USD 3.3bn),
a
decrease
of
CHF 1.2bn
(USD 1.0bn)
compared
with
31 December
2022.
The
respective
liability
of
UBS AG
has
been
substantially
extinguished.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
101
Risk-weighted assets
RWA development in 2023
During 2023, RWA
increased by USD 16.2bn to
USD 334.0bn, primarily driven by
increases of USD 12.7bn due
to asset
size and other
movements and USD 8.0bn due
to currency effects,
partly offset by a
decrease of USD 4.6bn due
to model
updates and methodology changes.
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors
, for more information
about RWA movements and definitions of RWA movement key drivers on a UBS Group AG
consolidated basis
Movement in risk-weighted assets by key driver
USD bn
RWA as of
31.12.22
Currency
effects
Model updates
and
methodology
changes
Asset size and
other
1
RWA as of
31.12.23
Credit and counterparty credit risk
2
Non-counterparty-related risk
3
Market risk
Operational risk
Total
1 Includes the
Pillar 3 categories
“Asset size,”
“Credit quality of
counterparties,” “Acquisitions
and disposals” and
“Other.”
For more information,
refer to the
31 December 2023 Pillar
3 Report, available
under
“Pillar 3 disclosures” at ubs.com/investors.
2 Includes settlement risk, credit
valuation adjustments,
equity exposures in the banking
book, investments in funds
and securitization exposures in
the banking book.
3 Non-counterparty-related risk includes deferred tax assets recognized for temporary differences, property,
equipment, software and other items.
Credit and counterparty credit risk
Credit and counterparty
credit risk
RWA increased by
USD 19.8bn to USD 220.1bn
as of 31 December
2023. This increase
was mainly driven by asset size and other movements of USD 11.7bn, currency effects of USD 7.6bn and model updates
and methodology changes of USD 0.4bn.
Asset size and
other movements
increased RWA
by USD 11.7bn,
mainly driven by
funding provided
by Group Treasury
to Credit Suisse and higher loans in Personal and
Corporate Banking.
Model updates and methodology changes resulted in an RWA increase
of USD 0.4bn, mainly driven by increases related
to updates in private equity
and hedge fund financing trades
models, as well as securities financing
transaction models,
partly offset by decreases related
to the recalibration of certain multipliers as a result
of our improvements to models.
›
Refer to “Credit risk” in the “Risk management and
control” section of this report for more information about
credit and
counterparty credit risk developments
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
about credit and counterparty credit risk developments on a UBS
Group AG consolidated basis
Market risk
Market risk RWA
increased by USD 1.2bn
to USD 14.7bn as of
31 December 2023, driven
by an increase
of USD 1.3bn
from asset size and other
movements in Global Markets in
the Investment Bank, partly offset by
a decrease of USD 0.1bn
related to
ongoing parameter
updates of the
value-at-risk (VaR)
model. FINMA approved
the integration
of time decay
into regulatory VaR
and stressed VaR,
which went live on 12 January 2024.
›
Refer to “Market risk” in the “Risk management
and control” section of this report for more information about
market risk
developments
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
about market risk developments on a UBS Group
AG consolidated basis
Operational risk
Operational risk RWA decreased
by USD 4.9bn to USD 76.5bn as of 31 December
2023. In the second quarter of 2023,
we reflected
diversification effects
at the
level of
UBS Group
AG consolidated,
which were
partly allocated
to UBS AG
consolidated in the third quarter of 2023.
›
Refer to “Advanced measurement approach model” in the
“Risk management and control” section of this report for
more
information about the AMA model
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
102
Risk-weighted assets, by business division and Group Items
USD bn
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
Non-core and
Legacy
1
Group
Items
1
Total
RWA
31.12.23
Credit and counterparty credit risk
2
Non-counterparty-related risk
3
Market risk
Operational risk
Total
31.12.22
Credit and counterparty credit risk
2
Non-counterparty-related risk
3
Market risk
Operational risk
Total
31.12.23 vs 31.12.22
Credit and counterparty credit risk
2
Non-counterparty-related risk
3
Market risk
Operational risk
Total
1 Starting with the third quarter of 2023, Non-core and Legacy
represents a separate reportable segment and Group Functions has been renamed Group Items. Prior periods
have been revised to reflect these changes.
2 Includes settlement
risk, credit valuatio
n
adjustments, equity
exposures in the
banking book, investments
in funds and
securitization exposures in
the banking
book.
3 Non-counterparty-related risk
includes
deferred tax assets recognized
for temporary differences (31 December
2023: USD 11.3bn; 31 December 2022:
USD 10.8bn), as well as
property, equipment, software and other items
(31 December 2023: USD 11.4bn;
31 December 2022: USD 11.8bn).
Leverage ratio denominator
During 2023, the
LRD increased by USD 74.8bn to
USD 1,104.4bn, primarily driven by
increases from asset size
and other
movements of USD 37.5bn and currency effects
of USD 37.3bn.
Movement in leverage ratio denominator by key driver
USD bn
LRD as of
31.12.22
Currency
effects
Asset size and
other
LRD as of
31.12.23
On-balance sheet exposures (excluding derivatives and securities
financing transactions)
1
Derivatives
Securities financing transactions
Off-balance sheet items
Deduction items
Total
1 The exposures exclude derivative
financial instruments, cash collateral receivables on
derivative instruments, receivables from securities financing transactions, and
margin loans, as well as
prime brokerage receivables
and financial assets at fair value not held for trading, both related to securities financing transactions.
These exposures are presented separately under Derivatives and Securities
financing transactions in this table.
The LRD movements described below exclude currency
effects.
On-balance sheet exposures (excluding
derivatives and securities
financing transactions) increased by USD 26.8bn, mainly
driven by
higher trading
portfolio assets due
to a
client-driven increase in
hedging activities
and market-driven movements
in the Investment Bank and higher lending balances, partly
offset by lower cash and central bank balances.
Derivative exposures increased
by USD 2.8bn, primarily in the Investment
Bank, reflecting higher trading volumes
across
products and lower netting, partly offset
by market-driven movements in foreign-currency
and interest-rate contracts.
Securities financing transactions increased by
USD 6.6bn, mainly due to higher collateral sourcing
activities, partly offset
by roll-offs of excess cash reinvestment in Group Treasury.
Off-balance sheet items increased by USD 1.4bn, mainly driven by higher loan commitment across various projects in
the
Investment Bank.
›
Refer to “Balance sheet and off-balance sheet” in this
section for more information about balance sheet
movements
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Capital management
103
Leverage ratio denominator by business division and Group Items
USD bn
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core and
Legacy
1
Group Items
1
Total
31.12.23
On-balance sheet exposures
Derivatives
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total
31.12.22
On-balance sheet exposures
Derivatives
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total
31.12.23 vs 31.12.22
On-balance sheet exposures
Derivatives
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total
1 Starting with the third quarter of 2023, Non-core and Legacy represents
a separate reportable segment and Group Functions has been renamed Group
Items. Prior periods have been revised to reflect these changes.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Liquidity and funding management
104
Liquidity and funding management
We
manage the
structural risks
of our
balance sheet,
including interest
rate
risk, structural
foreign
exchange
risk and
collateral risk,
as well
as liquidity
and funding
risk. This
section provides information
about liquidity
and funding
regulatory
requirements,
governance, management
(including sources
of liquidity
and funding),
contingency planning,
and stress
testing.
The
balances
disclosed
in
this
section
represent
year-end
positions,
unless
indicated
otherwise.
Intra-period
balances fluctuate in the ordinary course of business
and may differ from year-end positions.
Following the acquisition of the Credit Suisse Group and the corresponding additional disclosure requirements according
to FINMA
Circular
2016/1
“Disclosure
–
banks”,
we
disclose
the
liquidity
coverage
ratio
(the
LCR) and
the
net
stable
funding ratio (the NSFR) for UBS AG consolidated for the
first time in this section.
Strategy, objectives and governance
Audited |
prudently managing
our internal
and regulatory
liquidity and
funding requirements.
We measure
liquidity and
funding
risk using internal
and regulatory
models and metrics.
We define
and implement
internal stress
testing across
different
time horizons,
scenarios and
currencies
to ensure
we have
sufficient liquidity
and funding,
while remaining
compliant
with regulatory
requirements,
primarily expressed
through the
LCR and
the NSFR.
Our liquidity
and funding
strategy is
proposed by Group Treasury and approved by
the Asset and
Liability Committee (ALCO) of
UBS AG, which
is a
committee
of the Group Executive Board (the GEB) that
is overseen by the Risk Committee of the Board
of Directors (the BoD).
Liquidity and
funding limits
and other indicators
(including early-warning indicators)
are set at
UBS AG (consolidated)
and, where appropriate, at legal entity
and business division levels. Key
limits (under the authority of the
BoD) and
indicators
linked
to
these
limits
are
reviewed
and
reconfirmed
at
least
once
a
year
by
the
BoD
of
UBS
AG,
the
Executive Board
of UBS
AG, the
ALCO of
UBS AG
and the
Group Treasurer,
taking into
consideration the
Group’s
business strategy and risk appetite. Treasury Risk Control provides independent oversight
over liquidity and funding
risk.
p
›
Refer to the “Corporate governance”
and “Risk management and control” sections of
this report for more information
Group
Treasury
monitors
and
oversees
the
implementation
and
execution
of
our
liquidity
and
funding
strategy
and
manages liquidity
and funding
risk within
the limits
and other
relevant indicators,
thereby adhering
to the
internal risk
appetite
and regulatory
requirements.
This
includes
close
control
of both
our
cash
and collateral,
including
our
high-
quality
liquid
assets
(HQLA),
and
centralizes
the
Group’s
access
to
wholesale
cash
markets
in
Group
Treasury.
To
complement our business-as-usual management, Group Treasury maintains a Contingency Funding Plan and contributes
to plans for recovery and resolution
to define procedures throughout the crisis continuum. Group Treasury reports
on the
liquidity and funding status and position, at least monthly, to the
ALCO of UBS AG and the Risk Committee of the
BoD.
Liquidity and funding stress testing
Audited |
survive a severe idiosyncratic
and market-wide liquidity and
funding stress event
without government support, allowing
for discrete management actions.
Group Treasury maintains a
diversified, high-quality pool of
unencumbered liquid assets under
Treasury control. The liquid
asset portfolio is
managed dynamically,
so as to
operate at
all times within
the internal
risk appetite and
other relevant
Group and subsidiary liquidity and funding requirements.
p
Our liquidity and funding stress testing covers two main stress scenarios: a combined
(market and idiosyncratic) scenario
and a structural market-wide scenario. We continuously refine stress-testing
assumptions.
›
Refer to “Risk measurement” in the “Risk management
and control” section of this report for more information about
stress
testing
Combined (market and idiosyncratic) scenario
In
this
scenario,
UBS
faces
the
consequences
of
both
a
severely
deteriorated
macroeconomic
and
financial
market
environment and
a UBS-specific
event, resulting
in an
acute loss
of liquidity
over a
relatively short
period of
time. This
scenario represents
severe
yet plausible
events
encompassing
both
market-wide
and idiosyncratic
elements,
in which,
however,
franchise client relationships are materially maintained.
The risk appetite objective of this stress test is to ensure that UBS keeps a
cumulative liquidity surplus on each day in the
three-month stress
horizon. The
liquidity gap
is assessed
by modeling
the stressed
liquidity value
of the
liquidity buffer
and stressed liquidity inflows and outflows under the scenario.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Liquidity and funding management
105
Structural market-wide scenario
In this scenario, UBS is subject
to a significant deterioration of
macroeconomic and financial
market conditions globally,
resulting in a requirement
for long-term funding to survive
the liquidity drain and support the
franchise of the business.
Macroeconomic shocks
result in
deteriorated financial
market conditions
over the
scenario horizon
of one
year.
UBS is
assumed to be affected equally relative
to other global financial institutions.
The risk appetite objective of this stress test is to
ensure that UBS maintains a positive cumulative behavioral liquidity gap
across the
3-month,
6-month,
9-month
and
12-month
tenors.
The
liquidity
gap
is assessed
by
modeling
the
stressed
liquidity value of the liquidity buffer, and stressed liquidity inflows and
outflows under the scenario.
Funding management
Audited |
well-balanced
and
diversified
liability
structure.
Our
funding
management
team
looks
to
create
the
optimal
liability
structure to finance our businesses
in a reliable and
cost-efficient manner. Our funding activities are planned by
analyzing
the overall liquidity and funding requirements,
taking into account the amount
of stable funding that would be
needed
to support ongoing business activities through periods
of difficult market conditions.
p
The funding
strategy of
UBS AG
is set
annually in
the Funding
Plan and
is reviewed
on an
ongoing basis.
The Funding
Plan is developed by Group Treasury and approved by the
ALCO of UBS AG.
›
Refer to “Balance sheet and off-balance sheet” in this
section for more information about the development
of our short- and
long-term debt during 2023
Global Wealth Management
and Personal
& Corporate
Banking provide
significant, cost-efficient
and stable
sources of
funding. These include deposits and debt issued through the Swiss central mortgage institutions,
which use a portion of
our portfolio
of Swi
ss
residential
mortgages
as collateral
to generate
long-term
funding.
In addition,
we
have
several
short-, medium-
and long-term funding programs under which we
issue senior unsecured debt and structured
notes, as
well as short-term
debt. These programs
enable UBS to
source funding from
institutional and private
investors who are
active in Europe, the US and
Asia Pacific. Collectively, these
broad product offerings and funding
sources, together with
the global scope of our business activities, support our funding
stability.
Internal funding and funds transfer pricing
We use our
global liquidity and funding
framework to govern the
liquidity management of our
branches and subsidiaries.
Group Treasury
meets internal demands for funding
by channeling funds from
entities generating surplus cash to
those
in need of financing, except in circumstances where
transfer restrictions exist.
Funding costs and benefits
are allocated to our
business divisions according to
our liquidity and
funding risk management
framework. Our
internal funds
transfer pricing
system aims
to incentivize
that we
have the
right balance
of assets
and
liabilities in currencies and tenors.
Credit ratings
Credit
ratings can
affect
the cost
and availability
of funding,
especially from
wholesale
unsecured
sources.
Our credit
ratings can
also influence
the performance of
some of
our businesses
and the
levels of
client and
counterparty confidence.
Rating agencies
take into
account a
range of
factors when
assessing creditworthiness
and setting
credit ratings.
These
include
the
company’s
strategy,
its
business
position
and
franchise
value,
stability
and
quality
of
earnings,
capital
adequacy,
risk
profile
and
management,
liquidity
management,
diversification
of
funding
sources,
asset
quality,
and
corporate governance. Credit ratings reflect the
opinions of the rating agencies and can change at any time.
In evaluating
our liquidity
and funding
requirements, we
consider the
potential effect
of a
reduction in
our long-term
credit ratings
and a
corresponding reduction
in short-term
ratings. If
our credit
ratings were
to be
downgraded, rating
trigger clauses could result in an immediate cash settlement or the
need to deliver additional collateral to counterparties
from contractual obligations
related to over-the-counter
(OTC) derivative
positions and other
obligations. Based
on our
credit ratings as of 31 December
2023, in the event of a
one-notch reduction in our long-term credit
ratings of UBS AG
and UBS Europe SE,
we would have been
required to provide USD 0.0bn in
cash or other collateral. In
the event of a
two-
notch reduction,
it would
have been
USD 0.3bn and
for a
three-notch downgrade
USD 0.6bn. In
the two-
and three-
notch scenarios the collateral requirements predominantly
relate to OTC derivative positions.
In March
2023, following
the announcement
of planned
acquisition of
the
Credit Suisse
Group, rating
agencies
took
following
actions
regarding
UBS
AG’s
ratings:
Fitch
Ratings
Ireland
Limited
(Fitch)
placed
its
“AA–”
Long-Term
Issuer
Default Rating (IDR) on Rating Watch Negative and Moody’s Investors Service Limited (Moody’s) changed the outlook on
its Baseline Credit Assessment and Long-term Senior Debt ratings
to Negative. Upon the close of UBS’s acquisition of
the
Credit Suisse Group in
June 2023, Fitch downgraded
the Long-Term IDR of
UBS AG to “A+” from
“AA–” and changed
the outlook to Stable,
while Moody‘s maintained
all the ratings. S&P
Global Ratings Europe
Limited (S&P) affirmed
UBS
AG’s Long-term and Short-term issuer credit rating and
outlook in March 2023 and, more recently, in February 2024.
›
Refer to “Liquidity and funding management are critical
to our ongoing performance” in the “Risk factors”
section of this report
for more information
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Liquidity and funding management
106
Contingency Funding Plan
Audited
|
sufficient liquidity
to meet
payment obligations
in a liquidity
and funding
stress. The
plan specifies
the processes,
tools
and responsibilities that we
have available to
effectively manage liquidity and
funding through these periods.
Our funding
diversification
and
global
scope
help
to
protect
our
liquidity
position
in
the
event
of
a
crisis. Our
contingent
funding
sources include
our HQLA portfolios,
available Central
Bank eligible non-HQLA
collateral for liquidity
facilities at several
major central banks, contingent reductions of trading portfolio assets, and other actions available to the management.
p
Liquidity coverage ratio
The LCR measures the
short-term resilience of a
bank’s liquidity profile by
assessing whether sufficient HQLA are
available
to meet expected net cash outflows from a significant
liquidity stress scenario, as defined by the relevant
regulator.
For UBS AG,
HQLA are low-risk
unencumbered assets under the
control of Group
Treasury that are easily
and immediately
convertible into
cash at
little or
no loss
of value,
in order
to meet
liquidity needs.
Our HQLA
predominantly consist
of
assets that qualify as Level 1 in the LCR framework, including
cash, central bank reserves and government
bonds. HQLA
are held by UBS AG and its subsidiaries and
may include amounts that are available to meet funding
and collateral needs
in
certain
jurisdictions
but
are
not
readily
available
for
use
by
UBS AG
consolidated
as
a
whole.
These
limitations
are
typically the result of local regulatory requirements,
including local LCR and large exposure requirements.
Funds that are
effectively restricted
in subsidiaries
and branches
are excluded
from the
calculation of
UBS AG consolidated
HQLA. On
this basis, USD 33.5bn of assets were excluded from
our daily average UBS AG consolidated HQLA for the fourth
quarter
of 2023.
Amounts held
in excess
of local
liquidity requirements
that are
not subject
to other
restrictions are
generally
available for transfer within UBS AG consolidated.
Basel Committee on
Banking Supervision (BCBS) standards
require an LCR
of at least
100%. In a
period of financial stress,
the Swiss
Financial Market Supervisory
Authority (FINMA) may
allow banks
to use
their HQLA and
let their
LCR temporarily
fall below
the
minimum
threshold.
We
monitor
the
LCR
in
all
significant
currencies
in
order
to
manage
any
currency
mismatches between HQLA and the net expected cash outflows
in times of stress.
The daily average LCR of UBS AG consolidated for the fourth
quarter of 2023 was 189.7%
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
for more information
about the LCR on a UBS Group AG consolidated
basis
Liquidity coverage ratio
USD bn, except where indicated
Average 4Q23
1
High-quality liquid assets
254.5
Total net cash outflows
2
134.3
Liquidity coverage ratio (%)
3
189.7
1 Calculated based on
an average of
63 data points in
the fourth quarter of
2023.
2 Represents the net
cash outflows expected
over a stress period
of 30 calendar days.
3 Calculated after the
application of
haircuts and inflow and outflow rates, as well as, where applicable,
caps on Level 2 assets and cash inflows.
Too-big-to-fail liquidity requirements
The too-big-to-fail (TBTF)
liquidity requirements communicated
by FINMA in the
third quarter of
2023 became effective
on 1 January 2024. The affected legal entities of UBS AG
consolidated are compliant with these requirements.
Net stable funding ratio
The NSFR framework
is intended to
limit overreliance on short-term
wholesale funding, to
encourage a better assessment
of
funding
risk
across
all
on-
and
off-balance
sheet
items
and
to
promote
funding
stability.
The
NSFR
has
two
components: available stable
funding (ASF), as numerator, and required
stable funding (RSF), as denominator. ASF is the
portion
of
capital
and
liabilities
expected
to
be
available
over
the
period
of
one
year.
RSF
is a
measure
of
the
stable
funding requirement
of assets
based on their
maturity,
encumbrance and
other characteristics,
as well as
the potential
for contingent calls on
funding liquidity from off-balance sheet exposures. The
BCBS NSFR regulatory framework requires
a ratio of at least 100%.
As of 31 December 2023, the NSFR of UBS AG consolidated
was 119.6%.
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
for more information
about the NSFR on a UBS Group AG consolidated
basis
Net stable funding ratio
USD bn, except where indicated
31.12.23
Available stable funding (ASF)
602.6
Required stable funding (RSF)
503.8
Net stable funding ratio (%)
119.6
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
107
Balance sheet and off-balance sheet
Balance sheet
The
balances
disclosed
in
this
section
represent
year-end
positions,
unless
indicated
otherwise.
Intra-period
balances
fluctuate in the ordinary course of business and may differ from year
-end positions. Refer to the “Consolidated financial
statements”
section of this report for more information
about the development of UBS AG’s financial position.
Balance sheet assets
As
of
31 December
2023,
balance
sheet
assets
totaled
USD 1,156.0bn,
an
increase
of
USD 50.6bn
compared
with
31 December 2022.
Lending assets increased by USD 29.1bn, mainly
driven by currency effects of approximately USD 21.0bn. The
movement
not related
to currency
effects
was
mainly
driven
by funding
provided
by Group
Treasury
to Credit
Suisse,
as
well as
increases in
Personal &
Corporate Banking,
primarily reflecting
higher mortgage
loans and
real estate
financing, partly
offset by decreases in Lombard
loans in Global Wealth Management
.
Trading
portfolio assets increased by USD
27.1bn,
mainly in Financing and
Derivatives & Solutions
in the Investment
Bank, reflecting higher
inventory held to
hedge client
positions
and
market-driven
movements.
Securities
financing
transactions
at
amortized
cost
increased
by
USD 6.3bn,
mainly reflecting higher net cash reinvestment
trades in Group Treasury.
These increases
were partly
offset by
a USD 21.1bn decrease
in Derivatives and
cash collateral receivables
on derivative
instruments. The
decrease
was mainly
in Derivatives
&
Solutions and
Financing,
predominantly
reflecting
decreases
in
foreign exchange contracts,
where the contracts in
place at the end of
2023 had lower fair
values than the contracts
in
place at
the end
of 2022, as
well as decreases
in interest
rate contracts,
mainly resulting
from valuation
effects due
to
decreases in
long-term interest
rates.
These decreases
were partly
offset by
market-driven increases
in equity
contracts
reflecting a rise in equity markets.
Assets
As of
% change from
USD bn
31.12.23
31.12.22
31.12.22
Cash and balances at central banks
Lending
1
Securities financing transactions at amortized cost
Trading assets
Derivatives and cash collateral receivables on derivative instruments
Brokerage receivables
Other financial assets measured at amortized cost
Other financial assets measured at fair value
2
Non-financial assets
Total assets
1 Consists of Loans and advances to customers and Amounts due from banks.
2 Consists of Financial assets at fair value not held for trading and Financial assets measured at
fair value through other comprehensive
income.
Asset encumbrance
The table below provides a breakdown of on- and off-balance sheet assets between encumbered assets, unencumbered
assets and assets that cannot be pledged as collateral.
Assets are presented as
Encumbered if they have
been pledged as collateral
against an existing liability
or are otherwise
not available for
securing additional funding.
Included within the
latter category are
assets protected under
client asset
segregation rules, financial
assets for unit-linked
investment contracts, and
assets held in
certain jurisdictions to
comply
with explicit minimum local asset maintenance requirements
.
Assets
that
cannot
be
pledged
as
collateral
represent
assets
that
are
not
encumbered
but
by
their
nature
are
not
considered available to secure funding or meet collateral
needs.
All other
assets are
presented
as Unencumbered.
This
category
consists of
cash and
securities readily
realizable
in the
normal course of business,
which include high-quality liquid assets
and unencumbered positions in the
trading portfolio
of UBS AG.
In addition,
unencumbered assets
include loans
and advances
to customers
and amounts
due from
banks.
Unencumbered assets
that are
considered to
be available
to secure
funding at
the legal
entity level
may be
subject to
restrictions that limit the total amount of assets available
to UBS AG as a whole.
›
Refer to “Note 22 Restricted and transferred financial
assets”
in the “Consolidated financial statements” section
of this report for
more information
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
108
Asset encumbrance as of 31 December 2023
USD bn
Encumbered
Unencumbered
assets
Assets that
cannot be
pledged as
collateral
Total UBS AG
Assets pledged
as collateral
Assets otherwise
restricted and
not available to
secure funding
Balance sheet
Cash and balances at central banks
0.7
0.2
170.8
171.8
Amounts due from banks
2.5
2
0.1
28.2
Receivables from securities financing transactions measured at amortized
cost
74.1
74.1
Cash collateral receivables on derivative instruments
4.7
27.6
32.3
Loans and advances to customers
28.1
0.0
377.5
405.6
Other financial assets measured at amortized cost
1
3.3
36.7
7.3
54.3
Total financial assets measured at amortized cost
35.9
10.8
610.6
109.1
766.4
Financial assets at fair value held for trading
1
0.2
58.4
135.1
Derivative financial instruments
131.7
131.7
Brokerage receivables
20.9
20.9
Financial assets at fair value not held for trading
1
17.8
37.3
5.5
63.8
Total financial assets measured at fair value through profit or loss
79.7
18.0
95.6
158.2
351.5
Financial assets measured at fair value through other comprehensive income
1.8
0.4
2.2
Non-financial assets
0.0
16.5
19.5
35.9
Total balance sheet assets as of 31 December 2023
115.5
30.7
723.0
286.7
1,156.0
Total balance sheet assets as of 31 December 2022
77.6
26.9
698.9
302.0
1,105.4
Off-balance sheet
Fair value of securities accepted as collateral as of 31 December 2023
357.0
5.3
127.1
489.5
Fair value of securities accepted as collateral as of 31
December 2022
331.8
5.6
96.6
434.0
Total balance sheet assets and off-balance sheet securities accepted as collateral as of
31 December 2023
472.6
36.0
850.2
286.7
1,645.5
of which: high-quality liquid assets
261.7
Total balance sheet assets and off-balance sheet securities accepted as collateral as of
31 December 2022
409.4
32.6
795.5
302.0
1,539.5
of which: high-quality liquid assets
239.8
1 Includes assets pledged
as collateral that
may be sold or
repledged by counterparties.
The respective amounts
are disclosed in
“Note 22 Restricted and
transferred financial assets”
in the “Consolidated financial
statements” section of this report.
2 Mainly includes funding provided by Group Treasury to Credit Suisse.
Balance sheet liabilities
Total
liabilities as of 31 December
2023 were USD 1,100.4bn,
an increase of
USD 51.9bn compared
with 31 December
2022.
Customer deposits increased
by USD 28.5bn, driven by currency
effects of approximately
USD 21.3bn and non-foreign-
exchange-related increases of USD 7.2bn, mainly in Personal & Corporate Banking and Global Wealth Management as a
result
of
net
inflows
into
fixed-term
deposit
products,
partly
offset
by
lower
demand
and
sweep
deposits
driven
by
continued shifts into money
market funds and
US-government securities. As of
31 December 2023, the ratio
of customer
deposits to outstanding loans and advances to customers
was at 137% (31 December 2022: 135%).
Debt issued
designated at
fair value
and long-term
debt issued
measured at
amortized cost
increased
by USD 17.1bn.
Debt issued designated at fair value increased
by USD 14.5bn, reflecting net new
issuances and market-driven increases
due to
the rise
in equity
markets. Long-term
debt issued
measured
at amortized
cost increased
by USD 2.7bn,
mainly
driven
by
net
new
issuances
of
covered
bonds
and
debt
issued
through
the
Swiss
central
mortgage
institutions.
Subordinated
debt
remained
stable
during
2023,
with
one
low-trigger
loss-absorbing
tier
2
capital
instrument
of
USD 2.4bn being no longer eligible as a capital instrument as the residual maturity was less than one year. Funding from
UBS Group AG measured at amortized cost increased by USD 11.2bn, mainly reflecting higher on-lends eligible as TLAC.
›
Refer to the “Capital management” section of
this report for more information
Short-term borrowings increased
by USD 12.7bn, mainly due to net
new issuances of commercial paper
and certificates
of deposit in Group Treasury
,
as well as an increase in funding obtained from
US Federal Home Loan Banks.
These
increases
were
partly offset
by a
USD 15.7bn decrease
in Derivatives
and cash
collateral
payables
on derivative
instruments. The decrease was mainly
in Derivatives & Solutions
and Financing, reflecting the same
drivers as on
the asset
side.
Equity
Equity attributable to shareholders decreased
by USD 1,364m to USD 55,234m as of 31 December
2023.
This decrease
was mainly
driven by
the 2022
dividend
distribution of
USD 6,000m
to UBS
Group AG,
partly offset
by
total comprehensive income attributable to shareholders of USD 4,598m
,
reflecting net profit of USD 3,290m and other
comprehensive income (OCI) of USD
1,308m.
OCI mainly included cash flow
hedge OCI of USD 1,400m,
OCI related to
foreign currency
translation
of USD 849m,
negative OCI
related to
own credit
on financial
liabilities designated
at fair
value of USD 790m and negative defined benefit plan OCI
of USD 136m.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
109
In the second quarter of 2023, the share capital currency
of UBS AG was changed from the Swiss franc to the US dollar,
as approved
by the
shareholders
at
the
2023
Annual
General
Meeting.
As a
result,
the
nominal
value
per
share
was
changed from CHF 0.10 to USD 0.10,
resulting in a reclassification between share
capital and capital contribution reserve
(presented as
share
premium
in the
consolidated
financial
statements).
Total equity
reported was
not affected
by this
change.
›
Refer to the “UBS AG consolidated performance”
and “Consolidated financial statements” sections
of this report for more
information about OCI
›
Refer to the “Reconciliation of equity under IFRS
Accounting Standards to Swiss SRB common equity tier
1 capital” table in this
section for more information about the effects of OCI on common
equity tier 1 capital
Liabilities and equity
As of
% change from
USD bn
31.12.23
31.12.22
31.12.22
Short-term borrowings
1
Securities financing transactions at amortized cost
Customer deposits
Funding from UBS Group AG measured at amortized cost
Debt issued designated at fair value and long-term debt issued measured
at amortized cost
2
Trading liabilities
Derivatives and cash collateral payables on derivative instruments
Brokerage payables
Other financial liabilities measured at amortized cost
Other financial liabilities designated at fair value
Non-financial liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Other comprehensive income
3
Total equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Total liabilities and equity
1 Consists of
short-term debt issued
measured at
amortized cost and
amounts due to
banks.
2 The
classification of debt
issued measured
at amortized
cost into short-term
and long-term
is based on
original
contractual maturity and therefore
long-term debt also includes
debt with a remaining
time to maturity of
less than one year.
This classification does
not consider any early
redemption features.
3 Excludes other
comprehensive income related to defined benefit plans and own credit, which is recorded directly in Retained earnings.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
110
Liabilities by product and currency
USD equivalent
All currencies
of which: USD
of which: CHF
of which: EUR
USD bn
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Short-term borrowings
54.0
41.3
35.6
23.3
4.3
3.8
5.9
4.4
of which: amounts due to banks
16.7
11.6
8.1
4.2
3.9
3.7
0.7
1.1
of which: short-term debt issued
1,2
37.3
29.7
27.6
19.0
0.3
0.1
5.2
3.3
Securities financing transactions at amortized cost
5.8
4.2
5.1
3.6
0.0
0.0
0.3
0.2
Customer deposits
555.7
527.2
236.4
228.0
216.0
199.2
51.5
53.6
of which: demand deposits
146.2
182.3
36.8
48.0
61.5
71.9
24.7
37.4
of which: retail savings / deposits
152.7
149.3
28.9
24.6
119.2
119.0
4.5
5.6
of which: sweep deposits
41.0
69.2
41.0
69.2
0.0
0.0
0.0
0.0
of which: time deposits
215.8
126.3
129.6
86.1
35.4
8.3
22.3
10.6
Funding from UBS Group AG measured at amortized cost
67.3
56.1
44.6
34.7
2.0
2.7
18.9
15.7
Debt issued designated at fair value and long-term debt issued
measured at amortized cost
2
118.8
101.7
75.2
63.0
18.8
14.6
14.4
13.7
Trading liabilities
31.7
29.5
12.0
12.1
1.0
0.8
8.9
8.1
Derivatives and cash collateral payables on derivative instruments
175.6
191.3
146.7
160.4
4.1
3.8
15.2
15.8
Brokerage payables
42.3
45.1
31.4
32.3
0.7
0.4
2.4
3.2
Other financial liabilities measured at amortized cost
12.7
10.4
7.6
5.7
1.9
1.6
1.0
0.9
Other financial liabilities designated at fair value
27.4
32.0
5.7
12.8
0.1
0.1
4.1
4.1
Non-financial liabilities
9.2
9.7
2.4
2.8
2.0
1.1
2.5
2.9
Total liabilities
1,100.4
1,048.5
602.7
578.6
251.0
228.1
125.0
122.7
1 Short-term debt issued consists of certificates of deposit, commercial paper,
acceptances and promissory notes, and other money market paper.
2 The classification of debt issued measured at amortized cost into
short-term and long-term is based
on original contractual
maturity and therefore long-term
debt also includes debt
with a remaining time to
maturity of less than
one year.
This classification does not
consider any
early redemption features.
Off-balance sheet
In the
normal course
of business,
UBS AG enters
into transactions
where, pursuant
to IFRS
Accounting Standards
,
the
maximum contractual exposure
may not
be recognized in
whole or
in part
on its
balance sheet. These
transactions include
derivative instruments, guarantees,
loan commitments and similar arrangements.
When UBS AG incurs an
obligation or becomes
entitled to an asset
through these arrangements,
it recognizes them on
the balance
sheet. It
should be
noted that
in certain
instances the
amount recognized
on the
balance sheet
does not
represent the full gain or loss potential inherent in such arrangements.
The
following
paragraphs
provide
more
information
about
certain
off-balance
sheet
arrangements.
Additional
off-
balance sheet
information is
primarily provided
in Notes 9,
10, 17,
19, 20h,
22 and
28 in
the “Consolidated
financial
statements” section of this report
.
Guarantees,
loan commitments and similar arrangements
In the
normal course
of business,
UBS AG issues
various forms
of guarantees,
commitments to
extend credit,
standby
and
other
letters
of
credit
to
support
clients,
forward
starting
transactions,
note
issuance
facilities,
and
revolving
underwriting facilities.
With the
exception of
related premiums,
generally these
guarantees and
similar obligations
are
kept as off-balance sheet items, unless a provision
to cover probable losses or expected credit
losses is required.
Guarantees
represent
irrevocable
assurances
that,
subject
to
the
satisfying
of
certain
conditions,
UBS AG
will
make
payments if its clients fail to fulfill
their obligations to third parties. As of
31 December 2023, the net exposure (i.e., gross
values less sub-participations) from guarantees and
similar instruments was USD 31.5bn, compared
with USD 20.6bn as
of 31 December 2022. The increase of USD 10.9bn,
was mainly driven by sponsored repo clearing in
Group Treasury.
Fee
income from issuing guarantees
compared with total net fee
and commission income is insignificant
for both 2023 and
2022.
UBS AG also enters
into commitments to
extend credit
in the form
of credit lines
available to secure
the liquidity needs
of clients. The majority of irrevocable loan commitments range in maturity from one month to three years. During 2023,
irrevocable loan
commitments increased
by USD 4.0bn,
mainly in the
Investment Bank,
and committed
unconditionally
revocable credit
lines increased
by USD
3.7bn, mainly
driven by
increases
in facilities
provided
to clients
in Personal
&
Corporate Banking,
as well as currency effects.
Forward starting reverse repurchase agreements increased by USD 6.6bn,
in
Group
Treasury,
reflecting
fluctuations
in
levels
of
business
division
activity
in
short-dated
securities
financing
transactions.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
111
Off-balance sheet
As of
% change from
USD bn
31.12.23
31.12.22
31.12.22
Guarantees
1,2
31.5
20.6
53
Irrevocable loan commitments
1
44.0
40.0
10
Committed unconditionally revocable credit lines
47.4
43.7
9
Forward starting reverse repurchase agreements
10.4
3.8
173
1 Guarantees and irrevocable loan commitments are shown net of sub-participations.
2 Includes guarantees measured at fair value through profit or loss.
If customers
fail to
meet their
obligations, the
maximum exposure
to credit
risk of
UBS AG is
generally the
contractual
amount of these instruments. The risk is similar to the risk involved in extending loan facilities and is subject
to the same
risk management
and control
framework.
In 2023,
UBS AG recognized
net credit
loss releases
of USD 13m
related to
irrevocable loan commitments
,
guarantees and
other credit facilities
in the scope
of expected
credit loss measurement,
compared
with
net
credit
loss
releases
of
USD 3m
in
2022.
Provisions
recognized
for
irrevocable
loan
commitments,
guarantees
and
other
credit
facilities
in
the
scope
of
expected
credit
loss
measurement
were
USD 188m
as
of
31 December 2023, compared with USD 201m as of 31
December 2022.
›
Refer to “Note 9 Financial
assets at
amortized
cost and
other positions
in scope
of expected
credit loss
measurement”
and “Note 19
Expected
credit loss
measurement”
in the “Consolidated
financial
statements”
section of this report for more information about
provisions for expected credit losses
For
certain
obligations,
UBS AG
enters
into
partial
sub-participations
to
mitigate
various
risks
from
guarantees
and
irrevocable loan
commitments. A
sub-participation is
an agreement
by another
party to
take a
share of
the loss
in the
event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of the credit
facility. UBS AG
retains the contractual relationship
with the obligor, and
the sub-participant has
only an indirect relationship.
Generally,
UBS AG only enters
into sub-participation
agreements with
banks to which
it ascribes
a credit rating
equal to or
better
than that of the obligor.
UBS AG also provides
representations, warranties and indemnifications to third
parties in the normal course of business.
Support provided to non-consolidated investment funds
In 2023, UBS
AG did not
provide material
support, financial
or otherwise,
to unconsolidated
investment funds
when it
was not contractually obligated to do so, nor does it currently
have an intention to do so.
Clearing house and exchange memberships
UBS AG is a member
of numerous securities
and derivative exchanges
and clearing houses. In
connection with some
of
these memberships, UBS AG
may be required
to pay
a share of
the financial obligations
of another member
who defaults,
or UBS AG
may be
otherwise exposed
to additional
financial obligations.
While the
membership rules
vary,
obligations
generally would
arise only
if the
exchange or
clearing house
had exhausted
its resources. UBS AG
considers
the probability
of a material loss due to such obligations to be remote.
Deposit insurance
Swiss banking
law and
the deposit
insurance system
require Swiss
banks and
securities dealers
to jointly
guarantee an
amount
of
up
to
CHF 8bn
for
privileged
client
deposits
in
the
event
that
a
Swiss
bank
or
securities
dealer
becomes
insolvent. As of 31 December 2023, FINMA
estimates UBS AG’s share in the
deposit insurance system to be CHF 1.2bn.
This
represents
a
contingent
payment
obligation
and
exposes
UBS AG
to
additional
risk.
As
of
31 December
2023,
UBS AG considered the probability of a
material loss from its obligations to be remote.
UBS AG is
also subject to,
or is
a member of,
other deposit protection
schemes in other
countries. However, no
contingent
payment obligation existed as of 31 December 2023 from
any other material scheme.
Material cash requirements
The material cash
requirements of UBS AG
as of
31 December 2023 are
represented by the
residual contractual maturities
for non-derivative and
non-trading financial
liabilities included
in the table
presented in
“Note 23b Maturity
analysis of
financial liabilities on an undiscounted basis”
in the “Consolidated financial statements”
section of this report. Included
in the table are debt issued designated at fair value (USD 93.0bn), debt issued measured at amortized cost (USD 73.6bn)
and funding
from UBS
Group AG
measured at
amortized cost
(USD 86.1bn).
The amounts
represent
estimated future
interest and principal payments on an undiscounted
basis.
In
the
normal
course
of
business,
UBS AG
also
issues
or
enters
into
various
forms
of
guarantees,
irrevocable
loan
commitments and other similar arrangements that may result in an outflow of cash in the future. The maturity profile
of
these
obligations,
which
are
presented
off-balance
sheet,
are
included
in
“Note 23b
Maturity
analysis
of
financial
liabilities on an undiscounted basis” in the “Consolidated
financial statements” section of this report.
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Balance sheet and off-balance
sheet
112
Cash flows
As a global financial institution, our cash
flows are complex and often may bear little
relation to our net earnings and
net
assets.
Consequently,
we believe
that a
traditional cash
flow analysis
is less
meaningful
when evaluating
our liquidity
position
than
the
liquidity,
funding
and
capital
management
frameworks
and
measures
described
elsewhere
in
this
section.
›
Refer to the “Liquidity and funding management”
section of this report for more information
Cash and cash equivalents
As of
31 December
2023,
cash
and
cash
equivalents
totaled
USD 190.5bn,
a
decrease
of
USD 4.7bn
compared
with
31 December
2022,
driven
by net
cash
outflows
from
operating
and
investing
activities.
These
outflows
were
largely
offset
by net
cash inflows
from
financing
activities,
as
well as
positive
foreign
exchange
effects,
mainly
reflecting
the
depreciation of the US dollar against the Swiss franc
in 2023.
Operating activities
Net cash outflows
from operating
activities were
USD 28.2bn in
2023, compared
with inflows
of USD 10.6bn in
2022,
reflecting changes in
operating assets and
liabilities of USD 28.1bn
and other adjustments
to remove the
net impact of
non-cash items,
such as
foreign currency
effects. The
net change
in operating
assets and
liabilities includes
funding of
USD 15bn provided
to Credit
Suisse (included within
amounts due from
banks), as
well as a
USD 16.0bn movement
in
financial assets and
liabilities at fair value
held for trading
and derivative financial
instruments,
USD 6.1bn from brokerage
receivables and payables,
and USD 5.0bn from receivables
from securities financing transactions
measured at amortized
cost. These effects
were partly offset
by a USD 6.5bn
increase in
customer deposits and
a USD 3.7bn decrease
in loans
and advances to customers.
Investing activities
Investing activities resulted
in a net
cash outflow of
USD 4.9bn in 2023,
compared with
USD 12.3bn in 2022,
primarily
related to cash outflows of USD 3.8bn from
net purchases of debt securities measured
at amortized cost.
Financing activities
Financing activities
resulted in a
net cash inflow
of USD 19.7bn
in 2023, compared
with an outflow
of USD 5.3bn
in 2022,
mainly due to net
issuance proceeds of USD 19.0bn from debt designated at fair
value and long-term debt measured at
amortized cost,
as well as net
issuances
of short-term debt of USD 7.2bn. These inflows were partly offset
by a dividend
distribution
to shareholders
of USD 6.0bn.
›
Refer to “Primary financial statements and share information”
in the “Consolidated financial statements” section
of this report for
more information about cash flows
Statement of cash flows (condensed)
For the year ended
USD bn
31.12.23
31.12.22
Net cash flow from / (used in) operating activities
(28.2)
10.6
Net cash flow from / (used in) investing activities
(4.9)
(12.3)
Net cash flow from / (used in) financing activities
19.7
(5.3)
Effects of exchange rate differences on cash and cash equivalents
8.7
(5.6)
Net increase / (decrease) in cash and cash equivalents
(4.7)
(12.6)
Cash and cash equivalents at the end of the year
190.5
195.2
Annual Report 2023 |
Risk, capital, liquidity and funding, and
balance sheet | Currency management
113
Currency management
Strategy, objectives and governance
Group Treasury
focuses on three main areas of currency risk management: (i) currency-matched funding and investment
of non-US-dollar assets and liabilities; (ii) the sell-down of foreign currency IFRS Accounting Standards profits
and losses;
and
(iii) selective
hedging
of
anticipated
non-US-dollar
profits
and
losses
to
further
mitigate
the
effect
of
structural
imbalances in the balance sheet. Group Treasury
also manages structural currency composition across three scopes: UBS
Group AG consolidated, UBS AG consolidated,
and Credit Suisse AG consolidated.
Currency-matched funding and investment of non-US-dollar
assets and liabilities
For monetary balance sheet items and other investments, as far as is practical and efficient, UBS AG follows
the principle
of matching the currencies of its assets and liabilities for funding purposes. This
avoids profits and losses arising from the
translation of non-US-dollar assets and liabilities.
Net investment hedge accounting is applied to non-US-dollar core investments to
balance the effect of foreign exchange
movements on both common equity tier 1 (CET1) capital
and the CET1 capital ratio.
›
Refer to “Note 1 Summary of material accounting
policies” and “Note 25 Hedge accounting” in the
“Consolidated financial
statements”
section of this report for more information
›
Refer to “Capital management” in this section for
more information about UBS AG’s active management of sensitivity to currency
movements and the effect thereof on the key ratios
Sell-down of non-US-dollar reported profits and losses
Income statement
items of
foreign
subsidiaries and
branches of
UBS AG with
a functional
currency other
than the
US
dollar
are
translated
into
US
dollars
at
average
exchange
rates.
To
reduce
earnings
volatility
on
the
translation
of
previously
recognized
earnings
in
foreign
currencies,
Group
Treasury
centralizes
the
profits
and
losses
(under
IFRS
Accounting Standards)
arising in UBS AG and its branches and sells or buys the profit or loss for US dollars on a monthly
basis. The foreign subsidiaries of UBS AG
follow a similar monthly sell-down process into their
own functional currencies.
Retained earnings
in subsidiaries
and branches
with a
functional currency
other than
the US
dollar are
integrated and
managed as part of UBS AG’s net investment hedge accounting
program.
Annual Report 2023 |
Corporate governance
114
Corporate governance
Management report
Audited information according to the Swiss law and applicable regulatory
requirements and guidance
Disclosures
provided
are
in
line
with
the
requirements
of
the
Swiss
Code
of
Obligations
(tables
containing
such
information are marked as “Audited” throughout this section),
as well as other applicable regulations and guidance.
Table of contents
115
115
115
116
117
119
120
121
123
Annual Report 2023 |
Corporate governance
115
Corporate governance
UBS AG
is incorporated
and domiciled in
Switzerland and operates
under Art.
620 et
seq. of
the Swiss
Code of
Obligations
and Swiss banking law
as an
Aktiengesellschaft
, a corporation limited
by shares. The addresses
and telephone numbers
of the two registered offices of UBS AG are: Bahnhofstrasse 45, CH-8001 Zurich,
Switzerland, telephone +41-44-234 11
11;
and
Aeschenvorstadt
1,
CH-4051
Basel,
Switzerland,
telephone
+41-61-288
50
50.
The
corporate
identification
number is CHE-101.329.561.
The company was incorporated with unlimited duration on 29
June 1998, when Union Bank of Switzerland (founded in
1862) and
Swiss Bank Corporation
(founded in 1872)
merged to form
UBS AG. UBS
AG is
a regulated bank
in Switzerland
and is 100%
owned by
UBS Group
AG, the ultimate
parent of
the UBS
Group. UBS
AG’s purpose,
in accordance
with
art. 2 of
its Articles
of Association,
as amended
on 4 April
2023, is
the operation
bank and
its scope
extends to
a full
range of financial services activities in Switzerland and abroad.
As a
non-US
company
with
securities listed
on
the
New
York
Stock
Exchange
(the NYSE),
UBS AG
complies
with the
relevant corporate
governance standards
applicable to
foreign private
issuers listing
debt securities.
In addition,
it also
follows
the
standards
established
in
the
Swiss
Code
of
Best
Practice
for
Corporate
Governance.
The
Organization
Regulations of UBS
AG, adopted by the
Board of Directors
of UBS AG (the
BoD) based on
Art. 716b of
the Swiss Code
of
Obligations
and
Art.
25
and
27
of
the
Articles
of
Association
of
UBS
AG
(the
AoA),
constitute
UBS
AG’s
primary
corporate governance guidelines.
Operational structure
Operational structure
As of
31 December
2023,
the
operational
structure
of
the
UBS AG
is composed
of the
Global Wealth
Management,
Personal &
Corporate Banking,
Asset Management,
the Investment
Bank, and
Non-core and
Legacy business
divisions,
as well as Group functions.
›
Refer to the “Our businesses” section of this
report for more information about our business divisions
and Group functions
Share capital structure
Ordinary share capital
In April 2023, the Annual General Meeting (the AGM) approved
the conversion of the share capital currency
of UBS AG
from
the
Swiss
franc
to
the
US
dollar.
To
obtain
a
Swiss
franc
nominal
value
per
share
equaling
USD 0.10
after
the
conversion, the AGM also approved a CHF 28,860,895.32568 ordinary reduction of the share capital, and this reduction
resulted in a corresponding allocation to the
capital contribution reserve on UBS AG’s
standalone financial statements.
At year-end 2023, UBS
AG had 3,858,408,466 issued
shares,
with a nominal
value of USD 0.10 each,
equating to a share
capital of USD 385,840,846.60.
Under Swiss company
law, shareholders
must approve, in
a general meeting
of shareholders, any
increase or reduction
in the ordinary share capital,
the creation of conditional share capital or the introduction
of a capital band.
Conditional share capital
At year-end 2023, the following conditional share
capital was available to the BoD.
–
A maximum of USD 38,000,000,
represented by up to 380,000,000
fully paid registered shares with
a nominal value
of USD 0.10
each, to
be issued
through the
voluntary or
mandatory exercise
of conversion
rights and
/ or
warrants
granted in connection
with the issuance
of bonds or
similar financial instruments
on national or
international capital
markets.
This conditional
capital
allowance
was approved
at the
Extraordinary
General
Meeting (the
EGM) held
on
26 November 2014, having originally been approved at
the AGM of UBS AG
on 14 April 2010. The BoD has
not made
use of such allowance.
›
Refer to article 4a of the AoA for more information
about the terms and conditions of the
issue of shares out of existing
conditional capital – the AoA are available at
Annual Report 2023 |
Corporate governance
116
Capital band,
conversion capital and reserve capital
As of 31 December 2023, UBS AG has not introduced
a capital band, any conversion capital or any reserve
capital.
Shares
UBS AG has
a single class
of shares, which
are registered
shares in the
form of uncertificated
securities (in the
sense of
the Swiss Code of
Obligations) and intermediary
-held securities (in
the sense of the
Swiss Federal Act on
Intermediated
Securities). Each registered
share has a
nominal value
of USD 0.10 and
carries one vote
.
UBS AG imposes
no limitation
on the rights to own its securities.
Dividend distributions
The decision to pay a dividend
and the amount of any dividend
depend on a variety of factors, including
our profits, cash
flow generation and capital ratios.
At the 2024 AGM,
the BoD is proposing
to the shareholder for approval
a dividend of USD 3,000m
for the 2023 financial
year.
As of 31 December
2023, UBS AG
had 3,858,408,466
issued shares with
a nominal
value of USD
0.10 each, equating
to a
share
capital
of USD
385,840,846.60.
All shares
carry
voting rights,
were fully
paid
in and
eligible for
dividends.
There are no preferential
rights associated with these shares, and
no other classes of shares
have been issued by UBS AG.
Shareholders’ participation rights
Voting rights
The sole direct shareholder of UBS AG is UBS Group AG, which holds 100% of UBS AG shares. These shares are entitled
to voting rights without restriction.
Statutory quorums
Motions are decided at a general meeting by a majority of the votes represented, excluding blank and invalid ballots. For
the approval of
certain specific issues, the
Swiss Code of Obligations
requires a positive
vote from a two-thirds
majority
of the
votes represented
at the given
general meeting
and from
a majority
of the
nominal value
of shares
represented
thereat. Such issues include creating shares with privileged voting rights, introducing restrictions
on the transferability of
registered
shares,
creating
contingent
capital
or
introducing
a
capital
band,
conversion
capital
or
reserve
capital
and
restricting or excluding shareholders’ preemptive
rights.
The AoA also require a two-thirds majority of votes represented
for approval of any change to their provisions regarding
the number of BoD members, any decision to remove one-quarter or more of
the BoD members and any modification to
the provision establishing this qualified quorum.
Convocation of general meetings of shareholders
The AGM
must be held
within six
months of
the close
of the
financial year
(i.e., 31 December).
In 2024, the
AGM will
take place on 23 April.
EGMs
may
be
convened
whenever
the
BoD
or
the
auditors
consider
it
necessary.
Shareholders
individually
or
jointly
representing at least
10% of the
share capital may
at any time,
including during an
AGM, require, by
way of a
written
statement, that an EGM be convened to address a specific
issue they put forward.
Annual Report 2023 |
Corporate governance
117
Board of Directors
The BoD, led by the Chairman, consists of at least 5 and
no more than 12 members, as per our AoA.
The BoD, led
by the Chairman,
decides on the strategy
of UBS AG upon
recommendation by the President
of its Executive
Board (the EB)
and exercises the
ultimate supervision of
management. Its ultimate
responsibility for the
success of UBS AG
is exercised subject to the parameters set by the Group.
Members of the Board of Directors
Board of Directors
Position
Initial
election
Step
down
UBS business address
Colm Kelleher
Chairman of the BoD
2022
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Lukas Gähwiler
Vice Chairman
Member of the Risk Committee
2022
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Jeremy Anderson
Chairperson of Audit Committee
2018
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Claudia Böckstiegel
Member of the BoD
2021
Bahnhofstrasse 45, 8001 Zurich, Switzerland
William C. Dudley
Member of the Risk Committee
2019
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Patrick Firmenich
Member of the Audit Committee
2021
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Fred Hu
Member of the BoD
2018
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Mark Hughes
Chairperson of the Risk Committee
2020
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Nathalie Rachou
Member of the Risk Committee
2020
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Julie G. Richardson
Chairperson of the Compensation
Committee / Member of the Risk Committee
2017
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Dieter Wemmer
Member of the Audit Committee /
member of the Compensation Committee
2016
23.04.2024
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Jeanette Wong
Member of the Audit Committee /
member of the Compensation Committee
2019
Bahnhofstrasse 45, 8001 Zurich, Switzerland
Gail Kelly
Candidate to the UBS AG Board
Proposed
for election
at the 2024
AGM
Bahnhofstrasse 45, 8001 Zurich, Switzerland
›
Refer to the UBS Group Annual Report 2023, available
under “Annual reporting” at
ubs.com/investors
, for the biographies of the
members of the BoD
No current
BoD member
has either
an employment
contract
or a
significant business
connection to
UBS or
any of
its
subsidiaries. No member of the BoD currently carries
out operational management tasks within the Group.
All members
of the BoD are therefore non-executive members. Except for
Lukas Gähwiler, no member of the BoD
has carried out over
the past three years operational management tasks within the Group. All members of the
BoD are also members of UBS
Group AG’s Board of Directors, and committee membership is
the same for both entities.
In 2023, the
BoD had three
permanent committees:
the Audit Committee,
the Compensation
Committee and
the Risk
Committee.
Elections and terms of office
UBS AG’s sole shareholder,
UBS Group AG, annually elects each member of the
BoD individually.
Organizational principles and structure
Following
each
AGM,
the
BoD meets
to
appoint
one
or
more
Vice
Chairmen,
the
BoD committee
members
and the
respective committee
Chairpersons. At
the same meeting,
the BoD appoints
the Company Secretary,
who, pursuant to
the Organization Regulations, acts as secretary
to the BoD and its committees.
Pursuant to the AoA and the Organization Regulations, the BoD meets as often as business requires, but it must meet at
least six times a year.
BoD committees
The committees listed below
assist the BoD in fulfilling
the performance of its responsibilities.
Each committee meets as
often as its business requires, but at least four times a year for the Audit Committee,
the Compensation Committee and
the Risk Committee.
Annual Report 2023 |
Corporate governance
118
Audit Committee
Throughout
2023,
the
Audit
Committee
consisted
of
the
same
four
independent
BoD
members,
Jeremy
Anderson
(Chairperson), Patrick
Firmenich, Dieter
Wemmer and
Jeanette Wong.
All Audit
Committee members
have accounting
or
related
financial
management
expertise
and,
in
compliance
with
the
rules
established
pursuant
to
the
2002
US
Sarbanes–Oxley Act,
at least
one member
qualifies as
a financial
expert. The
NYSE standards
on corporate
governance
and Rule
10A-3 under
the US
Securities Exchange
Act set
more stringent
independence requirements
for members
of
audit
committees
than
for
the
other
members
of
the
BoD.
Throughout
2023,
all
members
of
the
Audit
Committee
satisfied these requirements, in
that they did not receive, directly
or indirectly,
any consulting, advisory or compensatory
fees from
any member
of the
Group other
than in their
capacity as
a BoD member,
did not hold,
directly or
indirectly,
UBS AG shares in excess of 5% of the outstanding capital, and did not serve on the audit committees
of more than two
other
public
companies.
The
function
of
the
Audit
Committee
is
to
support
the
Board
in
fulfilling
its
oversight
duty
relating to financial reporting and internal controls over financial reporting, the effectiveness of the external and internal
audit functions, as well as the
whistleblowing procedures. Management
is responsible for the preparation,
presentation
and integrity
of the
financial statements,
while the
external auditors
are
responsible
for auditing
financial statements.
The Audit Committee’s responsibility is one of
oversight and review.
Compensation Committee
Throughout
2023,
the
Compensation
Committee
consisted
of
the
same
three
independent
BoD
members,
Julie
G.
Richardson
(Chairperson),
Dieter
Wemmer
and
Jeanette
Wong.
The
function
of
the
Compensation
Committee
is
to
support the
Board in
its duties
to set
guidelines on
compensation and
benefits, to
oversee implementation
thereof, to
approve certain compensation and to scrutinize executive
performance.
Risk Committee
In
2023,
the
Risk
Committee
consisted
of
four
independent
BoD
members,
Mark
Hughes
(Chairperson),
William
C.
Dudley,
Nathalie
Rachou
and
Julie
G.
Richardson.
After
the
AGM,
the
Vice
Chairman,
Lukas
Gähwiler,
joined
the
committee.
The
function
of
the
Risk
Committee
is
to
oversee
and
support
the
Board
in
fulfilling
its
duty
to
set
and
supervise an appropriate risk management and control
framework in the areas of:
(i)
financial and non-financial risks; and
(ii)
balance sheet, treasury and capital management,
including funding, liquidity and equity attribution.
Cybersecurity governance
Cybersecurity as one of the inherently highest
and most rapidly evolving non-financial
risks is a key focus for the
BoD. It
is primarily
covered
by the
Risk Committee
through a
combination
of (i) regular
reporting as
part
of the
monthly
risk
reports
and quarterly
technology
risk updates,
and (ii)
dedicated
deep-dives
on
specific
cybersecurity
topics,
including
summaries and
assessments of
actual cybersecurity
incidents in
the industry,
assessments of
the firm’s
security posture
and related continuous improvement
measures. In addition, the BoD
members receive periodic updates from
the Group
Chief Information Security Office on key cybersecurity threats and incidents across the globe and industries, and the Risk
Committee regularly organizes education and training
sessions, including cyber exercises, for all BoD
members.
With respect
to the BoD,
Jeremy Anderson, Fred
Hu, Mark Hughes
and Julie G.
Richardson all have
expertise in technology
and cybersecurity.
Mr. Anderson
is an
IT expert,
having started
out as
a software
developer in
the early
1980s, before
working in IT
consulting and
developing a broad
knowledge of systems
integration and
IT outsourcing
services, as well
as software development.
He cemented
his reputation as
a tech specialist
by becoming a
founding sponsor
of KPMG’s
Global Fintech Network in
2014. Mr. Hu has a
Master’s degree in engineering
science from Tsinghua University
and has
vast experience advising and investing in leading firms in the
technology sector in China and globally. Mr. Hughes gained
substantial experience overseeing cybersecurity risk as the Group Chief Risk Officer at Royal Bank of Canada. Finally, Ms.
Richardson
has
spent
significant
time with
both
incumbent
and
new
technology
companies,
including
being
a
board
member of a digital knowledge management company, a leading
cloud monitoring firm and a cyber insurance company.
The BoD is
supported in overseeing risk
at the executive management
level by the
cybersecurity expertise of Mike
Dargan,
who is the Group Chief
Operations and Technology Officer, and Markus Ronner,
who is the Group Chief
Compliance and
Governance
Officer.
Mr.
Dargan
is responsible
for
delivering
digital
platforms,
technology
services,
infrastructure,
and
operations,
including
cybersecurity
and
information
security.
Previously,
he
was
Group
Chief
Digital
and
Information
Officer, after leading our Group Technology function since joining UBS
in 2016. In addition to this remit, he
was also UBS
Group AG’s
Group Executive
Board (GEB)
sponsor for
our digital
assets strategy
and a
sponsor of
artificial intelligence
and our agile transformation, which were
integrated into his area of responsibility
in 2023. Prior to joining UBS, he
held
various senior roles in technology, corporate strategy and investment banking at Standard Chartered
Bank, Merrill Lynch,
and Oliver
Wyman. Mr.
Ronner has
been with
UBS for
more than
40 years
and held
various positions
across the
firm,
including manager of the Group-wide
too-big-to-fail program, COO Wealth
Management & Swiss Bank, Head
Products
and Services
of Wealth
Management
& Swiss
Bank,
COO
Asset
Management,
and
Head
Group
Internal
Audit.
In his
current position, he
is responsible at
the Group level
for the control
of all non-financial risks,
governmental and regulatory
affairs, and investigations and governance matters.
›
Refer to “Non-financial risk” in the “Risk
management and control” section of this report for information
about cybersecurity
Annual Report 2023 |
Corporate governance
119
Important business connections of independent members
of the Board of Directors
As a
global
financial
services
provider
and
a
major
Swiss
bank,
we
enter
into
business
relationships
with
many
large
companies, including some in which our BoD members have
management or independent board responsibilities.
Our
Organization
Regulations
require
one-third
of
UBS AG
BoD
members
to
be
independent.
For
this
purpose,
independence is determined in accordance with FINMA Circular 2017/1
“Corporate governance – banks” and the NYSE
rules.
In 2023, our BoD met the standards of the Organization Regulations for the percentage
of directors who are considered
independent under the criteria described above.
All relationships
and transactions
with
UBS
AG’s
independent
BoD members
are
conducted in
the
ordinary
course
of
business
and
are
on
the
same
terms
as
those
prevailing
at
the
time
for
comparable
transactions
with
non-affiliated
persons. All relationships and transactions with BoD members’
associated companies are conducted at arm’s length.
Checks and balances: Board of Directors and Executive Board
We
operate
under a
strict dual
board
structure,
as mandated
by Swiss
banking law.
The separation
of responsibilities
between
the
BoD
and
the
EB
is
clearly
defined
in
the
Organization
Regulations.
The
BoD
decides
on
the
strategy
of
UBS AG,
upon
recommendations
by
the
President
of
the
EB,
and
exercises
ultimate
supervision
over
management;
whereas the EB, headed by the President of the
EB, has executive management responsibility. The functions of Chairman
and President of the
EB are assigned to
two different people, leading to a
separation of powers. This structure establishes
checks and
balances and
preserves the
institutional independence
of the
BoD from
the executive
management of
UBS
AG, for which responsibility
is delegated to the
EB, under the
leadership of the
President of the
EB. No member
of one
board may simultaneously be a member of the
other.
Supervision and
control of
the EB remain
with the
BoD. The authorities
and responsibilities of
the two
bodies are
governed
by the AoA and the Organization Regulations.
Although the recruiting process for
BoD and EB members takes
into account a broad spectrum of
factors, such as skills,
backgrounds,
experience
and
expertise,
our
approach
with
regard
to
diversity
considerations
does
not
constitute
a
diversity policy within the
meaning of the EU
Directive on Non-Financial
Reporting, and Swiss
law does not require
UBS
to maintain such a policy.
Executive Board
The BoD delegates the management of the business to the
Executive Board.
Responsibilities, authorities and organizational principles
of the Executive Board
At UBS AG,
management of the
business is also
delegated, and its
EB, under the
leadership of the
President of
the EB,
has executive management
responsibility for UBS
AG and its business.
All members of
the EB are
members of the
GEB.
Sabine Keller-Busse,
who serves as
President UBS
Switzerland AG
and Ulrich Körner,
CEO of Credit
Suisse AG are
both
not member of the EB.
UBS AG
EB
has two
permanent
committees:
the
Asset
and Liability
Committee
(the
ALCO) and
the
Finance
and Risk
Committee (the FRC).
The ALCO
is responsible
for managing
UBS AG’s
assets and
liabilities in
line with
the UBS
AG and
Group strategy
and
regulatory requirements. In 2023, the ALCO held 10 meetings.
The FRC is responsible for supervising and controlling UBS AG’s business, financial
and risk profile of the overall UBS AG
standalone as well as the entity’s business activities in Switzerland
and cross-jurisdictional branch-related matters, in line
with the UBS AG and Group strategy and regulatory
requirements. The FRC is also responsible for
ensuring the financial
and risk profile of UBS AG
standalone complies with the agreed risk appetite, by
ascertaining that appropriate and timely
actions are taken. In 2023, the FRC held three meetings.
Annual Report 2023 |
Corporate governance
120
Executive Board
Position
Initial
appointment
to the EB
Step-down
date
UBS business address
Sergio P.
Ermotti
President of the Executive Board
(also from 2011 to 2020)
05.04.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Michelle Bereaux
Integration Officer
09.05.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Christian Bluhm
Chief Risk Officer
2016
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Michael Dargan
Chief Operations and Technology Officer
2021
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Suni Harford
President Asset Management
2019
01.03.2024
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Naureen Hassan
President UBS Americas
2022
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Aleksandar Ivanovic
President Asset Management
01.03.2024
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Robert Karofsky
President Investment Bank
2018
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Iqbal Khan
President Global Wealth Management
2019
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Edmund Koh
President UBS Asia Pacific
2019
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Barbara Levi
General Counsel
2021
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Beatriz Martin
Jimenez
Head Non-core and Legacy and
President UBS Europe, Middle East and
Africa
09.05.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Markus Ronner
Chief Compliance and Governance Officer
2018
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Stefan Seiler
Head Human Resources & Corporate
Services
09.05.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Todd Tuckner
Chief Financial Officer
(as of 12.06.2023)
09.05.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Ralph Hamers
President of the Executive Board
2020
05.04.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
Sarah Youngwood
Chief Financial Officer
2022
12.06.2023
Bahnhofstrasse 45, 8001 Zurich,
Switzerland
›
Refer to the UBS Group Annual Report 2023, available
under “Annual reporting” at
ubs.com/investors
, for the biographies of the
members of the EB
Change of control and defense measures
Our Articles
of Association
(the
AoA) do
not
provide
any
measures
for
delaying,
deferring or
preventing
a change
of
control.
Clauses on change of control
Neither
the
terms
regulating
the
BoD
members’
mandate
nor
any
employment
contracts
with
EB
members
contain
change of control clauses.
All employment contracts
with EB members
stipulate a notice
period of six
months. During the
notice period, EB
members
are entitled to their
salaries and the continuation
of existing employment
benefits and may be
eligible to be considered
for a discretionary performance award based on their contribution
during their tenure.
In case
of a
change of
control, we
may, at
our discretion,
accelerate the
vesting of
and /
or relax
applicable forfeiture
provisions of employees’ awards.
Annual Report 2023 |
Corporate governance
121
Auditors
Audit is an
integral part of
corporate governance. While
safeguarding their
independence, the
external auditors closely
coordinate their work with Internal Audit (IA). The Audit Committee and, ultimately,
the BoD supervise the effectiveness
of audit work.
›
Refer to “Board of Directors” in this section for more information
about the Audit Committee
External independent auditors
The 2023 AGM re-elected Ernst
& Young Ltd (EY) as auditors for
UBS AG for the
2023 financial year. EY assumes virtually
all auditing functions according to
laws, regulatory requests
and the AoA. Robert Jacob is
the EY lead partner in charge
of the overall coordination
of the UBS Group
financial and regulatory
audits and the
co-signing partner of
the financial
audit.
In
2020,
Maurice
McCormick
became
the
lead
audit
partner
for
the
financial
statement
audit
and
has
an
incumbency limit of five years. In 2021, Hannes Smit became the Lead Auditor to the Swiss Financial Market Supervisory
Authority (FINMA),
with an incumbency limit
of seven years.
Daniel Martin has been
the co-signing partner for
the FINMA
audit since 2019, with an incumbency limit of seven years.
During 2023, the Audit Committee held 14 meetings with the external
auditors.
Review of UBS AG audit engagement
EU rules
require
UBS Europe
SE, an
indirect
subsidiary of
UBS AG,
to rotate
its external
auditors in
the 2024
financial
year.
In connection with this required
change, and in consideration of governance best
practices, the Board of
Directors
of UBS Group AG considered whether it would propose to shareholders a rotation of the Group auditor concurrent with
the change at
UBS Europe SE.
Under the direction
of the Audit
Committee of UBS
Group AG, UBS
Group conducted
a
formal review of the Group
audit engagement including soliciting proposals from potential auditors.
In early 2022, based
on the results of
this assessment, the
Board of Directors
of UBS Group AG
decided to retain
EY as the Group’s
external
auditors.
Audit effectiveness assessment
The Audit Committee
assesses the performance,
effectiveness and
independence of the
external auditors on an
annual
basis. The assessment is generally
based on interviews with senior
management and survey feedback
from stakeholders
across the Group. Assessment criteria include quality of service delivery, quality and competence of the audit team,
value
added
as
part
of
the
audit,
insightfulness,
and
the
overall
relationship
with
EY.
Based
on
its
own
analysis
and
the
assessment results, including
feedback received
as part of the
review of the
Group audit engagement
described above,
the Audit Committee concluded that EY’s audit has been effective.
Fees paid to external independent auditors
UBS AG and its subsidiaries paid the following fees (including expenses) to their external independent auditors.
For the year ended
USD m
31.12.23
31.12.22
Audit
Global audit fees
Additional services classified as audit (services required
by law or statute, including work of a non-recurring nature mandated
by regulators)
Total audit
Non-audit
Audit-related fees
of which: assurance and attestation services
of which: control and performance reports
of which: consultation concerning financial accounting and
reporting standards
Tax fees
All other fees
Total non-audit
Annual Report 2023 |
Corporate governance
122
Special auditors for potential capital increases
At the AGM
on 8 April 2021, BDO
AG was reappointed as
special auditors for
a three-year term of
office. Special auditors
provide audit opinions in connection with potential
capital increases independently from
other auditors.
Services performed and fees
The Audit Committee
oversees all services
provided to
UBS by the
external auditors. For
services requiring
the approval
from
the
Audit
Committee,
a
preapproval
may
be
granted
either
for
a
specific
mandate
or
in
the
form
of
a
blanket
preapproval authorizing
a limited and
well-defined type and
scope of services.
The fees (including
expenses) paid to
EY
are set forth in the table above.
In addition, EY received USD 27m
in 2023 (USD 35m in 2022) for services performed on
behalf of our investment funds, many of which have independent
fund boards or trustees.
Audit
work
includes
all
services
necessary
to
perform
the
audit
for
UBS
AG
in
accordance
with
applicable
laws
and
generally
accepted
auditing
standards,
as
well
as
other
assurance
services
that
conventionally
only
the
auditor
can
provide. These include statutory and regulatory audits, attestation
services and the review of documents to be filed
with
regulatory
bodies.
The
additional
services
classified
as audit
in 2023
included
several
engagements
for
which
EY
was
mandated at the request of FINMA.
Audit-related
work
consists
of
assurance
and
related
services
traditionally
performed
by
auditors,
such
as
attestation
services related to financial reporting, internal control reviews and performance standard reviews, as well as consultation
concerning financial accounting and reporting standards.
Tax
work
involves
services
performed
by
professional
staff
in
EY’s
tax
division
and
includes
tax
compliance
and
tax
consultation with respect to our own affairs.
“Other” services are permitted services, which include technical
IT security control reviews and assessments.
Internal Audit
IA performs the
internal auditing role
for UBS
AG. It is
an independent function
that provides
expertise and
insights to
confirm controls are functioning correctly
and highlight where UBS needs to better manage
current and emerging risks.
IA supports the BoD in discharging its
governance responsibilities by taking a dynamic approach to
audit, issue assurance
and risk assessment, drawing attention to key risks in order
to drive action to prevent unexpected loss or damage to the
firm’s
reputation.
To
support
the
achievement
of
UBS’s
objectives,
IA
independently,
objectively
and
systematically
assesses the:
(i)
soundness of UBS AG’s risk and control culture;
(ii)
reliability and integrity of financial and operational
information, including whether activities are properly,
accurately
and completely recorded, and the quality of underlying data
and models; and
(iii)
design, operating effectiveness and sustainability of:
–
processes to define strategy and risk appetite, as well as
the overall adherence to the approved strategy;
–
governance processes;
–
risk management, including whether risks are appropriately
identified and managed;
–
internal controls, specifically whether they are commensurate
with the risks taken;
–
remediation activities; and
–
processes
to
comply
with
legal
and
regulatory
requirements,
internal
policies,
and
UBS
AG’s
constitutional
documents and contracts.
Audit
reports
that
include
significant
issues
are
provided
to
the
President
of
the
EB,
relevant
EB
members
and
other
responsible management. The
Chairman, the
Audit Committee and
the Risk
Committee of the
BoD are
regularly informed
of such issues.
In addition, IA
provides independent assurance on
the effective and sustainable
remediation of control deficiencies
within
its mandate,
taking a
prudent and
conservative
risk-based approach
and assessing
at the
issue level
whether
the root
cause and the potential exposure for the firm have been holistically and sustainably addressed. IA also cooperates closely
with risk control functions and internal and external legal advisors
on investigations into major control issues.
To ensure IA’s independence from management, the
IA Executive UBS AG reports to
the Chairman of the BoD and
to the
Audit
Committee,
which
assesses
annually
whether
IA
has
sufficient
resources
to
perform
its
function,
as
well
as
its
independence and
performance. In
the Audit
Committee’s assessment,
IA is
sufficiently resourced
to fulfill
its mandate
and
complete
its
auditing
objectives.
IA’s
role,
position,
responsibilities
and
accountability
are
set
out
in
UBS
AG’s
Organization
Regulations
and
the
Charter
for
IA
.
IA
has
unrestricted
access
to
all
accounts,
books,
records,
systems,
property
and
personnel,
and
must
be
provided
with
all
information
and
data
that
it
needs
to
fulfill
its
auditing
responsibilities. IA
also conducts special
audits at
the request
of the
Audit Committee, or
other BoD
members, committees
or the President of the EB in consultation with the Audit
Committee.
IA enhances the efficiency of its work through coordination
and close cooperation with the external auditors.
Annual Report 2023 |
Corporate governance
123
Information policy
We provide regular information to
our shareholder and to the wider financial community.
Financial reports for UBS AG are expected to be published
on the following dates:
First quarter 2024
7 May 2024
Second quarter 2024
27 August 2024
Third quarter 2024
30 October 2024
The annual general meetings of the shareholders of UBS
AG will take place on the following dates:
2024
23 April 2024
2025
10 April 2025
›
Refer to the corporate calendar available at
ubs.com/investors
dates
Our annual and
quarterly publications are available in
fully online and .pdf
formats
at
ubs.com/investors
, under “Financial
information.”
Financial reporting policies
We report UBS
AG’s results for
each financial quarter,
with the exception of
the fourth quarter,
including a breakdown
of results
by business
division
and
disclosures
or key
developments
relating
to
risk
management
and control,
capital,
liquidity and funding management. With the exception of the
fourth quarter, each quarter we publish quarterly financial
reports for UBS AG.
The consolidated financial
statements of
UBS AG are
prepared in accordance
with IFRS Accounting
Standards as issued
by the International Accounting Standards Board.
›
Refer to “Note 1 Summary of material accounting
policies” in the “Consolidated financial statements”
section of this report for
more information about the basis of accounting
US disclosure requirements
As a
foreign private
issuer,
we must
file reports
and other
information, including
certain financial
reports, with
the US
Securities and Exchange Commission (the SEC) under the
US federal securities laws.
An evaluation of the
effectiveness of our
disclosure controls and
procedures (as defined
in Rule 13a–15e)
under the US
Securities Exchange Act of 1934 has been carried out, under the supervision of management,
including the Group CEO,
the Group CFO
and the Group
Controller and
Chief Accounting
Officer. Based on
that evaluation,
the Group
CEO and
the
Group
CFO
concluded
that
our
disclosure
controls
and
procedures
were
effective
as
of
31 December
2023.
No
significant
changes
have
been
made
to
our
internal
controls
or
to
other
factors
that
could
significantly
affect
these
controls subsequent to the date of their evaluation.
Annual Report 2023 |
Financial statements | Consolidated financial
statements
124
Financial statements
Consolidated financial statements
Table of contents
125
126
127
132
132
132
133
134
135
137
138
140
140
1
157
2a
159
2b
160
160
3
160
4
161
5
161
6
161
7
162
8
165
165
9
169
10
171
11
171
12
173
13
174
14
175
15
175
16
176
17
181
18
182
182
19
194
20
208
21
210
22
212
23
215
24
215
25
220
26
226
27
230
28
234
29
235
30
237
31
238
32
238
33
241
34
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
125
Management’s report on internal control over financial
reporting
Management’s responsibility for internal control over financial reporting
The Board of
Directors and management
of UBS AG are
responsible for establishing
and maintaining adequate
internal
control
over
financial
reporting.
UBS
AG’s
internal
control
over
financial
reporting
is
designed
to
provide
reasonable
assurance
regarding
the
preparation
and
fair
presentation
of
published
financial
statements
in
accordance
with
IFRS
Accounting Standards as issued by the International Accounting
Standards Board (IASB).
UBS AG’s internal control over financial reporting includes
those policies and procedures that:
–
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
transactions
and
dispositions of assets;
–
provide reasonable assurance
that transactions are
recorded as necessary
to permit preparation
and fair presentation
of financial statements,
and that
receipts and expenditures
of the company
are being made
only in accordance
with
authorizations of UBS AG management; and
–
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or
disposition
of the company’s assets that could have a material effect
on the financial statements.
Because
of its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or detect
misstatements.
Also, projections
of any
evaluation of
effectiveness to
future
periods are
subject to
the risk
that controls
may become
inadequate
because
of
changes
in
conditions,
or
that
the
degree
of
compliance
with
the
policies
or
procedures
may
deteriorate.
Management’s assessment of internal control over financial reporting
as of 31 December
2023
UBS
AG
management
has
assessed
the
effectiveness
of
UBS
AG’s
internal
control
over
financial
reporting
as
of
31 December
2023
based
on
the
criteria
set
forth
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(COSO)
in
Internal
Control
–
Integrated
Framework
(2013
Framework).
Based
on
this
assessment,
management believes that, as of 31 December 2023, UBS
AG’s internal control over financial reporting was effective.
The effectiveness of
UBS AG’s internal control
over financial reporting as
of 31 December 2022
has been audited by
Ernst
&
Young
Ltd,
UBS
AG’s
independent
registered
public
accounting
firm,
as
stated
in
their
registered public accounting firm on internal control over financial reporting,
which expresses an unqualified opinion on
the effectiveness of UBS AG’s internal control over financial reporting
as of 31 December 2023.
Reports of the independent registered public accounting
firm included in this report
The accompanying reports of
the independent registered public accounting
firm on the
consolidated financial statements
Report of
the independent registered
public accounting firm
on the consolidated
financial statements
and internal
control
over financial
reporting
reporting
of UBS Group
are included
in our filing
on 28 March
2024 with the
Securities and Exchange
Commission on
Form 20-F pursuant to US reporting obligations.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
126
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
127
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
128
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
129
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
130
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial information
131
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
132
UBS AG consolidated financial statements
Primary financial statements and share information
Audited |
Income statement
For the year ended
USD m
Note
31.12.23
31.12.22
31.12.21
Interest income from financial instruments measured at
amortized cost and fair value through
other comprehensive income
3
Interest expense from financial instruments measured at
amortized cost
3
(
19,643
)
(
6,696
)
(
3,366
)
Net interest income from financial instruments measured
at fair value through profit or loss and other
3
Net interest income
3
Other net income from financial instruments measured
at fair value through profit or loss
3
Fee and commission income
4
Fee and commission expense
4
(
1,790
)
(
1,823
)
(
1,985
)
Net fee and commission income
4
Other income
5
Total revenues
Credit loss expense / (release)
19
(
148
)
Personnel expenses
6
General and administrative expenses
7
Depreciation, amortization and impairment of non-financial
assets
11, 12
Operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
8
Net profit / (loss)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
133
Statement of comprehensive income
For the year ended
USD m
Note
31.12.23
31.12.22
31.12.21
Comprehensive income attributable to shareholders
Net profit / (loss)
Other comprehensive income that may be reclassified to the income
statement
Foreign currency translation
Foreign currency translation movements related to net assets of foreign operations, before tax
(
869
)
(
1,046
)
Effective portion of changes in fair value of hedging instruments
designated as net investment hedges, before tax
(
912
)
Foreign currency translation differences on foreign operations reclassified to the
income statement
(
1
)
Effective portion of changes in fair value of hedging instruments
designated as net investment hedges reclassified
to
the income statement
(
28
)
(
4
)
Income tax relating to foreign currency translations, including the effect of
net investment hedges
(
17
)
Subtotal foreign currency translation, net of tax
1
(
519
)
(
510
)
Financial assets measured at fair value through other comprehensive income
Net unrealized gains / (losses), before tax
(
440
)
(
203
)
Net realized (gains) / losses reclassified to the income statement
from equity
(
9
)
Reclassification of financial assets to Other financial assets measured
at amortized cost
2
Income tax relating to net unrealized gains / (losses)
(
3
)
Subtotal financial assets measured at fair value through other comprehensive
income, net of tax
(
157
)
Cash flow hedges of interest rate risk
25
Effective portion of changes in fair value of derivative instruments designated
as cash flow hedges, before tax
(
36
)
(
5,758
)
(
992
)
Net (gains) / losses reclassified to the income statement from
equity
(
159
)
(
1,073
)
Income tax relating to cash flow hedges
(
309
)
Subtotal cash flow hedges, net of tax
3
(
4,793
)
(
1,675
)
Cost of hedging
25
Cost of hedging, before tax
(
19
)
(
32
)
Income tax relating to cost of hedging
Subtotal cost of hedging, net of tax
(
19
)
(
26
)
Total other comprehensive income that may be reclassified to the income statement, net
of tax
(
5,260
)
(
2,368
)
Other comprehensive income that will not be reclassified to the income
statement
Defined benefit plans
26
Gains / (losses) on defined benefit plans, before tax
(
103
)
Income tax relating to defined benefit plans
(
33
)
(
31
)
Subtotal defined benefit plans, net of tax
(
136
)
Own credit on financial liabilities designated at fair value
20
Gains / (losses) from own credit on financial liabilities designated
at fair value, before tax
(
861
)
Income tax relating to own credit on financial liabilities designated
at fair value
(
71
)
Subtotal own credit on financial liabilities designated at
fair value, net of tax
(
790
)
4
Total other comprehensive income that will not be reclassified to the income statement,
net of tax
(
927
)
Total other comprehensive income
(
4,383
)
(
2,220
)
Total comprehensive income attributable to shareholders
Comprehensive income attributable to non-controlling
interests
Net profit / (loss)
Total other comprehensive income that will not be reclassified to the income statement,
net of tax
(
14
)
(
16
)
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
Net profit / (loss)
Other comprehensive income
(
4,396
)
(
2,235
)
of which: other comprehensive income that may be reclassified
to the income statement
(
5,260
)
(
2,368
)
of which: other comprehensive income that will not be reclassified
to the income statement
(
924
)
Total comprehensive income
1 Mainly reflects
a significant strengthening
of the Swiss
franc and the
euro against the
US dollar.
2 Effective 1
April 2022, a
portfolio of assets
previously classified as
Financial assets measured
at fair value
through other comprehensive income
was reclassified to
Other financial assets measured
at amortized cost. Refer
to Note 13a for
more information.
3 Mainly reflects net
losses on hedging instruments
that were
reclassified from OCI to the income statement.
4 Mainly reflects a tightening of our own credit spreads.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
134
Balance sheet
USD m
Note
31.12.23
31.12.22
Assets
Cash and balances at central banks
Amounts due from banks
9
Receivables from securities financing transactions measured at amortized
cost
9, 21
Cash collateral receivables on derivative instruments
9, 21
Loans and advances to customers
9
Other financial assets measured at amortized cost
9, 13a
Total financial assets measured at amortized cost
Financial assets at fair value held for trading
20
of which: assets pledged as collateral that may be sold or repledged
by counterparties
Derivative financial instruments
10, 20, 21
Brokerage receivables
20
Financial assets at fair value not held for trading
20
Total financial assets measured at fair value through profit or loss
Financial assets measured at fair value through other comprehensive income
20
Investments in associates
28b
Property, equipment and software
11
Goodwill and intangible assets
12
Deferred tax assets
8
Other non-financial assets
13b
Total assets
Liabilities
Amounts due to banks
Payables from securities financing transactions measured at amortized cost
21
Cash collateral payables on derivative instruments
21
Customer deposits
14a
Funding from UBS Group AG measured at amortized cost
14b
Debt issued measured at amortized cost
16
Other financial liabilities measured at amortized cost
18a
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
20
Derivative financial instruments
10, 20, 21
Brokerage payables designated at fair value
20
Debt issued designated at fair value
15, 20
Other financial liabilities designated at fair value
18b, 20
Total financial liabilities measured at fair value through profit or loss
Provisions
17a
Other non-financial liabilities
18c
Total liabilities
Equity
Share capital
Share premium
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
(
133
)
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Total liabilities and equity
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
135
Statement of changes in equity
USD m
Share
capital
Share
premium
Retained
earnings
Balance as of 31 December 2020
Premium on shares issued and warrants exercised
(
7
)
2
Tax (expense) / benefit
(
102
)
Dividends
(
4,539
)
Translation effects recognized directly in retained earnings
Share of changes in retained earnings of associates and
joint ventures
New consolidations / (deconsolidations) and other increases
/ (decreases)
3
Total comprehensive income for the year
of which: net profit / (loss)
of which: OCI, net of tax
Balance as of 31 December 2021
Premium on shares issued and warrants exercised
(
14
)
2
Tax (expense) / benefit
Dividends
(
4,200
)
Translation effects recognized directly in retained earnings
Share of changes in retained earnings of associates and
joint ventures
New consolidations / (deconsolidations) and other increases
/ (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
of which: OCI, net of tax
Balance as of 31 December 2022
Premium on shares issued and warrants exercised
(
19
)
2
Tax (expense) / benefit
Dividends
(
6,000
)
Translation effects recognized directly in retained earnings
Share of changes in retained earnings of associates and
joint ventures
(
1
)
Share capital currency change
(
48
)
New consolidations / (deconsolidations) and other increases
/ (decreases)
4
Total comprehensive income for the year
of which: net profit / (loss)
of which: OCI, net of tax
(
927
)
Balance as of 31 December 2023
1 Excludes other comprehensive income related to defined benefit plans and own credit, which is recorded directly in Retained earnings.
2 Includes decreases related to recharges by UBS Group AG for share-based
compensation awards granted to
employees of UBS AG or
its subsidiaries.
3 Includes the effects related
to the launch of UBS
AG’s new operational
partnership entity with Sumitomo Mitsui
Trust Holdings,
Inc in
2021.
4 Includes an increase of USD
m related to the issuance of high-trigger loss-absorbing additional tier 1 capital with an equity conversion feature.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
136
Other comprehensive
income recognized
directly in equity,
net of tax
1
of which:
foreign currency
translation
of which:
financial assets at
fair value through OCI
of which:
cash flow
hedges
Total equity
attributable to
shareholders
Non-controlling
interests
Total equity
(
7
)
(
7
)
(
102
)
(
102
)
(
4,539
)
(
4
)
(
4,542
)
(
18
)
(
18
)
(
2,368
)
(
510
)
(
157
)
(
1,675
)
(
2,368
)
(
510
)
(
157
)
(
1,675
)
(
2,220
)
(
16
)
(
2,235
)
(
7
)
(
14
)
(
14
)
(
4,200
)
(
9
)
(
4,209
)
(
69
)
(
69
)
(
3
)
(
3
)
(
7
)
(
3
)
(
5,260
)
(
519
)
(
4,793
)
(
5,260
)
(
519
)
(
4,793
)
(
4,383
)
(
14
)
(
4,396
)
(
133
)
(
4
)
(
4,234
)
(
19
)
(
19
)
(
6,000
)
(
4
)
(
6,004
)
(
127
)
(
127
)
(
1
)
(
1
)
(
31
)
(
2,961
)
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
137
Share information and earnings per share
Ordinary share capital
As of 31 December 2023, UBS AG had
second quarter
of 2023,
the share
capital currency
of UBS
AG was
changed from
the Swiss
franc to
the US
dollar,
as
approved by shareholders at
the 2023 Annual General Meeting (the
AGM). As a result, the nominal value
per share has
changed from CHF
, resulting in a
reclassification between share capital and capital contribution
reserve
(presented
as
share
premium
in
the
consolidated
financial
statements)
and
leading
to
a
share
capital
of
USD
. The shares were entirely
held by UBS Group AG.
Conditional share capital
As of
31 December 2023,
the following
conditional share
capital was
available to
the Board
of Directors
(the BoD)
of
UBS AG:
–
A maximum of
USD
of USD
granted in connection
with the issuance
of bonds or
similar financial instruments
on national or
international capital
markets.
This
conditional
capital
allowance
was
approved
at
the
Extraordinary
General
Meeting
held
on
26 November 2014, having originally
been approved at the AGM of
UBS AG on 14 April
2010. The BoD has not
made use of such allowance.
Capital band, conversion capital and reserve capital
As of 31 December 2023, UBS AG has not introduced a
capital band, any conversion capital or any reserve
capital.
Earnings per share
In 2015,
UBS AG
shares were delisted
from the
SIX Swiss
Exchange and the
New York
Stock Exchange. As
of 31 December
2023,
% of UBS AG’s issued
shares were held by UBS
Group AG and therefore were
not publicly traded. Accordingly,
earnings per share information is not provided for UBS AG.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
138
Statement of cash flows
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Cash flow from / (used in) operating activities
Net profit / (loss)
Non-cash items included in net profit and other adjustments:
Depreciation, amortization and impairment of non-financial
assets
Credit loss expense / (release)
(
148
)
Share of net (profit) / loss of associates and joint ventures
and impairment related to associates
(
32
)
(
105
)
Deferred tax expense / (benefit)
(
222
)
Net loss / (gain) from investing activities
(
225
)
(
1,515
)
(
230
)
Net loss / (gain) from financing activities
(
16,587
)
Other net adjustments
1
(
10,383
)
Net change in operating assets and liabilities:
1,2
Amounts due from banks and amounts due to banks
(
10,093
)
3
(
1,088
)
Receivables from securities financing transactions measured at amortized
cost
(
4,993
)
(
1,565
)
Payables from securities financing transactions measured at amortized cost
(
1,247
)
(
751
)
Cash collateral on derivative instruments
(
3,311
)
Loans and advances to customers
(
26,943
)
Customer deposits
(
9,409
)
Financial assets and liabilities at fair value held for trading and derivative financial
instruments
(
16,017
)
(
10,635
)
Brokerage receivables and payables
(
6,101
)
Financial assets at fair value not held for trading and other financial assets
and liabilities
(
4,661
)
Provisions and other non-financial assets and liabilities
(
437
)
Income taxes paid, net of refunds
(
1,541
)
(
1,495
)
(
1,026
)
Net cash flow from / (used in) operating activities
(
28,202
)
Cash flow from / (used in) investing activities
Purchase of subsidiaries, associates and intangible assets
(
4
)
(
3
)
(
1
)
Disposal of subsidiaries, associates and intangible assets
Purchase of property, equipment and software
(
1,283
)
(
1,478
)
(
1,581
)
Disposal of property, equipment and software
Net (purchase) / redemption of financial assets measured
at fair value through other comprehensive income
(
699
)
(
750
)
Purchase of debt securities measured at amortized cost
(
14,244
)
(
30,792
)
(
4,922
)
Disposal and redemption of debt securities measured at amortized
cost
Net cash flow from / (used in) investing activities
(
4,924
)
(
12,283
)
(
1,860
)
Table
continues below.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
139
Statement of cash flows (continued)
Table
continued from above.
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Cash flow from / (used in) financing activities
Net issuance (repayment) of short-term debt measured at amortized
cost
(
12,249
)
(
3,093
)
Distributions paid on UBS AG shares
(
6,000
)
(
4,200
)
(
4,539
)
Issuance of debt designated at fair value and long-term debt measured
at amortized cost
4
Repayment of debt designated at fair value and long-term debt measured
at amortized cost
4
(
85,541
)
(
67,670
)
(
79,799
)
Net cash flows from other financing activities
(
501
)
(
595
)
(
261
)
Net cash flow from / (used in) financing activities
(
5,257
)
Total cash flow
Cash and cash equivalents at the beginning of the year
Net cash flow from / (used in) operating, investing and financing
activities
(
13,435
)
(
6,911
)
Effects of exchange rate differences on cash and cash equivalents
1
(
5,645
)
(
5,306
)
Cash and cash equivalents at the end of the year
5
of which: cash and balances at central banks
6
of which: amounts due from banks
6
of which: money market paper
6,7
Additional information
Net cash flow from / (used in) operating activities includes:
Interest received in cash
Interest paid in cash
Dividends on equity investments, investment funds and associates
received in cash
8
1 Foreign currency translation and foreign exchange effects on operating assets and liabilities and on cash and cash equivalents
are presented within the Other net adjustments line. Does not include foreign currency
hedge effects related to foreign exchange
swaps.
2 Effective from 2023, UBS AG has refined the presentation in the statement of cash flows and now presents cash flows from Loans and advances to customers,
Customer deposits, Receivables from
securities financing transactions measured at
amortized cost and Payables
from securities financing transactions measured
at amortized cost as separate lines.
The presentation
change has had no effect on Net
cash flows from / (used in) operating
activities. Prior periods have been
aligned with this change in presentation.
3 Mainly reflects funding provided to
Credit Suisse.
4 Includes
funding from UBS Group AG
measured at amortized cost
(recognized on the balance sheet
in Funding from UBS Group
AG) and measured at
fair value (recognized on the
balance sheet in Other
financial liabilities
designated at fair value).
5 USD
m, USD
m and USD
m of Cash and cash
equivalents (mainly reflected in
Amounts due from banks) were
restricted as of 31 December
2023, 31 December 2022
and 31 December 2021, respectively.
Refer to Note 22
for more information.
6 Includes only balances
with an original maturity of
three months or less.
7 Money market paper
is included in the balance
sheet
under Financial assets
at fair value
not held for
trading (31 December
2023: USD
m; 31 December 2022:
USD
m; 31 December 2021:
USD
m), Other financial
assets measured at
amortized cost
(31 December 2023: USD
m; 31 December 2022:
USD
m; 31 December 2021:
USD
m) and Financial assets
at fair value
held for trading (31
December 2023: USD
m; 31 December 2022:
USD
m;
31 December 2021: USD
m).
8 Includes dividends received from associates reported within Net cash flow from / (used in) investing activities.
Changes in liabilities arising from financing activities
USD m
Debt issued
measured at
amortized cost
of which:
short-term
1
of which:
long-term
2
Debt issued
designated at fair
value
Over-the-
counter debt
instruments
3
Funding from
UBS Group
AG
4
Total
Balance as of 1 January 2022
Cash flows
(
19,390
)
(
12,249
)
(
7,141
)
(
251
)
(
461
)
Non-cash changes
(
3,543
)
(
1,173
)
(
2,370
)
(
12,895
)
(
193
)
(
7,595
)
(
24,225
)
of which: foreign currency translation
(
2,233
)
(
1,173
)
(
1,061
)
(
1,405
)
(
113
)
(
1,285
)
(
5,036
)
of which: fair value changes
(
11,490
)
(
80
)
(
1,060
)
(
12,629
)
of which: hedge accounting and other effects
(
1,310
)
(
1,310
)
(
5,250
)
(
6,560
)
Balance as of 31 December 2022
Cash flows
(
122
)
Non-cash changes
of which: foreign currency translation
(
50
)
of which: fair value changes
of which: hedge accounting and other effects
Balance as of 31 December 2023
1 Debt with an original contractual maturity of less than one year.
2 Debt with an original maturity greater than or equal to one year. The classification of debt issued into short-term and long-term does not consider
any early redemption
features.
3 Included in
balance sheet line
Other financial liabilities
designated at fair
value.
4 Includes funding
from UBS Group
AG measured at
amortized cost (refer
to Note 14b)
and
measured at fair value (refer to Note 18b).
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Notes to the UBS AG consolidated financial statements
Note 1
Summary of material accounting policies
The following table provides an overview of information included in this Note.
141
a)
141
141
1)
141
2)
141
a.
142
b.
146
c.
146
d.
146
e.
146
f.
147
g.
150
h.
151
i.
151
j.
152
3)
152
4)
153
5)
153
6)
154
7)
154
8)
154
9)
155
10)
155
11)
156
b)
156
c)
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Note 1
Summary of material accounting policies (continued)
a) Material accounting policies
This Note describes
the material accounting
policies applied in
the preparation
of the consolidated
financial statements
(the Financial
Statements) of
UBS AG and
its subsidiaries
(UBS AG). On
21 March 2024,
the Financial
Statements were
authorized for issue by the Board of Directors
(the BoD).
Basis of accounting
The
Financial
Statements
have
been
prepared
in
accordance
with
IFRS
Accounting
Standards,
as
issued
by
the
International Accounting Standards Board (the IASB),
and are presented in US dollars.
Disclosures marked as audited in the “Risk, capital, liquidity
and funding, and balance sheet” section of this report form
an integral part of the Financial Statements. These disclosures relate to requirements under IFRS 7,
Financial Instruments:
Disclosures
, and IAS 1,
Presentation of Financial Statements
, and are not repeated in this section.
The
accounting
policies
described
in
this
Note
have
been
applied
consistently
in
all
years
presented
unless
otherwise
stated in Note 1b.
Critical accounting estimates and judgments
Preparation of these Financial Statements under
IFRS Accounting Standards requires management to apply
judgment and make estimates and assumptions that
affect reported amounts of assets, liabilities,
income and expenses and disclosure,
of contingent assets and liabilities,
and may involve significant uncertainty
at the
time they are made. Such estimates and
assumptions are based on the best
available information. UBS AG regularly reassesses such estimates and assumptions,
which encompass historical
experience, expectations of
the future and
other pertinent factors,
to determine their
continuing relevance based
on current conditions,
updating them as necessary. Changes in those
estimates and assumptions may have a significant effect on
the Financial Statements. Furthermore, actual results
may differ significantly from UBS AG’s estimates, which could
result in significant losses to UBS AG,
beyond what was anticipated or provided for.
The following
areas contain
estimation uncertainty
or require
critical judgment
and have
a significant
effect on
amounts recognized
in the
Financial
Statements:
–
expected credit loss measurement (refer to item 2g in this Note
and to Note 19);
–
fair value measurement (refer to item 2f in this Note
and to Note 20);
–
income taxes (refer to item 6 in this Note and to Note
8);
–
provisions and contingent liabilities (refer to item 10 in this
Note and to Note 17);
–
post-employment benefit plans (refer to item 5 in
this Note and to Note 26);
–
goodwill (refer to item 9 in this Note and to Note
12); and
–
consolidation of structured entities (refer to item 1 in this Note
and to Note 28).
1) Consolidation
The Financial Statements include the financial statements of UBS AG and its subsidiaries, presented as a single economic
entity; intercompany
transactions and
balances have
been eliminated.
UBS AG consolidates
all entities
that it
controls,
including
structured
entities
(SEs),
which
is
the
case
when
it
has:
(i) power
over
the
relevant
activities
of
the
entity;
(ii) exposure to the entity‘s variable returns;
and (iii) the ability to use its power to affect
its own returns.
Consideration is given
to all facts
and circumstances to
determine whether UBS AG
has power over
another entity,
i.e.,
the current ability to direct the relevant activities of an entity when
decisions about those activities need to be made.
Subsidiaries,
including
SEs,
are
consolidated
from the
date
when
control
is gained
and deconsolidated
from
the
date
when control ceases. Control, or the lack thereof, is reassessed if facts and circumstances
indicate that there is a change
to one or more elements required to establish that control
is present.
Business combinations are
accounted for using
the acquisition method.
The amount of
non-controlling interests,
if any,
is measured at the non-controlling interest’s proportionate
share of the acquiree’s identifiable net assets.
›
Refer to Note 28
for more information
Critical accounting estimates and judgments
Each individual entity is assessed for consolidation in line with the aforementioned consolidation principles. The assessment of
control can be complex and
requires
the use
of significant judgment,
in particular in
determining whether UBS AG
has power over
the entity.
As the
nature and
extent of UBS AG’s
involvement is unique for each entity, there is no uniform consolidation outcome by entity.
Certain entities within a class may be consolidated while others
may not. When carrying out the consolidation assessment, judgment is exercised considering all
the relevant facts and circumstances, including the nature
and activities of the investee, as well as the
substance of voting and similar rights.
›
Refer to Note 28
for more information
2) Financial instruments
a. Recognition
UBS AG generally recognizes
financial instruments when
it becomes a
party to contractual
provisions of an
instrument.
However,
UBS AG does not recognize assets received
in transfers that do not qualify for derecognition
by the transferor
(applying
derecognition
principles
under
IFRS
Accounting
Standards
as
described
in
item
2e
below).
UBS AG
applies
settlement date accounting to all standard purchases
and sales of non-derivative financial instruments.
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Note 1
Summary of material accounting policies (continued)
UBS AG
may
act
in
a
fiduciary
capacity,
which
results
in
it
holding
or
placing
assets
on
behalf
of
individuals,
trusts,
retirement benefit
plans and
other institutions.
Unless these
items meet
the definition
of an
asset and
the recognition
criteria are
satisfied, they
are not
recognized on
UBS AG’s balance
sheet and
the related
income is
excluded from
the
Financial Statements.
Client cash balances associated with derivatives clearing
and execution services are not recognized on the
balance sheet
if, through contractual
agreement, regulation
or practice, UBS AG
neither obtains
benefits from
nor controls such
cash
balances.
b. Classification, measurement and presentation
Financial assets
Where the contractual
terms of a debt
instrument result in cash
flows that are
solely payments of principal and
interest
(SPPI) on
the principal
amount outstanding,
the debt
instrument is
classified as
measured at
amortized cost
if it is
held
within a business model that has an objective of holding financial assets to collect contractual cash flows, or at fair value
through other
comprehensive income
(FVOCI) if it
is held within
a business model
with the objective
of both collecting
contractual cash flows and selling financial assets.
All other
financial
assets
are measured
at fair
value
through
profit or
loss (FVTPL),
including those
held for
trading
or
those managed on a fair value basis, except for derivatives designated in certain hedge accounting relationships
(refer to
item 2j in this Note for more information).
Business model assessment and contractual cash flow characteristics
UBS AG determines
the nature
of a
business model
by considering
the way
financial assets
are managed
to achieve
a
particular business objective at the time an asset is recognized
.
In assessing
whether contractual
cash flows
are SPPI,
UBS AG considers
whether the
contractual terms
of the
financial
asset
contain
a
term
that
could
change
the
timing
or
amount
of
contractual
cash
flows
arising
over
the
life
of
the
instrument. This assessment includes contractual
cash flows that may vary
due to environmental, social and governance
(ESG) triggers.
Financial liabilities
Financial liabilities measured at amortized cost
Financial liabilities
measured at
amortized cost
include
Debt issued
measured at
amortized cost
Funding from
UBS
Group AG
measured at amortized cost
. The latter includes contingent capital instruments issued to UBS Group
AG prior
to November 2023 that contain contractual provisions under
which the principal amounts would be written down upon
either a specified common equity tier 1 (CET1) ratio breach or a determination by the Swiss Financial Market Supervisory
Authority (FINMA) that a viability event has occurred. Such contractual provisions are not derivatives, as the underlying is
deemed
to
be
a
non-financial
variable
specific
to
a
party
to
the
contract.
Issuances
after
November
2023
include
a
contractual equity
conversion feature
with the
same triggers,
i.e., a
CET1 ratio
breach or
FINMA viability
event. When
the debt is issued in
US dollars, these conversion features are classified as
equity and are accounted for in
Share premium
separately from the amortized cost debt host.
When the legal bail-in mechanism for write-down
or conversion into equity does not form part
of the contractual terms
of issued debt instruments, it does not affect the accounting classification
of these instruments as debt or equity.
If a debt were to be written down or converted into equity in a future period, it would be partially or fully derecognized,
with
the
difference
between
its
carrying
amount
and
the
fair
value
of
any
equity
issued
recognized
in
the
income
statement.
Financial liabilities measured at fair value through profit or
loss
UBS AG designates certain issued debt instruments
as financial liabilities at fair value
through profit or loss, on the
basis
that such financial instruments
include embedded derivatives
that are not
closely related and
which significantly impact
the cash
flows of
the instrument and
/ or
are managed on
a fair
value basis
(refer to the
table below
for more information).
Financial instruments
including embedded
derivatives arise
predominantly from
the issuance
of certain
structured debt
instruments.
Measurement and presentation
After initial
recognition,
UBS AG classifies,
measures
and presents
its financial
assets and
liabilities in
accordance
with
IFRS 9, as described in the table below.
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Note 1
Summary of material accounting policies (continued)
Classification, measurement and presentation
of financial assets
Financial assets classification
Significant items included
Measurement and presentation
Measured at
amortized cost
This classification includes:
–
cash and balances at central banks;
–
amounts due from banks;
–
receivables from securities financing transactions;
–
cash collateral receivables on derivative
instruments;
–
residential and commercial mortgages;
–
corporate loans;
–
secured loans, including Lombard loans, and
unsecured loans;
–
loans to financial advisors;
and
–
debt securities held as high-quality liquid
assets
(HQLA).
Measured at amortized cost using the effective interest
method less allowances for expected credit losses
(ECL)
(refer to items 2d and 2g in this Note for more information).
The following items are recognized in the income
statement:
–
interest income, which is accounted for in accordance
with item 2d in this Note;
–
ECL and reversals; and
–
foreign exchange (FX) translation gains and losses.
When a financial asset at amortized cost is derecognized,
the gain or loss is recognized in the income statement.
For amounts arising from settlement of certain derivatives,
see below in this table.
Measured at
FVOCI
Debt
instruments
measured at
FVOCI
This classification primarily includes debt securities
held as HQLA.
Measured at fair value,
with unrealized gains and losses
reported in
Other comprehensive income
, net of applicable
income taxes, until such investments are derecognized.
Upon derecognition, any accumulated balances in
Other
comprehensive income
statement and reported within
Other income.
The following items, which are determined on the
same
basis as for financial assets measured at amortized
cost, are
recognized in the income statement:
–
interest income, which is accounted for in accordance
with item 2d in this Note;
–
ECL and reversals; and
–
FX translation gains and losses.
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Note 1
Summary of material accounting policies (continued)
Classification, measurement and presentation
of financial assets
Financial assets classification
Significant items included
Measurement and presentation
Measured at
FVTPL
Held for
trading
Financial assets held for trading include:
–
all derivatives with a positive replacement value,
except
those that are designated and effective hedging
instruments; and
–
other financial assets acquired principally for the
purpose of selling or repurchasing in the near term, or
that are part of a portfolio of identified financial
instruments that are managed together and for
which
there is evidence of a recent actual pattern of short-
term profit taking. Included in this category are debt
instruments (including those in the form of
securities,
money market paper,
and traded corporate and bank
loans) and equity instruments.
Measured at fair value,
with changes recognized in the
income statement.
Derivative assets (including derivatives that
are designated
and effective hedging instruments) are generally
presented as
Derivative financial instruments
, except those
exchange-traded derivatives (ETD) and over-the-counter
(OTC)-cleared derivatives that are legally settled on
a daily
basis or economically net settled on a daily basis,
which
are presented within
Cash collateral receivables on
derivative instruments.
Changes in fair value, initial transaction costs,
dividends
and gains and losses arising on disposal or redemption
are
recognized in
Other net income from financial
instruments measured at fair value through
profit or loss
,
except interest income on instruments other than
derivatives (refer to item 2d in this Note), interest on
derivatives designated as hedging instruments
in hedges
of interest rate risk and forward points on certain short-
and long-duration FX contracts acting as economic
hedges,
which are reported in
Net interest income.
Changes in the fair value of derivatives that
are
designated and effective hedging instruments are
presented either in the income statement or
Other
comprehensive income
, depending on the type of hedge
relationship (refer to item 2j in this Note for more
information).
Mandatorily
measured at
FVTPL – Other
Financial assets mandatorily measured at FVTPL that
are
not held for trading include:
–
certain structured instruments, certain commercial
loans, and receivables from securities financing
transactions that are managed on a fair value basis;
–
loans managed on a fair value basis,
including those
hedged with credit derivatives;
–
certain debt securities held as HQLA and
managed on a
fair value basis;
–
certain investment fund holdings and assets
held to
hedge delivery obligations related to cash-settled
employee compensation plans;
–
brokerage receivables, for which contractual cash flows
do not meet the SPPI criterion because the aggregate
balance is accounted for as a single unit of
account,
with interest being calculated on the individual
components;
–
auction rate securities, for which contractual cash
flows
do not meet the SPPI criterion because interest may
be
reset at rates that contain leverage;
–
equity instruments;
and
–
assets held under unit-linked investment contracts.
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Note 1
Summary of material accounting policies (continued)
Classification, measurement and presentation
of financial liabilities
Financial liabilities classification
Significant items included
Measurement and presentation
Measured at amortized cost
This classification includes:
–
demand and time deposits;
–
retail savings / deposits;
–
sweep deposits;
–
payables
from securities financing transactions;
–
non-structured debt issued;
–
subordinated debt;
–
commercial paper and certificates of deposit;
–
obligations against funding from UBS Group AG;
and
–
cash collateral payables on derivative instruments.
Measured at amortized cost using the effective interest
method.
When a financial liability at amortized cost is
derecognized, the gain or loss is recognized in the income
statement.
Interest income generated from client deposits
derecognized pursuant to certain deposit sweep
programs
is presented within
Net interest income from financial
instruments measured at fair value through
profit or loss
and other
.
Measured at
FVTPL
Held for trading
Financial liabilities held for trading include:
–
all derivatives with a negative replacement value
(including certain loan commitments),
except those
that are designated and effective hedging
instruments; and
–
obligations to deliver financial instruments,
such as
debt and equity instruments, that UBS AG has
sold to
third parties but does not own (short positions).
Measurement and presentation of financial liabilities
classified at FVTPL follow the same principles
as for
financial assets classified at FVTPL, except that
the amount
of change in the fair value of a financial liability
designated at FVTPL that is attributable to changes
in
UBS AG’s own credit risk is presented in
Other
comprehensive income
Retained earnings
and is never reclassified to the income statement.
Derivative liabilities (including derivatives that
are
designated and effective hedging instruments)
are
generally presented as
Derivative financial instruments
,
except those exchange-traded and OTC-cleared
derivatives that are legally settled on a daily basis
or
economically net settled on a daily basis, which
are
presented within
Cash collateral payables on derivative
instruments.
Designated at
FVTPL
Financial liabilities designated
at FVTPL include:
–
issued hybrid debt instruments,
primarily equity-
linked, credit-linked and rates-linked bonds or notes;
–
issued debt instruments managed on a fair
value
basis;
–
obligations against funding from UBS Group AG
managed on a fair value basis;
–
certain payables from securities financing
transactions;
–
amounts due under unit-linked investment
contracts,
the cash flows of which are linked to financial
assets
measured at FVTPL and eliminate an accounting
mismatch;
and
–
brokerage payables, which arise in conjunction with
brokerage receivables and are measured at FVTPL to
achieve measurement consistency.
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Note 1
Summary of material accounting policies (continued)
c. Loan commitments and financial guarantees
Loan
commitments
are
arrangements
to
provide
credit
under
defined
terms
and
conditions.
Irrevocable
loan
commitments
are
classified
as:
(i) derivative
loan
commitments
measured
at
fair
value
through
profit
or
loss;
(ii) loan
commitments
designated
at
fair
value
through
profit
or
loss;
or
(iii) loan
commitments
not
measured
at
fair
value.
Financial guarantee contracts are contracts that require UBS AG to make specified payments to reimburse
the holder for
an incurred loss because a specified debtor
fails to make payments when due in
accordance with the terms of a specified
debt instrument.
d. Interest income and expense
Interest
income
and
expense
are
recognized
in
the
income
statement
based
on
the
effective
interest
method.
When
calculating the effective interest rate (the EIR) for financial instruments (other than
credit-impaired financial instruments),
UBS AG estimates future
cash flows considering
all contractual terms
of the instrument,
but not expected
credit losses,
with
the
EIR
applied
to
the
gross
carrying
amount
of
the
financial
asset
or
the
amortized
cost
of
a
financial
liability.
However,
when
a
financial
asset
becomes
credit
impaired
after
initial
recognition,
interest
income
is
determined
by
applying the EIR
to the amortized
cost of the
instrument, which
represents the
gross carrying
amount adjusted
for any
credit loss allowance.
Upfront fees, including fees on loan commitments not measured at fair value where a loan is expected to be issued, and
direct costs are
included within the
initial measurement
of a financial
instrument measured
at amortized
cost or FVOCI
and recognized over the expected life of the instrument
as part of its EIR.
Fees related to loan commitments
where no loan is expected to
be issued, as well as
loan syndication fees where UBS AG
does not
retain a
portion of
the syndicated
loan or
where UBS
AG does
retain a
portion of
the syndicated
loan at
the
same effective yield for comparable risk as other participants, are included in
Net fee and commission income
recognized over the life of the commitment or when syndication
occurs.
›
Refer to item 3 in this Note for more information
Interest
income
on
financial
assets,
excluding
derivatives,
is
included
in
interest
income
when
positive
and
in
interest
expense
when
negative.
Similarly,
interest
expense
on
financial
liabilities,
excluding
derivatives,
is
included
in
interest
expense, except when interest rates are negative,
in which case it is included in interest income.
›
Refer to item 2b in this Note and Note 3
for more information
e. Derecognition
Financial assets
UBS AG
derecognizes
a
transferred
financial
asset,
or
a
portion
of
a
financial
asset,
if
the
purchaser
has
obtained
substantially all the risks and rewards of the asset or a significant part of the risks and rewards combined with a practical
ability to sell or pledge the asset.
Where
financial
assets
have
been
pledged
as
collateral
or
in
similar
arrangements,
they
are
considered
to
have
been
transferred
if the
counterparty
has received
the contractual
rights to
the
cash flows
of the
pledged assets,
as
may be
evidenced
by,
for
example,
the
counterparty’s
right to
sell or
repledge
the
assets.
In
transfers
where
control
over
the
financial
asset
is
retained,
UBS AG
continues
to
recognize
the
asset
to
the
extent
of
its
continuing
involvement,
determined by the extent to which it is exposed to changes
in the value of the transferred asset following the transfer.
›
Refer to Note 22 for more information
Financial liabilities
UBS AG derecognizes
a financial
liability when
it is
extinguished,
i.e., when
the
obligation
specified
in the
contract
is
discharged, canceled or expires. When an existing financial liability is exchanged for a new one from the same lender on
substantially
different
terms,
or
the
terms
of
an
existing
liability
are
substantially
modified,
the
original
liability
is
derecognized
and
a
new
liability
recognized
with
any
difference
in
the
respective
carrying
amounts
recorded
in
the
income statement.
Certain OTC derivative
contracts and most
exchange-traded futures and option
contracts cleared through central
clearing
counterparties
and exchanges are
considered to be
settled on a
daily basis, as
the payment or
receipt of a
variation margin
on a daily basis represents a legal or economic settlement,
which results in derecognition of the associated derivatives.
›
Refer to Note 21 for more information
f. Fair value of financial instruments
UBS AG
accounts
for
a
significant
portion
of
its
assets
and
liabilities
at
fair
value.
Fair
value
is
the
price
on
the
measurement date
that would be received
for the sale of
an asset or paid
to transfer a liability in
an orderly transaction
between market
participants in the
principal market,
or in the most
advantageous market
in the absence
of a principal
market.
›
Refer to Note 20 for more information
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Note 1
Summary of material accounting policies (continued)
Critical accounting estimates and judgments
The use of valuation techniques, modeling assumptions and estimates of
unobservable market inputs in the fair valuation of
financial instruments requires
significant
judgment
and
could
affect
the
amount
of
gain
or
loss
recorded
for
a
particular
position.
Valuation
techniques
that
rely
more
heavily
on
unobservable inputs
and sophisticated
models inherently
require a
higher level
of judgment
and may
require adjustment
to reflect
factors that
market
participants would consider in estimating fair value,
such as close-out costs, which are presented in Note 20d.
UBS AG’s governance
framework over
fair value
measurement is described
in Note 20b,
and UBS AG provides
a sensitivity analysis
of the
estimated effects
arising from changing significant unobservable
inputs in Level 3 financial instruments to reasonably
possible alternative assumptions in Note
20f.
›
Refer to Note 20 for more information
g. Allowances and provisions for expected credit losses
ECL are
recognized for
financial assets
measured at
amortized cost,
financial assets
measured at
FVOCI, fee
and lease
receivables,
financial
guarantees,
and
loan
commitments
not
measured
at
fair
value.
ECL
are
also
recognized
on
the
undrawn
portion
of
committed
unconditionally
revocable
credit
lines,
which
include
UBS AG’s
credit
card
limits
and
master credit
facilities,
as UBS
AG is
exposed to
credit
risk because
the borrower
has the
ability
to draw
down funds
before UBS AG can take credit risk
mitigation actions.
Recognition of expected credit losses
ECL are recognized on the following basis.
–
Stage 1 instruments: Maximum 12-month ECL
are recognized from initial
recognition, reflecting the portion
of lifetime
ECL that would result
if a default occurs
in the 12 months
after the reporting date,
weighted by the risk
of a default
occurring.
–
Stage 2 instruments: Lifetime ECL are
recognized if a significant
increase in credit risk
(an SICR) is observed
subsequent
to
the
instrument’s
initial
recognition,
reflecting
lifetime
cash
shortfalls
that
would
result
from
all
possible
default
events over the
expected life
of a financial
instrument, weighted
by the risk
of a default
occurring. When
an SICR is
no longer observed, the instrument will move back to stage
1.
–
Stage 3 instruments:
Lifetime ECL
are always
recognized for
credit-impaired financial
instruments, as
determined by
the occurrence
of one
or more
loss events,
by estimating
expected cash
flows based
on a
chosen recovery
strategy.
Credit-impaired exposures
may include
positions for
which no
allowance has
been recognized,
for example
because
they are expected to be fully recoverable through collateral
held.
–
Changes in lifetime ECL since initial recognition are also
recognized for assets that are purchased credit impaired (PCI).
PCI financial
instruments include
those that
are purchased
at a
deep discount
or newly
originated with
a defaulted
counterparty;
they remain a separate category until derecognition.
All or part
of a financial
asset is written
off if it
is deemed uncollectible
or forgiven. Write-offs
reduce the principal
amount
of a claim
and are charged against
related allowances for credit
losses. Recoveries, in part or
in full, of
amounts previously
written off are generally credited to
Credit loss expense / (release)
.
ECL are recognized in the income statement in
Credit loss expense / (release)
. A corresponding ECL allowance is reported
as a decrease
in the carrying
amount of financial
assets measured at
amortized cost on
the balance sheet.
For financial
assets that
are measured
at FVOCI,
the carrying
amount is
not reduced,
but an
accumulated
amount is
recognized in
Other comprehensive
income
. For
off-balance sheet
financial instruments
and other
credit lines,
provisions for
ECL are
presented in
Provisions.
Default and credit impairment
UBS AG applies a single definition of
default for credit risk management
purposes, regulatory reporting and ECL,
with a
counterparty classified as defaulted based on quantitative
and qualitative criteria.
›
Refer to the “Risk management and control” section of this
report for more information
Measurement of expected credit losses
IFRS 9 ECL reflect
an unbiased, probability
-weighted estimate
based on loss
expectations resulting
from default
events.
The method
used to
calculate ECL
applies the
following principal
factors: probability
of default
(PD), loss
given default
(LGD) and
exposure
at default
(EAD). Parameters
are generally
determined on
an individual
financial asset
level. Based
on the materiality of
the portfolio, for
credit card
exposures and personal
account overdrafts
in Switzerland, a portfolio
approach is applied that
derives an average PD
and LGD for
the entire portfolio. PDs
and LGDs used in
the ECL calculation
are point-in-time(PIT)-based
for key
portfolios and
consider both
current conditions
and expected
cyclical changes.
For
material portfolios, PDs
and LGDs are determined
for different scenarios, whereas EAD projections are
treated as scenario
independent.
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Note 1
Summary of material accounting policies (continued)
For the
purpose
of determining
the ECL
-relevant
parameters,
UBS AG
leverages
its Basel
III advanced
internal
ratings-
based (A-IRB)
models that
are
also used
in determining
expected
loss (EL)
and risk-weighted
assets under
the Basel III
framework and Pillar 2 stress loss models. Adjustments have been made to these models and IFRS 9-related models have
been developed that consider the complexity, structure and
risk profile of relevant portfolios and take account
of the fact
that PDs and LGDs used in the ECL calculation are PIT-based, as opposed to the corresponding Basel III through-the-cycle
(TTC)
parameters.
All
models
that
are
relevant
for
measuring
expected
credit
losses
are
subject
to
UBS AG’s
model
validation and oversight processes.
Probability of default:
PD represents the probability
of a default over a
specified time period. A 12-month
PD represents
the probability of default determined for the next 12 months and a lifetime PD represents
the probability of default over
the remaining lifetime
of the instrument.
PIT PDs are
derived from TTC
PDs and scenario
forecasts. The modeling
is region,
industry and
client segment
specific and considers
both macroeconomic
scenario dependencies
and client-idiosyncratic
information.
Exposure at default:
EAD represents an estimate of
the exposure to credit
risk at the time
of a potential default occurring,
considering expected repayments, interest payments and accruals,
discounted at the EIR. Future drawdowns on facilities
are considered through
a credit conversion
factor (a CCF)
that is reflective
of historical
drawdown and default
patterns
and the characteristics of the respective portfolios.
Loss given default:
LGD represents an estimate
of the loss at the time of a potential
default occurring,
taking into account
expected
future
cash
flows
from
collateral
and
other
credit
enhancements,
or
expected
payouts
from
bankruptcy
proceedings
for unsecured claims
and, where applicable,
time to realization
of collateral and
the seniority of
claims. LGD is
commonly expressed
as a percentage
of EAD.
Estimation of expected credit losses
Number of scenarios and estimation of scenario weights
Determination
of probability-weighted
ECL requires evaluating
a range of
diverse and
relevant future economic
conditions,
especially
with a view to
modeling the
non-linear effect
of assumptions
about macroeconomic
factors on the
estimate.
To accommodate
this requirement,
UBS AG
uses different
economic
scenarios
in the
ECL calculation.
Each
scenario
is
represented by
a specific
scenario
narrative,
which
is relevant
considering
the exposure
of key
portfolios to
economic
risks, and for
which a set
of consistent macroeconomic variables
is determined. The
estimation of the
appropriate weights
for
these
scenarios
is
predominantly
judgment-based.
The
assessment
is
based
on
a
holistic
review
of
the
prevailing
economic or
political conditions,
which
may exhibit
different
levels of
uncertainty.
It takes
into account
the impact
of
changes in the nature and severity of the underlying scenario
narratives and the projected economic variables.
The determined weights constitute
the probabilities that
the respective set of
macroeconomic conditions will
occur and
not that the chosen particular narratives with the related
macroeconomic variables will materialize.
Macroeconomic and other factors
The range
of macroeconomic,
market and
other factors
that is
modeled as
part of
the scenario
determination is
wide,
and historical information
is used to support
the identification of
the key factors.
As the forecast
horizon increases, the
availability of
information decreases,
requiring an
increase
in judgment.
For cycle-sensitive
PD and
LGD determination
purposes, UBS AG
projects the
relevant economic
factors for
a period
of three
years before
reverting, over
a specified
period, to cycle-neutral PD and LGD for longer-term
projections.
Factors relevant
for ECL
calculation vary
by type
of exposure.
Regional and
client-segment characteristics
are generally
taken into account, with specific focus on Switzerland and
the US, considering UBS AG’s key ECL-relevant portfolios.
For
UBS AG,
the
following
forward-looking
macroeconomic
variables
represent
the
most
relevant
factors
for
ECL
calculation:
–
gross domestic product (GDP) growth rates, given their significant
effect on borrowers’ performance;
–
unemployment rates, given their significant effect on private
clients’ ability to meet contractual obligations;
–
house price indices, given their significant effect on mortgage
collateral valuations;
–
interest rates, given their significant effect on counterparties’
abilities to service debt;
–
consumer price
indices, given
their overall
relevance for
companies’ performance,
private clients’
purchasing power
and economic stability; and
–
equity indices, given that they are an important factor
in UBS AG’s corporate rating tools.
Scenario generation, review process and governance
A team of economists,
which is part of
Group Risk Control,
develops
the forward-looking
macroeconomic assumptions
with involvement from a broad range
of experts.
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Note 1
Summary of material accounting policies (continued)
The scenarios,
their weights
and the
key macroeconomic
and other
factors are
subject to
a critical
assessment by
the
IFRS 9 Scenario
Sounding Sessions
and ECL
Management
Forum, which
include senior
management
from Group
Risk
and Group
Finance. Important
aspects for
the review
include whether
there may
be particular
credit risk
concerns that
may not be capable
of being addressed systematically
and require post-model adjustments
for stage allocation and
ECL
allowance.
The
Group
Model
Governance
Committee
(the
GMGC),
as
the
highest
authority
under
UBS AG’s
model
governance
framework, ratifies the decisions taken by the ECL Management
Forum.
›
Refer to Note 19 for more information
ECL measurement period
The period for which
lifetime ECL are
determined is based on
the maximum contractual
period that UBS AG
is exposed
to
credit
risk,
taking
into
account
contractual
extension,
termination
and
prepayment
options.
For
irrevocable
loan
commitments and
financial guarantee
contracts, the
measurement period
represents
the maximum
contractual period
for which UBS AG has an obligation to extend credit.
Additionally, some financial instruments include both an on-demand loan and a revocable undrawn commitment, where
the contractual cancellation right does not limit UBS
AG’s exposure to credit risk to the contractual notice period,
as the
client has
the ability to
draw down funds
before UBS AG can
take risk-mitigating actions.
In such
cases UBS AG is
required
to estimate
the period
over which
it is
exposed to
credit risk.
This applies
to UBS AG’s
credit card
limits, which
do not
have a defined
contractual maturity
date, are callable
on demand and
where the drawn
and undrawn components
are
managed as one
exposure. The exposure
arising from UBS
AG’s credit card
limits is not
significant and is
managed at a
portfolio level, with
credit actions triggered
when balances are
past due. An
ECL measurement
period of seven
years is
applied for credit card limits,
capped at 12 months
for stage 1 balances, as a proxy
for the period that UBS AG
is exposed
to credit risk.
Customary master credit
agreements in the
Swiss corporate market
also include
on-demand loans and
revocable undrawn
commitments.
For
smaller
commercial
facilities,
a
risk-based
monitoring
(RbM)
approach
is
in
place
that
highlights
negative
trends
as
risk
events,
at
an
individual
facility
level,
based
on
a
combination
of
continuously
updated
risk
indicators. The risk
events trigger additional
credit reviews by
a risk officer,
enabling informed credit decisions
to be taken.
Larger
corporate
facilities
are
not
subject
to
RbM,
but
are
reviewed
at
least
annually
through
a
formal
credit
review.
UBS AG has
assessed these
credit risk
management practices
and considers
both the
RbM approach
and formal
credit
reviews
as
substantive
credit
reviews
resulting
in
a
re-origination
of
the
given
facility.
Following
this,
a
12-month
measurement period from the reporting date
is used for both
types of facilities as
an appropriate proxy of the
period over
which UBS AG
is exposed
to credit
risk, with
12 months
also used
as a
look-back period
for assessing
an SICR,
always
from the respective reporting date.
Significant increase in credit risk
Financial instruments subject
to ECL are
monitored on an
ongoing basis. To
determine whether the
recognition of a
maximum 12
-month ECL
continues to
be appropriate,
an assessment
is
made as
to whether
an SICR
has occurred
since initial recognition of the financial instrument, applying both
quantitative and qualitative factors.
Primarily, UBS AG assesses changes in
an instrument’s risk of default
on a quantitative basis by
comparing the annualized
forward-looking and scenario-weighted lifetime PD of an
instrument determined at two different dates:
–
at the reporting date; and
–
at inception of the instrument.
If, based on
UBS AG’s quantitative
modeling, an
increase exceeds
a set threshold,
an SICR
is deemed to
have occurred
and the instrument is transferred to stage 2 with lifetime
ECL recognized.
The threshold
applied varies
depending on
the original
credit quality
of the
borrower, with
a higher
SICR threshold
set
for those
instruments with
a low
PD at
inception. The
SICR assessment
based on
PD changes
is made
at an
individual
financial asset
level. A
high-level overview
of the
SICR trigger,
which is
a multiple
of the
annualized remaining
lifetime
PIT
PD expressed
in rating
downgrades,
is provided
in the
“SICR thresholds”
table
below. The
actual
SICR
thresholds
applied are defined on a more granular level by interpolating
between the values shown in the table.
SICR thresholds
Internal rating at origination
of the instrument
Rating downgrades /
SICR trigger
0–3
3
4–8
2
9–13
1
›
Refer to the “Risk management and control” section of this
report for more details about UBS AG’s internal rating system
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Note 1
Summary of material accounting policies (continued)
Irrespective of
the SICR
assessment based
on default
probabilities, credit
risk is
generally deemed
to have
significantly
increased for an instrument if contractual payments
are more than 30 days past due. For certain
less material portfolios,
specifically the Swiss
credit card portfolio, the
30-day past due
criterion is used
as the primary
indicator of an
SICR. Where
instruments are transferred
to stage 2 due
to the 30-day
past due criterion,
a minimum period
of six months
is applied
before a
transfer back
to stage 1 can
be triggered,
where applicable.
For instruments
in Personal &
Corporate Banking
and Global
Wealth Management
Region Switzerland
that
are between
90 and
180
days past
due but
have not
been
reclassified to stage 3, a one-year period is applied before
a transfer back to stage 1 can be triggered.
Additionally,
based
on
individual
counterparty-specific
indicators,
external
market
indicators
of
credit
risk
or
general
economic conditions, counterparties may be moved to a watch list, which is used as a secondary qualitative indicator for
an
SICR.
Exception
management
is
further
applied,
allowing
for
individual
and
collective
adjustments
on
exposures
sharing the same credit risk characteristics to take account
of specific situations that are not otherwise fully reflected.
In general, the overall SICR determination process does not
apply to Lombard loans, securities financing transactions and
certain
other
asset-based
lending
transactions,
because
of
the
risk
management
practices
adopted,
including
daily
monitoring processes
with strict
margining. If
margin calls
are not
satisfied, a
position is
closed out
and classified
as a
stage 3 position. In exceptional cases, an individual adjustment and a transfer into stage 2 may be made to take account
of specific facts.
Credit risk
officers are
responsible for
the identification
of an
SICR, which
for accounting
purposes is
in some
respects
different
from
internal
credit
risk
management
processes.
This
difference
mainly
arises
because
ECL
accounting
requirements are instrument-specific, such that
a borrower can have multiple
exposures allocated to different stages, and
maturing loans in stage 2 will migrate to stage 1 upon renewal irrespective of the
actual credit risk at that time. Under a
risk-based
approach,
a
holistic
counterparty
credit
assessment
and
the
absolute
level
of
risk
at
any
given
date
will
determine what risk-mitigating actions may be warranted.
›
Refer to the “Risk management and control” section of this
report for more information
Critical accounting estimates and judgments
The calculation of ECL requires
management to apply significant
judgment and make estimates
and assumptions that can
result in significant changes to
the
timing and the amount of ECL recognized.
Determination of a significant increase in
credit risk
IFRS 9 does not include a definition of what constitutes an
SICR, with UBS AG’s assessment considering qualitative and quantitative criteria. An IFRS 9 ECL
Management Forum has been established to
review and challenge the SICR results.
Scenarios, scenario weights and macroeconomic
variables
ECL reflect
an unbiased
and probability-weighted amount,
which UBS AG
determines by
evaluating a
range of
possible outcomes.
Management selects
forward-looking
scenarios
that
include
relevant
macroeconomic
variables
and
management’s
assumptions
around
future
economic
conditions.
IFRS 9
Scenario Sounding
Sessions,
in addition
to the IFRS
9 ECL
Management Forum,
are in place
to derive,
review and
challenge the
scenario selection
and weights,
and to determine whether any additional post-model
adjustments are required that may significantly affect ECL.
ECL measurement period
Lifetime ECL are generally
determined based upon
the contractual maturity
of the transaction, which
significantly affects ECL. For
credit card limits and
Swiss
callable master credit
facilities, judgment is required,
as UBS AG must
determine the period over
which it is
exposed to credit
risk. A seven-year
period is
applied for credit card limits, capped at 12 months for
stage 1 positions, and a 12-month period
applied for master credit facilities.
Modeling and post-model adjustments
A number of
complex models have
been developed or
modified to calculate
ECL, with additional
post-model adjustments required
that may significantly
affect ECL. The models are governed by UBS AG’s model validation controls
and approved by the GMGC. The post-model adjustments are approved by the
ECL Management Forum and endorsed by the
GMGC.
A sensitivity analysis covering key macroeconomic
variables, scenario weights and SICR trigger
points on ECL measurement is provided in Note 19f.
›
Refer to Note 19 for more information
h. Restructured and modified financial assets
When payment default is expected,
or where default has already occurred, UBS AG may grant concessions to borrowers
in financial difficulties that
it would not consider
in the normal course of
its business, such as preferential
interest rates,
extension of maturity,
modifying the schedule of repayments, debt / equity
swap, subordination, etc.
›
Refer to the “Risk management and control” section of this
report for more information
Modifications result in an
alteration of future contractual cash
flows and can
occur within UBS AG’s normal risk
tolerance
or as part of a credit
restructuring where a counterparty
is in financial difficulties. The
restructuring or modification of
a
financial asset
could lead
to
a
substantial change
in
the
terms
and conditions,
resulting
in
the
original
financial
asset
being
derecognized
and
a
new
financial
asset
being
recognized.
Where
the
modification
does
not
result
in
a
derecognition, any difference between
the modified contractual cash
flows discounted at the
original EIR and
the existing
gross carrying amount of the given financial asset is recognized
in the income statement as a modification gain or loss.
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Note 1
Summary of material accounting policies (continued)
i. Offsetting
UBS AG presents financial assets and liabilities on its
balance sheet net if (i) it has a
legally enforceable right to set off the
recognized
amounts
and
(ii) it
intends
either
to
settle
on
a
net
basis
or
to
realize
the
asset
and
settle
the
liability
simultaneously.
Netted
positions
include,
for
example,
certain
derivatives
and
repurchase
and
reverse
repurchase
transactions with various counterparties, exchanges and clearing houses.
In
assessing
whether
UBS AG
intends
to
either
settle
on
a
net
basis,
or
to
realize
the
asset
and
settle
the
liability
simultaneously, emphasis is
placed on the effectiveness
of operational settlement
mechanics in eliminating
substantially
all credit and liquidity exposure between the counterparties. This condition precludes offsetting
on the balance sheet for
substantial amounts of UBS AG’s financial assets
and liabilities, even though they may be
subject to enforceable netting
arrangements. Repurchase arrangements
and securities financing transactions
are presented net
only to the extent
that
the settlement
mechanism
eliminates, or
results in
insignificant, credit
and liquidity
risk, and
processes the
receivables
and payables in a single settlement process or cycle.
›
Refer to Note 21
for more information
j. Hedge accounting
UBS AG applies hedge accounting requirements of
IFRS 9 where the criteria for documentation and hedge effectiveness
are met.
If a
hedge relationship
no longer
meets the
criteria for
hedge accounting,
hedge accounting
is discontinued.
Voluntary discontinuation of
hedge accounting is not permitted under IFRS 9.
Fair value hedges of interest rate risk related to
debt instruments and loan assets
The
fair
value
change
of
the
hedged
item
attributable
to
a
hedged
risk
is reflected
as
an
adjustment
to
the
carrying
amount
of
the
hedged
item
and
recognized
in
the
income
statement
along
with
the
change
in
the
fair
value
of
the
hedging instrument.
Fair value hedges of FX risk related to debt instruments
The fair value change of the hedged item attributable
to the hedged risk is reflected
in the measurement of the hedged
item and
recognized
in the
income statement
along with
the change
in the
fair value
of the
hedging instrument.
The
foreign currency basis spread of cross-currency swaps designated as
hedging derivatives is excluded from the
designation
and accounted
for
as a
cost of
hedging with
amounts
deferred
in
Other
comprehensive
income
Equity
.
These
amounts are released to the income
statement over the term of the hedged item.
Discontinuation of fair value hedges
Discontinuations for reasons
other than
derecognition of the
hedged item result
in an
adjustment to the
carrying amount,
which
is
amortized
to
the
income
statement
over
the
remaining
life
of
the
hedged
item
using
the
effective
interest
method. If the hedged item is derecognized, the unamortized fair value adjustment or deferred
cost of hedging amount
is recognized immediately in the income statement
as part of any derecognition gain or loss.
Cash flow hedges of forecast transactions
Fair value gains or
losses associated with the
effective portion of derivatives designated as
cash flow hedges for cash
flow
repricing
risk are
recognized
initially
in
Other
comprehensive
income
Equity
Interest
income
from financial
instruments measured
at amortized
cost and
fair value
through other
comprehensive income
Interest
expense
from
financial
instruments
measured
at
amortized
cost
affect profit
or loss, including
discontinued hedges
for which forecast
cash flows are
expected to
occur.
If the
forecast
transactions
are
no
longer
expected
to occur,
the
deferred
gains
or
losses
are
immediately
reclassified
to the
income
statement.
Hedges of net investments in foreign operations
Gains or losses
on the hedging
instrument relating
to the
effective portion
of a
hedge are
recognized directly
in
Other
comprehensive income
Equity
, while any gains
or losses relating to
the ineffective and
/ or undesignated portion
(for example, the
interest element of
a forward contract) are
recognized in the
income statement. Upon
disposal or partial
disposal of the foreign
operation, the cumulative
value of any
such gains or losses
recognized in
Equity
the entity
is reclassified to
Other income
.
Interest Rate Benchmark Reform
UBS AG
continued
hedge
accounting
during
the
period
of uncertainty
before
existing
interest
rate
benchmarks
were
replaced with
alternative risk-free
interest rates. During
this period, UBS AG
assumed that
the current
benchmark rates
would continue to
exist, such that
forecast transactions were considered highly probable and
hedge relationships remain,
with little or
no consequential impact on
the financial statements. Upon
replacement of existing interest rate benchmarks
by alternative risk-free interest
rates, UBS AG applied the
requirements of
Amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4
and IFRS 16 (Interest Rate Benchmark Reform – Phase 2)
, where applicable
.
›
Refer to Note 25 for more information
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Note 1
Summary of material accounting policies (continued)
3) Fee and commission income and expenses
UBS AG earns fee income from the diverse range of services it provides to its clients. Fee income can be divided into two
broad
categories:
fees
earned from
services
that
are
provided
over
a
certain
period
of time,
such
as
management
of
clients’ assets, custody services
and certain advisory
services; and fees
earned from PIT services,
such as underwriting fees,
deal-contingent merger and acquisitions
fees, and brokerage fees (e.g.,
securities and derivatives execution
and clearing).
UBS AG recognizes fees earned from PIT services
when it has fully provided the service
to the client. Where the contract
requires services to be provided
over time, income is recognized on a systematic
basis over the life of the agreement.
Consideration
received
is allocated
to the
separately
identifiable performance
obligations
in a
contract.
Owing to
the
nature
of
UBS AG’s
business,
contracts
that
include
multiple
performance
obligations
are
typically
those
that
are
considered to include a
series of similar performance
obligations fulfilled over time
with the same pattern
of transfer to
the client, e.g., management
of client assets and
custodial services. As
a consequence, UBS AG
is not required to
apply
significant judgment in allocating the consideration received
across the various performance obligations.
PIT services
are generally
for a
fixed price
or dependent
on deal size,
e.g., a
fixed number
of basis
points of trade
size,
where the amount of revenue is known when the performance obligation is met. Fixed-over-time fees are recognized on
a straight-line
basis over
the performance period.
Custodial and asset
management fees
can be
variable through
reference
to
the
size
of
the
customer
portfolio.
However,
they
are
generally
billed
on
a
monthly
or
quarterly
basis
once
the
customer’s
portfolio
size
is
known
or
known
with
near
certainty
and
therefore
also
recognized
ratably
over
the
performance
period.
UBS AG
does
not
recognize
performance
fees
related
to
management
of
clients’
assets
or
fees
related to contingencies beyond UBS AG’s control until such
uncertainties are resolved.
UBS AG’s fees are generally earned from
short-term contracts. As a result, UBS AG’s contracts do
not include a financing
component or
result in
the recognition
of significant
receivables or
prepayment assets.
Furthermore, due
to the
short-
term nature of such contracts,
UBS AG has not capitalized
any material costs to
obtain or fulfill a contract
or generated
any significant contract assets or liabilities.
UBS AG presents expenses primarily in
line with their nature in the
income statement, differentiating between
expenses
that
are
directly
attributable
to the
satisfaction
of
specific
performance
obligations
associated
with
the
generation
of
revenues, which are generally
presented within
Total revenues
Fee and commission expense
, and those
that are related
to
personnel,
general
and
administrative
expenses,
or
depreciation
and
amortization
which
are
presented
within
Operating expenses
. For
derivatives execution and
clearing services (where
UBS AG acts
as an
agent), UBS AG
only records
its specific
fees in
the income
statement, with
fees payable
to other
parties not
recognized as
an expense
but instead
directly offset against the associated income collected from the given
client.
›
Refer to Note 4 for more information, including the
disaggregation of revenues
4) Share-based and other deferred compensation plans
UBS AG recognizes expenses for deferred compensation awards over the period that the
employee is required to provide
service to
become entitled
to the
award. Where
the service
period is
shortened, for
example in
the case
of employees
affected by restructuring programs or mutually agreed termination provisions, recognition of such expense is accelerated
to the
termination date.
Where no
future service
is required,
such as
for employees
who are
eligible for
retirement
or
who
have
met
certain
age
and
length-of-service
criteria,
the
services
are
presumed
to
have
been
received
and
compensation expense is
recognized over the
performance year or,
in the case of
off-cycle awards,
immediately on the
grant date.
Share-based compensation plans
UBS Group AG is the
grantor of and maintains the
obligation to settle share-based compensation plans that
are awarded
to employees
of UBS
AG. As
a consequence,
UBS AG
classifies the
awards
of UBS
Group
AG shares
as equity-settled
share-based payment transactions. UBS AG recognizes
the fair value of awards granted to its employees by reference
to
the fair value of UBS Group
AG’s equity instruments on the date of
grant, taking into account the terms and
conditions
inherent in the award,
including, where relevant,
dividend rights, transfer
restrictions in effect
beyond the vesting date,
market conditions, and non-vesting conditions.
For equity-settled awards,
fair value is
not remeasured unless the
terms of the award
are modified such that
there is an
incremental
increase
in
value.
Expenses
are
recognized,
on
a
per-tranche
basis,
over
the
service
period
based
on
an
estimate of
the number
of instruments
expected to
vest and
are adjusted
to reflect
the actual
outcomes of
service or
performance conditions.
For equity-settled
awards, forfeiture
events resulting
from a
breach of
a non-vesting
condition (i.e.,
one that
does not
relate to a service or performance condition) do not result
in any adjustment to the share-based compensation
expense.
For cash-settled
share-based
awards,
fair
value
is remeasured
at
each
reporting
date,
so that
the
cumulative
expense
recognized equals the cash distributed.
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Note 1
Summary of material accounting policies (continued)
Other deferred compensation plans
Compensation
expense
for
other
deferred
compensation
plans
is
recognized
on
a
per-tranche
or
straight-line
basis,
depending on
the nature
of the
plan. The
amount recognized
is measured
based on
the present
value of
the amount
expected to be paid under the
plan and is remeasured at each reporting date, so
that the cumulative expense recognized
equals the cash or the fair value of respective financial
instruments distributed.
›
Refer to Note 27 for more information
5) Post-employment benefit plans
Defined benefit plans
Defined benefit plans specify an amount of benefit
that an employee will receive, which usually depends on one or
more
factors,
such as age,
years of service
and compensation.
The defined benefit
liability recognized
in the balance
sheet is
the present value of the
defined benefit obligation,
measured using the projected
unit credit method, less the
fair value
of the
plan’s assets
at
the
balance
sheet
date,
with changes
resulting
from
remeasurements
recorded
immediately
in
Other comprehensive income
. If the fair value of the plan’s assets is higher than the present value of the defined benefit
obligation, the recognition of
the resulting net asset is limited
to the present value of
economic benefits available in the
form of
refunds from
the plan
or reductions
in future
contributions to
the plan.
Calculation of
the net
defined benefit
obligation or
asset takes
into account
the specific
features of
each plan,
including risk
sharing between
employee and
employer, and
is calculated periodically by independent qualified actuaries.
Critical accounting estimates and judgments
The net defined benefit
liability or asset at
the balance sheet date
and the related personnel
expense depend on the
expected future benefits to
be provided,
determined
using
a
number
of
economic
and
demographic assumptions.
A
range
of
assumptions
could
be
applied,
and
different
assumptions could
significantly alter the defined
benefit liability or asset and
pension expense recognized. The most
significant assumptions include life expectancy,
discount
rate, expected
salary increases,
pension increases
and interest
credits on
retirement savings
account balances. Sensitivity
analysis for
reasonable possible
movements in each significant assumption for
UBS AG‘s post-employment obligations
is provided in Note 26.
›
Refer to Note 26
for more information
Defined contribution plans
A
defined
contribution
plan
pays
fixed
contributions
into
a
separate
entity
from
which
post-employment
and
other
benefits
are
paid.
UBS AG
has
no
legal
or
constructive
obligation
to
pay
further
amounts
if
the
plan
does
not
hold
sufficient
assets
to
pay
employees
the
benefits
relating
to
employee
service
in
the
current
and
prior
periods.
Compensation expense is
recognized when the
employees have rendered
services in exchange for
contributions. This is
generally in the year of contribution. Prepaid contributions are recognized as an asset to the extent that a cash refund or
a reduction in future payments is available.
6) Income taxes
UBS AG is subject
to the income
tax laws of
Switzerland and
those of the
non-Swiss jurisdictions
in which UBS AG
has
business operations.
UBS AG’s provision for income taxes is composed of current and deferred taxes. Current income taxes represent taxes to
be paid or refunded for the current period or previous periods
.
Deferred tax assets
(DTAs) and
deferred tax liabilities
(DTLs) are
recognized for
temporary differences between
the carrying
amounts and
tax bases
of assets
and liabilities
that will
result in
deductible
or taxable
amounts,
respectively
in future
periods. DTAs may also arise
from other sources, including unused
tax losses and unused tax
credits. DTAs and DTLs are
measured using
the applicable
tax rates
and laws
that
have been
enacted
or substantively
enacted
by the
end of
the
reporting period and that will be in effect when such differences
are expected to reverse.
DTAs are recognized
only to the extent
it is probable
that sufficient taxable
profits will be
available against which
these
differences can
be used
.
When an
entity
or tax
group has
a history
of recent
losses, DTAs
are only
recognized
to the
extent that there are sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable
profit will be available against which the unused tax losses
can be utilized.
Deferred and current tax
assets and liabilities are
offset when: (i) they arise
in the same tax
reporting group; (ii) they relate
to the
same tax
authority; (iii) the
legal right
to offset
exists; and
(iv) with respect
to current
taxes they
are intended
to
be settled net or realized simultaneously.
Current and deferred taxes are recognized as income tax benefit or expense
in the income statement, except for current
and deferred taxes recognized in relation to: (i)
the acquisition of a subsidiary (for which
such amounts would affect the
amount of goodwill arising from the acquisition); (ii) unrealized gains or losses on
financial instruments that are classified
at
FVOCI;
(iii) changes
in
fair
value
of
derivative
instruments
designated
as
cash
flow
hedges;
(iv) remeasurements
of
defined benefit
plans; or
(v) certain
foreign currency
translations
of foreign
operations.
Amounts relating
to points
(ii)
through (v) above are recognized in
Other comprehensive income
Equity
.
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Note 1
Summary of material accounting policies (continued)
UBS AG reflects the
potential effect of
uncertain tax positions
for which acceptance
by the relevant
tax authority is
not
considered probable by
adjusting current or deferred
taxes, as applicable, using
either the most
likely amount or
expected
value methods,
depending on which
method is
deemed a better
predictor of the
basis on which,
and extent
to which,
the uncertainty will be resolved.
Critical accounting estimates and judgments
Tax laws are complex,
and judgment
and interpretations
about the
application of
such laws
are required when
accounting for
income taxes.
UBS AG considers
the performance of
its businesses and
the accuracy of
historical forecasts and
other factors when
evaluating the
recoverability of its
DTAs, including
the
remaining tax loss carry-forward period, and its
assessment of expected future taxable profits in
the forecast period used for recognizing DTAs.
Estimating
future profitability and business plan forecasts is inherently subjective
and is particularly sensitive to future economic,
market and other conditions.
Forecasts are
reviewed annually,
but adjustments may be
made at other
times, if required.
If recent losses
have been incurred,
convincing evidence is
required to prove there is sufficient future profitability
given that the value of
UBS AG’s DTAs may be affected, with
effects primarily recognized through the
income statement.
In addition, judgment is
required to assess the expected
value of uncertain tax
positions and the related
probabilities, including interpretation
of tax laws,
the resolution of any income tax-related appeals and litigation.
›
Refer to Note 8 for more information
7) Investments in associates
Interests in entities where UBS AG has significant influence
over the financial and operating policies of these entities but
does
not
have
control
are
classified
as
investments
in
associates
and
accounted
for
under
the
equity
method
of
accounting. Typically,
UBS AG has significant influence when it holds, or has the ability to hold, between 20% and 50%
of an entity’s voting rights. Investments
in associates are initially recognized at cost, and the
carrying amount is increased
or decreased after the date of acquisition
to recognize UBS AG’s share
of the investee’s comprehensive income
and any
impairment losses.
The net
investment in
an associate
is impaired
if there
is objective
evidence of
a loss
event and
the
carrying amount of the investment in the associate exceeds
its recoverable amount.
›
Refer to Note 28 for more information
8) Property, equipment and software
Property,
equipment and
software
development costs are capitalized
only when the costs can be measured
reliably and it is probable
that future economic
benefits
will
arise.
Depreciation
of
property,
equipment
and
software
begins
when
they
are
available
for
use
and
is
calculated on a straight-line basis over an asset’s estimated
useful life.
Property,
equipment
and
software
are
generally
tested
for
impairment
at
the
appropriate
cash-generating
unit
level,
alongside goodwill and intangible assets as
described in item 9 in this Note.
An impairment charge is recognized for
such
assets
if
the
recoverable
amount
is
below
its
carrying
amount.
The
recoverable
amounts
of
such
assets,
other
than
property that has a
market price, are
generally determined using
a replacement cost
approach that reflects
the amount
that would be currently required by a market participant to replace the service capacity of the asset. If such assets are no
longer used, they are tested individually for impairment.
›
Refer to Note 11 for more information
9) Goodwill
Goodwill represents
the
excess
of
the
consideration over
the
fair
value
of
identifiable assets,
liabilities and
contingent
liabilities
acquired that
arises in
a business
combination.
Goodwill
is not
amortized
but is
assessed
for impairment
at the
end
of
each
reporting
period,
or when
indicators
of impairment
exist.
UBS AG
tests
goodwill
for impairment
annually,
irrespective
of whether there
is any indication
of impairment.
An impairment charge
is recognized in the income
statement if the carrying
amount exceeds the recoverable
amount of a
cash-generating-unit.
Critical accounting estimates and judgments
UBS AG‘s methodology for goodwill impairment
testing is based on a model
that is most sensitive to the
following key assumptions:
(i) forecasts of earnings
available to shareholders (typically estimated
on a discrete basis for years
one to three but could extend
up to five years, as permitted
under IFRS Accounting
Standards, in order to reflect facts and circumstances specific to a cash-generating
unit);
(ii) changes in the discount rates; and (iii) changes in
the long-term
growth rate.
Earnings available to shareholders are estimated on the basis of forecast results, which are part of the business plan approved by the BoD. The discount
rates and
growth rates
are determined
using external information,
and also
considering inputs from
both internal and
external analysts and
the view
of
management.
The key assumptions used to determine the recoverable amounts of each cash-generating unit are tested for sensitivity by
applying reasonably possible
changes to those assumptions.
›
Refer to Notes 2 and 12 for more information
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Note 1
Summary of material accounting policies (continued)
10) Provisions and contingent liabilities
Provisions are
liabilities of
uncertain timing or
amount, and
are generally recognized
in accordance
with IAS 37,
Provisions,
Contingent Liabilities and Contingent
Assets
, when: (i) UBS AG has
a present obligation as
a result of a past event;
(ii) it
is probable that
an outflow of resources
will be required
to settle the obligation;
and (iii) a reliable
estimate of the
amount
of the obligation can be made.
The
majority
of
UBS AG’s
provisions
relate
to
litigation,
regulatory
and
similar
matters,
restructuring,
and
employee
benefits.
Restructuring
provisions
are
generally
recognized
as
a
consequence
of
management
agreeing
to
materially
change the scope of the business
or the manner in which it is conducted,
including changes in management structures.
Provisions
for
employee
benefits
relate
mainly
to
service
anniversaries
and
sabbatical
leave,
and
are
recognized
in
accordance with measurement principles set out in item 4 in this Note. In addition, UBS AG presents expected credit loss
allowances within
Provisions
credit line.
IAS 37 provisions
are measured considering
the best
estimate of
the consideration
required to
settle the
present obligation
at the balance sheet date.
When conditions required to recognize a provision are not met, a contingent liability is disclosed, unless the likelihood of
an outflow
of resources
is remote.
Contingent liabilities
are also
disclosed for
possible obligations
that arise
from past
events,
the existence of which
will be confirmed only
by uncertain future events not
wholly within the control
of UBS AG.
Critical accounting estimates and judgments
Recognition of provisions often involves significant judgment in assessing the existence of an obligation that results from past events and in
estimating the
probability, the timing and the amount of any outflows of resources. This is particularly the case for litigation, regulatory and similar matters, which, due to
their nature, are subject to many uncertainties,
making their outcome difficult to predict.
The amount of any provision
recognized is sensitive to the assumptions used,
and there could be a
wide range of possible outcomes for any
particular
matter.
Management regularly reviews all the available information regarding such matters, including legal advice, to assess whether the recognition criteria
for
provisions have been satisfied and to determine the
timing and the amount of any potential outflows.
›
Refer to Note 17 for more information
11) Foreign currency translation
Transactions
denominated in a foreign currency
are translated into the functional
currency of the reporting entity
at the
spot exchange
rate
on the
date of
the transaction.
At the
balance sheet
date, all
monetary
assets, including
those at
FVOCI, and
monetary
liabilities
denominated
in foreign
currency
are
translated
into
the functional
currency
using the
closing exchange rate. Translation
differences are
reported in
Other net income from
financial instruments measured
at
fair value through profit or loss
.
Non-monetary items measured at historical cost are translated
at the exchange rate on the date of the transaction.
Upon
consolidation,
assets
and liabilities
of foreign
operations
are translated
into
US dollars,
UBS AG’s
presentation
currency,
at the closing exchange rate on the balance sheet date,
and income and expense items and other comprehensive
income
are translated at the
average rate for
the period. The
resulting foreign currency translation differences are recognized in
Equity
and UBS AG no
longer controls
the foreign operation.
Share
capital issued and share premium held are
translated at the historic average rate, with the
difference between the
historic average rate and the spot rate
realized upon repayment of share capital reported as
Share premium.
amounts recognized
in
Other comprehensive
income
are translated at
the closing exchange
rate as
of the
balance sheet dates,
with any
translation effects adjusted through
Retained earnings
.
›
Refer to Note 32 for more information
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Note 1
Summary of material accounting policies (continued)
b) Changes in accounting policies, comparability and
other adjustments
New or amended accounting standards
IFRS 17, Insurance Contracts
Effective
from
1 January
2023,
UBS AG
has
adopted
IFRS
17,
Insurance
Contracts
,
which
sets
out
the
accounting
requirements for contractual rights
and obligations that
arise from insurance contracts
issued and reinsurance contracts
held. The adoption
has had no
effect on UBS AG’s
financial statements. UBS
AG does not
provide insurance services
in
any market.
Amendments to IAS 12, Income Taxes
In May 2023, the IASB issued amendments to IAS 12,
Income Taxes
, in relation to top-up taxes on income under
Global
Anti-Base Erosion
Rules that is
imposed under
legislation that
has been enacted
or substantively enacted
to implement
the Pillar Two
model rules published by the Organisation for Economic
Co-operation and Development.
Certain countries in which UBS
AG operates had enacted such
legislation by 31 December 2023,
including Switzerland,
which introduced a tax with effect from 1 January 2024
that is expected to be a qualified domestic minimum
top-up tax,
and
other
countries
(including
Germany,
France
and
Italy)
also
introduced
top-up
taxes
in
respect
of
a
non-domestic
UBS AG’s worldwide operations with effect from 1 January 2025. Moreover, it is
expected that other countries will enact
such legislation in 2024.
The amendments to IAS
12 introduced an exception,
whereby deferred tax
assets and deferred tax
liabilities should not
be
recognized
or
disclosed
in
respect
of top-up taxes,
which
has
been
applied
for
the
purposes
of
these
financial
statements.
An assessment
was
performed
of UBS
AG’s potential
exposure
to top-up
taxes
under
legislation that
was
enacted
or
substantively
enacted
to
implement
the
Pillar
Two
model
rules
by
31 December
2023,
reflecting
country-by-country
reporting and, also,
the corporate
tax expenses of
UBS AG entities
for recent years
and those expected
in future
years.
This assessment
indicated that
UBS AG’s profits
in future
years are
expected to
be almost
entirely earned
in countries
with corporate
tax expenses
that are
at a
tax rate
of 15%
or more
and will
not, therefore,
be subject
to top-up
taxes.
Consequently, UBS AG
is not
expected to
have a
material annual
exposure to
top-up
taxes for
future years
under this
legislation.
c) IFRS Accounting Standards and Interpretations
to be adopted in 2024 and later and other changes
Other amendments to IFRS Accounting Standards
The IASB has issued
a number of
minor amendments to
IFRS Accounting Standards,
effective from
1 January 2024 and
later.
These amendments are not expected to have a significant
effect on UBS AG when they are
adopted.
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Note 2a
Segment reporting
UBS AG’s
businesses
are
organized
globally
into
five
business
divisions:
Global
Wealth
Management,
Personal
&
Corporate Banking,
Asset Management,
the Investment
Bank, and
Non-core and
Legacy.
All five business
divisions are
supported
by
Group
Items
and
qualify
as
reportable
segments
for
the
purpose
of
segment
reporting.
Together
with
Group Items, the five business divisions reflect
the management structure of UBS AG.
–
Global Wealth
Management
ranges from investment
management to estate
planning and corporate
finance advice, in
addition to specific
wealth
management and banking products and services.
–
Personal
&
Corporate
Banking
retirement, financing,
investments and
strategic transactions,
in Switzerland,
through its
branch network
and digital
channels.
–
Asset Management
across
all
major
traditional
and
alternative
asset
classes,
as
well
as
advisory
support
to
institutions,
wholesale
intermediaries and wealth management clients.
–
The
Investment Bank
to
help
them
raise
capital,
grow
their
businesses,
invest
and
manage
risks.
Its
offering
includes
research,
advisory
services, facilitating clients raising debt
and equity from the public
and private markets and capital
markets, cash and
derivatives trading across equities and fixed income, and
financing.
–
Non-core and Legacy
in Group Functions
and smaller amounts of
assets and liabilities of
UBS AG’s business
divisions that have
been assessed
as not strategic in light of the acquisition of the Credit Suisse
Group.
–
Our Group functions are
support and control functions
that provide services to
the Group. Virtually
all costs incurred
by the support and control functions are allocated to
the business divisions, leaving a residual amount that we refer to
as
Group Items
(which
consists
of
the
Group
Operations
and
Technology
Office,
Corporate
Services,
Compliance,
Regulatory
&
Governance,
Finance,
Risk
Control,
Human
Resources,
Communications
&
Branding,
Legal,
the
Group
Integration
Office, Group Sustainability and Impact, and Chief Strategy
Office) and Group Treasury.
Financial information about
the five business divisions
and Group Items
is presented separately
in internal management
reports to the Executive Board,
which is considered the
“chief operating decision-maker”
pursuant to IFRS 8,
Operating
Segments
.
UBS AG’s
internal
accounting
policies,
which
include
management
accounting
policies
and
service-level
agreements,
determine
the
revenues
and
expenses
directly
attributable
to
each
reportable
segment.
Transactions
between
the
reportable segments are carried out at internally agreed rates and are
reflected in the operating results of the reportable
segments.
Revenue-sharing
agreements
are
used
to
allocate
external
client
revenues
to
reportable
segments
where
several
reportable
segments
are
involved
in
the
value
creation
chain.
Total
intersegment
revenues
for
UBS AG
are
immaterial, as the majority of the
revenues are allocated across the segments by
means of revenue-sharing agreements.
Interest income earned
from managing UBS
AG’s consolidated
equity is allocated
to the reportable
segments based on
average attributed equity and currency composition. Assets and
liabilities of the reportable segments are funded
through
and invested with Group functions, and the net interest
margin is reflected in the results of each reportable segment.
Segment
assets
are
based
on
a
third-party
view
and
do
not
include
intercompany
balances.
This
view
is
in
line
with
internal reporting to management. If one operating segment is involved in
an external transaction together with another
operating segment
or Group
function, additional
criteria are
considered to
determine the
segment that
will report
the
associated
assets.
This
will
include
a
consideration
of
which
segment’s
business
needs
are
being
addressed
by
the
transaction
and
which
segment
is
providing
the
funding
and
/
or
resources.
Allocation
of
liabilities
follows
the
same
principles.
Non-current assets
disclosed
for segment
reporting purposes
represent assets
that are
expected to
be recovered
more
than
12
months
after
the
reporting
date,
excluding
financial
instruments,
deferred
tax
assets
and
post-employment
benefits.
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Note 2a
Segment reporting (continued)
USD m
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core and
Legacy
1
Group
Items
1
UBS AG
For the year ended 31 December 2023
Net interest income
(
39
)
(
2,612
)
(
1,372
)
Non-interest income
Total revenues
(
128
)
Credit loss expense / (release)
(
1
)
Operating expenses
Operating profit / (loss) before tax
(
952
)
(
1,048
)
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
Additions to non-current assets
USD m
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core and
Legacy
1
Group
1
UBS AG
For the year ended 31 December 2022
Net interest income
(
19
)
(
241
)
(
690
)
Non-interest income
2
Total revenues
(
267
)
Credit loss expense / (release)
(
12
)
Operating expenses
Operating profit / (loss) before tax
(
1,091
)
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
Additions to non-current assets
USD m
Global Wealth
Management
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Non-core and
Legacy
1
Group
Items
1
UBS AG
For the year ended 31 December 2021
Net interest income
(
15
)
(
11
)
(
215
)
Non-interest income
Total revenues
Credit loss expense / (release)
(
29
)
(
86
)
(
34
)
(
148
)
Operating expenses
Operating profit / (loss) before tax
(
78
)
(
1,005
)
Tax expense / (benefit)
Net profit / (loss)
Additional information
Total assets
3
Additions to non-current assets
1 As of or for the year ended 31 December 2023, Non-core and Legacy (previously reported within Group Functions) became a separate reportable segment and Group Functions has been renamed Group Items. Prior
periods have been revised to reflect these changes.
2 Includes an USD
m gain in Asset Management related to the sale of
UBS AG‘s shareholding in Mitsubishi Corp.-UBS
Realty Inc.
3 During 2022, UBS AG
refined the methodology applied to allocate balance
sheet resources from Group Items to the business
divisions, with prospective effect. If the
new methodology had been applied as
of 31 December 2021, balance
sheet assets allocated to business divisions would have been USD
bn higher, of which USD
bn would have related to the Investment Bank.
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AG consolidated financial statements
159
Note 2b
Segment reporting by geographic location
The
operating
regions
shown
in
the
table
below
correspond
to
the
regional
management
structure
of
UBS AG.
The
allocation of total revenues to these
regions reflects, and is consistent with, the
basis on which the business is managed
and its performance
is evaluated.
These allocations
involve assumptions
and judgments
that management
considers to
be reasonable, and may
be refined to reflect
changes in estimates or
management structure. The
main principles of the
allocation methodology are
that client revenues
are attributed to
the domicile of
the given client
and trading and
portfolio
management
revenues are
attributed
to the
country where
the risk
is managed.
This
revenue attribution
is consistent
with the mandate
of the regional Presidents.
Certain revenues, such
as those related
to Non-core and
Legacy Portfolio,
are managed at a Group level. These revenues are included
in the
Global
The geographic analysis
of non-current assets
is based on
the location of
the entity in
which the given
assets are recorded.
For the year ended 31 December 2023
Total revenues
Total non-current assets
USD bn
Share %
USD bn
Share %
Americas
1
Asia Pacific
Europe, Middle East and Africa (excluding Switzerland)
Switzerland
Global
(
0.1
)
Total
For the year ended 31 December 2022
Total revenues
Total non-current assets
USD bn
Share %
USD bn
Share %
Americas
1
Asia Pacific
Europe, Middle East and Africa (excluding Switzerland)
Switzerland
Global
Total
For the year ended 31 December 2021
Total revenues
Total non-current assets
USD bn
Share %
USD bn
Share %
Americas
1
Asia Pacific
Europe, Middle East and Africa (excluding Switzerland)
Switzerland
Global
Total
1 Predominantly related to the US.
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Income statement notes
Note 3
Net interest
income and other
net income from
financial instruments
measured at fair
value through
profit or loss
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Net interest income from financial instruments measured
at fair value through profit or loss and other
Other net income from financial instruments measured
at fair value through profit or loss
1
Total net income from financial instruments measured at fair value through profit or loss and
other
Net interest income
Interest income from loans and deposits
2
Interest income from securities financing transactions measured
at amortized cost
3
Interest income from other financial instruments measured
at amortized cost
Interest income from debt instruments measured at fair
value through other comprehensive income
Interest resulting from derivative instruments designated as cash
flow hedges
(
1,898
)
Total interest income from financial instruments measured at amortized cost and fair
value through other comprehensive income
Interest expense on loans and deposits
4
Interest expense on securities financing transactions measured
at amortized cost
5
Interest expense on debt issued
Interest expense on lease liabilities
Total interest expense from financial instruments measured at amortized cost
Total net interest income from financial instruments measured at amortized cost and fair
value through other comprehensive income
Total net interest income from financial instruments measured at fair value through profit or loss
and other
Total net interest income
1 Includes net losses from financial liabilities
designated at fair value of
USD
m (net gains of USD
m in 2022 and net losses
of USD
m in 2021). This complementary
“of which” information for
financial liabilities designated at fair value excludes
fair value changes on hedges related to
financial liabilities designated at fair value, and foreign currency translation effects
arising from translating foreign currency
transactions into the respective
functional currency, both
of which are reported within
Other net income from financial
instruments measured at fair
value through profit or
loss. Net gains /
(losses) from financial
liabilities designated at fair value included net
losses of
m (net gains of USD
m and net losses of USD
m in 2022 and 2021, respectively) from
financial liabilities related to unit-linked investment
notes issued by UBS AG’s Asset Management business. These gains /
(losses) are fully offset within Other net income from financial instruments measured at fair value through profit or loss by the fair value change
on the financial assets hedging the unit-linked investment contracts, which are not disclosed as part of Net gains / (losses) from financial liabilities designated at fair value.
2 Consists of interest income from cash
and balances at central banks, amounts due from banks and customers, and cash collateral receivables on derivative instruments, as well as negative interest on amounts due to banks, customer deposits, and
cash
collateral payables on derivative instruments.
3 Includes negative interest, including fees, on payables from
securities financing transactions measured at amortized cost.
4 Consists of interest expense on
amounts
due to banks, cash collateral payables on derivative instruments, customer deposits, and funding from UBS Group AG measured at amortized cost, as well as negative interest on cash and balances at central banks,
amounts due from banks, and cash collateral receivables on derivative instruments.
5 Includes negative interest, including fees, on receivables from securities financing transactions
measured at amortized cost.
Note 4
Net fee and commission income
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Underwriting fees
M&A and corporate finance fees
Brokerage fees
Investment fund fees
Portfolio management and related services
Other
Total fee and commission income
1
of which: recurring
of which: transaction-based
of which: performance-based
Fee and commission expense
Net fee and commission income
1 For the
year ended 31 December
2023, reflects third-party
fee and commission
income of USD
m for Global
Wealth Management, USD
m for Personal
& Corporate Banking,
USD
m for Asset
Management, USD
m for the Investment Bank, USD
m for Non-core and Legacy and negative USD
m for Group Items (for the year ended 31 December 2022: USD
m for Global Wealth Management,
USD
m for
Personal
& Corporate
Banking,
USD
m for
Asset Management,
USD
m for
the Investment
Bank, USD
m for
Non-core
and Legacy
and USD
m for
Group Items;
for the
year
ended 31 December 2021: USD
m for Global Wealth
Management, USD
m for Personal
& Corporate Banking,
USD
m for Asset Management,
USD
m for the Investment
Bank, USD
m for
Non-core and Legacy and USD
m for Group Items). For the year ended 31 December
2023, Non-core and Legacy (previously reported within Group Functions)
represents a separate reportable segment and Group
Functions has been renamed Group Items. Prior periods have been revised to reflect these changes.
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AG consolidated financial statements
161
Note 5
Other income
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Associates, joint ventures and subsidiaries
Net gains / (losses) from acquisitions and disposals of
subsidiaries
1
(
11
)
Net gains / (losses) from disposals of investments in associates
and joint ventures
2
Share of net profits of associates and joint ventures
(
163
)
3
Total
(
138
)
Net gains / (losses) from disposals of financial assets measured
at fair value through other comprehensive income
(
1
)
(
1
)
Income from properties
4
Net gains / (losses) from properties held for sale
5
Income from shared services provided to UBS Group AG or its subsidiaries
Other
6
7
8
Total other income
1 Includes foreign exchange gains / (losses) reclassified
from other comprehensive income related to the
disposal or closure of foreign operations.
Refer to Note 29 for more information about
UBS AG’s acquisitions
and disposals of
subsidiaries and businesses.
2 Includes an USD
m gain related
to the sale
of UBS AG’s
shareholding in Mitsubishi
Corp.-UBS Realty
Inc.
3 Includes a
USD
m share of
proportionate
impairment losses reflected in the SIX Group profit
and loss, of which USD
m reported in Personal
and Corporate Banking and USD
m reported in Global Wealth Management.
4 Includes rent received from
third parties.
5 Mainly relates to the sale of a property in Basel.
6 Includes gains of USD
m related to the repurchase of UBS AG‘s
own debt instruments (compared with a gain of USD
m in 2022 and a loss
of USD
m in 2021).
7 Mainly relates to a portion of the total USD
m gain on the sale of UBS AG’s domestic wealth
management business in Spain of USD
m (with the remaining amount disclosed within
Net gains / (losses) from acquisitions and disposals of subsidiaries) and income of USD
m related to a legacy litigation settlement and a legacy bankruptcy claim.
8 Includes a gain of USD
m from the sale of
UBS AG’s domestic wealth management business in Austria.
Note 6
Personnel expenses
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Salaries
1
Variable compensation
2
of which: performance awards
of which: financial advisors
3
of which: other
Contractors
Social security
Post-employment benefit plans
4
of which: defined benefit plans
of which: defined contribution plans
Other personnel expenses
Total personnel expenses
1 Includes role-based
allowances.
2 Refer to
Note 27 for
more information.
3 Consists of
cash and deferred
compensation awards
and is based
on compensable
revenues and firm
tenure using a
formulaic
approach. It also
includes expenses
related to compe
nsation commitments
with financial advisors
entered into
at the time
of recruitment that
are subject
to vesting requirements.
4 Refer to Note
26 for
more
information. Includes curtailment
gains of USD
m for the
year ended 31
December 2023 (for
the year ended
31 December 2022:
USD
m; for the
year ended 31 December
2021: USD
m), which represent a
reduction in the defined benefit obligation related to the Swiss pension plan resulting from a decrease in headcount following restructuring activities.
Personnel expenses increased by USD
m to USD
m and included integration-related expenses
of USD
m.
Note 7
General and administrative expenses
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Outsourcing costs
Technology costs
Consulting, legal and audit fees
Real estate and logistics costs
Market data services
Marketing and communication
Travel and entertainment
Litigation, regulatory and similar matters
1
Other
of which: shared services costs charged by UBS Group AG or its subsidiaries
Total general and administrative expenses
1 Reflects the net increase, including recoveries from third parties, in provisions for litigation,
regulatory and similar matters recognized in the income statement. Refer to Note 17 for more information.
General
and
administrative
expenses
increased
by
USD
m
to
USD
m,
which
included
integration-related
expenses of USD
m, largely reflected in higher consulting and
real estate costs.
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AG consolidated financial statements
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Note 8
Income taxes
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Tax expense / (benefit)
Swiss
Current
Deferred
(
22
)
Total Swiss
Non-Swiss
Current
Deferred
(
262
)
Total non-Swiss
Total income tax expense / (benefit) recognized in the income statement
Income tax recognized in the income statement
The Swiss current tax expenses related to taxable profits
of UBS Switzerland AG and other Swiss entities.
The non-Swiss
current tax
expenses related
to expenses
of USD
m in
respect of
US corporate
alternative minimum
tax (CAMT) and USD
m in respect of other taxable profits of non-Swiss subsidiaries
and branches.
The non-Swiss net
deferred tax
benefit primarily related
to a benefit
of USD
m in respect
of an increase
in deferred
tax assets (DTAs) that resulted
from an increase in the
expected value of future tax deductions
for deferred compensation
awards due to an increase in the Group’s share price during the year. In addition, the net deferred tax benefit included a
benefit
of USD
m in
respect
of the
recognition of
DTAs for
tax
credits carried
forward
in respect
of CAMT.
These
benefits were partly offset by a net deferred tax expense of USD
m that primarily related to the amortization of DTAs
previously recognized in relation to tax losses carried forward
.
Excluding any potential
effects from the
remeasurement of
DTAs in connection
with the business
planning process and
any material jurisdictional
statutory tax rate changes
that could be
enacted, UBS AG expects
a tax rate
for 2024 of
around
%.
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Operating profit / (loss) before tax
of which: Swiss
of which: non-Swiss
Income taxes at Swiss tax rate of
% for 2023,
% for 2022 and
% for 2021
Increase / (decrease) resulting from:
Non-Swiss tax rates differing from Swiss tax rate
(
43
)
Tax effects of losses not recognized
Previously unrecognized tax losses now utilized
(
401
)
(
217
)
(
179
)
Non-taxable and lower-taxed income
(
165
)
(
316
)
(
252
)
Non-deductible expenses and additional taxable income
Adjustments related to prior years, current tax
(
15
)
(
33
)
(
38
)
Adjustments related to prior years, deferred tax
(
3
)
Change in deferred tax recognition
(
273
)
(
217
)
(
341
)
Adjustments to deferred tax balances arising from changes
in tax rates
(
1
)
Other items
Income tax expense / (benefit)
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163
Note 8
Income taxes (continued)
The components of
operating profit before tax,
and the differences between
income tax expense
reflected in the
financial
statements and the amounts calculated at the Swiss tax rate,
are provided in the table above and explained
below.
Component
Description
Non-Swiss tax rates
differing from the
Swiss tax rate
To the extent that UBS AG profits or losses arise outside Switzerland, the applicable local
tax rate may differ from the
Swiss tax rate. This item reflects, for such profits, an adjustment
from the tax expense that would arise at the
Swiss tax
rate to the tax expense that would arise at the
applicable local tax rate. Similarly, it reflects, for such losses, an adjustment
from the tax benefit that would arise at the Swiss
tax rate to the tax benefit that would arise
at the applicable local tax
rate.
Tax effects of losses
not recognized
This item relates to tax losses of entities arising in the
year that are not recognized as DTAs and where no tax benefit arises
in relation to those losses. Therefore, the tax benefit calculated
by applying the local tax rate to those losses
as described
above is reversed.
Previously
unrecognized tax losses
now utilized
This item relates to taxable profits of the year that are offset by tax losses
of previous years for which no DTAs were
previously recorded. Consequently, no current tax or deferred tax expense arises in relation to those taxable
profits and
the tax expense
calculated by applying the local tax rate on
those profits is reversed.
Non-taxable and lower-
taxed income
This item relates to tax deductions for the year in
respect of permanent differences. These include deductions in
respect of
profits that are either not taxable or are taxable at a lower rate of
tax than the local tax rate. They also include
deductions
made for tax purposes, which are not reflected in the
accounts.
Non-deductible
expenses and
additional taxable
income
This item relates to additional taxable income for
the year in respect of permanent differences. These include
income that
is recognized for tax purposes by an entity but is
not included in its profit that is reported in the financial
statements, as
well as expenses for the year that are non-deductible
(e.g., client entertainment costs are not deductible
in certain
locations).
Adjustments related to
prior years,
current tax
This item relates to adjustments to current tax expense for
prior years (e.g., if the tax payable for a year is
agreed with the
tax authorities in an amount that differs from the amount
previously reflected in the financial statements).
Adjustments related to
prior years,
deferred
tax
This item relates to adjustments to deferred tax positions
recognized in prior years (e.g., if a tax loss
for a year is fully
recognized and the amount of the tax loss agreed with
the tax authorities is expected to differ from the
amount previously
recognized as DTAs in the accounts).
Change in deferred tax
recognition
This item relates to changes in DTAs, including changes in DTAs previously recognized resulting from reassessments of
expected future taxable profits. It also includes changes
in temporary differences in the year, for which deferred tax is not
recognized.
Adjustments to
deferred tax balances
arising from changes in
tax rates
This item relates to remeasurements of DTAs and liabilities recognized due to changes
in tax rates. These have the effect
of changing the future tax saving that is expected from tax
losses or deductible tax differences and therefore the amount
of DTAs recognized or, alternatively,
changing the tax cost of additional taxable
income from taxable temporary
differences and therefore the deferred tax liability.
Other items
Other items include other differences between profits or losses
at the local tax rate and the actual local tax
expense or
benefit, including movements in provisions for uncertain
positions in relation to the current year and other items.
Income tax recognized directly in equity
A net tax expense of USD
m was recognized in
Other comprehensive income
m) and
a net tax benefit of USD
m was recognized in
Share premium
m).
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AG consolidated financial statements
164
Note 8
Income taxes (continued)
Deferred tax assets and liabilities
UBS AG has
gross
DTAs,
valuation
allowances
and recognized
DTAs
related
to tax
loss carry
-forwards
and deductible
temporary differences, as well as deferred tax liabilities in respect of taxable temporary differences, as shown in
the table
below.
The valuation
allowances reflect
DTAs
that were
not recognized
because, as
of the
last remeasurement
period,
management
did not
consider
it probable
that
there
would be
sufficient
future
taxable
profits
available
to utilize
the
related tax loss carry-forwards and deductible
temporary differences.
The recognition of DTAs is
supported by forecasts of taxable
profits for the entities concerned.
In addition, tax planning
opportunities are available that would
result in additional future taxable income
and these would be utilized,
if necessary.
Deferred tax
liabilities are recognized
in respect of
investments in subsidiaries,
branches and associates,
and interests in
joint arrangements,
except to
the extent
that UBS AG
can control
the timing
of the
reversal of
the associated
taxable
temporary difference, and it is probable that such will not reverse in
the foreseeable future. However, as of 31 December
2023, this exception was not considered to apply to any
taxable temporary differences.
USD m
31.12.23
31.12.22
Deferred tax assets
1
Gross
Valuation
allowance
Recognized
Gross
Valuation
allowance
Recognized
Tax loss carry-forwards
(
8,496
)
(
8,720
)
Unused tax credits
Temporary differences
(
579
)
(
408
)
of which: related to real estate costs capitalized for US
tax
purposes
of which: related to compensation and benefits
(
205
)
(
175
)
of which: related to cash flow hedges
of which: other
(
374
)
(
233
)
Total deferred tax assets
(
9,076
)
2
(
9,128
)
2
of which: related to the US
of which: related to other locations
Deferred tax liabilities
Total deferred tax liabilities
1 After offset of DTLs, as applicable.
2 As of 31 December 2023, UBS AG recognized DTAs of USD
m (31 December 2022: USD
m) in respect of entities that incurred losses in either the current or preceding
year.
In general, US federal tax losses incurred prior
to 31 December 2017 can be carried
forward for 20 years. US federal tax
losses incurred after that date
can be carried forward indefinitely,
although the utilization of such
losses is limited to
80%
of the
entity’s future
year taxable
profits. UK
tax losses
can also
be carried
forward indefinitely;
they can
shelter up
to
either 25% or 50%
of future year taxable
profits, depending on when
the tax losses
arose. The amounts of
US tax loss
carry-forwards that
are included
in the table
below are
based on their
amount for
federal tax
purposes rather
than for
state and local tax purposes.
Unrecognized tax loss carry-forwards
USD m
31.12.23
31.12.22
Within 1 year
From 2 to 5 years
From 6 to 10 years
From 11 to 20 years
No expiry
Total
of which: related to the US
1
of which: related to the UK
of which: related to other locations
1 Related to UBS AG’s US branch.
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AG consolidated financial statements
165
Balance sheet notes
Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement
The tables
below provide
information about
financial instruments
and certain
credit
lines that
are
subject to
expected
credit loss (ECL
)
requirements.
UBS AG’s ECL
disclosure segments,
or “ECL segments”
are aggregated
portfolios based
on shared risk characteristics and on the
same or similar rating methods applied. The
key segments are presented in the
table below.
›
Refer to Note 19 for more information about expected
credit loss measurement
Segment
Segment description
Description of credit risk sensitivity
Business division
Private clients with
mortgages
Lending to private clients secured by
owner-occupied real estate and
personal account overdrafts of those
clients
Sensitive to the interest rate environment,
unemployment levels, real estate collateral
values and other regional aspects
–
Personal & Corporate Banking
–
Global Wealth Management
Real estate financing
Rental or income-producing real estate
financing to private and corporate
clients secured by real estate
Sensitive to unemployment
levels, the
interest rate environment, real estate
collateral values and other regional
aspects
–
Personal & Corporate Banking
–
Global Wealth Management
–
Investment Bank
Large corporate clients
Lending to large corporate and multi-
national clients
Sensitive to GDP developments,
unemployment levels, seasonality,
business cycles and collateral values
(diverse collateral,
including real estate
and other collateral types)
–
Personal & Corporate Banking
–
Investment Bank
SME clients
Lending to small and medium-sized
corporate clients
Sensitive to GDP developments,
unemployment levels, the interest rate
environment and, to some extent,
seasonality,
business cycles and collateral
values (diverse collateral,
including real
estate and other collateral types)
–
Personal & Corporate Banking
Lombard
Loans secured by pledges of marketable
securities, guarantees and other forms
of collateral (including concentration in
hedge funds, private equity and unlisted
equities), as well as unsecured recourse
lending
Sensitive to equity and debt markets (e.g.,
changes in collateral values)
–
Global Wealth Management
Credit cards
Credit card solutions in Switzerland and
the US
Sensitive to unemployment levels
–
Personal & Corporate Banking
–
Global Wealth Management
Commodity trade
finance
Working capital financing of commodity
traders, generally extended on a self-
liquidating transactional basis
Sensitive primarily to the strength of
individual transaction structures and
collateral values (price volatility of
commodities),
as the primary source for
debt service is directly linked to the
shipments financed
–
Personal & Corporate Banking
Financial intermediaries
and hedge funds
Lending to financial institutions and
pension funds, including exposures to
broker-dealers and clearing houses
Sensitive to GDP development, the
interest rate environment, price and
volatility risks in financial markets, and
regulatory and political risk
–
Personal & Corporate Banking
–
Investment Bank
›
Refer to Note 19f for more details regarding sensitivity
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
166
Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement
(continued)
The tables
below provide
ECL exposure
and ECL
allowance and
provision
information about
financial instruments
and
certain non-financial instruments that are
subject to ECLs.
USD m
31.12.23
Carrying amount
1
ECL allowances
Financial instruments measured at amortized
cost
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Cash and balances at central banks
(
26
)
(
26
)
Amounts due from banks
(
7
)
(
6
)
(
1
)
Receivables from securities financing transactions measured at amortized
cost
(
2
)
(
2
)
Cash collateral receivables on derivative instruments
Loans and advances to customers
(
935
)
(
173
)
(
185
)
(
577
)
of which: Private clients with mortgages
(
156
)
(
39
)
(
89
)
(
28
)
of which: Real estate financing
(
46
)
(
20
)
(
25
)
(
1
)
of which: Large corporate clients
(
241
)
(
34
)
(
32
)
(
174
)
of which: SME clients
(
262
)
(
34
)
(
24
)
(
204
)
of which: Lombard
(
22
)
(
5
)
(
17
)
of which: Credit cards
(
42
)
(
6
)
(
11
)
(
24
)
of which: Commodity trade finance
(
119
)
(
7
)
(
111
)
Other financial assets measured at amortized cost
(
87
)
(
16
)
(
5
)
(
66
)
of which: Loans to financial advisors
(
49
)
(
4
)
(
1
)
(
44
)
Total financial assets measured at amortized cost
(
1,057
)
(
197
)
(
217
)
(
643
)
Financial assets measured at fair value through other comprehensive income
Total on-balance sheet financial assets within the scope of ECL requirements
(
1,057
)
(
197
)
(
217
)
(
643
)
Total exposure
ECL provisions
Off-balance sheet (within the scope of ECL)
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Guarantees
(
40
)
(
14
)
(
7
)
(
19
)
of which: Large corporate clients
(
10
)
(
3
)
(
2
)
(
6
)
of which: SME clients
(
7
)
(
1
)
(
1
)
(
5
)
of which: Financial intermediaries and hedge funds
(
12
)
(
8
)
(
3
)
of which: Lombard
(
1
)
(
1
)
of which: Commodity trade finance
(
1
)
(
1
)
Irrevocable loan commitments
(
95
)
(
55
)
(
38
)
(
2
)
of which: Large corporate clients
(
76
)
(
45
)
(
28
)
(
2
)
Forward starting reverse repurchase and securities borrowing agreements
Committed unconditionally revocable credit lines
(
49
)
(
39
)
(
10
)
of which: Real estate financing
(
4
)
(
3
)
(
1
)
of which: Large corporate clients
(
6
)
(
4
)
(
3
)
of which: SME clients
(
21
)
(
17
)
(
3
)
of which: Lombard
of which: Credit cards
(
10
)
(
8
)
(
2
)
of which: Commodity trade finance
Irrevocable committed prolongation of existing loans
(
4
)
(
3
)
Total off-balance sheet financial instruments and credit lines
(
188
)
(
111
)
(
56
)
(
21
)
Total allowances and provisions
(
1,244
)
(
308
)
(
272
)
(
664
)
1 The carrying amount of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL
allowances.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
167
Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement
(continued)
USD m
31.12.22
Carrying amount
1
ECL allowances
Financial instruments measured at amortized
cost
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Cash and balances at central banks
(
12
)
(
12
)
Amounts due from banks
(
6
)
(
5
)
(
1
)
Receivables from securities financing transactions measured at amortized
cost
(
2
)
(
2
)
Cash collateral receivables on derivative instruments
Loans and advances to customers
(
783
)
(
129
)
(
180
)
(
474
)
of which: Private clients with mortgages
(
161
)
(
27
)
(
107
)
(
28
)
of which: Real estate financing
(
41
)
(
17
)
(
23
)
of which: Large corporate clients
(
130
)
(
24
)
(
14
)
(
92
)
of which: SME clients
(
251
)
(
26
)
(
22
)
(
203
)
of which: Lombard
(
26
)
(
9
)
(
17
)
of which: Credit cards
(
36
)
(
7
)
(
10
)
(
19
)
of which: Commodity trade finance
(
96
)
(
6
)
(
90
)
Other financial assets measured at amortized cost
(
86
)
(
17
)
(
6
)
(
63
)
of which: Loans to financial advisors
(
59
)
(
7
)
(
2
)
(
51
)
Total financial assets measured at amortized cost
(
890
)
(
154
)
(
199
)
(
537
)
Financial assets measured at fair value through other comprehensive income
Total on-balance sheet financial assets within the scope of ECL requirements
(
890
)
(
154
)
(
199
)
(
537
)
Total exposure
ECL provisions
Off-balance sheet (within the scope of ECL)
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Guarantees
(
48
)
(
13
)
(
9
)
(
26
)
of which: Large corporate clients
(
26
)
(
2
)
(
3
)
(
21
)
of which: SME clients
(
5
)
(
1
)
(
1
)
(
3
)
of which: Financial intermediaries and hedge funds
(
12
)
(
8
)
(
4
)
of which: Lombard
(
1
)
(
1
)
of which: Commodity trade finance
(
1
)
(
1
)
Irrevocable loan commitments
(
111
)
(
59
)
(
52
)
of which: Large corporate clients
(
93
)
(
49
)
(
45
)
Forward starting reverse repurchase and securities borrowing agreements
Committed unconditionally revocable credit lines
(
40
)
(
32
)
(
8
)
of which: Real estate financing
(
6
)
(
6
)
of which: Large corporate clients
(
4
)
(
1
)
(
2
)
of which: SME clients
(
19
)
(
16
)
(
3
)
of which: Lombard
of which: Credit cards
(
7
)
(
5
)
(
2
)
of which: Commodity trade finance
Irrevocable committed prolongation of existing loans
(
2
)
(
2
)
Total off-balance sheet financial instruments and credit lines
(
201
)
(
106
)
(
69
)
(
26
)
Total allowances and provisions
(
1,091
)
(
260
)
(
267
)
(
564
)
1 The carrying amount of financial assets measured at amortized cost represents the total gross exposure net of the respective ECL
allowances.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
168
Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement
(continued)
Coverage ratios are
calculated for
the core loan
portfolio by taking
ECL allowances
and provisions
divided by the
gross
carrying amount
of the
exposures. Core
loan exposure
is defined
as the
sum of
Loans and
advances to
customers
Loans to financial advisors
.
These ratios are influenced by the following key factors:
–
Lombard loans are generally secured with marketable securities in portfolios that are, as a rule, highly diversified,
with
strict lending policies that are intended to ensure that
credit risk is minimal under most circumstances;
–
mortgage loans
to private
clients and real
estate financing
are controlled
by conservative
eligibility criteria,
including
low loan-to-value ratios and strong debt service capabilities;
–
the amount of unsecured retail lending (including credit cards)
is insignificant;
–
lending in Switzerland includes government-backed COVID-19 loans;
–
contractual
maturities
in
the
loan portfolio,
which
are
a
factor
in the
calculation
of
ECLs,
are
generally
short,
with
Lombard lending
typically having
average
contractual
maturities of
12 months
or less,
real estate
lending generally
between two
and three
years in
Switzerland,
with long-dated
maturities in
the US,
and corporate
lending between
one and two years with related loan commitments up to
four years; and
–
write-offs of
ECL allowances against
the gross
loan balances
when all
or part
of a
financial asset
is deemed
uncollectible
or forgiven, reduces the coverage ratios.
The total
combined on-
and off-balance
sheet coverage
ratio was
at
point higher than on
31 December 2022. The combined stage 1 and
2 ratio of
with 31 December 2022; the stage 3 ratio was
%, materially unchanged compared with 31 December
2022.
31.12.23
Gross carrying amount (USD m)
ECL coverage (bps)
On-balance sheet
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 1&2
Stage 3
Private clients with mortgages
Real estate financing
Total real estate lending
Large corporate clients
SME clients
Total corporate lending
Lombard
Credit cards
Commodity trade finance
Other loans and advances to customers
Loans to financial advisors
Total other lending
Total
1
Gross exposure (USD m)
ECL coverage (bps)
Off-balance sheet
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 1&2
Stage 3
Private clients with mortgages
Real estate financing
Total real estate lending
Large corporate clients
SME clients
Total corporate lending
Lombard
Credit cards
Commodity trade finance
Financial intermediaries and hedge funds
Other off-balance sheet commitments
Total other lending
Total
2
Total on- and off-balance sheet
3
1 Includes Loans
and advances to
customers and Loans
to financial advisors,
which are presented
on the balance
sheet line Other
financial assets measured
at amortized cost.
2 Excludes Forward
starting reverse
repurchase and securities borrowing agreements.
3 Includes on-balance sheet exposure, gross and off-balance sheet exposure (notional) and the related
ECL coverage ratio (bps).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
169
Note 9
Financial assets at amortized cost and other positions
in scope of expected credit loss measurement
(continued)
31.12.22
Gross carrying amount (USD m)
ECL coverage (bps)
On-balance sheet
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 1&2
Stage 3
Private clients with mortgages
Real estate financing
Total real estate lending
Large corporate clients
SME clients
Total corporate lending
Lombard
Credit cards
Commodity trade finance
Other loans and advances to customers
Loans to financial advisors
Total other lending
Total
1
Gross exposure (USD m)
ECL coverage (bps)
Off-balance sheet
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 1&2
Stage 3
Private clients with mortgages
Real estate financing
Total real estate lending
Large corporate clients
SME clients
Total corporate lending
Lombard
Credit cards
Commodity trade finance
Financial intermediaries and hedge funds
Other off-balance sheet commitments
Total other lending
Total
2
Total on- and off-balance sheet
3
1 Includes Loans
and advances to
customers and Loans
to financial advisors,
which are presented
on the balance
sheet line Other
financial assets measured
at amortized cost.
2 Excludes Forward
starting reverse
repurchase and securities borrowing agreements.
3 Includes on-balance sheet exposure, gross and off-balance sheet exposure (notional) and the related
ECL coverage ratio (bps).
Note 10
Derivative instruments
Overview
Over-the-counter (OTC) derivative
contracts are usually traded under a standardized International Swaps
and Derivatives
Association (ISDA)
master agreement
or other
recognized local
industry-standard master
agreements between
UBS AG
and
its
counterparties.
Terms
are
negotiated
directly
with
counterparties
and
the
contracts
have
industry-standard
settlement
mechanisms
prescribed
by
ISDA
or
similar
industry-standard
solutions.
Other
OTC
derivatives
are
cleared
through clearing houses,
in particular interest
rate swaps with
LCH, where a
settled-to-market method has
been generally
adopted, under
which cash
collateral exchanged
on a
daily basis
is considered
to legally
settle the
market value
of the
derivatives. Regulators
in various
jurisdictions have
introduced rules
requiring the
payment and
collection of
initial and
variation margins on certain OTC derivative contracts, which may
have a bearing on price and other relevant
terms.
Exchange-traded derivatives (ETD) are standardized in terms of their amounts and
settlement dates, and are bought and
sold
on
regulated
exchanges.
Exchanges
offer
the
benefits
of
pricing
transparency,
standardized
daily
settlement
of
changes in value and, consequently, reduced credit risk.
Most of UBS AG’s
derivative transactions relate to
sales and market-making
activity. Sales activities
include the structuring
and marketing of derivative products
to customers to enable
them to take, transfer,
modify or reduce current
or expected
risks. Market-making aims to
directly support the facilitation and
execution of client activity,
and involves quoting bid and
offer prices to other market participants with the aim of generating revenues based on spread and volume. UBS AG also
uses various derivative instruments for hedging purposes.
›
Refer to Notes 15 and 20 for more information about
derivative instruments
›
Refer to Note 25 for more information about derivatives
designated in hedge accounting relationships
Annual Report 2023
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AG consolidated financial statements
170
Note 10
Derivative instruments (continued)
Risks of derivative instruments
The derivative financial assets shown on the
balance sheet can be an important component of UBS AG’s credit
exposure;
however,
the
positive
replacement
values
related
to
a
respective
counterparty
are
rarely
an
adequate
reflection
of
UBS AG’s credit exposure in its derivatives business with that counterparty. This is
generally the case because, on the one
hand, replacement values can increase over time (potential future exposure), while, on the other hand, exposure may be
mitigated by entering into master netting agreements and bilateral collateral arrangements. Both the exposure measures
used internally
by UBS AG
to control
credit risk
and the
capital requirements imposed
by regulators
reflect these additional
factors.
›
Refer to Note 21 for more information about derivative
financial assets and liabilities after consideration
of netting potential
permitted under enforceable netting arrangements
›
Refer to the “Risk management and control” section of this
report for more information about the risks arising from derivative
instruments
Derivative instruments
31.12.23
31.12.22
USD bn
Derivative
financial
assets
Derivative
financial
liabilities
Notional amounts
related to
derivative financial
assets and
liabilities
2,3
Other
notional
amounts
2,4
Derivative
financial
assets
Derivative
financial
liabilities
Notional amounts
related to
derivative financial
assets and
liabilities
2,3
Other
notional
amounts
2,4
Interest rate
of which: forwards (OTC)
1
of which: swaps (OTC)
of which: options (OTC)
of which: futures (ETD)
of which: options (ETD)
Credit derivatives
of which: credit default swaps (OTC)
of which: total return swaps (OTC)
Foreign exchange
of which: forwards (OTC)
of which: swaps (OTC)
of which: options (OTC)
Equity / index
of which: swaps (OTC)
of which: options (OTC)
of which: futures (ETD)
of which: options (ETD)
of which: client-cleared transactions (ETD)
Commodities
of which: swaps (OTC)
of which: options (OTC)
of which: futures (ETD)
of which: forwards (ETD)
of which: client-cleared transactions (ETD)
Other
5
Total derivative instruments,
based on IFRS netting
6
1 Includes certain
forward starting repurchase
and reverse repurchase agreements
that are classified
as measured at
fair value
through profit or
loss and are recognized
within derivative instruments.
2 In cases
where derivative financial instruments are presented on a net basis on the balance sheet, the
respective notional amounts of the netted derivative financial instruments are still presented on a gross basis.
3 Notional
amounts of client-cleared ETD and OTC transactions through central clearing counterparties are not disclosed, as they have a significantly different risk profile.
4 Other notional amounts relate to derivatives that are
cleared through either a central counterparty or an exchange. The fair value of these derivatives is presented
on the balance sheet net of the corresponding cash margin under Cash collateral receivables on derivative
instruments and Cash collateral payables on
derivative instruments, and was
not material for any of the periods
presented.
5 Includes mainly derivative
loan commitments measured at FVTPL, as well
as unsettled
purchases and sales of non-derivative financial instruments
for which the changes in the fair value
between trade date and settlement date are
recognized as derivative financial instruments.
6 Derivative financial
assets and liabilities are presented net on the balance sheet if UBS AG
has the unconditional and legally enforceable right to offset
the recognized amounts, both in the normal course of
business and in the event of
default, bankruptcy or insolvency of the entity and all of
the counterparties, and intends either to settle on a net basis or to
realize the asset and settle the liability simultaneously. Refer to Note 21 for
more information
on netting arrangements.
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AG consolidated financial statements
171
Note 10
Derivative instruments (continued)
On
a
notional
amount
basis,
approximately
%
of
OTC
interest
rate
contracts
held
as
of
31 December
2023
(31 December 2022:
%) mature
within one year,
% (31 December 2022:
%) within one to
five years and
%
(31 December 2022:
%) after five years.
Notional amounts of interest rate contracts cleared through either a central counterparty
or an exchange that are legally
settled or economically
net settled on a
daily basis are
presented under
Other notional amounts
are categorized into maturity
buckets on the basis
of contractual maturities of
the cleared underlying derivative
contracts.
Other notional
amounts related
to interest
rate contracts
increased by
USD
trn compared
with 31 December
2022,
mainly reflecting
lower compression
activity and
higher business
volumes driven
by elevated
interest rate
volatility and
inflation.
Note 11
Property, equipment and software
At historical cost less accumulated depreciation
USD m
Owned
properties and
equipment
1
Leased
properties and
equipment
2
Software
Projects in
progress
2023
3
2022
3
Historical cost
Balance at the beginning of the year
Additions
Disposals / write-offs
4
(
299
)
(
63
)
(
1,087
)
(
1,449
)
(
414
)
Reclassifications
(
1,561
)
(
894
)
Foreign currency translation
(
200
)
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Impairment
5
Disposals / write-offs
4
(
296
)
(
62
)
(
1,087
)
(
1,445
)
(
410
)
Reclassifications
(
2
)
(
566
)
Foreign currency translation
(
99
)
Balance at the end of the year
Net book value
Net book value at the beginning of the year
Net book value at the end of the year
6
1 Includes leasehold improvements and IT hardware.
2 Represents right-of-use assets recognized by UBS AG as lessee. UBS AG predominantly enters into lease contracts, or contracts that include lease components,
in relation to real
estate, including offices,
retail branches and
sales offices. The
total cash outflow for
leases during 2023 was
USD
m (2022: USD
m). Interest expense on
lease liabilities is included
within
Interest expense from financial
instruments measured at amortized
cost and Lease liabilities
are included within Other
financial liabilities measured
at amortized cost.
Refer to Notes 3
and 18a, respectively.
There
were no material gains or losses arising from sale-and-leaseback
transactions in 2023 and in 2022.
3 The total reclassification amount for the
respective periods represents net reclassifications from / to
Properties
and other non-current assets held
for sale.
4 Includes write-offs of
fully depreciated assets.
5 Impairment charges recorded in
2023 generally relate to
assets that are no longer
used, for which the
recoverable
amount based on a value-in-use approach was determined to be zero.
6 Consists of USD
m related to software and USD
m related to Owned properties and equipment.
Note 12
Goodwill and intangible assets
Introduction
UBS AG performs an impairment test on its goodwill assets
on an annual basis or when indicators of impairment exist.
UBS AG considers Asset Management,
as reported in Note 2a, as a separate cash-generating unit (a CGU), as that is the
level at which the
performance of investment (and the
related goodwill) is reviewed and
assessed by management. Given
that a
significant amount
of goodwill
in Global Wealth
Management relates
to the
acquisition of
PaineWebber Group,
Inc. in 2000, which mainly affected the Americas portion
of the business, this goodwill remains separately monitored
by
the
Americas,
despite
the
formation
of
Global
Wealth
Management
in
2018.
Therefore,
goodwill
for
Global
Wealth
Management
is
separately
considered
for
impairment
at
the
level
of
two
CGUs:
Americas;
and
Switzerland
and
International (consisting of EMEA, Asia Pacific and Global).
The impairment
test is
performed for
each CGU
to which
goodwill is
allocated by
comparing the
recoverable amount
with the
carrying amount
of the
respective CGU.
UBS AG determines
the recoverable
amount of
the respective
CGUs
based on their value in use. An impairment
charge is recognized if the carrying amount exceeds the recoverable
amount.
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172
Note 12
Goodwill and intangible assets (continued)
As
of
31 December
2023,
total
goodwill
recognized
on
the
balance
sheet
was
USD
bn,
of
which
USD
bn
was
carried by
the Global
Wealth Management
Americas CGU,
USD
bn was
carried by
the Global
Wealth Management
Switzerland and International CGU, and USD
bn was carried by Asset Management. Based on the impairment testing
methodology described below, UBS AG
concluded that the goodwill
balances as of
31 December 2023 allocated to
these
CGUs were not impaired. For each
of the CGUs, the recoverable amount
substantially exceeded the carrying value
as of
31 December
2023
and
there
was
no
indication
of
a
significant
risk
of
goodwill
impairment
based
on
the
testing
performed as of 31 December 2023.
Methodology for goodwill impairment testing
The recoverable
amounts are
determined using
a discounted
cash flow
model, which
has been
adapted to
use inputs
that consider features of
the banking business and its
regulatory environment.
The recoverable amount of
a CGU is the
sum of
the discounted
earnings attributable
to shareholders
from the
first three
forecast years
and the
terminal value,
adjusted for the effect of the capital
assumed to be needed over the next
three years and to support growth beyond that
period. The
terminal value,
which covers
all periods
beyond the
third year,
is calculated
on the
basis of
the forecast
of
the third-year
profit, the
discount rate
and the
long-term growth
rate, as well
as the
implied perpetual
capital growth.
For
the
Global
Wealth
Management
Americas
CGU,
the
methodology
is
consistently
applied,
however,
the
forecast
period was extended from three to five years (with a
terminal value thereafter) in 2023 to provide for the CGU’s specific
planning
assumptions,
namely
the
ongoing
investments
in
the
core
banking
infrastructure
in
the
US
to
enhance
the
product capabilities and offerings
in this market in the mid term. The extension
of the forecast period from three
to five
years did not trigger,
defer or avoid an impairment of goodwill as of 31
December 2023.
The
carrying
amount
for
each
CGU
is
determined
by
reference
to
UBS’s
equity
attribution
framework.
Within
this
framework,
UBS
attributes
equity
to
the
businesses
on
the
basis
of
their
risk-weighted
assets
and
leverage
ratio
denominator (both
metrics include
resource allocations
from Group
Items to the
business divisions),
their goodwill
and
their
intangible
assets,
as
well
as
attributed
equity
related
to
certain
common
equity
tier 1
deduction
items.
The
framework
is
primarily
used
for
the
purpose
of
measuring
the
performance
of
the
businesses
and
includes
certain
management assumptions. Attributed equity
is equal to
the capital a
CGU requires to
conduct its business
and is currently
considered a reasonable
approximation of the
carrying amount of
the CGUs. The
attributed equity methodology
is also
applied in the
business planning process,
the inputs from
which are used
in calculating the
recoverable amounts
of the
respective CGU.
Assumptions
Valuation
parameters
used
within
UBS AG’s
impairment
test
model are
linked
to external
market
information,
where
applicable. The
model used
to determine
the recoverable
amount is
most sensitive
to changes
in the
forecast earnings
available to shareholders in years one to three, to changes in the discount rates and to changes in the long-term growth
rate. The applied
long-term growth
rate is based
on long-term economic
growth rates for
different regions
worldwide.
Earnings available
to
shareholders
are
estimated
on
the
basis of
forecast
results,
which
are
part
of the
business
plan
approved by the Board of Directors.
The
discount
rates
are
determined
by
applying
a
capital
asset
pricing
model-based
approach,
as
well
as
considering
quantitative and qualitative inputs from both internal and external analysts and the view of management. They also take
into account
regional differences
in risk-free
rates at
the level of
the individual
CGUs. In line
with discount
rates, long-
term growth rates are determined at the regional level based
on nominal GDP growth rate forecasts.
Key
assumptions
used
to
determine
the
recoverable
amounts
of
each
CGU
are
tested
for
sensitivity
by
applying
a
reasonably possible change to
those assumptions. Forecast earnings available
to shareholders were changed by
%, the
discount rates
were changed by
points. Under all scenarios,
reasonably possible changes
in key assumptions did
not result in an
impairment of goodwill
or
intangible
assets
reported
by
Global
Wealth
Management
Americas,
Global
Wealth
Management
Switzerland
and
International, and Asset Management.
If the estimated earnings
and other assumptions in future periods
deviate from the current outlook,
the value of goodwill
attributable to
Global Wealth
Management Americas,
Global Wealth
Management
Switzerland and
International, and
Asset Management may become impaired in the
future, giving rise to losses
in the income statement. Recognition of any
impairment of
goodwill would
reduce IFRS
Accounting Standards
equity and
net profit.
It would
not affect
cash flows
and,
as
goodwill
is
required
to
be
deducted
from
capital
under
the
Basel III
capital
framework,
no
effect
would
be
expected on UBS AG’s capital ratios.
Discount and growth rates
Discount rates
Growth rates
In %
31.12.23
31.12.22
31.12.23
31.12.22
Global Wealth Management Americas
Global Wealth Management Switzerland and International
Asset Management
Annual Report 2023
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173
Note 12
Goodwill and intangible assets (continued)
USD m
Goodwill
Intangible assets
1
2023
2022
Historical cost
Balance at the beginning of the year
Additions
Disposals
2
(
10
)
(
30
)
(
40
)
(
22
)
Foreign currency translation
(
76
)
Balance at the end of the year
Accumulated amortization and impairment
Balance at the beginning of the year
Amortization
Impairment / (reversal of impairment)
(
1
)
Disposals
2
(
30
)
(
30
)
Foreign currency translation
(
11
)
Balance at the end of the year
Net book value at the end of the year
of which: Global Wealth Management Americas
of which: Global Wealth Management Switzerland and International
of which: Asset Management
of which: Investment Bank
1 Intangible assets mainly include customer relationships, contractual rights and the fully amortized branch network intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. in 2000.
2 Reflects the derecognition of goodwill allocated to business and intangible assets held by entities that have been disposed of.
Refer to Note 29 for more information.
The table below presents estimated aggregated
amortization expenses for intangible assets.
USD m
Intangible assets
Estimated aggregated amortization expenses for:
2024
2025
2026
2027
2028
Thereafter
Not amortized due to indefinite useful life
Total
Note 13
Other assets
a) Other financial assets measured at amortized cost
USD m
31.12.23
31.12.22
Debt securities
Loans to financial advisors
Fee- and commission-related receivables
Finance lease receivables
Settlement and clearing accounts
Accrued interest income
Other
1
Total other financial assets measured at amortized cost
1 Predominantly includes cash collateral provided to exchanges and clearing houses to secure securities trading activity through
those counterparties.
Effective from 1 April
2022, UBS has reclassified a
portfolio of financial assets from
Financial assets measured at fair value
through other comprehensive income with a fair value of USD
bn (the Portfolio) to Other financial assets measured at
amortized cost.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
174
Note 13
Other assets (continued)
The Portfolio’s cumulative fair value losses of USD
m pre-tax and USD
m post-tax, previously recognized in
Other
comprehensive
income
,
have
been
removed
from
equity
and
adjusted
against
the
value
of
the
assets
on
the
reclassification date, so that
the Portfolio is measured
as if the assets
had always been classified
at amortized cost, with
a value
of USD
bn as
on 1
April 2022.
The reclassification
had no
effect on
the income
statement. The
reclassified
Portfolio
is
made
up
of
high-quality
liquid
assets,
primarily
US
government
treasuries
and
US
government
agency
mortgage-backed securities, held
and separately managed
by UBS Bank
USA. The accounting
reclassification has arisen
as a direct result
of the transformation
of UBS’s Global
Wealth Management Americas
business, which has significantly
impacted UBS Bank
USA. This includes initiatives
approved by the
Group Executive Board to
significantly grow and extend
the business,
as disclosed
on 1 February
2022 during
UBS’s fourth
quarter
2021 earnings
presentation.
Over the
two
years preceding the reclassification date, UBS Bank USA’s deposit base
grew by more than 100% generating substantial
cash balances, with a number of new products being launched,
including new deposit types that are longer in duration,
additional lending and a broader range of customer
segments targeted. Following the commencement of these activities
and the announcement
made in the
first quarter of
2022, the Portfolio
is no longer
held in a
business model to
collect
the contractual
cash flows
and sell
the assets
but
is instead
solely held
to collect
the contractual
cash flows
until the
assets mature, requiring a reclassification of the Portfolio
in line with IFRS 9 with effect from 1 April 2022.
b) Other non-financial assets
USD m
31.12.23
31.12.22
Precious metals and other physical commodities
Deposits and collateral provided in connection with litigation,
regulatory and similar matters
1
Prepaid expenses
VAT,
withholding tax and other tax receivables
Properties and other non-current assets held for sale
Other
Total other non-financial assets
1 Refer to Note 17 for more information.
Note 14
Customer deposits, and funding from UBS Group
AG
a) Customer deposits
USD m
31.12.23
31.12.22
Demand deposits
Retail savings / deposits
Sweep deposits
Time deposits
1
Total customer deposits
1 Includes customer deposits in UBS AG Jersey Branch placed by UBS Switzerland AG on behalf of its clients.
Customer deposits increased mainly due to net inflows into time deposit products,
and positive foreign currency effects,
partly
offset
by
continued
shifts
into
money
market
funds
and
US-government
securities.
In
addition,
customers
continued to shift funds from Demand and Sweep
deposits into time deposits.
b) Funding from UBS Group AG measured at amortized
cost
USD m
31.12.23
31.12.22
Debt contributing to total loss-absorbing capacity (TLAC)
Debt eligible as high-trigger loss-absorbing additional tier
1 capital instruments
Debt eligible as low-trigger loss-absorbing additional
tier 1 capital instruments
Other
1
Total funding from UBS Group AG measured at amortized cost
2,3
1 Includes debt not eligible as TLAC having
a residual maturity of less than one year
and high-trigger loss-absorbing additional tier 1 capital instruments
that ceased to be eligible when UBS Group AG
issued notice
of redemption.
2 The Total
funding from UBS Group AG
measured at amortized cost consists
of subordinated debt of UBS
AG and its subsidiaries toward
UBS Group AG. Subordinated
debt consists of unsecured
debt obligations that are
contractually subordinated in right of
payment to all other
present and future non-subordinated
obligations of the respective
issuing entity. All instruments contributing
to TLAC are subordinated
since 1.1.2020.
3 UBS AG has also recognized funding from UBS Group AG that is designated at fair value.
Refer to Note 18b for more information.
UBS AG uses interest rate and foreign exchange derivatives to
manage the risks inherent in certain debt
instruments held
at amortized cost. In
some cases, UBS AG applies
hedge accounting for
interest rate risk
as discussed in item
2j in Note
1a and Note 25.
As a result of applying
hedge accounting, the life-to-date adjustment to
the carrying amount of
Funding
from UBS Group AG measured at amortized cost
bn as of 31 December 2023 and a decrease
of USD
bn as of 31 December 2022, reflecting changes
in fair value due to interest rate movements.
Of the
Total funding from UBS
Group AG measured at
amortized cost
bn
pays a fixed interest rate and USD
bn pays a floating rate of interest.
›
Refer to Note 23 for maturity information
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
175
Note 15
Debt issued designated at fair value
USD m
31.12.23
31.12.22
Issued debt instruments
Equity-linked
1
Rates-linked
Credit-linked
Fixed-rate
Commodity-linked
Other
Total debt issued designated at fair value
of which: issued by UBS AG with original maturity greater than one
year
2
1 Includes investment fund unit-linked instruments issued.
2 Based on original contractual maturity without considering any early redemption features. As of 31 December 2023,
% of the balance was unsecured
(31 December 2022:
%).
Note 16
Debt issued measured at amortized cost
USD m
31.12.23
31.12.22
Short-term debt
1
Senior unsecured debt
of which: issued by UBS AG with original maturity greater than one
year
Covered bonds
Subordinated debt
of which: eligible as low-trigger loss-absorbing tier 2 capital
instruments
of which: eligible as non-Basel III-compliant tier 2 capital
instruments
Debt issued through the Swiss central mortgage institutions
Long-term debt
2
Total debt issued measured at amortized cost
3,4
1 Debt with an original contractual maturity
of less than one year,
includes mainly certificates of deposit and
commercial paper.
2 Debt with an original contractual
maturity greater than or equal to one year.
The
classification of debt
issued into
short-term and long
-term does not
consider any early
redemption features.
3 Net of
bifurcated embedded derivatives,
the fair value
of which was
not material
for the
periods
presented.
4 Except for Covered bonds and Debt issued through the Swiss central mortgage institutions,
% of the balance was unsecured as of 31 December 2023.
UBS AG uses interest rate and foreign exchange derivatives to
manage the risks inherent in certain debt
instruments held
at amortized cost. In
some cases, UBS AG applies
hedge accounting for
interest rate risk
as discussed in item
2j in Note
1a and Note
25.
As a result
of applying hedge
accounting, the
life-to-date adjustment
to the carrying
amount of
Debt
issued measured at amortized cost
bn as of 31 December 2023 and a decrease of USD
bn
as of 31 December 2022, reflecting changes
in fair value due to interest rate movements.
Subordinated debt consists
of unsecured debt
obligations that are
contractually subordinated
in right of
payment to all
other
present
and
future
non-subordinated
obligations
of
the
respective
issuing
entity.
All
of
the
subordinated
debt
instruments outstanding as of 31 December 2023 pay a
fixed rate of interest.
›
Refer to Note 23 for maturity information
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
176
Note 17
Provisions and contingent liabilities
a) Provisions
The table below presents an overview of total provisions.
USD m
31.12.23
31.12.22
Provisions other than provisions for expected credit losses
Provisions for expected credit losses
1
Total provisions
1 Refer to Note 9 for more information about ECL provisions recognized for off-balance sheet financial instruments and credit lines.
The following table presents additional information for
provisions other than provisions for expected
credit losses.
USD m
Litigation,
regulatory and
similar matters
1
Restructuring
2
Real estate
3
Other
4
Total 2023
Balance at the beginning of the year
Increase in provisions recognized in the income statement
Release of provisions recognized in the income statement
(
47
)
(
13
)
(
17
)
(
77
)
Provisions used in conformity with designated purpose
(
1,642
)
(
114
)
(
12
)
(
27
)
(
1,795
)
Foreign currency translation and other movements
Balance at the end of the year
1 Consists of provisions for losses resulting from legal, liability and compliance risks.
2 Consists of USD
m of provisions for onerous contracts related to real estate as of 31 December 2023 (31 December 2022:
USD
m) and USD
m of personnel-related restructuring provisions as of 31 December
2023 (31 December 2022: USD
m).
3 Mainly includes provisions for reinstatement costs with respect to
leased properties.
4 Mainly includes provisions related to employee benefits and operational risks.
Restructuring provisions relate to onerous contracts and personnel-related provisions. Onerous contracts for property are
recognized
when
UBS AG
is committed
to pay
for non-lease
components, such
as utilities,
service charges,
taxes and
maintenance,
when
a
property
is
vacated
or
not
fully
recovered
from
sub-tenants.
Personnel-related
restructuring
provisions are
generally used
within a
short period
of time.
The level
of personnel-related
provisions can
change when
natural
staff
attrition
reduces
the
number
of
people
affected
by
a
restructuring
event,
and
therefore
results
in
lower
estimated costs.
Information about provisions
and contingent liabilities
in respect of
litigation, regulatory
and similar matters,
as a class,
is included in Note 17b. There are no material contingent
liabilities associated with the other classes of provisions.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
177
Note 17
Provisions and contingent liabilities (continued)
b) Litigation, regulatory and similar matters
UBS operates in
a legal and
regulatory environment that
exposes it to
significant litigation and
similar risks arising
from
disputes and
regulatory
proceedings.
As a
result,
UBS
is involved
in various
disputes
and legal
proceedings,
including
litigation, arbitration, and regulatory
and criminal investigations. “UBS,”
“we” and “our,” for
purposes of this
Note, refer
to UBS AG and / or one or more of its subsidiaries, as applicable.
Such
matters
are
subject
to
many
uncertainties,
and
the
outcome
and
the
timing
of
resolution
are
often
difficult
to
predict,
particularly
in
the
earlier
stages
of
a
case.
There
are
also
situations
where
UBS
may
enter
into
a
settlement
agreement.
This
may
occur
in
order
to
avoid
the
expense,
management
distraction
or
reputational
implications
of
continuing to contest
liability, even for
those matters for
which UBS believes
it should be
exonerated. The uncertainties
inherent in
all such
matters
affect
the amount
and timing
of any
potential outflows
for
both matters
with respect
to
which provisions have
been established and
other contingent liabilities.
UBS makes provisions
for such matters
brought
against it when,
in the opinion of
management after seeking legal
advice, it is
more likely than not
that UBS has a
present
legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and
the amount
can be
reliably
estimated. Where
these factors
are otherwise
satisfied, a
provision may
be established
for
claims that have not yet been asserted
against UBS, but are nevertheless expected to be,
based on UBS’s experience with
similar asserted claims. If any of those conditions is not met, such matters result in contingent liabilities. If the amount of
an
obligation
cannot
be
reliably
estimated,
a
liability
exists
that
is
not
recognized
even
if
an
outflow
of
resources
is
probable. Accordingly, no provision is established even if the potential outflow of resources
with respect to such matters
could be
significant. Developments
relating to
a matter
that occur
after the
relevant reporting
period, but
prior to
the
issuance of financial
statements, which affect
management’s assessment
of the provision
for such matter
(because, for
example, the developments provide evidence of conditions that existed at the end of the reporting period), are adjusting
events
after
the
reporting
period
under
IAS
10
and
must
be
recognized
in
the
financial
statements
for
the
reporting
period.
Specific
litigation,
regulatory
and
other
matters
are
described
below,
including
all
such
matters
that
management
considers to
be material
and others
that management
believes to
be of
significance to
UBS due
to potential
financial,
reputational and other
effects. The amount of
damages claimed, the size
of a transaction
or other information is
provided
where available and appropriate in order to assist users in considering
the magnitude of potential exposures.
In the case of certain matters below, we
state that we have established a provision,
and for the other matters, we make
no such statement.
When we
make this statement
and we
expect disclosure
of the
amount of a
provision to prejudice
seriously our position with other parties in the matter because it would reveal
what UBS believes to be the probable and
reliably estimable
outflow, we
do not
disclose that
amount. In
some cases
we are
subject to
confidentiality obligations
that preclude
such disclosure.
With respect
to the
matters
for which
we do
not state
whether
we have
established a
provision, either: (a) we have
not established a provision;
or (b) we have established
a provision but expect disclosure
of
that fact
to prejudice
seriously our
position with
other parties
in the
matter because
it would
reveal the
fact that
UBS
believes an outflow of resources to be probable and reliably estimable.
With respect to certain litigation, regulatory and similar matters for which we have established provisions, we are able to
estimate the expected
timing of outflows.
However, the aggregate
amount of the
expected outflows for
those matters
for which
we are
able to
estimate expected
timing is
immaterial relative
to our
current and
expected levels
of liquidity
over the relevant time periods.
The aggregate amount provisioned for litigation, regulatory and similar matters
as a class is disclosed in the “Provisions”
table in Note 17a
above. It is not practicable to
provide an aggregate estimate of liability
for our litigation, regulatory and
similar matters as a class of contingent liabilities. Doing so would require UBS to provide speculative legal assessments as
to claims
and proceedings
that involve
unique fact
patterns or
novel legal
theories, that
have not
yet been
initiated or
are at early stages of adjudication, or as to which alleged damages have not been quantified by the claimants. Although
UBS therefore
cannot provide
a numerical
estimate of
the future
losses that
could arise
from litigation,
regulatory and
similar
matters,
UBS
believes
that
the
aggregate
amount
of
possible
future
losses
from
this
class
that
are
more
than
remote substantially exceeds the level of current provisions.
Litigation, regulatory and
similar matters may also
result in non-monetary
penalties and consequences.
A guilty plea to,
or conviction
of, a
crime could
have material
consequences for
UBS. Resolution
of regulatory
proceedings may
require
UBS to obtain waivers of regulatory disqualifications to maintain certain operations,
may entitle regulatory authorities to
limit,
suspend
or
terminate
licenses
and
regulatory
authorizations,
and
may
permit
financial
market
utilities
to
limit,
suspend or terminate UBS’s participation in
such utilities. Failure to obtain such waivers,
or any limitation, suspension or
termination of licenses, authorizations or participations, could
have material consequences for UBS.
The risk of loss associated with
litigation, regulatory and similar matters
is a component of operational
risk for purposes
of determining capital requirements. Information concerning our capital requirements and the calculation of operational
risk for this purpose is included in the “Capital, liquidity
and funding, and balance sheet” section of this report.
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| Consolidated financial statements | UBS
AG consolidated financial statements
178
Note 17
Provisions and contingent liabilities (continued)
Provisions for litigation, regulatory and similar matters
by business division and in Group Items
1
USD m
Global Wealth
Manage-
ment
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
Non-core
and
Legacy
2
Group
2
Total 2023
Balance at the beginning of the year
Increase in provisions recognized in the income statement
Release of provisions recognized in the income statement
(
7
)
(
9
)
(
2
)
(
29
)
(
47
)
Provisions used in conformity with designated purpose
(
98
)
(
1
)
(
106
)
(
1,435
)
(
1
)
(
1,642
)
Foreign currency translation and other movements
Balance at the end of the year
1 Provisions, if any,
for the matters described in item 2
of this Note are recorded in Global Wealth
Management, and provisions, if any,
for the matters described in items 1 and
4 of this Note are allocated between
Global Wealth Management and Personal & Corporate Banking. Provisions,
if any, for the matters described in item 3 are allocated between the Investment
Bank and Group Items.
2 Starting with the third quarter
of 2023, Non-core and Legacy represents a separate reportable segment and Group Functions has been renamed Group Items.
Prior periods have been revised to reflect these changes.
1. Inquiries regarding cross-border wealth management businesses
Tax and regulatory authorities in a number of
countries have made inquiries,
served requests for information or
examined
employees located in their
respective jurisdictions
relating to the
cross-border wealth
management services provided
by
UBS and other financial institutions.
Since 2013, UBS (France) S.A., UBS AG and certain former employees have been under investigation in
France in relation
to UBS’s cross-border business with French clients. In connection with this investigation, the
investigating judges ordered
UBS AG to provide bail (“
caution
”) of EUR
bn.
In 2019, the court
of first instance
returned a verdict
finding UBS AG
guilty of unlawful solicitation
of clients on
French
territory
and aggravated
laundering of
the proceeds
of tax
fraud, and
UBS (France)
S.A. guilty
of aiding
and abetting
unlawful solicitation
and of
laundering the
proceeds of
tax fraud.
The court
imposed fines
aggregating EUR
bn on
UBS AG and UBS (France) S.A. and
awarded EUR
m of civil damages to the
French state. A trial in the Paris
Court of
Appeal took place in March 2021. In December
2021, the Court of Appeal found UBS
AG guilty of unlawful solicitation
and aggravated
laundering
of the
proceeds of
tax
fraud. The
court
ordered a
fine of
EUR
m, the
confiscation
of
EUR
bn, and awarded civil
damages to the French
state of EUR
m. UBS appealed the
decision to the French
Supreme
Court.
The
Supreme
Court
rendered
its
judgment
on
15
November
2023.
It
upheld
the
Court
of
Appeal‘s
decision
regarding unlawful solicitation and aggravated
laundering of the proceeds of tax
fraud, but overturned the confiscation
of EUR
bn, the
penalty of
EUR
m and the
EUR
m of civil
damages awarded
to the
French state.
The case
has
been remanded to
the Court of
Appeal for a
retrial regarding these
overturned elements. The
French state has
reimbursed
the EUR
m of civil damages to UBS AG.
Our balance sheet
at 31 December
2023 reflected
a provision
in an amount
that UBS believes
to be appropriate
under
the applicable accounting standard. As in the case of other matters for which we have established provisions,
the future
outflow
of
resources
in
respect
of
such
matters
cannot
be
determined
with
certainty
based
on
currently
available
information and accordingly may ultimately
prove to be substantially greater
(or may be less) than the provision
that we
have recognized.
2. Madoff
In relation to the Bernard L. Madoff Investment Securities LLC (BMIS) investment
fraud, UBS AG, UBS (Luxembourg) S.A.
(now UBS Europe SE, Luxembourg branch) and certain other UBS
subsidiaries have been subject to inquiries by a
number
of regulators,
including the
Swiss Financial Market
Supervisory Authority
(FINMA) and the
Luxembourg Commission
de
Surveillance du
Secteur Financier.
Those inquiries
concerned two
third-party funds
established under
Luxembourg law,
substantially all assets of which
were with BMIS,
as well as certain
funds established in offshore
jurisdictions with either
direct or
indirect exposure
to BMIS. These
funds faced severe
losses, and the
Luxembourg funds
are in
liquidation. The
documentation
establishing
both
funds
identifies
UBS
entities
in
various
roles,
including
custodian,
administrator,
manager,
distributor and promoter,
and indicates that UBS employees serve as board
members.
In 2009 and 2010,
the liquidators of
the two Luxembourg
funds filed claims
against UBS entities,
non-UBS entities and
certain individuals,
including
current and
former
UBS employees,
seeking amounts
totaling approximately
EUR
bn,
which includes amounts that the funds may be held liable
to pay the trustee for the liquidation of BMIS (BMIS Trustee).
A large number of alleged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses
relating to the Madoff fraud. The majority of these
cases have been filed in Luxembourg, where decisions that the claims
in
eight
test
cases
were
inadmissible
have
been
affirmed
by
the
Luxembourg
Court
of
Appeal,
and
the
Luxembourg
Supreme Court has dismissed a further appeal in one of
the test cases.
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AG consolidated financial statements
179
Note 17
Provisions and contingent liabilities (continued)
In the US, the BMIS Trustee
filed claims against UBS entities, among others, in
relation to the two Luxembourg funds and
one of the offshore funds. The total amount
claimed against all defendants in these
actions was not less than USD
bn.
In 2014,
the
US Supreme
Court rejected
the BMIS
Trustee’s
motion for
leave to
appeal decisions
dismissing all
claims
except
those
for
the
recovery
of
approximately
USD
m
of
payments
alleged
to
be
fraudulent
conveyances
and
preference payments. In 2016, the
bankruptcy court dismissed these claims
against the UBS entities. In
2019, the Court
of Appeals reversed
the dismissal of the
BMIS Trustee’s remaining claims,
and the US
Supreme Court subsequently denied
a petition
seeking review
of the
Court of
Appeals’ decision.
The case
has been
remanded to
the Bankruptcy
Court for
further proceedings.
3. Foreign exchange, LIBOR and benchmark rates, and other
trading practices
Foreign
exchange-related
regulatory
matters:
concerning
possible
manipulation
of
foreign
exchange
markets
and
precious
metals
prices.
As
a
result
of
these
investigations,
UBS
entered
into
resolutions
with
Swiss,
US
and
United
Kingdom
regulators
and
the
European
Commission.
UBS
was
granted
conditional
immunity
by
the
Antitrust
Division
of
the
DOJ
and
by
authorities
in
other
jurisdictions in
connection
with potential
competition
law
violations relating
to foreign
exchange and
precious
metals
businesses.
Foreign exchange-related civil litigation:
jurisdictions
against
UBS
and
other
banks
on
behalf
of
putative
classes
of
persons
who
engaged
in
foreign
currency
transactions with any of
the defendant banks. UBS has resolved
US federal court class actions
relating to foreign currency
transactions with
the defendant
banks and
persons who
transacted in
foreign exchange
futures contracts
and options
on such
futures
under
a
settlement
agreement
that
provides for
UBS to
pay
an aggregate
of USD
m and
provide
cooperation to the
settlement classes. Certain
class members have
excluded themselves
from that settlement
and have
filed individual
actions in
US and
English courts
against
UBS and
other banks,
alleging violations
of US
and European
competition laws and unjust enrichment. UBS and the other
banks have resolved those individual matters.
In 2015, a
putative class
action was
filed in federal
court against
UBS and numerous
other banks
on behalf of
persons
and businesses
in the US
who directly
purchased foreign
currency from
the defendants
and alleged
co-conspirators for
their own end use.
In 2022, the
court denied plaintiffs’
motion for class certification.
In March 2023, the
court granted
defendants’ summary judgment motion, dismissing the case.
Plaintiffs have appealed.
LIBOR
and
other
benchmark-related
regulatory
matters:
regarding potential improper attempts by UBS,
among others, to manipulate LIBOR and
other benchmark rates at certain
times.
UBS
reached
settlements
or
otherwise
concluded
investigations
relating
to
benchmark
interest
rates
with
the
investigating
authorities.
UBS
was
granted
conditional
leniency
or
conditional
immunity
from
authorities
in
certain
jurisdictions, including the
Antitrust Division of the
DOJ and the Swiss
Competition Commission (WEKO),
in connection
with
potential
antitrust
or
competition
law
violations
related
to
certain
rates.
However,
UBS
has
not
reached
a
final
settlement with WEKO, as the Secretariat of WEKO has asserted
that UBS does not qualify for full immunity.
LIBOR and other
benchmark-related civil litigation:
the federal
courts in
New York
against UBS
and numerous
other banks
on behalf
of parties
who transacted
in certain
interest rate benchmark-based derivatives.
Also pending in
the US and
in other jurisdictions are
a number of other
actions
asserting losses related
to various products
whose interest
rates were
linked to LIBOR
and other benchmarks,
including
adjustable
rate
mortgages,
preferred
and
debt
securities,
bonds
pledged
as
collateral,
loans,
depository
accounts,
investments
and
other
interest-bearing
instruments.
The
complaints
allege
manipulation,
through
various
means,
of
certain benchmark interest rates, including USD LIBOR, Euroyen TIBOR, Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR and
seek unspecified compensatory and other damages under
varying legal theories.
USD LIBOR class and individual
actions in the US:
In 2013 and 2015,
the district court in
the USD LIBOR actions dismissed,
in whole or in part, certain
plaintiffs’ antitrust claims, federal racketeering
claims, Commodity Exchange Act claims,
and
state common
law claims,
and again
dismissed the
antitrust claims
in 2016
following
an appeal.
In 2021,
the Second
Circuit affirmed
the district
court’s dismissal
in part
and reversed
in part
and remanded
to the
district court
for further
proceedings. The
Second Circuit,
among other
things, held
that there
was personal
jurisdiction over
UBS and
other foreign
defendants. Separately, in
2018, the Second
Circuit reversed in part
the district court’s
2015 decision dismissing
certain
individual plaintiffs’ claims and
certain of these actions
are now proceeding. In
2018, the district court denied
plaintiffs’
motions for class
certification in
the USD class
actions for
claims pending against
UBS, and plaintiffs
sought permission
to appeal that
ruling to the
Second Circuit. The Second
Circuit denied the
petition to appeal. In
2020, an individual action
was
filed
in
the
Northern
District
of
California
against
UBS
and
numerous
other
banks
alleging
that
the
defendants
conspired
to
fix
the
interest
rate
used
as
the
basis
for
loans
to
consumers
by
jointly
setting
the
USD LIBOR
rate
and
monopolized
the
market
for
LIBOR-based
consumer
loans
and
credit
cards.
In
September
2022,
the
court
granted
defendants’ motion to
dismiss the complaint
in its entirety, while
allowing plaintiffs the
opportunity to file an
amended
complaint.
Plaintiffs
filed
an
amended
complaint
in
October
2022,
and
defendants
moved
to
dismiss
the
amended
complaint.
In
October
2023,
the
court
dismissed
the
amended
complaint
with
prejudice.
In
January
2024,
plaintiffs
appealed the
dismissal to
the
Ninth Circuit
Court of
Appeals.
Defendants
filed their
response
to the
appeal
in
March
2024.
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AG consolidated financial statements
180
Note 17
Provisions and contingent liabilities (continued)
Other benchmark class actions in the US:
Yen
LIBOR
/
Euroyen
TIBOR
–
In
2017,
the
court
dismissed
one
Yen
LIBOR
/
Euroyen
TIBOR
action
in
its
entirety
on
standing grounds.
In 2020,
the appeals court
reversed the
dismissal and,
subsequently,
plaintiffs in
that action filed
an
amended complaint focused
on Yen
LIBOR. In 2022, the
court granted UBS’s motion
for reconsideration and
dismissed
the
case
against
UBS.
The
dismissal
of
the
case
against
UBS
could be
appealed
following
the
disposition
of
the
case
against the remaining defendant in the district court.
CHF LIBOR
filed an amended
complaint, and
the court granted
a renewed motion
to dismiss in
2019. Plaintiffs appealed.
In 2021,
the Second Circuit granted the parties’ joint motion
to vacate the dismissal and remand the case
for further proceedings.
Plaintiffs filed a third amended
complaint in November 2022
and defendants moved
to dismiss the amended
complaint
in January 2023.
EURIBOR
for lack of personal jurisdiction. Plaintiffs have appealed.
GBP LIBOR
Government bonds:
on behalf
of persons
who participated
in markets
for US
Treasury securities
since 2007.
A consolidated
complaint was
filed in 2017 in the US District Court for the Southern District of New York alleging that
the banks colluded with respect
to, and
manipulated prices
of, US
Treasury securities
sold at
auction and
in the
secondary market
and asserting
claims
under the
antitrust
laws and
for
unjust
enrichment.
Defendants’
motions to
dismiss
the
consolidated
complaint
were
granted in 2021.
Plaintiffs filed an
amended complaint, which defendants
moved to dismiss
later in 2021.
In March 2022,
the court granted defendants’
motion to dismiss that
complaint, and in February
2024, the Second Circuit
affirmed the
district
court’s
dismissal.
Similar
class
actions
have
been
filed
concerning
European
government
bonds
and
other
government bonds.
In 2021,
the European
Commission
issued a
decision finding
that UBS
and six
other
banks breached
European
Union
antitrust rules in 2007–2011 relating
to European government bonds. The
European Commission fined UBS
EUR
m.
UBS is appealing the amount of the fine.
With respect to
additional matters
and jurisdictions
not encompassed
by the
settlements and
orders referred
to above,
our balance
sheet at
31 December
2023 reflected
a provision
in an amount
that UBS
believes to
be appropriate
under
the applicable accounting standard. As in the case of other matters
for which we have established provisions, the future
outflow
of
resources
in
respect
of
such
matters
cannot
be
determined
with
certainty
based
on
currently
available
information and accordingly may ultimately
prove to be substantially greater
(or may be less) than the provision that
we
have recognized.
4. Swiss retrocessions
The Federal Supreme Court of Switzerland
ruled in 2012, in a test case
against UBS, that distribution fees paid
to a firm
for distributing third-party and intra-group investment funds and structured products must be disclosed and surrendered
to clients who have entered
into a discretionary mandate
agreement with the firm,
absent a valid waiver.
FINMA issued
a supervisory note to
all Swiss banks
in response to
the Supreme
Court decision. UBS
has met the FINMA
requirements
and has notified all potentially affected clients.
The Supreme Court decision has resulted, and continues to result, in a number of client requests for
UBS to disclose and
potentially
surrender
retrocessions.
Client
requests
are
assessed
on
a
case-by-case
basis.
Considerations
taken
into
account when assessing these cases include, among other things, the existence of a discretionary
mandate and whether
or not the client documentation contained a valid waiver
with respect to distribution fees.
Our
balance
sheet
at
31
December
2023 reflected
a
provision
with
respect
to
matters
described
in
this
item
4
in
an
amount that UBS
believes to be
appropriate under the
applicable accounting standard. The
ultimate exposure will
depend
on client requests and
the resolution thereof, factors that are
difficult to predict and
assess. Hence, as in the
case of other
matters for which
we have established
provisions, the future
outflow of resources
in respect of
such matters cannot
be
determined
with
certainty
based
on
currently
available
information
and
accordingly
may
ultimately
prove
to
be
substantially greater (or may be less) than the provision that
we have recognized.
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AG consolidated financial statements
181
Note 18
Other liabilities
a) Other financial liabilities measured at amortized
cost
USD m
31.12.23
31.12.22
Other accrued expenses
Accrued interest expenses
Settlement and clearing accounts
Lease liabilities
Other
Total other financial liabilities measured at amortized cost
b) Other financial liabilities designated at fair value
USD m
31.12.23
31.12.22
Financial liabilities related to unit-linked investment contracts
Securities financing transactions
Over-the-counter debt instruments and other
Funding from UBS Group AG
1
Total other financial liabilities designated at fair value
1 The Funding from UBS Group AG consists
of subordinated debt of UBS AG and its subsidiaries
toward UBS Group AG. Subordinated
debt consists of unsecured debt obligations that are contractually
subordinated
in right of payment to all other present and future non-subordinated obligations of the respective issuing entity.
c) Other non-financial liabilities
USD m
31.12.23
31.12.22
Compensation-related liabilities
of which: financial advisor compensation plans
of which: other compensation plans
of which: net defined benefit liability
of which: other compensation-related liabilities
1
Current tax liabilities
Deferred tax liabilities
VAT,
withholding tax and other tax payables
Deferred income
Other
Total other non-financial liabilities
1 Includes liabilities for payroll taxes and untaken vacation.
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AG consolidated financial statements
182
Additional information
Note 19
Expected credit loss measurement
a) Expected credit losses in the period
Total net credit loss expenses were USD
m in 2023, reflecting net credit loss expenses of USD
m related to stage 1
and 2 positions and net credit loss expenses of
USD
m related to credit-impaired
(stage 3) positions.
›
Refer to Note 19b for more information regarding changes to expected
credit loss
models, scenarios, scenario weights and the
post-model adjustments
and to Note 19c for more information regarding the development
of ECL allowances and provisions
Stage 3
net
expenses
of
USD
m
were
recognized
across
a
number
of
defaulted
positions,
with
net
expenses
of
USD
m
in
the
Investment
Bank,
USD
m
in
Personal
&
Corporate
Banking
and
USD
m
in
Global
Wealth
Management.
Credit loss expense / (release)
Performing positions
Credit-impaired positions
USD m
Stages 1 and 2
Stage 3
Total
For the year ended 31.12.23
Global Wealth Management
(
2
)
Personal & Corporate Banking
Asset Management
(
1
)
(
1
)
Investment Bank
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.22
Global Wealth Management
(
5
)
Personal & Corporate Banking
Asset Management
Investment Bank
(
18
)
(
12
)
Non-core and Legacy
Group Items
1
Total
For the year ended 31.12.21
Global Wealth Management
(
28
)
(
1
)
(
29
)
Personal & Corporate Banking
(
62
)
(
24
)
(
86
)
Asset Management
Investment Bank
(
34
)
(
34
)
Non-core and Legacy
Group Items
1
Total
(
123
)
(
25
)
(
148
)
1 Starting with the third quarter of 2023, Non-core and Legacy became a separate reportable segment and Group Functions has been renamed Group Items. Prior periods have been restated to reflect these changes.
b) Changes to
ECL models, scenarios,
scenario weights
and key inputs
Refer to
Note 1a for
information about
the
principles governing expected
credit
loss (ECL)
models, scenarios,
scenario
weights and
key inputs applied.
Governance
Comprehensive
cross-functional
and cross-divisional
governance
processes are
in place
and are
used to
discuss and
approve
scenario updates and weights,
to assess whether
significant increases in credit
risk resulted in
stage transfers, to
review
model outputs
and to reach conclusions
regarding post-model
adjustments.
Model changes
During 2023, the model review and enhancement
process led to adjustments of the probability
of default (PD), loss given
default (LGD) and credit conversion
factor (CCF) models, resulting
in a USD
m increase in ECL allowances. This includes
an increase
of USD
m
in
the Investment
Bank, mainly
related to
lending to
Large corporate
clients
,
and a
USD
m
increase in Personal
& Corporate Banking,
mainly related
to lending to
Large corporate
clients
SME clients.
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AG consolidated financial statements
183
Note 19
Expected credit loss measurement (continued)
Scenario and
key input updates
During 2023, the scenarios and related macroeconomic factors were updated from
those applied at the end
of 2022 by
considering
the prevailing
economic
and political
conditions
and uncertainty.
The review
focused
on events
that significantly
changed the economic outlook during the year:
the inflation outlook and economic growth
in Europe, and
rising global
interest rates
due to central
banks’ adoption
of more restrictive
monetary policies.
Baseline
scenario
: the
projections
of the
baseline scenario,
which are
aligned
to the
economic and
market assumptions
used
for
UBS’s
business
planning
purposes,
are broadly
in line
with
external
benchmarks,
such
as that
from Bloomberg
Consensus,
Oxford Economics
and the International
Monetary Fund World Economic
Outlook. The expectation
for 2024 is that global
growth slows
down under
the weight of
monetary policy
tightening and
continued pressure
on real purchasing
power due
to high, though falling inflation,
and fading fiscal support. Unemployment
rates are forecast to increase
slightly from their
2023 levels.
Interest rates are
expected to
remain high,
given the
persistence of inflationary pressures, leading
to a
less
optimistic outlook
for house prices
worldwide,
including in
Switzerland.
Mild debt crisis scenario
: The first hypothetical downside scenario is the mild debt crisis scenario. At the beginning of the
second quarter
of 2023,
UBS replaced
the global
crisis scenario
applied
at the
end of
2022 and
at the
end of
the first
quarter
of 2023 with the mild debt crisis
scenario. Economic,
market and political
developments suggested
that the scenario suite
should be rebalanced by reintroducing
a mild downside scenario. The mild debt crisis scenario
covers similar risks, but the
assumptions
are milder
than the
global
crisis
scenario.
Therefore,
the scenario
shocks
are less
severe.
It assumes
that political,
solvency and liquidity concerns cause a
sell-off of sovereign debt in
emerging markets and the peripheral Eurozone. The
global economy
and financial
markets are
negatively
affected,
and central
banks are
assumed to
ease their
monetary policy.
Stagflationary geopolitical crisis scenario:
The second
downside scenario is
aligned with
the 2024
Group binding
stress
scenario and was updated in 2023
to reflect expected risks, resulting in minimal changes.
Geopolitical tensions cause an
escalation
of security
concerns
and undermine
globalization.
The ensuing
economic
regionalization
leads
to a
surge
in global
commodity prices and further disruptions
of supply chains,
and raises the specter of prolonged stagflation. Central
banks
are forced
to further
tighten monetary policy
to contain
inflationary pressures. The severe
interest rate and
house price
assumptions in the scenario had a substantive impact on model-based ECL allowances
for loans secured by mortgages in
Switzerland and the
US. These
effects were
partly offset by
post-model adjustment releases related to
loans secured by
mortgages. Refer
to the section
below on “Scenario
weights and post-model
adjustments” for
more details.
Asset price
inflation scenario:
The upside
scenario is
based on
positive developments, such
as an
easing of
geopolitical
tensions across
the globe
and a rebound
in Chinese
economic growth.
A combination
of lower commodity
prices, effective
monetary
policies
and easing
supply chain
disruptions
helps to
reduce inflation.
Improved
consumer
and business
sentiment
lead to
a global
economic rebound,
enabling central
banks to
normalize interest
rates, which
causes asset
prices to
increase
significantly.
The table below details the key assumptions for the four scenarios
applied as of 31 December 2023.
Scenario weights and post-model adjustments
The scenario weights did not change during 2023, but the
scenario suite was adjusted in the second quarter of 2023
to
replace one of
the two severe downside
scenarios with a
mild downside scenario.
The mild debt
crisis scenario, developed
in early 2023,
was introduced
in the scenario
suite with the
same weight as
the more
severe global crisis
scenario, i.e.,
%,
to
balance
a
somewhat
more
optimistic
outlook
with
milder
scenario
assumptions.
The
weights
were
kept
unchanged for the stagflationary geopolitical crisis, baseline and asset price inflation scenarios, i.e.,
%,
% and
%,
respectively.
The weights are shown in the table below.
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AG consolidated financial statements
184
Note 19
Expected credit loss measurement (continued)
However, unquantifiable risks continue to be relevant, as the
geopolitical risks remained high in 2023, and the
impact on
the world economy from
escalations with unforeseeable consequences could be
severe. In the near
term, this uncertainty
relates
primarily
to
developments
in
the
Russia–Ukraine
and
Middle
East
conflicts.
Models,
which
are
based
on
supportable
statistical
information
from
past
experiences
regarding
interdependencies
of
macroeconomic
factors
and
their implications for credit risk portfolios, cannot comprehensively reflect such extraordinary events, such as a pandemic
or
a
fundamental
change
in
the
world
political
order.
Rather
than
creating
multiple
additional
scenarios
to
attempt
gauging these risks and applying model parameters that
lack supportable information and cannot be robustly
validated,
management continued to also apply post-model adjustments.
Total
stage 1
and
2
allowances
and
provisions
were
USD
m
as
of
31 December
2023
and
included
post-model
adjustments of
USD
m (31 December
2022: USD
m). Overlays
are to
cover for
uncertainty levels,
including the
geopolitical situation.
Economic scenarios and weights applied
Assigned weights in %
ECL scenario
31.12.23
31.12.22
Asset price inflation
Baseline
Mild debt crisis
Stagflationary geopolitical crisis
Global crisis
Scenario assumptions
One year
Three years cumulative
31.12.23
Asset price
inflation
Baseline
Mild debt
crisis
Stagflationary
geopolitical
crisis
Asset price
inflation
Baseline
Mild debt
crisis
Stagflationary
geopolitical
crisis
Real GDP growth (% change)
United States
(
1.6
)
(
4.8
)
(
4.4
)
Eurozone
(
1.7
)
(
5.6
)
(
0.1
)
(
5.7
)
Switzerland
(
1.2
)
(
4.8
)
(
4.9
)
Consumer price index (% change)
United States
(
0.1
)
Eurozone
(
0.2
)
Switzerland
(
0.4
)
Unemployment rate (end-of-period level, %)
United States
Eurozone
Switzerland
Fixed income: 10-year government bonds (change in yields, basis points)
USD
(
82
)
(
215
)
(
78
)
(
155
)
EUR
(
90
)
(
185
)
(
78
)
(
140
)
CHF
(
41
)
(
73
)
(
34
)
(
28
)
Equity indices (% change)
S&P 500
(
26.6
)
(
51.5
)
(
12.2
)
(
45.6
)
EuroStoxx 50
(
26.4
)
(
51.6
)
(
16.6
)
(
47.2
)
SPI
(
24.5
)
(
51.6
)
(
11.2
)
(
47.2
)
Swiss real estate (% change)
Single-Family Homes
(
1.5
)
(
4.4
)
(
18.5
)
(
3.0
)
(
28.6
)
Other real estate (% change)
United States (S&P / Case–Shiller)
(
8.6
)
(
20.0
)
(
5.2
)
(
30.2
)
Eurozone (House Price Index)
(
5.9
)
(
8.4
)
(
5.2
)
(
12.9
)
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
185
Note 19
Expected credit loss measurement (continued)
Scenario assumptions
One year
Three years cumulative
31.12.22
Asset price
inflation
Baseline
Stagflationary
geopolitical
crisis
Global crisis
Asset price
inflation
Baseline
Stagflationary
geopolitical
crisis
Global crisis
Real GDP growth (% change)
United States
(
0.3
)
(
4.8
)
(
6.4
)
(
4.4
)
(
1.8
)
Eurozone
(
5.6
)
(
8.5
)
(
5.7
)
(
8.3
)
Switzerland
(
4.8
)
(
6.7
)
(
4.9
)
(
3.7
)
Consumer price index (% change)
United States
(
0.5
)
Eurozone
(
0.7
)
(
0.7
)
Switzerland
(
1.8
)
(
1.6
)
Unemployment rate (end-of-period level, %)
United States
Eurozone
Switzerland
Fixed income: 10-year government bonds (change in yields, basis points)
USD
(
6
)
(
326
)
(
13
)
(
291
)
EUR
(
271
)
(
247
)
CHF
(
210
)
(
160
)
Equity indices (% change)
S&P 500
(
51.5
)
(
50.0
)
(
45.6
)
(
27.9
)
EuroStoxx 50
(
51.6
)
(
50.0
)
(
47.2
)
(
39.3
)
SPI
(
51.6
)
(
46.0
)
(
47.2
)
(
32.9
)
Swiss real estate (% change)
Single-Family Homes
(
16.7
)
(
19.9
)
(
32.9
)
(
23.9
)
Other real estate (% change)
United States (S&P / Case–Shiller)
(
4.5
)
(
12.8
)
(
19.3
)
(
0.6
)
(
35.8
)
(
32.7
)
Eurozone (House Price Index)
(
2.7
)
(
8.4
)
(
8.9
)
(
14.7
)
(
17.5
)
c) Development of ECL allowances and provisions
The ECL allowances and provisions recognized
in the period are impacted by a variety
of factors, such as:
–
the effect of selecting and updating forward-looking scenarios
and the respective weights;
–
origination of new instruments during the period;
–
the effect of
passage of
time (lower residual
lifetime PD and
the effect of
discount unwind) as
the ECL on
an instrument
for the remaining lifetime decreases (all other factors remaining
the same);
–
derecognition of instruments in the period;
–
change in individual asset quality of instruments;
–
movements
from
a
maximum
12-month
ECL to
the
recognition
of lifetime
ECL (and
vice versa)
following transfers
between stages 1 and 2;
–
movements from stages 1 and 2 to stage 3 (credit-impaired status)
when default has become certain and PD increases
to 100% (or vice versa);
–
changes in models or updates to model parameters;
–
write-off; and
–
foreign exchange translations for assets denominated in
foreign currencies.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
186
Note 19
Expected credit loss measurement (continued)
The
table
below
explains
the
changes
in
the
ECL
allowances
and
provisions
for
on-
and
off-balance
sheet
financial
instruments and credit lines
in scope of ECL requirements
between the beginning and
the end of the
period due to the
factors listed above.
Development of ECL allowances and
provisions
USD m
Total
Stage 1
Stage 2
Stage 3
Balance as of 31 December 2022
(
1,091
)
(
260
)
(
267
)
(
564
)
Net movement from new and derecognized transactions
1
(
11
)
(
27
)
of which: Private clients with mortgages
(
5
)
(
8
)
of which: Real estate financing
(
2
)
(
4
)
of which: Large corporate clients
(
8
)
of which: SME clients
(
3
)
(
3
)
of which: Other
(
4
)
(
4
)
(
1
)
(
1
)
Remeasurements with stage transfers
2
(
140
)
(
7
)
(
142
)
of which: Private clients with mortgages
(
1
)
of which: Real estate financing
(
2
)
(
5
)
of which: Large corporate clients
(
76
)
(
3
)
(
76
)
of which: SME clients
(
56
)
(
1
)
(
55
)
of which: Other
(
10
)
(
11
)
Remeasurements without stage transfers
3
of which: Private clients with mortgages
(
5
)
(
3
)
of which: Real estate financing
(
1
)
of which: Large corporate clients
(
8
)
of which: SME clients
(
1
)
of which: Other
(
34
)
(
2
)
(
14
)
(
18
)
(
15
)
(
15
)
(
7
)
(
8
)
Model changes
4
(
27
)
(
18
)
(
9
)
Movements with profit or loss impact
5
(
143
)
(
30
)
(
120
)
Movements without profit or loss impact (write-off, FX and other)
6
(
10
)
(
18
)
(
13
)
Balance as of 31 December 2023
(
1,244
)
(
308
)
(
272
)
(
664
)
1 Represents the
increase and decrease
in allowances
and provisions resulting
from financial instruments
(including guarantees
and facilities) that
were newly originated,
purchased or renewed
and from the
final
derecognition of loans or facilities on
their maturity date or earlier.
2 Represents the remeasurement between 12-month and lifetime
ECL due to stage transfers.
3 Represents the change in allowances and provisions
related to
changes in
model inputs
or assumptions,
including changes
in forward-looking
macroeconomic
conditions,
changes in
the exposure
profile,
PD and
LGD changes,
and unwinding
of the
time value.
4 Represents the change in the allowances and provisions related to changes in models and methodologies.
5 Includes ECL movements from new and derecognized transactions, remeasurement changes, and model
and methodology changes.
6 Represents the decrease in allowances
and provisions resulting from write-offs
of the ECL allowance against
the gross carrying amount when all
or part of a financial asset
is deemed
uncollectible or forgiven and movements in foreign exchange rates.
Movements with
profit or
loss impact:
m:
–
Net movement
from new
and derecognized
transactions
m stage
1 expenses
and USD
m stage
2
releases: Stage 1 expenses are primarily
driven by new loans secured by
real estate and corporate lending. The residual
effect is spread across other lending segments. Stage 2
releases are largely driven by redemption of real estate lending
in Personal & Corporate Banking and Global Wealth Management.
–
Remeasurements with stage transfers
m releases in
stage 1 and USD
m expenses in
stage 2. This
mainly
includes the transfer of a few large corporate and real estate
financing transactions from stage 1 to 2 (i.e., releases in
stage 1 and related but generally higher expenses in stage
2), driven by rating downgrades and scenario effects.
–
Remeasurements without stage transfers
m and stage 2 releases of USD
m. These
releases of USD
m relate to large corporate lending
(USD
m) and real estate lending (USD
m), substantially due
to scenario effects, partly offset by expenses to a single
sovereign counterparty (USD
m).
–
Model changes
: refer to Note 19b for more information.
Movements without
profit or
loss impact
: Stages
1 and
2 allowances
increased by
USD
m, almost
entirely driven
by
FX. Stage
3 allowances
decreased
by USD
m, driven
by FX
and other
movements
of USD
m, partly
offset
by net
write-offs / recoveries of USD
m.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
187
Note 19
Expected credit loss measurement (continued)
Development of ECL allowances and
provisions
USD m
Total
Stage 1
Stage 2
Stage 3
Balance as of 31 December 2021
(
1,165
)
(
282
)
(
220
)
(
662
)
Net movement from new and derecognized transactions
1
(
7
)
(
21
)
(
2
)
of which: Private clients with mortgages
(
6
)
(
6
)
of which: Real estate financing
(
3
)
(
5
)
of which: Large corporate clients
(
1
)
(
2
)
of which: SME clients
(
1
)
(
1
)
of which: Other
(
6
)
(
8
)
(
2
)
Remeasurements with stage transfers
2
(
65
)
(
39
)
(
46
)
of which: Private clients with mortgages
(
10
)
(
12
)
of which: Real estate financing
(
1
)
of which: Large corporate clients
(
33
)
(
28
)
(
21
)
of which: SME clients
(
23
)
(
2
)
(
22
)
of which: Other
(
6
)
(
4
)
(
3
)
(
1
)
Remeasurements without stage transfers
3
(
8
)
(
27
)
of which: Private clients with mortgages
(
12
)
(
18
)
of which: Real estate financing
of which: Large corporate clients
(
11
)
of which: SME clients
(
6
)
(
10
)
(
9
)
of which: Other
(
15
)
(
12
)
(
8
)
(
8
)
(
8
)
(
3
)
(
1
)
(
6
)
Model changes
4
Movements with profit or loss impact
5
(
29
)
(
49
)
Movements without profit or loss impact (write-off, FX and other)
6
Balance as of 31 December 2022
(
1,091
)
(
260
)
(
267
)
(
564
)
1 Represents the
increase and decrease
in allowances
and provisions resulting
from financial instruments
(including guarantees
and facilities) that
were newly originated,
purchased or renewed
and from the
final
derecognition of loans or facilities on
their maturity date or earlier.
2 Represents the remeasurement between 12-month and lifetime
ECL due to stage transfers.
3 Represents the change in allowances and provisions
related to
changes in
model inputs
or assumptions,
including changes
in forward-looking
macroeconomic
conditions,
changes in
the exposure
profile,
PD and
LGD changes,
and unwinding
of the
time value.
4 Represents the change in the allowances and provisions related to changes in models and methodologies.
5 Includes ECL movements from new and derecognized transactions, remeasurement changes, and model
and methodology changes.
6 Represents the decrease in allowances
and provisions resulting from write-offs
of the ECL allowance against
the gross carrying amount when all
or part of a financial asset
is deemed
uncollectible or forgiven and movements in foreign exchange rates.
As explained in Note 1a, the assessment of a significant increase in credit risk (an
SICR) considers a number of qualitative
and quantitative
factors to
determine whether
a stage
transfer between
stage 1 and
stage 2 is
required, although
the
primary assessment considers changes in PD based on rating analyses and economic
outlook. Additionally, UBS AG takes
into consideration
counterparties
that have
moved to
a credit
watch list
and those
with payments
that are
at least
30
days past due.
ECL stage 2 (“significant deterioration
in credit risk”) allowances / provisions as of 31 December
2023 – classification by trigger
USD m
Stage 2
of which:
PD layer
of which:
watch list
of which:
≥30 days
past due
On- and off-balance sheet
(
272
)
(
197
)
(
23
)
(
53
)
of which: Private clients with mortgages
(
89
)
(
69
)
(
21
)
of which: Real estate financing
(
26
)
(
21
)
(
5
)
of which: Large corporate clients
(
66
)
(
48
)
(
15
)
(
2
)
of which: SME clients
(
38
)
(
23
)
(
5
)
(
9
)
of which: Financial intermediaries and hedge funds
(
4
)
(
4
)
of which: Loans to financial advisors
(
1
)
(
1
)
of which: Credit cards
(
13
)
(
13
)
of which: Other
(
33
)
(
31
)
(
2
)
(
1
)
d) Maximum exposure to credit risk
The tables
below provide UBS AG’s
maximum exposure to
credit risk for
financial instruments subject
to ECL
requirements
and
the
respective
collateral
and
other
credit
enhancements
mitigating
credit
risk
for
these
classes
of
financial
instruments.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
188
Note 19
Expected credit loss measurement (continued)
The maximum exposure
to credit risk
includes the carrying
amounts of financial
instruments recognized on
the balance
sheet subject to credit risk
and the notional amounts for off-balance sheet
arrangements. Where information is available,
collateral is presented at fair
value. For other collateral, such as
real estate, a reasonable alternative
value is used. Credit
enhancements,
such
as
credit
derivative
contracts
and
guarantees,
are
included
at
their
notional
amounts.
Both
are
capped at
the maximum
exposure to
credit risk
for which
they serve
as security.
The “Risk
management
and control”
section of this
report describes
management’s view
of credit
risk and the
related exposures,
which can differ
in certain
respects from the requirements of IFRS Accounting Standards.
Maximum exposure to credit risk
31.12.23
Collateral
1,2
Credit enhancements
1
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Maximum
exposure to
credit risk
Cash
collateral
received
Collateralized
by equity and
debt
instruments
Secured by
real estate
Other
collateral
3
Netting
Credit
derivative
contracts
Guarantees
and sub-
participations
Financial assets measured at
amortized cost on the balance sheet
Cash and balances at central banks
Amounts due from banks
4
Receivables from securities financing transactions
measured at amortized cost
Cash collateral receivables on derivative instruments
5,6
Loans and advances to customers
Other financial assets measured at amortized cost
Total financial assets measured at amortized cost
Financial assets measured at fair value
through other comprehensive income – debt
Total maximum exposure to credit risk
reflected on the balance sheet within the scope of ECL
Guarantees
7
Irrevocable loan commitments
Forward starting reverse repurchase and securities
borrowing agreements
Committed unconditionally revocable credit lines
Total maximum exposure to credit risk not
reflected on the balance sheet within the scope of ECL
31.12.22
Collateral
1,2
Credit enhancements
1
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Maximum
exposure to
credit risk
Cash
collateral
received
Collateralized
by equity and
debt
instruments
Secured by
real estate
Other
collateral
3
Netting
Credit
derivative
contracts
Guarantees
and sub-
participations
Financial assets measured at
amortized cost on the balance sheet
Cash and balances at central banks
Amounts due from banks
4
Receivables from securities financing transactions
measured at amortized cost
Cash collateral receivables on derivative instruments
5,6
Loans and advances to customers
Other financial assets measured at amortized cost
Total financial assets measured at amortized cost
Financial assets measured at fair value
through other comprehensive income – debt
Total maximum exposure to credit risk
reflected on the balance sheet within the scope of ECL
Guarantees
7
Irrevocable loan commitments
Forward starting reverse repurchase and securities
borrowing agreements
Committed unconditionally revocable credit lines
Total maximum exposure to credit risk not
reflected on the balance sheet within the scope of ECL
1 Of which: USD
m for 31 December 2023
(31 December 2022: USD
m) relates to total credit-impaired
financial assets measured at amortized
cost and USD
m for 31 December 2023
(31 December
2022: USD
m) to total off-balance sheet financial instruments and
credit lines for credit-impaired positions.
2 Collateral arrangements generally incorporate
a range of collateral, including cash, equity
and debt
instruments, real estate and
other collateral. For
the purpose of this
disclosure, UBS AG
applies a risk-based
approach that generally prioritizes
collateral according to its
liquidity profile. In the
case of loan facilities
with funded and unfunded elements, the
collateral is first allocated to the funded element.
3 Includes but is not limited to life insurance contracts,
rights in respect of subscription or capital commitments from fund
partners, inventory, mortgage loans, gold
and other commodities.
4 Amounts due from banks include amounts held with third-party banks on behalf of clients.
The credit risk associated with these balances may be
borne by those clients.
5 Included within Cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. Some of these margin balances reflect amounts transferred
on behalf of clients who retain the associated credit risk.
6 The amount shown in the “Netting” column represents
the netting potential not recognized on the balance sheet. Refer to
Note 21 for more information.
7 Guarantees collateralized by equity and debt instruments include certain overnight repurchase and
reverse repurchase transactions where UBS acts as a sponsoring member for eligible clients when
clearing through
the Fixed Income Clearing Corporation
(FICC). As part of
this arrangement, UBS guarantees
FICC for prompt and
full payment and performance
of the clients‘ respective
obligations under the FICC rules.
The Group
minimizes its liability under
these guarantees by obtaining
a security interest in
the cash or high-quality
securities collateral that the
clients place with the
clearing house; therefore,
the risk of loss
is expected to be
remote.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
189
Note 19
Expected credit loss measurement (continued)
e) Financial assets subject to credit risk by rating category
The table
below shows
the
credit quality
and the
maximum exposure
to credit
risk based
on
UBS AG’s internal
credit
rating system and
year-end stage
classification. Under
IFRS 9, the
credit risk
rating reflects
UBS AG’s assessment
of the
probability of default of individual counterparties,
prior to substitutions. The amounts presented are gross of impairment
allowances.
›
Refer to the “Risk management and control” section of this
report for more details regarding UBS AG’s internal grading system
Financial assets subject to credit risk by rating
category
USD m
31.12.23
Rating category
1
0–1
2–3
4–5
6–8
9–13
Credit-
impaired
(defaulted)
Total gross
carrying
amount
ECL
allowances
Net carrying
amount
(maximum
exposure to
credit risk)
Financial assets measured at amortized cost
Cash and balances at central banks
(
26
)
of which: stage 1
of which: stage 2
(
26
)
Amounts due from banks
(
7
)
of which: stage 1
(
6
)
of which: stage 2
(
1
)
of which: stage 3
Receivables from securities financing transactions
(
2
)
of which: stage 1
(
2
)
Cash collateral receivables on derivative instruments
of which: stage 1
Loans and advances to customers
(
935
)
of which: stage 1
(
173
)
of which: stage 2
(
185
)
of which: stage 3
(
577
)
Other financial assets measured at amortized cost
(
87
)
of which: stage 1
(
16
)
of which: stage 2
(
5
)
of which: stage 3
(
66
)
Total financial assets measured at amortized cost
(
1,057
)
On-balance sheet financial instruments
Financial assets measured at FVOCI – debt instruments
Total on-balance sheet financial instruments
(
1,057
)
1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in the “Risk management and
control” section of this report for more information on rating categories.
Off-balance sheet positions subject to expected
credit loss by rating category
USD m
31.12.23
Rating category
1
0–1
2–3
4–5
6–8
9–13
Credit-
impaired
(defaulted)
Total off-
balance sheet
exposure
(maximum
exposure to
credit risk)
ECL provision
Off-balance sheet financial instruments
Guarantees
(
40
)
of which: stage 1
(
14
)
of which: stage 2
(
7
)
of which: stage 3
(
19
)
Irrevocable loan commitments
(
95
)
of which: stage 1
(
55
)
of which: stage 2
(
38
)
of which: stage 3
(
2
)
Forward starting reverse repurchase and securities borrowing agreements
Total off-balance sheet financial instruments
(
134
)
Credit lines
Committed unconditionally revocable credit lines
(
49
)
of which: stage 1
(
39
)
of which: stage 2
(
10
)
of which: stage 3
Irrevocable committed prolongation of existing loans
(
4
)
of which: stage 1
(
3
)
of which: stage 2
of which: stage 3
Total credit lines
(
53
)
1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in the “Risk management
and control” section of this report for more information on rating categories.
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Note 19
Expected credit loss measurement (continued)
Financial assets subject to credit risk by rating
category
USD m
31.12.22
Rating category
1
0–1
2–3
4–5
6–8
9–13
Credit-
impaired
(defaulted)
Total gross
carrying
amount
ECL
allowances
Net carrying
amount
(maximum
exposure to
credit risk)
Financial assets measured at amortized cost
Cash and balances at central banks
(
12
)
of which: stage 1
of which: stage 2
(
12
)
Amounts due from banks
(
6
)
of which: stage 1
(
5
)
of which: stage 2
(
1
)
of which: stage 3
Receivables from securities financing transactions
measured at amortized cost
(
2
)
of which: stage 1
(
2
)
Cash collateral receivables on derivative instruments
of which: stage 1
Loans and advances to customers
(
783
)
of which: stage 1
(
129
)
of which: stage 2
(
180
)
of which: stage 3
(
474
)
Other financial assets measured at amortized cost
(
86
)
of which: stage 1
(
17
)
of which: stage 2
(
6
)
of which: stage 3
(
63
)
Total financial assets measured at amortized cost
(
890
)
On-balance sheet financial instruments
Financial assets measured at FVOCI – debt instruments
Total on-balance sheet financial instruments
(
890
)
1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in the “Risk management and
control” section of this report for more information on rating categories.
Off-balance sheet positions subject to expected
credit loss by rating category
USD m
31.12.22
Rating category
1
0–1
2–3
4–5
6–8
9–13
Credit-
impaired
(defaulted)
Total off-
balance sheet
exposure
(maximum
exposure to
credit risk)
ECL provisions
Off-balance sheet financial instruments
Guarantees
(
48
)
of which: stage 1
(
13
)
of which: stage 2
(
9
)
of which: stage 3
(
26
)
Irrevocable loan commitments
(
111
)
of which: stage 1
(
59
)
of which: stage 2
(
52
)
of which: stage 3
Forward starting reverse repurchase and securities borrowing agreements
Total off-balance sheet financial instruments
(
159
)
Credit lines
Committed unconditionally revocable credit lines
(
40
)
of which: stage 1
(
32
)
of which: stage 2
(
8
)
of which: stage 3
Irrevocable committed prolongation of existing loans
(
2
)
of which: stage 1
(
2
)
of which: stage 2
of which: stage 3
Total credit lines
(
42
)
1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in the “Risk management and
control” section of this report for more information on rating categories.
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Note 19
Expected credit loss measurement (continued)
f) Sensitivity information
As outlined in Note 1a, ECL estimates involve significant uncertainties
at the time they are made.
ECL models
The models applied to determine point-in-time PD and LGD rely on market and statistical data, which has been found
to
correlate
well
with
historically
observed
defaults
in sufficiently
homogeneous
segments.
The risk
sensitivities
for
each of the ECL reporting segments to such factors are summarized
in Note 9.
Sustainability and climate risk
Sustainability
and
climate
risk
may
negatively
affect
clients
or
portfolios
due
to
direct
or
indirect
transition
costs,
or
exposure to physical risks in locations likely to be impacted
by climate change. Such effects could lead to a deterioration
in credit
worthiness, which
in turn
would have
an impact
on ECLs.
While some
macroeconomic indicators
used in
the
current PD models could be
influenced by climate change, UBS
currently does not use a specific
sustainability and climate
risk scenario in addition
to the typically four
general economic scenarios applied to
derive the weighted-average ECL. The
rationale
for
the
approach
at
this
point
in
time
is
the
significance
of
model
risks
and
challenges
in
calibration
and
probability weight assessment given the paucity of
data.
Instead, UBS AG focuses
on the process
of vetting clients
and business transactions
and takes individual
actions, where
transition risk is deemed to
be a significant driver of
a counterparty’s credit worthiness.
This review process may
lead to
a downward revision of the counterparty
’s credit rating, or the adoption of
risk mitigating actions, and hence
affect the
individual contribution to ECLs.
At the
portfolio
level,
UBS
has started
to
use
stress
loss assumptions
to assess
the
extent
to which
sustainability
and
climate risk may
affect the quality
of the loans
extended to
small and medium-sized
enterprises, large corporate
clients
and financial institutions. Initial tests were based on a set of assumptions presented by external parties (such as the Bank
of England), and complemented by internally derived climate pathway scenarios. Such analysis undertaken during 2022,
and reassessed during 2023, concluded that the counterparties are not expected to be significantly impacted by physical
or transition risks,
mainly as
there are no
material risk concentrations
in high-risk
sectors. The analysis
of the corporate
loan book has also shown
that any potential significant
impacts from transition costs
or physical risks would
materialize
over
a
time
horizon
that
exceeds
in
most
cases
the
contractual
lifetime
of
the
underlying
assets.
Based
on
current
information
on regulatory
developments,
this
would
also apply
to the
portfolio
of
private clients’
mortgages
and real
estate financing, given the long lead times for investments
in upgrading the housing stock.
As a result of the aforementioned factors, it was assessed that the magnitude of any impact of sustainability and climate
risk on
the weighted
-average
ECL would
not be
material
as of
31 December
2023. Therefore,
no specific
post-model
adjustment was made in this regard.
›
Refer to “UBS AG consolidated supplemental disclosures
required under SEC regulations” for the maturity profile of UBS AG’s
core loan book
Forward-looking scenarios
Depending on
the scenario
selection and
related
macroeconomic
assumptions for
the risk
factors, the
components of
the
relevant
weighted-average
ECL
change.
This
is
particularly
relevant
for
interest
rates,
which
can
move
in
both
directions under
a given
growth assumption
,
e.g., low
growth with
high interest
rates in
a stagflation
scenario, versus
low growth and falling
interest rates
in a recession. Management
generally looks for scenario
narratives that reflect
the
key risk drivers of a given credit portfolio.
As forecasting
models are complex,
due to
the combination of
multiple factors, simple
what-if analyses involving
a change
of individual parameters
do not necessarily provide
realistic information on
the exposure of
segments to changes
in the
macroeconomy.
Portfolio-specific
analyses
based
on
their
key
risk
factors
would
also
not
be
meaningful,
as
potential
compensatory effects in other
segments would be ignored. The table
below indicates some sensitivities to ECLs,
if a key
macroeconomic
variable
for
the
forecasting
period
is
amended
across
all
scenarios
with
all
other
factors
remaining
unchanged.
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Note 19
Expected credit loss measurement (continued)
Potential effect on stage 1 and stage 2 positions
from changing key parameters as of 31 December
2023
USD m
100% Baseline
100%
Stagflationary
geopolitical crisis
100% Mild Debt
Crisis
Weighted average
Change in key parameters
Fixed income: Government bonds (absolute change)
–0.50%
(
3
)
(
104
)
(
3
)
(
14
)
+0.50%
+1.00%
Unemployment rate (absolute change)
–1.00%
(
4
)
(
142
)
(
6
)
(
20
)
–0.50%
(
2
)
(
76
)
(
3
)
(
11
)
+0.50%
+1.00%
Real GDP growth (relative change)
–2.00%
–1.00%
+1.00%
(
3
)
(
12
)
(
6
)
(
6
)
+2.00%
(
5
)
(
22
)
(
7
)
(
10
)
House Price Index (relative change)
–5.00%
–2.50%
+2.50%
(
7
)
(
76
)
(
9
)
(
18
)
+5.00%
(
11
)
(
149
)
(
19
)
(
34
)
Equity (S&P500, EuroStoxx, SMI) (relative change)
–10.00%
–5.00%
+5.00%
(
2
)
(
5
)
(
3
)
(
2
)
+10.00%
(
3
)
(
8
)
(
5
)
(
4
)
Sensitivities
can
be
more
meaningfully
assessed
in
the
context
of
coherent
scenarios
with
consistently
developed
macroeconomic
factors.
The
table
above
outlines
favorable
and
unfavorable
effects,
based
on
reasonably
possible
alternative changes
to the
economic conditions for
stage 1 and
stage 2 positions.
The ECL
impact is
calculated for
material
portfolios and disclosed for each scenario.
The forecasting horizon is limited to three years, with a model-based mean reversion of PD and LGD assumed thereafter.
Changes to these timelines may have an effect on ECLs:
depending on the cycle, a longer or shorter forecasting
horizon
will lead to different annualized lifetime PD and average LGD estimations. This is currently not deemed to be
material for
UBS, as a large
proportion of loans,
including mortgages in
Switzerland, have maturities
that are within the
forecasting
horizon.
Scenario weights and stage allocation
Potential effect on stage 1 and stage 2 positions
from changing scenario weights or moving
to an ECL lifetime calculation as of 31 December
2023
Actual ECL
allowances and
provisions,
including staging
(as per Note 9)
Pro forma ECL
allowances and
provisions,
assuming all
positions being
subject to lifetime
ECL
Scenarios
Weighted average
100% Baseline
100% Asset price
inflation
100%
Stagflationary
geopolitical crisis
100% Mild debt
crisis
Weighted average
USD m, except where indicated
Segmentation
Private clients with mortgages
(
133
)
(
43
)
(
10
)
(
521
)
(
63
)
(
368
)
Real estate financing
(
52
)
(
34
)
(
21
)
(
200
)
(
36
)
(
125
)
Large corporate clients
(
152
)
(
108
)
(
53
)
(
252
)
(
146
)
(
234
)
SME clients
(
103
)
(
85
)
(
57
)
(
186
)
(
96
)
(
164
)
Other segments
(
140
)
(
126
)
(
78
)
(
162
)
(
151
)
(
302
)
Total
(
580
)
(
396
)
(
219
)
(
1,322
)
(
492
)
(
1,193
)
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Note 19
Expected credit loss measurement (continued)
Potential effect on stage 1 and stage 2 positions
from changing scenario weights or moving
to an ECL lifetime calculation as of 31 December
2022
Actual ECL
allowances and
provisions,
including staging
(as per Note 9)
Pro forma ECL
allowances and
provisions,
assuming all
positions being
subject to lifetime
ECL
Scenarios
Weighted average
100% Baseline
100% Asset price
inflation
100%
Stagflationary
geopolitical crisis
100% Global crisis
Weighted average
USD m, except where indicated
Segmentation
Private clients with mortgages
(
136
)
(
25
)
(
13
)
(
523
)
(
184
)
(
473
)
Real estate financing
(
43
)
(
26
)
(
22
)
(
176
)
(
30
)
(
126
)
Large corporate clients
(
136
)
(
97
)
(
84
)
(
199
)
(
174
)
(
235
)
SME clients
(
86
)
(
67
)
(
66
)
(
162
)
(
97
)
(
153
)
Other segments
(
125
)
(
114
)
(
111
)
(
145
)
(
153
)
(
281
)
Total
(
526
)
(
329
)
(
295
)
(
1,204
)
(
638
)
(
1,267
)
Scenario weights
ECL is sensitive to changing scenario weights, in particular if narratives and parameters are
selected that are not close to
the baseline scenario, highlighting the non-linearity of credit
losses.
As shown
in the
table
above,
the
ECLs for
stage 1
and stage
2 positions
would
have
been
USD
m (31
December
2022:
USD
m)
instead
of
USD
m (31
December
2022:
USD
m)
if ECLs
had
been
determined
solely
on the
baseline scenario
. The weighted-average ECL therefore amounted
to
% (31 December 2022:
%) of the baseline
value. The effects of weighting each of the four scenarios 100%
are shown in the table above.
Stage allocation and SICR
The determination of
what constitutes an
SICR is based
on management judgment,
as explained in
Note 1a. Changing
the SICR trigger will have a direct effect on ECLs, as more or
fewer positions would be subject to lifetime ECLs under any
scenario.
The
relevance
of the
SICR trigger
on overall
ECL is
demonstrated
in the
table
above
with the
indication that
the
ECL
allowances and provisions for stage 1 and stage
2 positions would have been USD
m, if all non-impaired positions
across the portfolio
had been measured for
lifetime ECLs irrespective
of their actual
SICR status. This amount
compares
with actual stage 1 and 2 allowances and provisions of USD
m as of 31 December 2023.
Maturity profile
The maturity
profile is
an important
driver in
ECLs, in
particular for
transactions in
stage 2.
A transfer
of a
transaction
into stage
2 may
therefore have a
significant effect on
ECLs. The
current maturity profile
of most
lending books
is relatively
short.
Lending to
large corporate
clients is
generally between
one and
two years,
with related
loan commitments
up to
four
years. Real estate lending is generally between two and three years in Switzerland, with long-dated maturities in the US.
Lombard-lending
contracts
typically
have
average
contractual
maturities
of
12
months
or
less,
and
include
callable
features.
A
significant
portion
of
our
lending
to
SMEs
and
Real
estate
financings
is
documented
under
multi-purpose
credit
agreements, which
allow for
various forms
of utilization
but are
unconditionally cancelable
by UBS
at any
time: (i) for
drawings under such agreements with a fixed
maturity, the respective term is applied for ECL
calculations, or a maximum
of 12 months in stage
1; (ii) for unused credit lines and all drawings that
have no fixed maturity (e.g., current accounts),
UBS generally applies a 12-month maturity from the reporting date, given the credit review policies, which require either
continuous monitoring of key indicators and behavioral patterns for smaller positions or an annual formal review for any
other limit. The ECLs for these products are sensitive
to shortening or extending the maturity assumption.
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Note 20
Fair value measurement
a) Valuation principles
All financial and non-financial
assets and liabilities
measured or disclosed
at fair value
are categorized into
one of three
fair
value
hierarchy
levels
in
accordance
with
IFRS
Accounting
Standards.
The
fair
value
hierarchy
is
based
on
the
transparency
of inputs
to the
valuation of
an asset
or liability
as of
the measurement
date. In
certain cases,
the inputs
used to measure fair value may fall within different
levels of the fair value hierarchy.
For disclosure purposes, the level in
the hierarchy within which an instrument is classified in its entirety is based on the lowest level input
that is significant to
the position’s fair value measurement:
–
Level 1 – quoted prices (unadjusted) in active markets
for identical assets and liabilities;
–
Level 2 – valuation techniques for which all significant inputs
are, or are based on, observable market data;
or
–
Level 3 – valuation techniques for which significant inputs
are not based on observable market data.
Fair values are determined using quoted
prices in active markets for
identical assets or liabilities, where available.
Where
the
market
for
a
financial
instrument
or
non-financial
asset
or
liability
is
not
active,
fair
value
is
established
using
a
valuation
technique,
including
pricing
models.
Valuation
adjustments
may
be
made
to
allow
for
additional
factors,
including model, liquidity, credit
and funding risks, which are
not explicitly captured within
the valuation technique, but
which would nevertheless
be considered by
market participants
when establishing a
price. The limitations
inherent in a
particular valuation technique
are considered in
the determination of
the classification of
an asset or
liability within the
fair value
hierarchy. Generally,
the unit
of account
for a
financial instrument
is the
individual instrument,
and UBS
AG
applies valuation adjustments
at an individual instrument
level, consistent with that
unit of account. However,
if certain
conditions are met, UBS AG
may estimate the fair value
of a portfolio of financial
assets and liabilities with substantially
similar and offsetting risk exposures on the basis of the
net open risks.
›
Refer to Note 20d for more information
b) Valuation governance
UBS AG’s fair value
measurement and
model governance
framework includes numerous
controls and
other procedural
safeguards that
are intended
to maximize
the quality
of fair
value measurements
reported
in the
financial statements.
New products and
valuation techniques
must be reviewed
and approved
by key stakeholders
from the
risk and finance
control functions. Responsibility
for the ongoing measurement
of financial and non-financial
instruments at fair value
is
with the business divisions.
Fair
value
estimates
are
validated
by
the
risk
and
finance
control
functions,
which
are
independent
of
the
business
divisions. Independent price verification is performed by Finance through benchmarking the business divisions’ fair
value
estimates
with
observable
market
prices
and
other
independent
sources.
A
governance
framework
and
associated
controls are
in place
in order
to monitor
the quality
of third-party
pricing sources
where
used. For
instruments
where
valuation models are used to
determine fair value, independent
valuation and model control
groups within Finance and
Risk Control
evaluate UBS AG’s
models on
a regular
basis, including
valuation and
model input
parameters, as
well as
pricing. As
a result
of the
valuation controls
employed,
valuation adjustments
may be
made to
the business
divisions’
estimates of fair value to align with independent market
data and the relevant accounting standard.
›
Refer to Note 20d for more information
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Note 20
Fair value measurement (continued)
c) Fair value hierarchy
The table
below provides the
fair value
hierarchy classification of
financial and non-financial
assets and
liabilities measured
at
fair
value.
The
narrative
that
follows
describes
valuation
techniques
used
in
measuring
their
fair
value
of
different
product types
(including significant
valuation inputs
and assumptions
used) and
the factors
considered in
determining
their classification within the fair value hierarchy.
During 2023, assets and liabilities that were transferred from Level 2 to
Level 1, or from Level 1 to Level
2, and were held
for the entire reporting
period were not
material. In the fourth
quarter of 2023,
UBS AG has prospectively
amended its
approach to testing for observability as part of
an accounting methodology alignment following the acquisition of Credit
Suisse. This methodological change enhances
UBS AG’s assessment of
sensitivities to unobservable valuation parameters.
Application of the new methodology as of 31 December 2022 would have resulted in USD
bn lower Level 3 liabilities
(as of 31 December 2023 the balance of affected liabilities in Level 3 was USD
bn), with an offsetting impact to Level
2 liabilities.
Determination of fair values from quoted market
prices or valuation techniques
1
31.12.23
31.12.22
USD m
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial assets measured at fair value on a recurring basis
Financial assets at fair value held for trading
of which: Equity instruments
of which: Government bills / bonds
of which: Investment fund units
of which: Corporate and municipal bonds
of which: Loans
of which: Asset-backed securities
Derivative financial instruments
of which: Foreign exchange
of which: Interest rate
of which: Equity / index
of which: Credit
of which: Commodities
Brokerage receivables
Financial assets at fair value not held for trading
of which: Financial assets for unit-linked investment contracts
of which: Corporate and municipal bonds
of which: Government bills / bonds
of which: Loans
of which: Securities financing transactions
of which: Auction rate securities
of which: Investment fund units
of which: Equity instruments
Financial assets measured at fair value through other comprehensive income on
a recurring basis
Financial assets measured at fair value through other comprehensive
income
of which: Commercial paper and certificates of deposit
of which: Corporate and municipal bonds
Non-financial assets measured at fair value on a recurring basis
Precious metals and other physical commodities
Non-financial assets measured at fair value on a non-recurring basis
Other non-financial assets
2
Total assets measured at fair value
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Note 20
Fair value measurement (continued)
Determination of fair values from quoted market
prices or valuation techniques (continued)
1
31.12.23
31.12.22
USD m
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial liabilities measured at fair value on a recurring basis
Financial liabilities at fair value held for trading
of which: Equity instruments
of which: Corporate and municipal bonds
of which: Government bills / bonds
of which: Investment fund units
Derivative financial instruments
of which: Foreign exchange
of which: Interest rate
of which: Equity / index
of which: Credit
of which: Commodities
Financial liabilities designated at fair value on a recurring basis
Brokerage payables designated at fair value
Debt issued designated at fair value
Other financial liabilities designated at fair value
of which: Financial liabilities related to unit-linked investment contracts
of which: Securities financing transactions
of which: Funding from UBS Group AG
of which: Over-the-counter debt instruments and other
Total liabilities measured at fair value
1 Bifurcated embedded derivatives are presented on the same balance sheet lines
as their host contracts and are not included in this table. The fair value of these derivatives was not
material for the periods presented.
2 Other non-financial assets primarily consist of properties and other non-current assets held for sale, which are measured at the
lower of their net carrying amount or fair value less costs to sell.
Valuation techniques
UBS AG
uses
widely
recognized
valuation
techniques
for
determining
the
fair
value
of
financial
and
non-financial
instruments that are
not actively traded
and quoted. The
most frequently applied
valuation techniques include
discounted
value of expected cash flows, relative value
and option pricing methodologies.
Discounted
value
of
expected
cash
flows
is
a
valuation
technique
that
measures
fair
value
using
estimated
expected
future cash flows from
assets or liabilities and
then discounts these
cash flows using a
discount rate or discount
margin
that
reflects
the
credit and
/ or
funding spreads
required
by the
market
for
instruments with
similar
risk and
liquidity
profiles to
produce
a present
value. When
using such
valuation
techniques,
expected
future cash
flows are
estimated
using an observed
or implied
market price
for the future
cash flows or
by using
industry-standard cash
flow projection
models.
The
discount
factors
within
the
calculation
are
generated
using
industry-standard
yield
curve
modeling
techniques and models.
Relative
value models
measure fair
value based
on the
market prices
of equivalent
or comparable
assets or
liabilities,
making
adjustments
for differences
between the
characteristics
of the observed
instrument and
the instrument
being valued.
Option
pricing
models
incorporate
assumptions
regarding
the
behavior
of
future
price
movements
of
an
underlying
referenced
asset
or
assets
to
generate
a
probability-weighted
future
expected
payoff
for
the
option.
The
resulting
probability-weighted expected
payoff is
then discounted
using discount
factors generated
from industry-standard
yield
curve modeling
techniques and
models. The
option pricing
model may
be implemented
using a
closed-form analytical
formula or other mathematical techniques (e.g., binomial tree
or Monte Carlo simulation).
Where available, valuation techniques use
market-observable assumptions and inputs. If
such data is not
available, inputs
may be derived
by reference
to similar assets
in active markets,
from recent prices
for comparable
transactions or
from
other observable market data.
In such cases,
the inputs selected are
based on historical
experience and practice for
similar
or analogous
instruments, derivation of
input levels
based on
similar products
with observable price
levels, and
knowledge
of current market conditions and valuation approaches.
For
more
complex
instruments,
fair
values
may
be
estimated
using
a
combination
of
observed
transaction
prices,
consensus pricing services and relevant
quotes. Consideration is given
to the nature of
the quotes (e.g., indicative
or firm)
and the
relationship of recently
evidenced market
activity to
the prices
provided by consensus
pricing services.
UBS AG
also
uses
internally
developed
models,
which
are
typically
based on
valuation
methods
and
techniques
recognized
as
standard within
the industry. Assumptions
and inputs
used in
valuation techniques include
benchmark interest
rate curves,
credit
and
funding
spreads
used
in
estimating
discount
rates,
bond
and
equity
prices,
equity
index
prices,
foreign
exchange rates, levels
of market volatility
and correlation. Refer
to Note 20e
for more information.
The discount curves
used by UBS AG incorporate the funding and credit characteristics
of the instruments to which they are applied.
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Note 20
Fair value measurement (continued)
Financial instruments excluding derivatives: valuation and classification in the fair value hierarchy
Product
Valuation and classification in the fair value hierarchy
Government bills
and bonds
Valuation
–
Generally valued using prices obtained directly
from the market.
–
Instruments not priced directly using active-market data are valued using discounted cash flow valuation
techniques that incorporate market data
for similar government instruments.
Fair value
hierarchy
–
Generally traded in active markets with prices that can be obtained directly from these markets,
resulting
in classification as Level 1, while the remaining
positions are classified as Level 2 and Level
3.
Corporate and
municipal bonds
Valuation
–
Generally
valued
using
prices
obtained
directly from
the
market
for
the
security,
or
similar
securities,
adjusted for seniority, maturity and liquidity.
–
When prices are
not available, instruments
are valued
using discounted cash
flow valuation techniques
incorporating the credit spread of the
issuer or similar issuers.
–
For convertible
bonds without
directly comparable
prices, issuances
may be
priced using
a convertible
bond model.
Fair value
hierarchy
–
Generally classified as Level 1 or Level 2, depending
on the depth of trading activity behind price
sources.
–
Level 3 instruments have no suitable pricing information
available.
Traded loans and
loans measured at
fair value
Valuation
–
Valued directly
using market
prices that
reflect recent
transactions or
quoted dealer
prices, where
available.
–
Where no
market price data
is available,
loans are
valued by relative
value benchmarking using
pricing
derived from debt instruments in comparable entities
or different products in the same entity,
or by using
a credit default swap
valuation technique, which requires inputs
for credit spreads, credit
recovery rates
and interest
rates. Recently originated
commercial real estate
loans are
measured using a
securitization
approach based on rating agency guidelines.
Fair value
hierarchy
–
Instruments with suitably deep and liquid pricing
information are classified as Level 2.
–
Positions requiring the
use of valuation
techniques, or for
which the price
sources have insufficient
trading
depth, are classified as Level 3.
Investment fund
units
Valuation
–
Predominantly exchange-traded,
with
readily available
quoted
prices
in
liquid
markets. Where
market
prices are not available, fair value may be measured
using net asset values (NAVs).
Fair value
hierarchy
–
Listed units
are classified
as Level 1,
provided there
is sufficient
trading activity
to justify
active-market
classification, while other positions are classified
as Level 2.
–
Positions for
which NAVs are
not available,
or where the
unit or
underlying investments are
illiquid are
classified as Level 3.
Asset-backed
securities (ABS)
Valuation
–
For liquid securities, the
valuation process will
use trade and price
data, updated for movements
in market
levels between the time of trading and the time of valuation. Less liquid instruments are measured using
discounted expected
cash flows
incorporating price
data for
instruments or
indices with
similar risk
profiles.
Fair value
hierarchy
–
Residential
mortgage-backed
securities,
commercial
mortgage-backed
securities
and
other
ABS
are
generally classified as
Level 2. However, if
significant inputs are
unobservable, or if market
or fundamental
data is not available, they are classified as Level
3.
Auction rate
securities (ARS)
Valuation
–
ARS
are
valued
utilizing
a
discounted
cash
flow
methodology.
The
model
captures
interest
rate
risk
emanating from the note coupon, credit risk attributable to the underlying closed-end fund investments,
liquidity risk as a function of the level of trading volume in these
positions, and extension risk, as ARS are
perpetual instruments that require an assumption
regarding their maturity or issuer redemption
date.
Fair value
hierarchy
–
Granular and liquid pricing information is generally not available for ARS. As a result, these securities are
classified as Level 3.
Equity instruments
Valuation
–
Listed equity instruments are generally valued
using prices obtained directly from the market.
–
Unlisted equity holdings, including private
equity positions, are initially
marked at their transaction price
and are
revalued when reliable
evidence of
price movement becomes
available or
when the
position is
deemed to be impaired.
Fair value
hierarchy
–
The majority of
equity securities are
actively traded on
public stock exchanges
where quoted prices
are
readily and regularly available, resulting in Level
1 classification.
–
Equity securities less actively traded will be
classified as Level 2 and illiquid positions
as Level 3.
Financial assets for
unit-linked
investment
contracts
Valuation
–
The majority of assets are listed on exchanges
and fair values are determined using quoted
prices.
Fair value
hierarchy
–
Most assets are classified as Level 1 if actively traded,
or Level 2 if trading is not active.
–
Instruments for which prices are not readily available
are classified as Level 3.
Securities
financing
transactions
Valuation
–
These instruments are valued using discounted expected cash flow techniques. The discount rate applied
is based on funding curves that are relevant
to the collateral eligibility terms.
Fair value
hierarchy
–
Collateral funding curves for these
instruments are generally observable and, as
a result, these positions
are classified as Level 2.
–
Where the
collateral terms
are non-standard,
the funding
curve may
be considered
unobservable and
these
positions are classified as Level 3.
Brokerage
receivables and
payables
Valuation
–
Fair value is determined based on the value of
the underlying balances.
Fair value
hierarchy
–
Due to their on-demand nature, these receivables
and payables are deemed as Level 2.
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Note 20
Fair value measurement (continued)
Product
Valuation and classification in the fair value hierarchy
Financial liabilities
related to unit-
linked investment
contracts
Valuation
–
The fair
values of
investment contract
liabilities are
determined by
reference to
the fair
value of
the
corresponding assets.
Fair value
hierarchy
–
The
liabilities themselves
are
not actively
traded, but
are
mainly referenced
to
instruments that
are
actively traded and are therefore classified
as Level 2.
Precious metals and
other physical
commodities
Valuation
–
Physical assets are valued using the spot rate
observed in the relevant market.
Fair value
hierarchy
–
Generally traded
in active
markets with
prices that
can be
obtained directly
from these
markets, resulting
in classification as Level 1.
Debt issued
designated at fair
value
Valuation
–
The risk management and the valuation approaches for these instruments are closely aligned with the
equivalent
derivatives
business
and
the
underlying risk,
and
the
valuation
techniques used
for
this
component are the same as the relevant valuation
techniques described below.
Fair value
hierarchy
–
The observability is closely aligned with the equivalent
derivatives business and the underlying risk.
Commercial paper
and certificates of
deposit
Valuation
–
Generally valued using
discounted cash flow
valuation techniques
incorporating the
spread of the
issuer
or similar issuers over the underlying currency
risk-free curve.
Fair value
hierarchy
–
Due to the short-dated nature of
the positions and liquid underlying pricing inputs, they are generally
classified as Level 2.
Derivative instruments: valuation and classification
in the fair value hierarchy
The curves used
for discounting expected cash
flows in the
valuation of collateralized
derivatives reflect the funding
terms
associated with the relevant collateral arrangement for the instrument
being valued. These collateral arrangements differ
across
counterparties
with
respect
to
the
eligible
currency
and
interest
terms
of
the
collateral.
The
majority
of
collateralized derivatives are
measured using a discount
curve based on funding rates
derived from overnight interest
in
the cheapest eligible currency for the respective
counterparty collateral agreement.
Uncollateralized and
partially collateralized
derivatives are
discounted using
the alternative
reference rate
(the ARR)
(or
equivalent)
curve
for
the
currency
of the
instrument. As
described
in Note
20d, the
fair
value
of uncollateralized
and
partially collateralized
derivatives
is then
adjusted
by credit
valuation
adjustments
(CVAs),
debit valuation
adjustments
(DVAs) and
funding valuation
adjustments (FVA
s), as
applicable,
to reflect
an estimation
of the
effect
of counterparty
credit risk, UBS AG’s own credit risk, and funding costs
and benefits.
›
Refer to Note 10 for more information about derivative
instruments
Derivative product
Valuation and classification in the fair value hierarchy
Interest rate
contracts
Valuation
–
Interest rate swap contracts
are valued by estimating
future interest cash flows
and discounting those cash
flows using
a rate
that reflects the
appropriate funding rate
for the
position being
measured. The yield
curves used to estimate future index
levels and discount rates are generated using
market-standard yield
curve models using interest rates associated with
current market activity. The key inputs to the models
are
interest rate swap rates, forward rate agreement rates, short-term interest rate futures prices,
basis swap
spreads and inflation swap rates.
–
Interest rate option contracts
are valued using various
market-standard option models, using inputs
that
include interest rate yield curves, inflation curves,
volatilities and correlations.
–
When the maturity
of an interest
rate swap or
option contract exceeds
the term for
which standard market
quotes are observable for
a significant input parameter,
the contracts are valued
by extrapolation from the
last observable point using standard assumptions
or by reference to another observable comparable
input
parameter to represent a suitable proxy for that
portion of the term.
Fair value
hierarchy
–
The majority of interest
rate swaps are classified
as Level 2, as the standard
market contracts that form
the
inputs for yield curve models are generally traded
in active and observable markets.
–
Options are
generally treated
as Level 2,
as the calibration
process enables
the model
output to
be validated
to active-market
levels. Models
calibrated in
this way
are then
used to
revalue the
portfolio of
both standard
options and more exotic products.
–
Interest rate swap
or option contracts
are classified as
Level 3 when the
terms
exceed standard market-
observable quotes.
–
Exotic options for
which appropriate volatility
or correlation input
levels cannot be implied
from observable
market data are classified as Level 3.
Credit derivative
contracts
Valuation
–
Credit derivative
contracts are
valued using
industry-standard models
based primarily
on
market credit
spreads, upfront pricing points and implied recovery rates. Where a derivative credit spread is not directly
available, it may be derived from the price of
the reference cash bond.
–
Asset-backed credit
derivatives are
valued using
a valuation
technique similar
to that
of the
underlying
security with an adjustment to reflect
the funding differences between cash
and synthetic form.
Fair value
hierarchy
–
Single-entity and
portfolio
credit derivative
contracts are
classified as
Level 2
when credit
spreads and
recovery rates
are determined
from actively
traded observable
market data.
Where the
underlying reference
name(s) are not actively traded
and the correlation cannot be
directly mapped to actively traded tranche
instruments, these contracts are classified
as Level 3.
–
Asset-backed
credit
derivatives
follow
the
characteristics
of
the
underlying
security
and
are
therefore
distributed across Level 2 and Level 3.
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Note 20
Fair value measurement (continued)
Derivative product
Valuation and classification in the fair value hierarchy
Foreign exchange
contracts
Valuation
–
Open spot foreign exchange (FX) contracts are
valued using the FX spot rate observed
in the market.
–
Forward FX contracts are valued using the FX spot rate adjusted for forward pricing points observed from
standard market-based sources.
–
Over-the-counter (OTC) FX
option contracts are
valued using
market-standard option valuation
models.
The models used for shorter-dated options (i.e.,
maturities of five years or
less) tend to be different
than
those used for
longer-dated options
because the models
needed for longer-dated
OTC FX contracts
require
additional consideration of interest rate and FX
rate interdependency.
–
The valuation for
multi-dimensional FX
options uses a
multi-local volatility
model, which is
calibrated to the
observed FX volatilities for all relevant FX pairs.
Fair value
hierarchy
–
The
markets
for
FX
spot
and
FX
forward
pricing
points
are
both
actively
traded
and
observable
and
therefore such FX contracts are generally classified
as Level 2.
–
A significant proportion of
OTC FX option contracts are
classified as Level 2 as
inputs are derived mostly
from standard market contracts traded in
active and observable markets.
Equity / index
contracts
Valuation
–
Equity forward
contracts have
a single
stock or
index underlying and
are valued
using market-standard
models. The key inputs to the models are stock
prices, estimated dividend rates and equity funding rates
(which are implied
from prices of
forward contracts observed
in the market).
Estimated cash flows
are then
discounted using market-standard discounted cash flow models using a rate that reflects the appropriate
funding rate for
that portion
of the portfolio.
When no market
data is
available for the
instrument maturity,
they are
valued by
extrapolation of
available data,
use of
historical dividend
data, or
use of
data for
a
related equity.
–
Equity option contracts are valued
using market-standard models
that estimate the equity forward
level as
described
for
equity
forward
contracts
and
incorporate
inputs
for
stock
volatility
and
for
correlation
between
stocks
within
a
basket.
The
probability-weighted expected
option
payoff
generated
is
then
discounted
using
market-standard
discounted
cash
flow
models
applying
a
rate
that
reflects
the
appropriate funding rate
for that portion of
the portfolio. When
volatility, forward or
correlation inputs are
not
available,
they
are
valued
using
extrapolation
of
available
data,
historical
dividend,
correlation
or
volatility data, or the equivalent data for
a related equity.
Fair value
hierarchy
–
As inputs are
derived mostly from standard
market contracts traded in
active and observable
markets, a
significant proportion of equity forward contracts
are classified as Level 2.
–
Equity option positions for which inputs are derived
from standard market contracts traded in active and
observable markets are also classified
as Level 2. Level 3 positions are those
for which volatility, forward or
correlation inputs are not observable.
Commodity
contracts
Valuation
–
Commodity forward
and swap
contracts are
measured using
market-standard models
that use
market
forward levels on standard instruments.
–
Commodity
option
contracts
are
measured
using
market-standard
option
models
that
estimate
the
commodity forward level
as described for
commodity forward and
swap contracts, incorporating
inputs
for the volatility of the underlying
index or commodity. For commodity
options on baskets of commodities
or
bespoke
commodity
indices,
the
valuation
technique
also
incorporates
inputs
for
the
correlation
between different commodities or commodity
indices.
Fair value
hierarchy
–
Individual
commodity contracts
are
typically classified
as
Level 2,
because
active
forward and
volatility
market data is available.
d) Valuation adjustments and other items
The output
of a
valuation technique
is always
an estimate of
a fair
value that
cannot be
measured with complete
certainty.
As a result,
valuations are adjusted where appropriate
and when such
factors would be
considered by market participants
in estimating fair value, to reflect close-out costs, credit exposure, model-driven valuation uncertainty,
funding costs and
benefits, trading restrictions and other factors.
Deferred day-1 profit or loss reserves
For new
transactions where
the valuation
technique used
to measure
fair value
requires
significant inputs
that are
not
based on observable market data, the financial instrument is initially recognized at the transaction price. The transaction
price may differ from the fair value obtained using
a valuation technique, where any such difference
is deferred and not
initially recognized in the income statement.
Deferred day-1 profit or loss
is generally released into
Other net income from financial
instruments measured at fair value
through profit
or loss
the transaction is closed out.
The table below summarizes the changes in deferred day-1
profit or loss reserves during the respective period.
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Note 20
Fair value measurement (continued)
Deferred day-1 profit or loss reserves
USD m
2023
2022
2021
Reserve balance at the beginning of the year
Profit / (loss) deferred on new transactions
(Profit) / loss recognized in the income statement
(
275
)
(
295
)
(
308
)
Foreign currency translation
(
2
)
Reserve balance at the end of the year
Own credit
Own credit risk
is reflected in
the valuation of
UBS AG’s fair value
option liabilities where
this component is considered
relevant for valuation purposes by UBS AG’s counterparties
and other market participants.
Changes in
the fair
value of
financial liabilities
designated at
fair value
through profit
or loss
related to
own credit
are
recognized
in
Other
comprehensive
income
Retained
earnings,
with
no
reclassification
to
the
income
statement
in
future
periods.
statement, as UBS AG does not hedge changes in own credit.
Own credit is estimated using own credit adjustment (OCA) curves, which incorporate observable market data,
including
market-observed secondary prices for UBS’s debt
and debt curves of peers. In the
table below, the change in unrealized
own credit consists of changes in fair value that are attributable to the change in UBS
AG’s credit spreads, as well as the
effect of changes in
fair values attributable
to factors other
than credit spreads,
such as redemptions,
effects from time
decay and
changes in
interest and
other market
rates. Realized
own credit
is recognized
when an
instrument with
an
associated
unrealized
OCA
is
repurchased
prior
to
the
contractual
maturity
date.
Life-to-date
amounts
reflect
the
cumulative unrealized change since initial recognition.
›
Refer to Note 15 for more information about debt
issued designated at fair value
Own credit adjustments on financial liabilities
designated at fair value
Included in Other comprehensive income
For the year ended
USD m
31.12.23
31.12.22
31.12.21
Recognized during the period:
Realized gain / (loss)
(
14
)
Unrealized gain / (loss)
(
869
)
Total gain / (loss), before tax
(
861
)
USD m
31.12.23
31.12.22
31.12.21
Recognized on the balance sheet as of the end of the period:
Unrealized life-to-date gain / (loss)
(
312
)
(
315
)
of which: debt issued designated at fair value
(
208
)
(
144
)
of which: other financial liabilities designated at fair value
(
105
)
(
172
)
Credit valuation adjustments
In
order
to
measure
the
fair
value
of
OTC
derivative
instruments,
including
funded
derivative
instruments
that
are
classified as
Financial assets at
fair value
not held
for trading,
inherent
in
these
instruments.
This
amount
represents
the
estimated
fair
value
of
protection
required
to
hedge
the
counterparty credit risk of
such instruments. A CVA
is determined for each counterparty,
considering all exposures with
that counterparty,
and is dependent on the expected future
value of exposures, default probabilities
and recovery rates,
applicable collateral or netting arrangements, break
clauses, funding spreads, and other contractual
factors.
Funding valuation adjustments
FVAs
reflect
the
costs
and
benefits
of
funding
associated
with
uncollateralized
and
partially
collateralized
derivative
receivables and payables
and are calculated
as the valuation effect
from moving the
discounting of the uncollateralized
derivative cash flows from the ARR to OCA using the CVA
framework, including the probability of counterparty
default.
An FVA is also applied to collateralized
derivative assets in cases where the collateral
cannot be sold or repledged.
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Note 20
Fair value measurement (continued)
Debit valuation adjustments
A DVA is estimated to incorporate own credit in the valuation of derivatives where an FVA is not already recognized. The
DVA calculation
is effectively consistent with
the CVA framework,
being determined for each counterparty,
considering
all exposures
with that
counterparty
and taking
into account
collateral
netting agreements,
expected
future
mark-to-
market movements and UBS AG’s credit default
spreads.
Other valuation adjustments
Instruments that are measured as
part of a
portfolio of combined long
and short positions
are valued at mid-market levels
to ensure consistent valuation
of the long- and
short-component risks. A liquidity
valuation adjustment is then
made to
the overall
net long
or short
exposure to
move the
fair value
to bid
or offer
as appropriate,
reflecting current
levels of
market
liquidity.
The bid–offer
spreads
used in
the calculation
of this
valuation adjustment
are
obtained from
market
transactions and other relevant sources and
are updated periodically.
Uncertainties
associated
with
the
use of
model-based
valuations
are
incorporated
into the
measurement
of fair
value
through the use of model
reserves. These reserves reflect
the amounts that UBS AG estimates
should be deducted from
valuations produced directly
by models to incorporate
uncertainties in the relevant
modeling assumptions, in the
model
and market inputs used,
or in the calibration
of the model output
to adjust for known
model deficiencies. In
arriving at
these
estimates,
UBS AG
considers
a
range
of
market
practices,
including
how
it
believes
market
participants
would
assess these uncertainties. Model reserves
are reassessed periodically in light
of data from market
transactions, consensus
pricing services and other relevant sources.
Balance sheet valuation adjustments
on financial instruments
As of
USD m
31.12.23
31.12.22
Credit valuation adjustments
1
(
37
)
(
33
)
Funding and debit valuation adjustments
(
82
)
(
46
)
Other valuation adjustments
(
730
)
(
839
)
of which: liquidity
(
308
)
(
311
)
of which: model uncertainty
(
423
)
(
529
)
1 Amounts do not include reserves against defaulted counterparties.
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Note 20
Fair value measurement (continued)
e) Level 3 instruments: valuation techniques and inputs
The table below presents
material Level 3 assets
and liabilities, together
with the valuation techniques
used to measure
fair value,
the inputs
used in
a given
valuation technique
that are
considered significant
as of
31 December 2023
and
unobservable, and a range of values for those unobservable inputs.
The range of
values represents the highest-
and lowest-level inputs used
in the valuation
techniques. Therefore, the range
does not reflect the level of uncertainty regarding a particular input or an assessment of the reasonableness of UBS AG’s
estimates and assumptions, but rather the different underlying characteristics of the relevant assets and liabilities held by
UBS AG. The
ranges will
therefore vary
from period
to period
and parameter
to parameter
based on
characteristics of
the instruments held at each balance sheet date. Furthermore, the ranges of unobservable inputs may
differ across other
financial institutions, reflecting the diversity of the products
in each firm’s inventory.
Valuation techniques and inputs used in the fair value measurement
of Level 3 assets and liabilities
Fair value
Significant
unobservable
input(s)
1
Range of inputs
Assets
Liabilities
Valuation
technique(s)
31.12.23
31.12.22
USD bn
31.12.23
31.12.22
31.12.23
31.12.22
low
high
weighted
average
2
low
high
weighted
average
2
unit
1
Financial assets and liabilities at fair value held for trading and Financial assets at fair
value not held for trading
Corporate and municipal
bonds
Relative value to
market comparable
Bond price equivalent
points
Discounted expected
cash flows
Discount margin
basis
points
Traded loans, loans
measured at fair value,
loan commitments and
guarantees
Relative value to
market comparable
Loan price equivalent
points
Discounted expected
cash flows
Credit spread
basis
points
Market comparable
and securitization
model
Credit spread
basis
points
Auction rate securities
Discounted expected
cash flows
Credit spread
basis
points
Investment fund units
3
Relative value to
market comparable
Net asset value
Equity instruments
3
Relative value to
market comparable
Price
Debt issued designated at
fair value
4
Other financial liabilities
designated at fair value
Discounted expected
cash flows
Funding spread
basis
points
Derivative financial instruments
Interest rate
Option model
Volatility of interest
rates
basis
points
Credit
Discounted expected
cash flows
Credit spreads
basis
points
Bond price equivalent
points
Equity / index
Option model
Equity dividend yields
%
Volatility of equity
stocks, equity and
other indices
%
Equity-to-FX
correlation
(
40
)
(
29
)
%
Equity-to-equity
correlation
(
25
)
%
1 The ranges
of significant unobservable inputs
are represented in points,
percentages and basis points.
Points are a percentage
of par (e.g., 100
points would be 100%
of par).
2 Weighted averages are
provided for
most non-derivative financial instruments and were
calculated by weighting inputs based on the fair values
of the respective instruments. Weighted averages
are not provided for inputs related to Other
financial liabilities
designated at fair value and Derivative financial instruments, as this would not be meaningful.
3 The range of inputs is not disclosed, as there is a dispersion of values given the diverse nature of the investments.
4 Debt
issued designated at fair value primarily consists of UBS AG structured notes, which include variable maturity
notes with various equity and foreign exchange underlying risks, as well as rates-linked and credit
-linked notes,
all of which have embedded derivative parameters that are considered to be unobservable. The equivalent
derivative instrument parameters are presented in the respective derivative financial instruments lines in this table.
Annual Report 2023
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AG consolidated financial statements
203
Note 20
Fair value measurement (continued)
Significant unobservable inputs in Level 3 positions
This section
discusses the
significant unobservable
inputs used
in the valuation
of Level 3
instruments and
assesses the
potential effect that
a change
in each
unobservable input in
isolation may
have on
a fair value
measurement. Relationships
between observable and unobservable inputs have not
been included in the summary below.
Input
Description
Bond price
equivalent
–
Where market prices are
not available for a
bond, fair value is
measured by comparison with observable pricing data
from
similar instruments. Factors considered when selecting comparable instruments include credit quality, maturity and industry
of the issuer. Fair value may be measured either by a direct price comparison or
by conversion of an instrument price into a
yield (either as an outright yield or as a spread
to the relevant benchmark rate).
–
For corporate and municipal bonds, the
range represents the range of prices
from reference issuances used in determining
fair value. Bonds priced
at 0 are distressed
to the point that
no recovery is
expected, while prices
significantly in excess
of 100
or
par relate
to inflation-linked
or structured
issuances that
pay a
coupon in
excess of
the market
benchmark as
of the
measurement date.
–
For credit derivatives, the bond price range
represents the range of prices used for
reference instruments, which are typically
converted to an equivalent yield or credit
spread as part of the valuation process.
Loan price
equivalent
–
Where market prices are
not available for a
traded loan or a
loan commitment, fair value is
measured by comparison with
observable pricing data for similar instruments. Factors considered when selecting comparable instruments include industry
segment,
collateral
quality,
maturity
and
issuer-specific
covenants.
Fair
value
may
be
measured either
by
a
direct
price
comparison or
by conversion
of an
instrument price
into a
yield. The
range represents
the range
of prices
derived from
reference issuances of a similar credit quality used to measure fair value for loans classified as Level 3. Loans priced at 0
are
distressed to the
point that no
recovery is expected,
while a current
price of
100 represents a
loan that is
expected to be
repaid in full.
Credit spread
–
Valuation models for many credit derivatives
and other credit sensitive products require
an input for the credit spread, which
is a reflection of the
credit quality of the
associated referenced underlying.
The credit spread of
a particular security is quoted
in relation
to the
yield on
a benchmark
security or
reference rate,
typically either
US Treasury
or ARR,
and is
generally expressed
in terms of
basis points.
An increase /
(decrease) in
credit spread will
increase /
(decrease) the value
of credit protection
offered
by credit default swaps
and other credit
derivative products. The
income statement effect
from such changes
depends on the
nature and direction
of the positions
held. Credit spreads
may be negative
where the asset
is more creditworthy
than the
benchmark against which the spread is calculated. A wider credit spread represents decreasing creditworthiness. The range
represents a diverse set of underlyings, with
the lower end of the
range representing credits of the highest quality and
the
upper end of the range representing greater
levels of credit risk.
Discount margin
–
The discount margin (DM) spread represents the discount rates applied to present
value cash flows of an asset to reflect the
market return required
for uncertainty in
the estimated cash
flows. DM spreads
are a rate
or rates applied
on top of
a floating
index (e.g., Secured Overnight Financing Rate
(SOFR)) to discount expected cash flows.
Generally, a decrease / (increase) in
the DM in isolation would result in a higher
/ (lower) fair value.
–
The high
end of
the range
relates to
securities that
are priced
low within
the market
relative to
the expected
cash flow
schedule. This indicates that the market is pricing
an increased risk of credit loss into the security
that is greater than what is
being captured by
the expected cash flow
generation process. The low
ends of the
ranges are typical
of funding rates
on
better-quality instruments.
Funding spread
–
Structured financing transactions
are valued using synthetic
funding curves that best
represent the assets that
are pledged as
collateral for the
transactions. They
are not representative
of where UBS AG
can fund itself
on an unsecured
basis but provide
an estimate of where UBS AG can source and deploy secured funding with counterparties
for a given type of collateral. The
funding spreads are expressed
in terms of basis points,
and if funding spreads
widen, this increases the
effect of discounting.
–
A small proportion of structured debt instruments and non-structured fixed-rate bonds within financial liabilities designated
at fair value had an exposure to funding
spreads that was longer in duration than the
actively traded market.
Volatility
–
Volatility measures
the variability
of future prices
for a particular
instrument and
is generally expressed
as a percentage,
where
a higher number reflects a more volatile
instrument, for which future price
movements are more likely to occur.
Volatility is a
key input into
option models, where it
is used to derive
a probability-based distribution of future
prices for the underlying
instrument. The
effect
of
volatility on
individual positions
within
the portfolio
is driven
primarily by
whether the
option
contract is a long or short position. In most cases, the fair value of an
option increases as a result of an increase in volatility
and is reduced
by a decrease
in volatility. Generally, volatility used
in the measurement of
fair value is
derived from active-
market option prices (referred to as
implied volatility). A key feature of
implied volatility is the volatility “smile”
or “skew,”
which represents the effect of pricing options
of different option strikes at different implied
volatility levels.
–
Volatilities of low interest rates
tend to be much higher
than volatilities of high
interest rates. In addition,
different currencies
may have significantly different implied volatilities.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
204
Note 20
Fair value measurement (continued)
Input
Description
Correlation
–
Correlation measures the
interrelationship between
the movements of
two variables. It is
expressed as a percentage
between
–100%
and
+100%,
where
+100%
represents
perfectly
correlated
variables
(meaning
a
movement
of
one
variable
is
associated with a movement of the other variable in the same direction) and –100% implies that
the variables are inversely
correlated
(meaning
a
movement of
one
variable
is
associated
with
a
movement of
the
other
variable
in
the
opposite
direction). The effect of correlation
on the measurement of
fair value depends on the
specific terms of the instruments
being
valued, reflecting the range of different payoff
features within such instruments.
Equity dividend
yields
–
The derivation of a forward price
for an individual stock or index is
important for measuring fair value for forward or swap
contracts and for measuring fair
value using option pricing models.
The relationship between the
current stock price and the
forward price is based on a combination
of expected future dividend levels
and payment timings, and, to a lesser
extent, the
relevant funding
rates applicable
to the stock
in question.
Dividend yields
are generally
expressed as
an annualized
percentage
of the share price, with
the lowest limit of 0% representing a
stock that is not expected to
pay any dividend. The dividend
yield and timing represent
the most significant parameter in
determining fair value for instruments
that are sensitive to
an
equity forward price.
f) Level 3 instruments: sensitivity to changes in unobservable
input assumptions
The table below summarizes
those financial assets and
liabilities classified as Level
3 for which a
change in one or
more
of
the
unobservable
inputs
to
reflect
reasonably
possible
favorable
and
unfavorable
alternative
assumptions
would
change fair value significantly, and the estimated effect thereof. The table below does not represent the estimated effect
of stress
scenarios.
Interdependencies
between
Level 1,
2 and
3 parameters
have not
been
incorporated
in the
table.
Furthermore, direct
interrelationships
between the
Level 3 parameters
discussed below
are not
a significant element
of
the valuation uncertainty.
Sensitivity data is estimated
using a number of techniques,
including the estimation
of price dispersion among
different
market participants, variation
in modeling approaches
and reasonably possible
changes to assumptions
used within the
fair value
measurement process.
The sensitivity
ranges are
not always
symmetrical around
the fair
values, as the
inputs
used in valuations are not always precisely in the middle
of the favorable and unfavorable range.
Sensitivity data
is determined at
a product or
parameter level
and then aggregated
assuming no diversification
benefit.
Diversification would
incorporate estimated
correlations across
different sensitivity
results and,
as such,
would result
in
an overall sensitivity that would
be less than the sum
of the individual component sensitivities. However,
UBS AG believes
that the diversification benefit is not significant to this analysis.
Sensitivity of fair value measurements to changes
in unobservable input assumptions
1
31.12.23
31.12.22
USD m
Favorable
changes
Unfavorable
changes
Favorable
changes
Unfavorable
changes
Traded loans, loans measured at fair value, loan commitments and guarantees
2
(
29
)
2
(
12
)
Securities financing transactions
(
24
)
(
37
)
Auction rate securities
(
21
)
(
46
)
Asset-backed securities
(
22
)
(
27
)
Equity instruments
(
178
)
(
161
)
Interest rate derivatives, net
(
18
)
(
12
)
Credit derivatives, net
(
5
)
(
4
)
Foreign exchange derivatives, net
(
4
)
(
5
)
Equity / index derivatives, net
(
285
)
(
330
)
Other
(
62
)
(
62
)
Total
(
648
)
(
696
)
1 Sensitivity of issued and over-the-counter debt instruments is reported with the equivalent derivative
or Other.
2 Includes refinements applied in estimating valuation uncertainty across various parameters.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
205
Note 20
Fair value measurement (continued)
g) Level 3 instruments: movements during the period
The table below presents
additional information about
material Level 3 assets
and liabilities measured
at fair value on
a
recurring basis.
Level 3 assets
and liabilities
may be
hedged with
instruments classified
as Level 1
or Level 2
in the
fair
value hierarchy,
and, as a result, realized and unrealized gains and losses included in the table may not
include the effect
of
related
hedging
activity.
Furthermore,
the
realized
and
unrealized
gains
and
losses
presented
in
the
table
are
not
limited
solely
to
those
arising
from
Level
3 inputs,
as
valuations
are
generally
derived
from
both
observable
and
unobservable
parameters.
Assets
and
liabilities
transferred
into
or
out
of
Level 3
are
presented
as
if
those
assets
or
liabilities had been transferred at the beginning of the
year.
Movements of Level 3 instruments
USD bn
Balance at
the beginning
of the period
Net gains /
losses
included in
compre-
hensive
income
1
of which:
related to
instruments
held at the
end of the
period
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
translation
Balance at
the end
of the period
For the twelve months ended 31 December 2023
2
Financial assets at fair value held for
trading
(
0.1
)
(
0.1
)
(
0.8
)
(
0.3
)
of which: Equity instruments
(
0.1
)
(
0.1
)
(
0.1
)
(
0.0
)
of which: Corporate and municipal
bonds
(
0.0
)
(
0.0
)
(
0.3
)
(
0.0
)
of which: Loans
(
0.1
)
(
0.1
)
(
0.4
)
(
0.2
)
Derivative financial instruments –
assets
(
0.3
)
(
0.3
)
(
0.0
)
(
0.5
)
(
0.3
)
of which: Interest rate
(
0.0
)
(
0.2
)
(
0.1
)
(
0.0
)
of which: Equity / index
(
0.2
)
(
0.2
)
(
0.1
)
(
0.2
)
of which: Credit
(
0.1
)
(
0.1
)
(
0.1
)
(
0.0
)
Financial assets at fair value not held
for trading
(
0.7
)
(
0.0
)
(
0.1
)
of which: Loans
(
0.0
)
(
0.0
)
(
0.1
)
(
0.0
)
of which: Auction rate securities
(
0.1
)
of which: Equity instruments
(
0.2
)
Derivative financial instruments –
liabilities
(
0.0
)
(
0.6
)
(
0.2
)
of which: Interest rate
(
0.1
)
(
0.0
)
of which: Equity / index
(
0.4
)
(
0.2
)
of which: Credit
(
0.0
)
(
0.1
)
(
0.0
)
Debt issued designated at fair value
(
3.2
)
(
2.6
)
Other financial liabilities designated at
fair value
(
0.2
)
(
0.0
)
For the twelve months ended 31 December 2022
Financial assets at fair value held for
trading
(
0.3
)
(
0.3
)
(
1.8
)
(
0.3
)
(
0.0
)
of which: Investment fund units
(
0.0
)
(
0.0
)
(
0.0
)
(
0.0
)
(
0.0
)
of which: Corporate and municipal
bonds
(
0.0
)
(
0.0
)
(
0.6
)
(
0.0
)
(
0.0
)
of which: Loans
(
0.1
)
(
0.1
)
(
1.1
)
(
0.2
)
Derivative financial instruments –
assets
(
0.7
)
(
0.0
)
(
0.0
)
of which: Interest rate
(
0.2
)
(
0.1
)
(
0.0
)
of which: Equity / index
(
0.3
)
(
0.0
)
(
0.0
)
of which: Credit
(
0.1
)
(
0.2
)
Financial assets at fair value not held
for trading
(
1.2
)
(
0.0
)
(
0.3
)
(
0.0
)
of which: Loans
(
0.0
)
(
0.0
)
(
0.4
)
(
0.3
)
(
0.0
)
of which: Auction rate securities
(
0.3
)
of which: Equity instruments
(
0.1
)
(
0.0
)
Derivative financial instruments –
liabilities
(
0.8
)
(
0.4
)
(
0.9
)
(
0.2
)
(
0.1
)
of which: Interest rate
(
0.3
)
(
0.0
)
(
0.0
)
(
0.0
)
(
0.0
)
of which: Equity / index
(
0.4
)
(
0.3
)
(
0.7
)
(
0.2
)
(
0.0
)
of which: Credit
(
0.1
)
(
0.0
)
(
0.1
)
(
0.0
)
(
0.0
)
Debt issued designated at fair value
(
1.3
)
(
0.9
)
(
3.1
)
(
3.3
)
(
0.3
)
Other financial liabilities designated at
fair value
(
1.0
)
(
1.0
)
(
0.1
)
(
0.2
)
(
0.0
)
1 Net gains / losses included in comprehensive income are recognized in Net interest income and Other net income from financial instruments measured at fair value through profit or loss in the Income statement, and
also in
Gains /
(losses) from
own credit
on financial
liabilities designated
at fair
value, before
tax in
the Statement
of comprehensive
income.
2 Total
Level 3 assets
as of
31 December 2023
were USD
bn
(31 December 2022: USD
bn). Total Level 3 liabilities as of 31 December 2023 were USD
bn (31 December 2022: USD
bn).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
206
Note 20
Fair value measurement (continued)
h) Maximum exposure to credit risk for financial instruments
measured at fair value
The tables below provide UBS AG’s maximum exposure to credit risk for financial instruments measured at fair value
and
the respective collateral and other credit
enhancements mitigating credit risk for these
classes of financial instruments.
The maximum exposure
to credit risk
includes the carrying
amounts of financial
instruments recognized on
the balance
sheet subject to credit risk
and the notional amounts for off-balance sheet
arrangements. Where information is available,
collateral is presented at fair
value. For other collateral, such as
real estate, a reasonable alternative
value is used. Credit
enhancements,
such
as
credit
derivative
contracts
and
guarantees,
are
included
at
their
notional
amounts.
Both
are
capped at
the maximum
exposure to
credit risk
for which
they serve
as security.
The “Risk
management
and control”
section of this
report describes
management’s view
of credit
risk and the
related exposures,
which can differ
in certain
respects from the requirements of IFRS Accounting Standards.
Maximum exposure to credit risk
31.12.23
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
Secured by
real estate
Other
collateral
Netting
Credit
derivative
contracts
Guarantees
and sub-
participations
Financial assets measured at
fair value on the balance sheet
1
Financial assets at fair value
held for trading – debt instruments
2,3
Derivative financial instruments
4
Brokerage receivables
Financial assets at fair value not
held for trading – debt instruments
5
Total financial assets measured at fair value
Guarantees
31.12.22
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
Secured by
real estate
Other
collateral
Netting
Credit
derivative
contracts
Guarantees
and sub-
participations
Financial assets measured at
fair value on the balance sheet
1
Financial assets at fair value
held for trading – debt instruments
2,3
Derivative financial instruments
4
Brokerage receivables
Financial assets at fair value not
held for trading – debt instruments
5
Total financial assets measured at fair value
Guarantees
1 The maximum exposure to loss
is generally equal to the carrying
amount and subject to change over
time with market movements.
2 For the purpose of
this disclosure, collateral and credit
enhancements were
not considered as these positions are generally managed under the market risk framework.
3 Does not include investment fund units.
4 The amount shown in the “Netting” column represents the netting potential
not recognized
on the
balance sheet.
Refer to
Note 21 for
more information.
5 Does not
include unit-linked
investment contracts
and investment
fund units.
Financial assets
at fair
value not
held for
trading
collateralized by equity and debt instruments consisted of structured loans and reverse repurchase and securities borrowing agreements.
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| Consolidated financial statements | UBS
AG consolidated financial statements
207
Note 20
Fair value measurement (continued)
i) Financial instruments not measured at fair value
The table below provides the estimated fair values of financial
instruments not measured at fair value.
Financial instruments not measured at fair value
31.12.23
31.12.22
Carrying
amount
Fair value
Carrying
amount
Fair value
USD bn
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Assets
Cash and balances at central banks
Amounts due from banks
Receivables from securities financing
transactions measured at amortized cost
Cash collateral receivables on derivative
instruments
Loans and advances to customers
Other financial assets measured at amortized
cost
Liabilities
Amounts due to banks
Payables from securities financing
transactions measured at amortized cost
Cash collateral payables on derivative
instruments
Customer deposits
Funding from UBS Group AG measured at
amortized cost
Debt issued measured at amortized cost
Other financial liabilities measured at
amortized cost
2
1 Includes certain financial instruments where the carrying
amount is a reasonable approximation of the
fair value due to the instruments’ short-term
nature (instruments that are receivable or
payable on demand or
with a remaining maturity (excluding the effects of callable features) of three months or less).
2 Excludes lease liabilities.
The fair values
included in the
table above have
been calculated for
disclosure purposes
only.
The valuation techniques
and assumptions
described
below relate
only to
the fair
value of
UBS AG’s financial
instruments not
measured
at fair
value. Other institutions may use different
methods and assumptions for their fair value
estimations, and therefore
such
fair value disclosures
cannot necessarily be compared
from one financial
institution to another.
The following principles
were applied when determining fair value estimates for
financial instruments not measured at fair
value.
–
For financial
instruments
with remaining
maturities greater
than three
months, the
fair value
was determined
from
quoted market prices, if available.
–
Where quoted market prices were
not available, the fair values were estimated
by discounting contractual cash flows
using current
market
interest
rates
or appropriate
yield curves
for
instruments
with
similar credit
risk and
maturity.
These estimates generally include adjustments for counterparty
credit risk or UBS AG’s own credit.
–
For short-term financial instruments with
remaining maturities of three months
or less, the carrying amount, which
is
net of credit loss allowances, is generally considered a reasonable
estimate of fair value.
Annual Report 2023
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AG consolidated financial statements
208
Note 21
Offsetting financial assets and financial liabilities
UBS AG
enters
into
netting
agreements
with
counterparties
to
manage
the
credit
risks
associated
primarily
with
repurchase
and
reverse
repurchase
transactions,
securities
borrowing
and
lending,
over-the-counter
derivatives,
and
exchange-traded derivatives. These netting agreements
and similar arrangements generally enable the counterparties
to
set
off
liabilities
against
available
assets
received
in
the
ordinary
course
of
business
and
/
or
in
the
event
that
the
counterparties to the transaction are unable to fulfill
their contractual obligations.
The tables below
provide a summary
of financial assets
and financial liabilities
subject to offsetting,
enforceable master
netting
arrangements
and
similar
agreements,
as
well
as
financial
collateral
received
or
pledged
to
mitigate
credit
exposures for these financial instruments.
UBS AG
engages
in
a
variety
of
counterparty
credit
risk
mitigation
strategies
in
addition
to
netting
and
collateral
arrangements. Therefore, the net
amounts presented in the
tables below do not purport
to represent their actual
credit
risk exposure.
Financial assets subject to offsetting, enforceable
master netting arrangements and similar
agreements
Assets subject to netting arrangements
Netting recognized on the balance sheet
Netting potential not recognized on
the balance sheet
3
Assets not
subject to netting
arrangements
4
Total assets
As of 31.12.23, USD bn
Gross assets
before netting
Netting with
gross liabilities
2
Net assets
recognized
on the
balance
sheet
Financial
liabilities
Collateral
received
Assets after
consideration
of
netting
potential
Assets
recognized
on the
balance
sheet
Total assets
after
consideration
of netting
potential
Total assets
recognized
on the
balance
sheet
Receivables from securities financing
transactions measured at amortized cost
(
12.2
)
(
1.5
)
(
55.2
)
Derivative financial instruments
(
2.5
)
(
99.3
)
(
23.4
)
Cash collateral receivables on
derivative instruments
1
(
20.4
)
(
2.5
)
Financial assets at fair value
not held for trading
(
89.6
)
(
1.8
)
(
4.9
)
of which: reverse
repurchase agreements
(
89.6
)
(
1.8
)
(
3.7
)
Total assets
(
104.3
)
(
122.9
)
(
85.9
)
As of 31.12.22, USD bn
Receivables from securities financing
transactions measured at amortized cost
(
11.1
)
(
3.0
)
(
46.4
)
Derivative financial instruments
(
2.5
)
(
110.9
)
(
28.5
)
Cash collateral receivables on
derivative instruments
1
(
20.9
)
(
1.9
)
Financial assets at fair value
not held for trading
(
76.8
)
(
1.5
)
(
7.3
)
of which: reverse
repurchase agreements
(
76.8
)
(
1.5
)
(
6.1
)
Total assets
(
90.4
)
(
136.3
)
(
84.1
)
1 The net
amount of Cash collateral
receivables on derivative
instruments recognized on
the balance sheet includes
certain OTC
derivatives that are
net settled on
a daily basis either
legally or in substance
under
IAS 32 principles and exchange-traded
derivatives that are economically
settled on a daily basis.
2 The logic of
the table results in amounts
presented in the “Netting
with gross liabilities” column corresponding
directly to the amounts presented in the “Netting with gross
assets” column in the liabilities table presented below.
Netting in this column for reverse repurchase agreements presented within
the lines “Receivables
from securities financing transactions
measured at amortized cost”
and “Financial assets at
fair value not
held for trading”
taken together corresponds
to the amounts presented
for repurchase agreements
in the
“Payables from securities financing transactions measured at amortized cost” and “Other financial liabilities designated at fair value” lines
in the liabilities table presented below.
3 For the purpose of this disclosure,
the amounts of financial instruments and cash collateral presented have been capped so as not to exceed the net amount of financial assets presented on the balance sheet; i.e., over-collateralization, where
it exists,
is not reflected in the table.
4 Includes assets not subject to enforceable netting arrangements and other out-of-scope items.
Annual Report 2023
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AG consolidated financial statements
209
Note 21
Offsetting financial assets and financial liabilities (continued)
Financial liabilities subject to offsetting, enforceable
master netting arrangements and similar
agreements
Liabilities subject to netting arrangements
Netting recognized on the balance sheet
Netting potential not recognized
on the balance sheet
3
Liabilities not
subject
to netting
arrangements
4
Total liabilities
As of 31.12.23, USD bn
Gross
liabilities
before
netting
Netting with
gross assets
2
Net
liabilities
recognized
on the
balance
sheet
Financial
assets
Collateral
pledged
Liabilities
after
consideration
of netting
potential
Liabilities
recognized
on the
balance
sheet
Total
liabilities
after
consideration
of netting
potential
Total
liabilities
recognized
on the
balance
sheet
Payables from securities financing
transactions measured at amortized cost
(
12.1
)
(
0.8
)
(
3.2
)
Derivative financial instruments
(
2.5
)
(
99.3
)
(
24.5
)
Cash collateral payables on
derivative instruments
1
(
17.2
)
(
3.4
)
Other financial liabilities
designated at fair value
(
89.8
)
(
2.5
)
(
4.8
)
of which: repurchase agreements
(
89.8
)
(
2.5
)
(
4.4
)
Total liabilities
(
104.3
)
(
119.7
)
(
36.0
)
As of 31.12.22, USD bn
Payables from securities financing
transactions measured at amortized cost
(
11.1
)
(
1.3
)
(
1.8
)
Derivative financial instruments
(
2.5
)
(
110.9
)
(
26.2
)
Cash collateral payables on
derivative instruments
1
(
20.0
)
(
1.9
)
Other financial liabilities
designated at fair value
(
76.9
)
(
3.2
)
(
12.4
)
of which: repurchase agreements
(
76.9
)
(
3.2
)
(
12.1
)
Total liabilities
(
90.4
)
(
135.3
)
(
42.3
)
1 The net amount of Cash collateral payables on derivative instruments recognized on the balance sheet includes certain OTC derivatives that are net settled on a daily basis either legally or in substance under IAS 32
principles and exchange-traded derivatives that are economically settled on
a daily basis.
2 The logic of the table results
in amounts presented in the “Netting with
gross assets” column corresponding to the amounts
presented in the “Netting with gross
liabilities” column in the assets table presented
above. Netting in this column for repurchase agreements
presented within the lines “Payables from securities financing transactions
measured at amortized
cost” and “Other
financial liabilities designated
at fair value”
taken together
corresponds to the
amounts presented for
reverse repurchase agreements
in the “Receivables
from securities
financing transactions measured at amortized cost”
and “Financial assets at fair value not held
for trading” lines in the assets
table presented above.
3 For the purpose of this
disclosure, the amounts of financial
instruments and cash collateral presented have been capped so as not to exceed the net amount of financial liabilities presented on the balance sheet;
i.e., over-collateralization, where it exists,
is not reflected in the
table.
4 Includes liabilities not subject to enforceable netting arrangements and other out-of-scope items.
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AG consolidated financial statements
210
Note 22
Restricted and transferred financial assets
This Note
provides information
about restricted
financial assets
(Note 22a),
transfers of
financial assets
(Note 22b
and
22c) and financial assets that are received
as collateral with the right to resell or repledge
these assets (Note 22d).
a) Restricted financial assets
Restricted
financial
assets
consist
of
assets
pledged
as
collateral
against
an existing
liability
or contingent
liability
and
other assets that are otherwise explicitly restricted
such that they cannot be used to secure
funding.
Financial
assets
are
mainly
pledged
as
collateral
in
securities
lending
transactions,
in
repurchase
transactions
and
in
relation to mortgage loans,
which serve as
collateral against loans from
Swiss mortgage institutions and US
Federal Home
Loan Banks
and
in
connection
with
the
issuance
of covered
bonds.
Of
these
pledged
mortgage
loans, approximately
USD
bn as of 31 December 2023 could be withdrawn or used for future liabilities or covered
bond issuances without
breaching existing collateral
requirements (31 December
2022: approximately USD
bn). Existing liabilities
against Swiss
central mortgage institutions
and US
Federal Home Loan
Banks and
for existing covered
bond issuances were
USD
bn
as of 31 December 2023 (31 December 2022: USD
bn).
Repurchase
and
securities
lending
arrangements
are
generally
entered
into
under
standard
market
agreements.
For
securities
lending,
the
cash
received
as
collateral
may
be
more
or
less
than
the
fair
value
of
the
securities
loaned,
depending on
the nature
of the
transaction. For
repurchase agreements,
the fair
value of
the collateral
sold under
an
agreement to repurchase is generally in excess of the cash borrowed.
Other restricted financial
assets include assets
protected under client
asset segregation rules,
assets held under
unit-linked
investment contracts to back related liabilities to the policy holders and assets held in certain jurisdictions to comply with
explicit minimum local asset
maintenance requirements. The carrying amount
of the liabilities associated
with these other
restricted financial
assets
is generally
equal to
the carrying
amount of
the assets,
with the
exception of
assets held
to
comply with local asset maintenance requirements, for
which the associated liabilities are greater.
Restricted financial assets
USD m
31.12.23
31.12.22
Restricted
financial assets
of which: assets
pledged as
collateral that
may be sold or
repledged by
counterparties
Restricted
financial assets
of which: assets
pledged as
collateral that
may be sold or
repledged by
counterparties
Financial assets pledged as collateral
Cash and balances at central banks
1
Financial assets at fair value held for trading
Loans and advances to customers
Financial assets at fair value not held for trading
Debt securities classified as Other financial assets measured
at amortized cost
Total financial assets pledged as collateral
Other restricted financial assets
Amounts due from banks
Financial assets at fair value held for trading
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
2
Financial assets at fair value not held for trading
Financial assets measured at fair value through other comprehensive
income
Other
Total other restricted financial assets
Total financial assets pledged and other restricted financial assets
3
1 Assets pledged to the depositor protection system in Switzerland following new requirements that became effective in 2023.
2 Predominantly includes cash collateral provided to exchanges and clearing houses
to secure
securities trading
activity through
those
counterparties.
3 Does
not include
assets placed
with central
banks related
to undrawn
credit lines
and for
payment, clearing
and settlement
purposes
(31 December 2023: USD
bn; 31 December 2022: USD
bn).
In
addition
to
the
table
above,
USD
bn
were
placed
at
central
banks
to
meet
local
statutory
minimum
reserve
requirements as of 31 December 2023 (31
December 2022: USD
bn).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
211
Note 22
Restricted and transferred financial assets (continued)
In
addition
to
restrictions
on
financial
assets,
UBS AG
and
its
subsidiaries
are,
in
certain
cases,
subject
to
regulatory
requirements that affect
the transfer
of dividends
and capital
within UBS AG,
as well
as intercompany lending.
Supervisory
authorities also may
require entities to measure
capital and leverage ratios
on a stressed
basis, such as
the Federal Reserve
Board’s Comprehensive Capital Analysis and
Review (CCAR) process, which may
limit the relevant subsidiaries’ ability
to
make distributions of capital based on the results of those
tests.
Supervisory
authorities
generally
have
discretion
to
impose
higher
requirements
or
to
otherwise
limit
the
activities
of
subsidiaries.
Non-regulated subsidiaries are generally
not subject to such requirements and transfer
restrictions. However, restrictions
can
also
be
the
result
of
different
legal,
regulatory,
contractual,
entity-
or
country-specific
arrangements
and
/
or
requirements.
b) Transferred financial assets that are not derecognized
in their entirety
The
table
below
presents
information
for
financial
assets
that
have
been
transferred
but
are
subject
to
continued
recognition in full, as well as recognized
liabilities associated with those transferred assets.
Transferred financial assets subject to continued recognition in full
USD m
31.12.23
31.12.22
Carrying amount
of transferred
assets
Carrying amount of
associated liabilities
recognized
on balance sheet
Carrying amount
of transferred
assets
Carrying amount of
associated liabilities
recognized
on balance sheet
Financial assets at fair value held for trading that may be sold or repledged
by counterparties
Financial assets at fair value not held for trading that may be sold or repledged
by
counterparties
Debt securities classified as Other financial assets measured
at amortized cost that may be
sold or repledged by counterparties
Total financial assets transferred
Transactions in which financial assets are transferred but continue to be
recognized in their entirety on UBS AG’s balance
sheet include
securities lending
and repurchase
agreements,
as well
as other
financial asset
transfers. Repurchase
and
securities lending
arrangements are, for
the most
part, conducted
under standard market
agreements and are
undertaken
with counterparties subject to UBS AG’s normal credit
risk control processes.
›
Refer to Note 1a item 2e for more information about repurchase
and securities lending agreements
Financial assets at
fair value held
for trading that
may be sold
or repledged
by counterparties
include securities lending
and
repurchase
agreements
in
exchange
for
cash
received,
securities
lending
agreements
in
exchange
for
securities
received and other financial asset transfers.
For
securities
lending
and
repurchase
agreements,
a
haircut
of
between
%
and
%
is
generally
applied
to
the
transferred
assets,
which
results
in
associated
liabilities
having
a
carrying
amount
below
the
carrying
amount
of
the
transferred assets. The
counterparties to the
associated liabilities included
in the
table above have
full recourse to
UBS AG.
In securities
lending arrangements
entered into
in exchange
for the
receipt of
other securities
as collateral,
neither the
securities received nor the obligation to return them are recognized on UBS AG’s balance sheet, as the risks and rewards
of
ownership
are
not
transferred
to
UBS AG.
In
cases
where
such
financial
assets
received
are
subsequently
sold
or
repledged in another transaction, this is not considered to
be a transfer of financial assets.
Other financial asset transfers primarily include
securities transferred to collateralize derivative transactions, for which the
carrying amount
of associated liabilities
is not
included in
the table above,
because those replacement
values are
managed
on a
portfolio basis
across counterparties
and product
types, and
therefore there
is no
direct relationship
between the
specific collateral pledged and the associated liability.
Transferred financial assets that are not subject
to derecognition in full but remain on the balance
sheet to the extent of
UBS AG’s continuing involvement were not material as of
31 December 2023 and as of 31 December 2022.
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AG consolidated financial statements
212
Note 22
Restricted and transferred financial assets (continued)
c) Transferred financial assets that are derecognized
in their entirety with continuing involvement
Continuing involvement in
a transferred and
fully derecognized financial
asset may result from
contractual provisions in
the particular transfer
agreement or from
a separate
agreement, with the
counterparty or
a third party,
entered into
in
connection with the transfer.
The fair
value and
carrying amount of
UBS AG’s continuing
involvement from
transferred positions
as of
31 December
2023 and
31 December
2022 was
not material.
Life-to-date
losses reported
in prior
periods primarily
relate
to legacy
positions in securitization vehicles that have been fully marked
down, with no remaining exposure to loss.
d) Off-balance sheet assets received
The table below presents assets received from third parties that can be sold or repledged and that are not recognized on
the balance sheet but that are held as collateral, including
amounts that have been sold or repledged.
Off-balance sheet assets received
USD m
31.12.23
31.12.22
Fair value of assets received that can be sold or repledged
of which: sold or repledged
1 Includes securities
received as initial
margin from its
clients that UBS
AG is required
to remit to
central counterparties,
brokers and
deposit banks through
its exchange-traded
derivative clearing
and execution
services.
2 Does not include off-balance sheet securities (31 December
2023: USD
bn; 31 December 2022: USD
bn) placed with central banks related to undrawn
credit lines and for payment, clearing and
settlement purposes for which there are no associated liabilities or contingent liabilities.
Note 23
Maturity analysis of assets and liabilities
a) Maturity analysis of carrying amounts of assets and
liabilities
The table
below provides
an analysis
of carrying
amounts of
balance sheet
assets and
liabilities, as
well as
off-balance
sheet
exposures
by
residual
contractual
maturity
as
of
the
reporting
date.
The
residual
contractual
maturity
of
assets
includes the effect
of callable features.
The residual contractual
maturity of liabilities and
off-balance sheet exposures
is
based on the earliest date on which a third party
could require UBS AG to pay.
Derivative financial instruments
and financial assets
and liabilities at
fair value held for
trading are presented
in the
Due
within 1 month
Assets held to hedge unit-linked investment contracts
(presented within
Financial assets at fair value not
held for trading
)
are
presented
in
the
Due within
1
month
under unit-linked investment contracts (presented within
Other financial liabilities designated at fair value
).
Other financial assets
and liabilities with
no contractual maturity, such
as equity securities,
are presented in
the
Perpetual /
Not applicable
counterparty
of the
instrument
is entitled
to
give.
Where
there
is no
contractual
notice
period,
undated
or perpetual
contracts are presented in the
Perpetual / Not applicable
Non-financial assets
and liabilities
with no
contractual maturity
are generally
included in
the
Perpetual /
Not applicable
column.
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AG consolidated financial statements
213
Note 23
Maturity analysis of assets and liabilities (continued)
31.12.23
USD bn
Due within
1 month
Due between
1 and 3
months
Due between
3 and 12
months
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
Perpetual /
Not
applicable
Total
Assets
Total financial assets measured at amortized cost
Amounts due from banks
Loans and advances to customers
Other financial assets measured at amortized cost
Total financial assets measured at fair value through profit or
loss
Financial assets at fair value not held for trading
Financial assets measured at fair value through other
comprehensive income
Total non-financial assets
Total assets
Liabilities
Total financial liabilities measured at amortized cost
Customer deposits
Funding from UBS Group AG measured at amortized cost
Debt issued measured at amortized cost
of which: non-subordinated
of which: subordinated
Total financial liabilities measured at fair value through
profit or loss
1
Debt issued designated at fair value
Total non-financial liabilities
Total liabilities
Guarantees, loan commitments and forward starting transactions
2
Irrevocable loan commitments
Guarantees
Forward starting reverse repurchase and securities borrowing
agreements
Irrevocable committed prolongation of existing loans
Total
31.12.22
USD bn
Due within
1 month
Due between
1 and 3
months
Due between
3 and 12
months
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
Perpetual /
Not
applicable
Total
Assets
Total financial assets measured at amortized cost
Amounts due from banks
Loans and advances to customers
Other financial assets measured at amortized cost
Total financial assets measured at fair value through profit or
loss
Financial assets at fair value not held for trading
Financial assets measured at fair value through other
comprehensive income
Total non-financial assets
Total assets
Liabilities
Total financial liabilities measured at amortized cost
Customer deposits
Funding from UBS Group AG measured at amortized cost
Debt issued measured at amortized cost
of which: non-subordinated
of which: subordinated
Total financial liabilities measured at fair value through
profit or loss
1
Debt issued designated at fair value
Total non-financial liabilities
Total liabilities
Guarantees, loan commitments and forward starting transactions
2
Irrevocable loan commitments
Guarantees
Forward starting reverse repurchase and securities borrowing
agreements
Irrevocable committed prolongation of existing loans
Total
1 As of 31 December
2023 and 31 December 2022,
the contractual redemption amount
at maturity of debt issued
designated at fair value
through profit or loss and
other financial liabilities measured at
fair value
through profit or loss
was not materially
different from the carrying
amount.
2 The notional
amounts associated with
derivative loan commitments,
as well as
forward starting repurchase
and reverse repurchase
agreements, measured at
fair value through
profit or loss
are presented together
with notional amounts
related to derivative
instruments and have
been excluded from
the table above.
Refer to Note
10 for more
information.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
214
Note 23
Maturity analysis of assets and liabilities (continued)
b) Maturity analysis of financial liabilities on an undiscounted
basis
The table below provides
an analysis of financial
liabilities on an undiscounted
basis, including all
cash flows relating
to
principal and
future interest
payments. The
residual contractual
maturities for
non-derivative and
non-trading financial
liabilities are based on the earliest date on
which UBS AG could be contractually required to pay. Derivative positions and
trading liabilities,
predominantly made
up of short
sale transactions,
are presented
in the
Due within 1
month
,
as this provides a conservative reflection of the nature of these trading activities. The residual contractual
maturities may
extend over significantly longer periods.
31.12.23
USD bn
Due within
1 month
Due between
1 and 3
months
Due between
3 and 12
months
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
Perpetual /
Not
applicable
Total
Financial liabilities recognized on balance sheet
1
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Funding from UBS Group AG measured at amortized cost
2
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
3,4
Derivative financial instruments
3,5
Brokerage payables designated at fair value
Debt issued designated at fair value
6
Other financial liabilities designated at fair value
Total financial liabilities measured at fair value through
profit or loss
Total
Guarantees, loan commitments and forward starting transactions
Irrevocable loan commitments
7
Guarantees
Forward starting reverse repurchase and securities
borrowing agreements
7
Irrevocable committed prolongation of existing loans
Total
31.12.22
USD bn
Due within
1 month
Due between
1 and 3
months
Due between
3 and 12
months
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
Perpetual /
Not
applicable
Total
Financial liabilities recognized on balance sheet
1
Amounts due to banks
Payables from securities financing transactions
Cash collateral payables on derivative instruments
Customer deposits
Funding from UBS Group AG measured at amortized cost
2
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
3,4
Derivative financial instruments
3,5
Brokerage payables designated at fair value
Debt issued designated at fair value
6
Other financial liabilities designated at fair value
Total financial liabilities measured at fair value through
profit or loss
Total
Guarantees, loan commitments and forward starting transactions
Irrevocable loan commitments
7
Guarantees
Forward starting reverse repurchase and securities
borrowing agreements
7
Irrevocable committed prolongation of existing loans
Total
1 Except for financial liabilities at
fair value held for trading
and derivative financial instruments
(see footnote 3), the amounts
presented generally represent undiscounted
cash flows of future interest and
principal
payments.
2 The time-bucket Perpetual / Not applicable
includes perpetual loss-absorbing additional tier 1 capital instruments.
3 Carrying amount is fair value. Management believes that this best represents
the
cash flows
that would
have to
be paid
if these
positions had
to be
settled or
closed out.
4 Contractual
maturities of
financial liabilities
at fair
value
held for
trading are:
USD
bn due
within 1
month
(31 December 2022: USD
bn), USD
bn due between 1
month and 1 year
(31 December 2022:
USD
bn) and USD
bn due between 1
and 5 years (31
December 2022: USD
bn).
5 Includes USD
m
(31 December 2022: USD
m) related to fair
values of derivative
loan commitments and forward
starting reverse repurchase agreements
classified as derivatives,
presented within “Due within
1 month”. The
full
contractual committed amount of USD
bn (31 December 2022: USD
bn) is presented in Note 10 under notional amounts.
6 Future interest payments on variable-rate liabilities are determined by reference
to the applicable interest rate prevailing as of
the reporting date. Future principal payments that are variable are
determined by reference to the conditions existing at
the relevant reporting date.
7 Excludes derivative
loan commitments and forward starting reverse repurchase agreements measured at fair value (see footnote 5).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
215
Note 24
Interest rate benchmark reform
During 2023, UBS AG largely completed the transition of the USD London Interbank Offered Rate (LIBOR) contracts. The
transition of the
largest remaining non-derivative
exposure, the US
mortgage portfolio
of approximately
USD
bn as of
31 December
2022,
was
substantially
completed,
with
these
contracts
automatically
converting
to
term
Secured
Overnight Financing
Rate (SOFR)
from their
next interest
rate reset
date following
the cessation
of the
respective USD
LIBOR rates, i.e.,
30 June 2023. Corporate
loans in the
Investment Bank have
now also been transitioned
to alternative
rates.
In August
2022, to
facilitate
the transition
of derivatives
linked to
the USD
LIBOR Swap
Rate, UBS AG
adhered
to the
June 2022
Benchmark Module
of the
ISDA 2021
Fallbacks Protocol
on the
USD LIBOR
Swap Rate.
As of
31 December
2023, the transition of these USD LIBOR-linked derivatives had been
materially accomplished.
The
table
below
sets
out
the
contracts
that
remained
as
of
31
December
2022.
No
contracts
are
included
as
of
31 December 2023 given transition has largely completed as noted
above.
31.12.22
1
Measure
USD LIBOR
benchmark rates
Carrying value of non-derivative financial instruments
Total non-derivative financial assets
USD m
2
Total non-derivative financial liabilities
USD m
3
Trade count of derivative financial instruments
Total derivative financial instruments
Trade count
4
Off-balance sheet exposures
Total irrevocable loan commitments
USD m
5
1 As of 31 December 2022, non-USD balances and trade counts were minimal.
2 Includes USD
bn of loans related to revolving multi-currency credit lines,
where IBOR transition efforts are complete, except
for
USD LIBOR. The remaining balances as of 31 December 2022 primarily related to US mortgages and corporate
lending.
3 Relates to floating-rate notes that per their contractual terms can reset to rates
linked to
LIBOR, with transition dependent upon the actions of respective issuers.
4 Includes approximately
30 June 2023. No further contractual fixing is required for these contracts.
5 Includes approximately USD
bn of loan commitments that can be drawn in different currencies; however,
only USD LIBOR transition
efforts remained open as of 31 December 2022.
In addition, as of 31 December 2023
UBS AG had approximately USD
bn equivalent of yen- and US
dollar-denominated
funding from UBS Group
AG that, per current
contractual terms, if not
called on their respective
call dates, would reset
based
directly
on
JPY
LIBOR
and
USD
LIBOR.
Furthermore,
several
contracts
providing
funding
from
UBS
Group AG
reference rates
indirectly derived
from IBORs,
if they
are not
called on
their respective
call dates.
These contracts
have
robust
IBOR
fallback
language,
and
the
confirmation
of
interest
rate
calculation
mechanics
will
be
communicated
in
advance of any rate resets.
Note 25
Hedge accounting
Derivatives designated in hedge accounting relationships
UBS AG applies hedge
accounting to interest
rate risk and
foreign exchange
risk, including structural
foreign exchange
risk related to net investments in foreign
operations.
›
Refer to “Market risk” in the “Risk management
and control” section of this report for more information about
how risks arise
and how they are managed by UBS AG
Hedging instruments and hedged risk
Interest rate swaps are
designated in fair
value hedges or
cash flow hedges
of interest rate risk
arising solely
from changes
in benchmark
interest
rates. Fair
value changes
arising from
such risk
are usually
the largest
component of
the overall
change in the fair value of the hedged position in transaction
currency.
Cross-currency
swaps
are
designated
as
fair
value
hedges
of
foreign
exchange
risk.
Foreign
exchange
forwards
and
foreign exchange swaps
are mainly designated
as hedges of
structural foreign exchange
risk related to
net investments
in foreign operations. In both cases the hedged risk arises solely from
changes in the spot foreign exchange rate.
The notional of the designated hedging instruments matches the
notional of the hedged items, except when
the interest
rate
swaps
are
designated
in
cash
flow
hedges
after
the
trade
date,
in
which
case
the
hedge
ratio
designated
is
determined based on the swap sensitivity.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
216
Note 25
Hedge accounting (continued)
Hedged items and hedge designation
Fair value hedges of interest rate risk related to
debt instruments and loan assets
Fair
value
hedges
of
interest
rate
risk
related
to
debt
instruments
and
loan
assets
involve
swapping
fixed
cash
flows
associated with
the loans
to customers
(including long-term
fixed-rate mortgage
loans in
Swiss francs),
debt securities
held, customer
deposits, funding
from UBS
Group AG, debt
issued to floating
cash flows
by entering
into interest
rate
swaps that either pay fixed and receive floating cash flows or that receive fixed and pay floating cash flows. The floating
future cash flows
are based on
the following benchmark
rates: Secured Overnight
Financing Rate (SOFR),
Effective Federal
Funds Rate (EFFR), Swiss
Average Rate Overnight (SARON), Euro Interbank Offered Rate
(EURIBOR), Euro Short-Term Rate
(ESTR),
Sterling Overnight
Index Average
(SONIA), AUD
London Interbank
Offered
Rate (AUD
LIBOR),
Tokyo
Overnight
Average Rate (TONA) and Singapore
Overnight Rate Average (SORA).
Cash flow hedges of forecast transactions
UBS AG hedges
forecast cash
flows on
non-trading financial
assets and
liabilities that
bear interest
at variable
rates or
are expected
to be refinanced
or reinvested
in the future,
due to movements
in future
market rates.
The amounts and
timing of future
cash flows, representing both
principal and interest flows,
are projected on the
basis of contractual
terms
and
other
relevant
factors,
including
estimates
of
prepayments
and
defaults.
The
aggregate
principal
balances
and
interest
cash
flows
across
all
portfolios
over
time
form
the
basis
for
identifying
the
non-trading
interest
rate
risk
of
UBS AG, which is hedged with interest rate swaps, the maximum maturity of which is
15 years. Cash flow forecasts and
risk exposures
are monitored
and adjusted
on an
ongoing basis,
and consequently
additional hedging
instruments are
traded and designated, or are terminated resulting
in a hedge discontinuance.
Fair value hedges of foreign exchange risk related to issued
debt instruments
Debt instruments denominated in currencies other than the US dollar are designated in fair value hedges of spot foreign
exchange
risk,
in
addition
to
and
separate
from
the
fair
value
hedges
of
interest
rate
risk.
Cross-currency
swaps
economically
convert
debt
instruments
denominated
in
currencies
other
than
the
US
dollar
to
US
dollars.
The
hedge
designations also involve
intragroup debt instruments
which are
eliminated upon consolidation
but FX gains
and losses
impact consolidated profit or loss.
Hedges of net investments in foreign operations
UBS AG applies hedge accounting for certain net investments in
foreign operations, which include subsidiaries, branches
and associates.
Upon maturity of
hedging instruments, typically
one to
three months, the
hedge relationship is
terminated
and new designations are made to reflect
any changes in the net investments in foreign operations.
Economic relationship between hedged item and hedging
instrument
The economic relationship
between the
hedged item and
the hedging
instrument is
determined based
on a qualitative
analysis
of
their
critical
terms.
In
cases
where
hedge
designation
takes
place
after
the
trade
date
of
the
hedging
instrument, a quantitative
analysis of the
possible behavior of
the hedging
derivative and the
hedged item
during their
respective terms is also performed.
Sources of hedge ineffectiveness
In
hedges
of
interest
rate
risk,
hedge
ineffectiveness
can
arise
from
mismatches
of
critical
terms
and
/
or
the
use
of
different curves to
discount the hedged item and
instrument, or from entering
into a hedge relationship
after the trade
date of the hedging derivative.
In hedges of foreign
exchange risk related
to debt issued, hedge
ineffectiveness can arise
due to the discounting
of the
hedging instruments and
undesignated risk components and
lack of such
discounting and risk
components in the
hedged
items.
In hedges of net investments in foreign operations, ineffectiveness is unlikely unless the hedged net assets fall below the
designated hedged amount.
The exceptions are
hedges where the
hedging currency is
not the same
as the currency
of
the foreign operation, where the currency basis may cause ineffectiveness.
Hedge ineffectiveness from financial instruments
measured at fair value through profit or loss
is recognized in
Other net
income from financial instruments measured at fair value
through profit or loss.
Derivatives not designated in hedge accounting relationships
Non-hedge-accounted
derivatives
are
mandatorily
held
for
trading
with
all
fair
value
movements
taken
to
Other
net
income from financial instruments
measured at fair value through
profit or loss
, even when held as an
economic hedge
or to
facilitate client
clearing. The
one exception
relates to
forward points
on certain
short- and
long-duration foreign
exchange contracts acting as economic hedges, which are
reported in
Net interest income.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
217
Note 25
Hedge accounting (continued)
All hedges: designated hedging instruments
and hedge ineffectiveness
As of or for the year ended
31.12.23
USD m
Notional
amount
Carrying amount
Changes in
fair value of
hedging
instruments
1
Changes in
fair value of
hedged
items
1
Hedge
ineffectiveness
recognized in the
income statement
Derivative
financial
assets
Derivative
financial
liabilities
Interest rate risk
Fair value hedges
(
2,195
)
Cash flow hedges
(
35
)
Foreign exchange risk
Fair value hedges
2
(
151
)
(
19
)
Hedges of net investments in foreign operations
(
910
)
As of or for the year ended
31.12.22
USD m
Notional
amount
Carrying amount
Changes in
fair value of
hedging
instruments
1
Changes in
fair value of
hedged
items
1
Hedge
ineffectiveness
recognized in the
income statement
Derivative
financial
assets
Derivative
financial
liabilities
Interest rate risk
Fair value hedges
(
5,195
)
(
27
)
Cash flow hedges
(
5,813
)
(
53
)
Foreign exchange risk
Fair value hedges
2
(
1,088
)
Hedges of net investments in foreign operations
(
319
)
(
1
)
1 Amounts used
as the basis
for recognizing hedge
ineffectiveness for the
period.
2 The
foreign currency basis
spread of cross-currency
swaps designated as
hedging derivatives
is excluded from
the hedge
accounting designation and accounted for as a cost of hedging with amounts deferred in Other comprehensive income within Equity.
Fair value hedges: designated hedged items
recognized on balance sheet
1
USD m
31.12.23
31.12.22
Interest rate
risk
FX risk
Interest rate
risk
FX risk
Loans and advances to customers
Carrying amount of designated loans
of which: accumulated amount of fair value hedge adjustment
(
508
)
(
1,249
)
of which: accumulated amount of fair value hedge adjustment subject
to amortization attributable to the
portion of the portfolio that ceased to be part of hedge
accounting
(
179
)
(
51
)
Other financial assets measured at amortized cost – debt securities
Carrying amount of designated debt securities
(
109
)
(
180
)
Customer deposits
Carrying amount of Customer deposits
Funding from UBS Group AG
Carrying amount of designated debt instruments
(
3,174
)
(
5,055
)
Debt issued measured at amortized cost
Carrying amount of designated debt issued
(
412
)
(
1,002
)
1 In addition, as of 31 December
2023 UBS AG designated in
fair value hedges of FX
risk USD
bn of intragroup debt instruments
which are not recognized on consolidated
balance sheet but FX gains and
losses
on these instruments impact consolidated profit or loss. No such designations were in place as of 31 December 2022.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
218
Note 25
Hedge accounting (continued)
Fair value hedges: profile of the timing of the
nominal amount of the hedging instrument
31.12.23
USD bn
Due within
1 month
Due between
1 and 3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
Total
Interest rate swaps
Cross-currency swaps
31.12.22
USD bn
Due within
1 month
Due between
1 and 3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
Total
Interest rate swaps
Cross-currency swaps
Cash flow hedge reserve on a pre-tax basis
USD m
31.12.23
31.12.22
Amounts related to hedge relationships for which hedge
accounting continues to be applied
(
2,349
)
(
4,692
)
Amounts related to hedge relationships for which hedge
accounting is no longer applied
(
1,331
)
(
540
)
Total other comprehensive income recognized directly in equity related to cash flow hedges, on a pre-tax basis
(
3,680
)
(
5,232
)
Foreign currency translation reserve on a pre-tax basis
USD m
31.12.23
31.12.22
Amounts related to hedge relationships for which hedge
accounting continues to be applied
(
690
)
Amounts related to hedge relationships for which hedge
accounting is no longer applied
Total other comprehensive income recognized directly in equity related to hedging instruments
designated as net investment hedges, on a pre-tax
basis
(
424
)
Interest rate benchmark reform
In 2023,
UBS AG
applied
the
relief
provided
by
Interest
Rate
Benchmark
Reform
(Amendments
to
IFRS 9,
IAS 39
and
IFRS 7)
, published by
the International Accounting
Standards Board
in September 2019,
to its hedges
in US dollars
and
Singapore dollars
until they
transitioned to
alternative reference
rate (ARR)
designations
in May
2023 and
June 2023,
respectively.
The transition
of fair
value hedges
took place
following the
IBOR transition
for swaps
with LCH
(formerly
the London Clearing House), with hedge relationships
continuing in accordance with
Interest Rate Benchmark Reform –
Phase 2 (Amendments
to IFRS 9,
IAS 39, IFRS
7, IFRS
4 and IFRS
16)
. Cash flow
hedge relationships
were discontinued
and replaced with new ARR designations in May
2023.
As of 31 December 2023,
there were no hedge
relationships where the designated
risk is LIBOR and
maturing after the
cessation date of
the applicable
interest rate benchmarks.
The following
table provides details
on the
hedging instruments
in such hedge relationships as of 31 December 2022.
Hedges of net investments in foreign operations are not
affected by the amendments.
›
Refer to Note 1a item 2j for more information
about the relief provided by the amendments to IFRS
9 and IFRS 7 related to
interest rate benchmark reform
›
Refer to Note 24 for more information about the transition
progress
Hedging instruments referencing LIBOR
31.12.22
Carrying amount
USD m
Notional
amount
Derivative
financial
assets
Derivative
financial
liabilities
Interest rate risk
Fair value hedges
Cash flow hedges
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
219
Note 26
Post-employment benefit plans
a) Defined benefit plans
UBS AG has
established defined benefit
plans for
its employees in
various jurisdictions in
accordance with local
regulations
and practices.
The major
plans are
located in
Switzerland, the
UK, the
US and Germany.
The level
of benefits
depends
on the specific plan rules.
UBS AG has not been involved in the major Credit
Suisse defined benefit plans.
Swiss pension plan
In 2017,
a
significant number
of employees
were
transferred
from
UBS AG to
UBS
Business Solutions
AG, which
is a
directly
held
subsidiary
of
UBS
Group AG.
There
continues
to
be
one
pooled
UBS
Swiss
pension
plan
in
Switzerland
covering
the
employees
of
UBS AG
and
those
transferred
to
UBS
Business
Solutions
AG.
UBS AG
and
UBS
Business
Solutions AG
both are
legal sponsors
of the
UBS Swiss pension
plan. Since
the date
of the
employee transfer,
UBS AG
and UBS
Business Solutions
AG apply
proportionate
defined benefit
accounting, i.e.,
the net
pension cost
and the
net
pension asset
/ liability
of the
UBS Swiss
pension plan
are allocated
proportionally
between UBS AG
and UBS
Business
Solutions AG based on the aggregated
net pension cost and defined benefit obligations
related to their employees.
The
UBS Swiss pension plan
offers retirement, disability and survivor benefits and is
governed by a
Pension Foundation Board.
The responsibilities of
this board are defined
by Swiss pension
law and the
plan rules. The
UBS Swiss pension
plan exceeds
the minimum benefit requirements under
Swiss pension law.
Savings contributions to the UBS Swiss
pension plan are paid by both
the employer and the employee. Depending on
the
age of
the employee,
UBS AG pays
a savings
contribution
that ranges
between
% and
% of
the contributory
base salary
and between
% and
% of
the contributory
variable compensation.
Employees can
choose the
level of
savings contributions paid by them,
which vary between
% and
% of the contributory base salary
and between
% and
% of the contributory
variable compensation, depending on
age and choice of savings
contribution category.
UBS AG also pays risk contributions that are used to fund
disability and survivor benefits.
The plan offers to members at the
normal retirement age of
lump sum payment. Participants
can choose to draw
early retirement benefits starting
from the age of
, but they can
also continue employment
and remain active
members of
the plan until
the age of
. Employees can
make additional
purchases of benefits to fund early retirement benefits.
The pension amount
payable to a
participant is calculated
by applying a conversion
rate to the
accumulated balance of
the
participant’s
retirement
savings
account
at
the
retirement
date.
The
balance
is
based
on
credited
vested
benefits
transferred
from
previous
employers,
purchases
of
benefits,
employee
and
employer
contributions
made
to
the
participant’s
retirement
savings
account,
and
interest
accrued.
The
annual
interest
rate
credited
to
participants
is
determined by the Pension Foundation Board at the end
of each year.
Although the UBS
Swiss pension plan is
based on a
defined contribution promise under
Swiss pension law, it
is accounted
for as a defined benefit plan
under IFRS Accounting Standards,
primarily because of the obligation
to accrue interest on
the participants’ retirement savings accounts and the payment
of lifetime pension benefits.
An actuarial valuation in accordance with Swiss pension law is performed regularly.
Should an underfunded situation on
this basis occur, the Pension Foundation Board is required to take the necessary measures to ensure that full funding can
be
expected
to
be
restored
within
a
maximum
period
of
underfunded on
a Swiss
pension law
basis, additional
employer and
employee contributions
could be
required. In
this
situation, the risk is
shared between employer and employees, and
the employer is not
legally obliged to cover
more than
%
of the
additional
contributions
required.
As of
31 December
2023,
the
UBS Swiss
pension
plan
had a
technical
funding ratio in accordance with Swiss pension law of
% (31 December 2022:
%).
The
investment
strategy
of
the
UBS
Swiss
pension
plan
complies
with
Swiss
pension
law,
including
the
rules
and
regulations relating
to diversification of
plan assets, and
is derived from
the risk budget
defined by
the Pension
Foundation
Board based on
regularly performed
asset and liability
management analyses.
The Pension Foundation
Board strives for
a medium- and long-term balance between assets and liabilities.
As
of
31 December
2023,
the
UBS
Swiss
pension
plan
was
in
a
surplus
situation
on
an
IFRS
Accounting
Standards
measurement basis, as the fair value
of the plan’s assets exceeded
the defined benefit obligation (DBO) by
USD
m
(31 December 2022: USD
m). However, a surplus is only recognized on the balance sheet to the extent that it does
not
exceed
the
estimated
future
economic
benefit,
which
equals
the
difference
between
the
present
value
of
the
estimated
future
net
service
cost
and
the
present
value
of
the
estimated
future
employer
contributions.
As
of
both
31 December 2023 and 31 December
2022, the estimated future economic
benefit was zero and hence
no net defined
benefit asset was recognized on the balance sheet.
The regular employer contributions to the UBS Swiss pension
plan in 2024 are estimated at USD
m.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
220
Note 26
Post-employment benefit plans (continued)
UK pension plan
The UBS
UK pension
plan is
a career
-average revalued
earnings scheme,
and benefits
increase
automatically based
on
UK price inflation, subject
to defined caps. The
normal retirement age for most participants is
. The plan provides
guaranteed lifetime pension
benefits to participants upon
retirement. The
UK plan has been
closed to new entrants
for
more
than 20
years and
participants
are
no longer
accruing benefits
for current
or future
service. Instead,
employees
participate in the UBS UK defined contribution plan.
The governance responsibility
for the UBS
UK plan lies
jointly with the
UBS UK Pension
Trustee Board and
UBS AG. The
plan
assets
are
invested
in
a
diversified
portfolio
of
financial
assets,
which
include
longevity
swaps
to
hedge
the
risk
between expected and actual longevity.
In
2019,
UBS AG
and
the
UBS
UK
Pension
Trustee
Board
entered
an
arrangement
whereby
a
collateral
pool
was
established to
provide security
for the
UBS UK
pension fund.
The value
of the
collateral pool
as of
31 December 2023
was USD
m (31 December
2022: USD
m) and
includes corporate
bonds, government-related
debt instruments
and other financial
assets. The
arrangement provides
the Pension
Trustee Board
dedicated access
to a
pool of assets
in
the event of UBS AG’s insolvency or not paying a required funding
contribution.
In 2023, UBS AG
made funding contributions
of USD
m to the
UBS UK pension
plan (2022: USD
m). The employer
contributions to the UBS UK
pension plan in 2024 are estimated
at USD
m, subject to regular funding reviews
during
the year.
US defined benefit plans
There are two main
UBS US pension plans, with a
normal retirement age of
. Both plans were closed to
new entrants
more than 20 years
ago. Since they
closed, new employees
have participated
in a UBS defined
contribution
plan.
One of
the
UBS defined
benefit
plans
is a
contribution-based
plan
in which
each
participant accrues
a
percentage
of
salary in a retirement
savings account. The
retirement savings account
is credited annually with
interest based on
a rate
that is linked to the average yield on one-year US government bonds. For the other UBS defined benefit plan, retirement
benefits accrue based on the
career-average earnings of each individual
plan participant. Former employees with
vested
benefits can take a lump sum payment
or a lifetime annuity.
As required under
applicable pension laws,
both plans have
fiduciaries who, together
with UBS AG, are
responsible for
the governance of the plans.
Each plan’s
fiduciaries are
responsible
for the
investment
decisions with
respect to
the plan
assets. The
plan assets
of
both plans are invested in diversified portfolios of financial assets.
The employer contributions to the UBS US defined benefit
plans in 2024 are estimated at USD
m.
German pension plans
There are two major unfunded UBS defined
benefit plans in Germany.
The normal retirement age
is
paid directly
by UBS AG.
In the
larger of
the two
plans each
participant accrues
a percentage
of salary
in a
retirement
savings account.
The accumulated
account
balance
of the
participant
is credited
on an
annual
basis with
guaranteed
interest at a rate of
%. The plan has been closed to new entrants, and all participants younger than the age of 55 as of
June
2021
no
longer
accrue
benefits.
In
the
other
plan,
amounts
are
accrued
annually
based
on
employee
elections
related to
variable compensation. For
this plan, the
accumulated account
balance is credited
on an annual
basis with a
guaranteed interest rate
of
% for amounts accrued
before 2010, of
% for amounts accrued
from 2010 to 2017
and
of
% for amounts accrued
after 2017. Both
plans are subject
to German pension
law, whereby
the responsibility
to
pay
pension
benefits
when
they
are
due
resides
entirely
with
UBS AG.
A
portion
of
the
pension
payments
is
directly
increased in line with price inflation.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
221
Note 26
Post-employment benefit plans (continued)
In June 2021, UBS AG implemented a
new funded UBS pension plan with
interest credited to participants equal
to actual
investment returns
with a
guaranteed minimum
of
%. The
plan was
implemented retrospectively
for new
hires since
June 2018 and for all eligible active participants younger
than 55 from July 2021. Each participant accrues
a percentage
of salary in a retirement savings account.
The employer contributions to the UBS German defined benefit
plans in 2024 are estimated at USD
m.
Financial information by plan
The tables
below provide
an analysis
of the
movement
in the
net asset
/ liability
recognized
on the
balance sheet
for
defined benefit plans, as well as an analysis of amounts
recognized in net profit and in
Other comprehensive incom
e.
Defined benefit plans
USD m
Swiss plan
UK plan
US and German plans
Total
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Defined benefit obligation at the beginning of the year
Current service cost
Interest expense
Plan participant contributions
Remeasurements
(
2,424
)
(
1,474
)
(
267
)
(
4,165
)
of which: actuarial (gains) / losses due to changes in demographic
assumptions
(
75
)
(
6
)
(
2
)
(
31
)
(
3
)
of which: actuarial (gains) / losses due to changes in financial
assumptions
(
2,653
)
(
1,575
)
(
279
)
(
4,506
)
of which: experience (gains) / losses
1
(
3
)
Past service cost related to plan amendments
Curtailments
(
3
)
(
13
)
(
3
)
(
13
)
Benefit payments
(
662
)
(
796
)
(
107
)
(
123
)
(
110
)
(
111
)
(
880
)
(
1,030
)
Other movements
(
5
)
(
5
)
Foreign currency translation
(
291
)
(
408
)
(
28
)
(
727
)
Defined benefit obligation at the end of the year
of which: amounts owed to active members
of which: amounts owed to deferred members
of which: amounts owed to retirees
of which: funded plans
of which: unfunded plans
Fair value of plan assets at the beginning of the year
Return on plan assets excluding interest income
(
1,942
)
(
1,312
)
(
223
)
(
3,476
)
Interest income
Employer contributions
Plan participant contributions
Benefit payments
(
662
)
(
796
)
(
107
)
(
123
)
(
110
)
(
111
)
(
880
)
(
1,030
)
Administration expenses, taxes and premiums paid
(
8
)
(
7
)
(
4
)
(
3
)
(
12
)
(
11
)
Other movements
(
1
)
(
1
)
Foreign currency translation
(
322
)
(
450
)
(
772
)
Fair value of plan assets at the end of the year
Surplus / (deficit)
(
356
)
(
335
)
Asset ceiling effect at the beginning of the year
Interest expense on asset ceiling effect
Asset ceiling effect excluding interest expense and foreign currency
translation on
asset ceiling effect
(
1,332
)
(
1,332
)
Foreign currency translation
(
31
)
(
31
)
Asset ceiling effect at the end of the year
Net defined benefit asset / (liability) of major plans
(
356
)
(
335
)
(
15
)
(
14
)
Net defined benefit asset / (liability) of remaining plans
(
90
)
(
80
)
Total net defined benefit asset / (liability)
(
105
)
(
94
)
of which: Net defined benefit asset
of which: Net defined benefit liability
2
(
487
)
(
449
)
1 Experience (gains) /
losses are a component
of actuarial remeasurements of
the defined benefit obligation
and reflect the effects
of differences between
the previous actuarial assumptions
and what has actually
occurred.
2 Refer to Note 18c.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
222
Note 26
Post-employment benefit plans (continued)
Income statement – expenses related to defined benefit plans
1
USD m
Swiss plan
UK plan
US and German plans
Total
For the year ended
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Current service cost
Interest expense related to defined benefit obligation
Interest income related to plan assets
(
393
)
(
274
)
(
126
)
(
70
)
(
48
)
(
31
)
(
568
)
(
376
)
Interest expense on asset ceiling effect
Administration expenses, taxes and premiums paid
Past service cost related to plan amendments
Curtailments
(
3
)
(
13
)
(
3
)
(
13
)
Net periodic expenses recognized in net profit for major plans
(
17
)
(
3
)
Net periodic expenses recognized in net profit for remaining plans
2
Total net periodic expenses recognized in net profit
1 Refer to Note 6.
2 Includes differences between actual and estimated performance award accruals.
Other comprehensive income – gains / (losses) on defined benefit plans
USD m
Swiss plan
UK plan
US and German plans
Total
For the year ended
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Remeasurement of defined benefit obligation
(
1,901
)
(
96
)
(
33
)
(
2,031
)
of which: change in discount rate assumption
(
1,332
)
(
69
)
(
33
)
(
1,434
)
of which: change in rate of pension increase assumption
(
5
)
of which: change in rate of interest credit on retirement savings
assumption
(
408
)
(
9
)
(
82
)
(
490
)
of which: change in life expectancy
(
1
)
of which: change in other actuarial assumptions
(
88
)
(
19
)
(
83
)
of which: experience gains / (losses)
1
(
688
)
(
226
)
(
135
)
(
107
)
(
11
)
(
820
)
(
344
)
Return on plan assets excluding interest income
(
1,942
)
(
1,312
)
(
223
)
(
3,476
)
Asset ceiling effect excluding interest expense and foreign currency
translation
(
656
)
(
656
)
Total gains / (losses) recognized in other comprehensive income for major plans
(
56
)
(
173
)
(
31
)
(
8
)
(
95
)
Total gains / (losses) recognized in other comprehensive income for remaining plans
(
8
)
Total gains / (losses) recognized in other comprehensive income
2
(
103
)
1 Experience (gains) /
losses are a component
of actuarial remeasurements of
the defined benefit obligation
and reflect the effects
of differences between
the previous actuarial assumptions
and what has actually
occurred.
2 Refer to the “Statement of comprehensive income”.
The table below provides information about the duration
of the DBO and the timing for expected benefit payments.
Swiss plan
UK plan
US and German plans
1
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Duration of the defined benefit obligation (in years)
Maturity analysis of benefits expected to be paid
USD m
Benefits expected to be paid within 12 months
Benefits expected to be paid between 1 and 3 years
Benefits expected to be paid between 3 and 6 years
Benefits expected to be paid between 6 and 11 years
Benefits expected to be paid between 11 and 16 years
Benefits expected to be paid in more than 16 years
1 The duration of the defined benefit obligation represents a weighted average across US and
German plans.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
223
Note 26
Post-employment benefit plans (continued)
Actuarial assumptions
The
actuarial
assumptions
used
for
the
defined
benefit
plans
are
based on
the
economic
conditions
prevailing
in the
jurisdiction in
which they
are
offered.
Changes in
the defined
benefit obligation
are
most sensitive
to changes
in the
discount rate. The discount
rate is based on
the yield of high-quality
corporate bonds quoted
in an active market
in the
currency
of
the
respective
plan.
A
decrease
in
the
discount
curve
increases
the
DBO.
UBS AG
regularly
reviews
the
actuarial assumptions used in calculating the DBO to determine
their continuing relevance.
›
Refer to Note 1a item 5 for a description
of the accounting policy for defined benefit plans
The tables below show the significant actuarial assumptions
used in calculating the DBO at the end of the year.
Significant actuarial assumptions of
defined benefit
plans
Swiss plan
UK plan
US plans
German plans
In %
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Discount rate
1
1
Rate of pension increase
Rate of interest credit on retirement savings
2
2
1 Represents weighted average across US pension plans.
2 Only applicable to one of the UBS US pension plans
Mortality tables and life expectancies for
major plans
Life expectancy at age 65 for a male member currently
aged 65
aged 45
Country
Mortality table
31.12.23
31.12.22
31.12.23
31.12.22
Switzerland
BVG 2020 G with CMI 2022 projections
1
UK
S3PA with CMI 2022 projections
2
USA
Pri-2012 with MP-2021 projection scale
Germany
Dr. K. Heubeck 2018 G
Life expectancy at age 65 for a female member currently
aged 65
aged 45
Country
Mortality table
31.12.23
31.12.22
31.12.23
31.12.22
Switzerland
BVG 2020 G with CMI 2022 projections
1
UK
S3PA with CMI 2022 projections
2
USA
Pri-2012 with MP-2021 projection scale
Germany
Dr. K. Heubeck 2018 G
1 In 2022, BVG 2020 G with CMI 2021 projections was used.
2 In 2022, S3PA with CMI 2021 projections was used.
Sensitivity analysis of significant actuarial assumptions
The table
below presents
a sensitivity
analysis for
each significant
actuarial assumption,
showing how
the DBO
would
have been affected
by changes in
the relevant
actuarial assumption that
were reasonably
possible at the
balance sheet
date.
Unforeseen
circumstances
may
arise,
which
could
result
in
variations
that
are
outside
the
range
of
alternatives
deemed
reasonably
possible.
Caution
should
be
used
in
extrapolating
the
sensitivities
below
on
the
DBO,
as
the
sensitivities may not be linear.
Sensitivity analysis of significant actuarial
assumptions
1
Increase / (decrease) in defined benefit obligation
Swiss plan
UK plan
US and German plans
USD m
31.12.23
31.12.22
31.12.23
31.12.22
31.12.23
31.12.22
Discount rate
Increase by 50 basis points
(
857
)
(
641
)
(
164
)
(
141
)
(
50
)
(
51
)
Decrease by 50 basis points
Rate of pension increase
Increase by 50 basis points
Decrease by 50 basis points
–
2
–
2
(
129
)
(
118
)
(
4
)
(
3
)
Rate of interest credit on retirement savings
Increase by 50 basis points
–
3
–
3
Decrease by 50 basis points
(
144
)
(
106
)
–
3
–
3
(
8
)
(
8
)
Life expectancy
Increase in longevity by one additional year
1 The sensitivity analyses are based on a change in one
assumption while holding all other assumptions constant, so that interdependencies between
the assumptions are excluded.
2 As the assumed rate of pension
increase was
% as of 31 December 2023 and as of 31 December 2022, a downward change in assumption
is not applicable.
3 As the UK plan does not provide interest credits on retirement savings,
a change in
assumption is not applicable.
Annual Report 2023
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AG consolidated financial statements
224
Note 26
Post-employment benefit plans (continued)
Fair value of plan assets
The tables below
provide information
about the composition
and fair value
of plan assets
of the major
defined benefit
plans.
Composition and fair value of plan assets
Swiss defined benefit plan
31.12.23
31.12.22
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
USD m
Quoted
in an active
market
Other
Total
Quoted
in an active
market
Other
Total
Cash and cash equivalents
Real estate / property
Domestic
Foreign
Investment funds
Equity
Domestic
Foreign
Bonds
1
Domestic, AAA to BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Foreign
Other
Other investments
Total fair value of plan assets
31.12.23
31.12.22
Total fair value of plan assets
of which:
2
Bank accounts at UBS Group AG
UBS Group AG debt instruments
UBS Group AG shares
Securities lent to UBS Group AG
3
Property occupied by UBS Group AG
Derivative financial instruments, counterparty UBS Group
AG
3
1 The bond credit ratings are
primarily based on S&P’s credit ratings.
Ratings AAA to BBB– and below BBB– represent investment
grade and non-investment grade ratings,
respectively. In cases where credit
ratings
from other rating agencies were used, these were converted to the equivalent rating in S&P’s rating classification.
2 Bank accounts at UBS AG encompass accounts in the name of the Swiss pension fund. The other
positions disclosed
in the
table encompass
both direct
investments in
UBS AG
instruments and
UBS Group
AG shares
and indirect
investments, i.e.,
those made
through funds
that the
pension fund
invests in.
3 Securities lent to UBS AG and derivative
financial instruments are presented gross of any
collateral. Securities lent to UBS AG
were fully covered by collateral as
of 31 December 2023 and 31 December 2022.
Net
of collateral, derivative financial instruments amounted to negative USD
m as of 31 December 2023 (31 December 2022: negative USD
m).
Annual Report 2023
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AG consolidated financial statements
225
Note 26
Post-employment benefit plans (continued)
Composition and fair value of plan assets
(continued)
UK defined benefit plan
31.12.23
31.12.22
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
USD m
Quoted
in an active
market
Other
Total
Quoted
in an active
market
Other
Total
Cash and cash equivalents
(
27
)
(
27
)
(
1
)
Bonds
1
Domestic, AAA to BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Investment funds
Equity
Domestic
Foreign
Bonds
1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Domestic
Foreign
Other
(
280
)
(
280
)
(
11
)
Repurchase agreements
(
947
)
(
947
)
(
35
)
(
612
)
(
612
)
(
25
)
Other investments
Total fair value of plan assets
1 The bond credit ratings are
primarily based on S&P’s credit ratings.
Ratings AAA to BBB– and below BBB– represent
investment grade and non-investment grade
ratings, respectively. In
cases where credit ratings
from other rating agencies were used, these were converted to the equivalent rating in S&P’s
rating classification.
US and German defined benefit
plans
31.12.23
31.12.22
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
USD m
Quoted
in an active
market
Other
Total
Quoted
in an active
market
Other
Total
Cash and cash equivalents
Equity
Domestic
Foreign
Bonds
1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Investment funds
Equity
Domestic
Foreign
Bonds
1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Domestic
Other
Other investments
(
8
)
(
7
)
(
1
)
Total fair value of plan assets
1 The bond credit ratings are
primarily based on S&P’s credit ratings.
Ratings AAA to BBB– and below BBB– represent
investment grade and non-investment grade
ratings, respectively. In
cases where credit ratings
from other rating agencies were used, these were converted to the equivalent rating in S&P’s
rating classification.
Annual Report 2023
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AG consolidated financial statements
226
Note 26
Post-employment benefit plans (continued)
b) Defined contribution plans
UBS AG sponsors
several defined
contribution
plans, with
the most
significant plans
in the
US and
the
UK. UBS
AG’s
obligation is limited to its contributions made
in accordance with each plan, which
may include direct contributions and
matching contributions.
Employer contributions
to defined
contribution plans
are
recognized as
an expense
and were
USD
m in 2023 and USD
m in 2022.
›
Refer to Note 6 for more information
c) Related-party disclosure
UBS AG
is the
principal
provider
of banking
services
for
the
pension fund
of
UBS AG
in
Switzerland.
In this
capacity,
UBS AG is
engaged to
execute
most of
the pension
fund’s banking
activities. These
activities can
include, but
are
not
limited to, trading,
securities lending
and borrowing
and derivative
transactions. The
non-Swiss UBS AG
pension funds
do not
have a
similar banking
relationship with
UBS AG. During
2023, UBS
AG received
USD
m in
fees for
banking
services
from
the
major post-employment
benefit
plans
(2022:
USD
m).
As of
31 December
2023,
the
major
post-
employment benefit plans held USD
m in UBS Group AG shares (31 December
2022: USD
m).
›
Refer to the “Composition and fair value of
plan assets” table in Note 26a for more information
about fair value of investments in
UBS AG and UBS Group AG instruments held
by the Swiss pension fund
Note 27
Employee benefits: variable compensation
a) Plans offered
UBS has
several share-based
and other
deferred compensation
plans that
align the
interests of
Group Executive
Board
(GEB) members and other employees with the interests
of investors.
Share-based awards are granted
in the form of
notional shares and, where
permitted, carry a dividend
equivalent that may be
paid in notional shares or cash. Awards are settled by delivering UBS shares at vesting, except in jurisdictions
where this is not
permitted for legal or tax reasons.
Deferred
compensation
awards
are
generally
forfeitable
upon,
among
other
circumstances,
voluntary
termination
of
employment with UBS. These compensation plans are also designed to meet
regulatory requirements and include special
provisions
for
regulated
employees.
For
the
majority
of
variable
compensation
awards
granted
under
such
plans
to
employees of UBS AG, the
grantor entity is UBS
Group AG. Expenses associated
with these awards
are charged by
UBS
Group AG to UBS AG. For the purpose of this Note, refere
nces to shares refer to UBS Group AG shares.
The most significant deferred compensation plans
are described below.
›
Refer to Note 1a
item 4 for a description of the accounting
policy related to share-based and other deferred compensation plans
Mandatory deferred compensation plans
Long-Term Incentive Plan
The Long-Term
Incentive Plan
(LTIP)
is a
mandatory deferred
share-based
compensation plan
for senior
leaders of
the
Group (i.e., GEB members and selected senior management).
The number of notional shares delivered at vesting depends on two equally weighted
performance metrics over a three-
year
performance
period:
return
on
common
equity
tier
1
(CET1)
capital
and
relative
total
shareholder
return,
which
compares
the
total
shareholder
return
(TSR)
of
UBS
with
the
TSR
of
an
index
consisting
of
listed
Global
Systemically
Important
Banks as
determined
by the
Financial Stability
Board (excluding
UBS). The
final number
of shares
vest
over
three
years
following the
performance
period for
GEB
members,
and cliff-vest
in
the
year
following the
performance
period for selected senior management.
Equity Ownership Plan / Fund Ownership Plan
The Equity Ownership Plan
(EOP) is the deferred
share-based compensation
plan for employees outside
of the GEB that
are subject to deferral requirements.
EOP awards generally vest over three
years.
Certain Asset
Management employees
receive some
or all of
their EOP
in the form
of notional
funds (Fund
Ownership
Plan or FOP, previously
named AM EOP).
This plan is
generally delivered in
cash and vests
over three years.
The amount
delivered depends on the value of the underlying investment
funds at the time of vesting.
Annual Report 2023
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AG consolidated financial statements
227
Note 27
Employee benefits: variable compensation
(continued)
Deferred Contingent Capital Plan
The
Deferred
Contingent
Capital
Plan
(DCCP)
is
a
deferred
compensation
plan
for
all
employees
who
are
subject
to
deferral requirements.
Such employees
are
awarded
notional additional
tier 1
(AT1)
capital instruments,
which, at
the
discretion of UBS, can be settled in cash or a perpetual, marketable AT1 capital instrument. DCCP awards generally bear
notional
interest
paid
annually
(except
for
certain
regulated
employees)
and
vest
in
full
after
five
years.
Awards
are
forfeited if a
viability event occurs
(i.e., if FINMA
notifies the firm
that the DCCP
awards must be written
down to mitigate
the risk of insolvency,
bankruptcy or failure
of UBS) or
if the firm
receives a commitment
of extraordinary
support from
the public
sector that
is necessary
to prevent
such an
event. DCCP
awards are
also written
down if
the Group’s
CET1
capital ratio falls
below a defined threshold. In
addition, GEB members forfeit
% of DCCP
awards for each loss-making
year during the vesting period.
Financial advisor variable compensation
In line with market practice for US wealth management businesses, the compensation for US financial advisors in Global
Wealth Management
consists of cash
compensation and deferred
compensation awards, determined
using a formulaic
approach based on production.
Cash
compensation
reflects
a
percentage
of
the
compensable
production
that
each
financial
advisor
generates.
Compensable production is generally based on transaction revenue and investment advisory fees and may reflect further
adjustments. The percentage rate generally varies based
on the level of the production and firm tenure.
Financial
advisors
may
also
be
granted
annual
deferred
compensation.
These
amounts
generally
vest
over
a
six-year
period. The annual deferred compensation amount reflects
the overall percentage rate and production.
Cash compensation and
deferred compensation awards
may be reduced
for, among other
things, errors, negligence
or
carelessness, or failure to comply with the firm’s rules, standards, practices and / or policies, and / or applicable laws and
regulations.
Financial
advisors
may
also
participate
in
additional
programs
to
support
promoting
and
developing
their
business
or
supporting the transition of
client relationships where appropriate. Financial
advisor compensation also includes
expenses
related to compensation commitments with financial advisors
entered into at the time of recruitment that are
subject to
vesting requirements.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
228
Note 27
Employee benefits: variable compensation
(continued)
b) Effect on the income statement
Effect on the income statement for the financial year and
future periods
The table
below provides
information about
compensation
expenses related
to total
variable compensation
that were
recognized in the financial year ended
31 December 2023, as well as
expenses that were deferred and will be
recognized
in the income statement for 2024
and later.
The majority of expenses deferred
to 2024 and later that are
related to the
2023 performance
year pertain
to awards
granted in
February 2024.
The total
unamortized compensation
expense for
unvested share
-based awards
granted up
to 31 December
2023 will
be recognized
in future
periods over
a weighted
average period of
Variable compensation
Expenses recognized in 2023
Expenses deferred to 2024 and later
1
USD m
Related to the
2023
performance
year
Related to prior
performance
years
Total
Related to the
2023
performance
year
Related to prior
performance
years
Total
Non-deferred cash
(
36
)
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Long-Term Incentive Plan
of which: Fund Ownership Plan
Variable compensation – performance awards
Variable compensation – financial advisors
2
of which: non-deferred cash
(
4
)
of which: deferred share-based awards
of which: deferred cash-based awards
of which: compensation commitments with recruited financial
advisors
Variable compensation – other
3
Total variable compensation
4
1 Estimate as
of 31 December 2023.
Actual amounts to
be expensed in
future periods may
vary; e.g., due
to forfeiture of
awards.
2 Financial advisor compensation
consists of cash
and deferred compensation
awards and is based on
compensable revenues and firm tenure
using a formulaic approach. It
also includes expenses related to
compensation commitments with financial advisors
entered into at the time
of recruitment
that are subject to vesting requirements.
3 Consists of replacement payments, forfeiture credits,
severance payments, retention plan payments and interest
expense related to the Deferred Contingent Capital Plan.
4 Includes USD
m in expenses related to share-based compensation
(performance awards: USD
m; other variable compensation: USD
m; financial advisor compensation: USD
m). A further USD
m
in expenses related to share-based compensation
was recognized within other expense categories
included in Note 6 (salaries: USD
m related to role-based allowances;
social security: USD
m; other personnel
expenses: USD
m related to the Equity Plus Plan).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
229
Note 27
Employee benefits: variable compensation
(continued)
Variable compensation (continued)
Expenses recognized in 2022
Expenses deferred to 2023 and later
1
USD m
Related to the
2022
performance
year
Related to prior
performance
years
Total
Related to the
2022
performance
year
Related to prior
performance
years
Total
Non-deferred cash
(
9
)
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Long-Term Incentive Plan
of which: Fund Ownership Plan
Variable compensation – performance awards
Variable compensation – financial advisors
2
of which: non-deferred cash
of which: deferred share-based awards
of which: deferred cash-based awards
of which: compensation commitments with recruited financial
advisors
Variable compensation – other
3
Total variable compensation
4
1 Estimate as
of 31 December
2022. Actual amounts
to be expensed
in future periods
may vary; e.g.,
due to forfeiture
of awards.
2 Financial advisor compensation
consists of cash
and deferred compensation
awards and is based on
compensable revenues and firm tenure
using a formulaic approach. It
also includes expenses related to
compensation commitments with financial advisors entered
into at the time of
recruitment
that are subject to vesting requirements.
3 Consists of replacement payments, forfeiture credits,
severance payments, retention plan payments
and interest expense related to the Deferred Contingent Capital Plan.
4 Includes USD
m in expenses related to share-based compensation (performance awards: USD
m; other variable compensation: USD
m; financial advisor compensation: USD
m). A further USD
m in
expenses related to
share-based compensation
was recognized
within other
expense categories
included in
Note 6 (salaries:
USD
m related to
role-based allowances;
social security:
USD
m; other
personnel
expenses: USD
m related to the Equity Plus Plan).
Variable compensation (continued)
Expenses recognized in 2021
Expenses deferred to 2022 and later
1
USD m
Related to the
2021
performance
year
Related to prior
performance
years
Total
Related to the
2021
performance
year
Related to prior
performance
years
Total
Non-deferred cash
(
8
)
Deferred compensation awards
of which: Equity Ownership Plan
of which: Deferred Contingent Capital Plan
of which: Long-Term Incentive Plan
of which: Fund Ownership Plan
Variable compensation – performance awards
Variable compensation – financial advisors
2
of which: non-deferred cash
(
6
)
of which: deferred share-based awards
of which: deferred cash-based awards
of which: compensation commitments with recruited financial
advisors
Variable compensation – other
3
Total variable compensation
4
1 Estimate as of 31
December 2021. Actual amounts
expensed may vary; e.g.,
due to forfeiture of
awards.
2 Financial advisor compensation
consists of cash and
deferred compensation awards and
is based on
compensable revenues and firm tenure using
a formulaic approach. It also includes
expenses related to compensation commitments
with financial advisors entered into
at the time of recruitment that
are subject to
vesting requirements.
3 Consists
of replacement
payments, forfeiture
credits, severance
payments, retention
plan payments
and interest
expense related
to the
Deferred Contingent
Capital Plan.
4 Includes
USD
m in expenses related to share-based compensation
(performance awards: USD
m; other variable compensation: USD
m; financial advisor compensation: USD
m). A further USD
m in expenses
related to share-based
compensation was
recognized within
other expense categories
included in Note
6 (salaries: USD
m related to
role-based allowances;
social security: USD
m; other personnel
expenses:
USD
m related to the Equity Plus Plan).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
230
Note 27
Employee benefits: variable compensation
(continued)
c) Outstanding share-based compensation awards
Share and performance share awards
Movements in
outstanding share
-based awards
granted by
UBS AG and
its subsidiaries
to employees
during 2023
and
2022 are provided in the table below.
Movements in outstanding share-based compensation
awards
Number of shares
2023
Weighted
average grant
date fair
value (USD)
Number of shares
2022
Weighted
average grant
date fair
value (USD)
Outstanding, at the beginning of the year
Awarded during the year
Distributed during the year
(
132,770
)
(
37,994
)
Forfeited during the year
(
4,043
)
(
1,923
)
Outstanding, at the end of the year
of which: shares vested for accounting purposes
The
total
carrying
amount
of
the
liability
related
to
cash-settled
share-based
awards
as
of
31 December
2023
and
31 December 2022 was USD
m and USD
m, respectively.
d) Valuation
UBS share awards
UBS measures compensation expense
based on the average market
price of UBS shares
on the grant date as quoted
on
the SIX
Swiss Exchange,
taking into
consideration post-vesting
sale and
hedge restrictions,
non-vesting conditions
and
market conditions, where
applicable. The fair
value of
the share awards subject
to post-vesting sale
and hedge restrictions
is discounted on
the basis of
the duration of
the post-vesting restriction
and is referenced
to the cost
of purchasing
an
at-the-money European
put option
for the
term of
the transfer
restriction. The
grant date
fair value
of notional
shares
without dividend
entitlements also
includes a
deduction for
the present
value of
future
expected dividends
to be
paid
between the grant date and distribution.
Note 28
Interests in subsidiaries and other entities
a) Interests in subsidiaries
UBS AG
defines its significant subsidiaries
as those entities
that, either individually
or in aggregate, contribute
significantly
to UBS AG’s
financial position or
results of
operations, based
on a number
of criteria, including
the subsidiaries’ equity
and
contribution
to
UBS
AG’s
total
assets
and
profit
or
loss
before
tax,
in
accordance
with
the
requirements
set
by
IFRS 12, Swiss regulations and the rules of the US Securities
and Exchange Commission (the SEC).
Individually significant subsidiaries
The table below lists UBS AG’s individually significant subsidiaries as of 31 December 2023. Unless otherwise stated, the
subsidiaries listed below
have share capital consisting
solely of ordinary
shares held entirely by
UBS AG
and the proportion
of ownership interest held is equal to the voting
rights held by UBS AG.
The
country
where
the
respective
registered
office
is located
is also
the
principal
place
of business.
UBS
AG operates
through a
global branch
network and
a significant
proportion of
its business
activity is
conducted outside
Switzerland,
including in the UK,
the US, Singapore, the Hong
Kong SAR and other countries. UBS
Europe SE has branches
and offices
in a number of EU Member
States, including Germany, Italy, Luxembourg,
France and Spain. Share
capital is provided in
the currency of the legally registered office.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
231
Note 28
Interests in subsidiaries and other entities
(continued)
Individually significant subsidiaries of
UBS AG as of 31 December 2023
1
Company
Registered office
Primary business
Share capital in million
Equity interest accumulated in %
USD
2
USD
CHF
USD
EUR
USD
USD
3
CHF
1 Includes direct
and indirect subsidiaries
of UBS AG.
2 Consists of common
share capital of
USD
.
3 Consists of common
share capital of
USD
.
Other subsidiaries
The table below
lists other direct
and indirect subsidiaries
of UBS AG
that are not
individually significant but
contribute
to
UBS
AG’s
total
assets
and
aggregated
profit
before
tax
thresholds
and
are
thus
disclosed
in
accordance
with
requirements set by the SEC.
Other subsidiaries of UBS AG as of 31
December 2023
Company
Registered office
Primary business
Share capital in million
Equity interest
accumulated in %
USD
HKD
GBP
CHF
USD
USD
EUR
CHF
EUR
USD
USD
AUD
1
HKD
JPY
JPY
1 Includes a nominal amount relating to redeemable preference shares.
Consolidated structured entities
Consolidated
structured
entities
(SEs)
include
certain
investment
funds,
securitization
vehicles
and
client
investment
vehicles. UBS AG has no individually significant subsidiaries that
are SEs.
In 2023 and 2022, UBS
AG did not enter into any
contractual obligation that could
require UBS AG to provide
financial
support to
consolidated SEs.
In addition,
UBS AG
did not
provide support,
financial or
otherwise, to
a consolidated
SE
when UBS
AG was not
contractually obligated
to do so,
nor does
UBS AG currently
have any intention
to do
so in the
future.
Furthermore,
UBS
AG
did
not
provide
support,
financial
or
otherwise,
to
a
previously
unconsolidated
SE
that
resulted in UBS AG controlling the SE during the reporting
period.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
232
Note 28
Interests in subsidiaries and other entities
(continued)
b) Interests in associates and joint ventures
As of
31 December
2023 and
31 December
2022, no
associate or
joint venture
was
individually
material to
UBS AG.
Also, there were no significant restrictions on the ability of associates or joint ventures to transfer funds to UBS AG or its
subsidiaries as cash dividends or
to repay loans or advances
made. There were no quoted market
prices for any associates
or joint ventures of UBS AG.
Investments in associates and joint ventures
USD m
2023
2022
Carrying amount at the beginning of the year
Additions
Reclassifications
(
44
)
Share of comprehensive income
(
180
)
(
41
)
of which: share of net profit / (loss)
1
(
163
)
of which: share of other comprehensive income
2
(
17
)
(
73
)
Share of changes in retained earnings
(
1
)
Dividends received
(
35
)
(
31
)
Foreign currency translation
(
30
)
Carrying amount at the end of the year
of which: associates
of which: SIX Group AG, Zurich
3
of which: other associates
of which: joint ventures
1 For 2023, consists of negative USD
m from associates (for 2022, consists of USD
m from associates and USD
m from joint ventures).
2 For 2023, consists of negative USD
m from associates (for 2022,
consists of negative USD
m from associates).
3 In 2023, UBS AG’s legal equity interest amounted to
%. UBS AG is represented on the Board of Directors.
c) Unconsolidated structured entities
UBS AG is considered to
sponsor another entity if, in addition
to ongoing involvement with
that entity,
it had a key role
in establishing that
entity or in
bringing together relevant counterparties
for a transaction
facilitated by that
entity. During
2023,
UBS
AG
sponsored
the
creation
of various
SEs
and
interacted
with a
number
of non-sponsored
SEs,
including
securitization vehicles, client vehicles and certain
investment funds, that UBS AG did not consolidate
as of 31 December
2023 because it did not control them.
Interests in unconsolidated structured entities
The table below
presents UBS AG’s
interests in and
maximum exposure
to loss from
unconsolidated SEs, as
well as the
total assets held by the SEs in which UBS had an interest
as of year-end, except for investment funds sponsored
by third
parties, for which the carrying amount of UBS’s interest
as of year-end has been disclosed.
As a
consequence of the
acquisition of the
Credit Suisse Group
and the
resulting increase in
interests in
structured entities,
interests
in
client
vehicles
sponsored
by
UBS
are
presented
separately
to
other
vehicles
sponsored
by third
parties,
to
clearly
distinguish
the
different
types
of
entities
that
UBS
is
involved
with.
Further,
bonds
issued
by
US
government-sponsored entities included within Group Treasury’s HQLA
portfolio have been excluded given UBS
does not
absorb significant risk and third-party funding vehicles of large multi-nationals have been excluded as they are no longer
considered
structured
entities.
Prior
periods
have
been
restated
to
reflect
these
changes.
As
a
consequence
of
these
changes, UBS AG does not disclose any interest in other vehicles
sponsored by third parties.
Sponsored unconsolidated structured entities in which UBS
did not have an interest at year-end
During 2023 and 2022, UBS AG did not earn material income from
sponsored unconsolidated SEs in which UBS
did not
have an interest at year-end.
During 2023 and
2022, UBS AG
and third parties
did not transfer
any assets into
sponsored securitization vehicles created
in the year. UBS AG
and third parties transferred assets, alongside deposits and
debt issuances (which are assets from the
perspective
of
the
vehicle),
of
USD
bn
and
USD
bn,
respectively,
into
sponsored
client
vehicles
created
in
2023
(2022:
USD
bn
and
USD
bn,
respectively).
For
sponsored
investment
funds,
transfers
arose
during
the
period
as
investors invested and redeemed
positions, thereby changing
the overall size of the
funds, which, when combined
with
market movements, resulted in a total closing net asset value
of USD
bn (31 December 2022: USD
bn).
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
233
Note 28
Interests in subsidiaries and other entities
(continued)
31.12.23
USD m, except where indicated
Securitization
vehicles
1
Client Vehicles
sponsored by UBS
2
Investment
funds
Total
Maximum
exposure to loss
3
Financial assets at fair value held for trading
Derivative financial instruments
Loans and advances to customers
Financial assets at fair value not held for trading
Financial assets measured at fair value through other
comprehensive income
Other financial assets measured at amortized cost
Total assets
Derivative financial instruments
Total liabilities
Assets held by the unconsolidated structured entities in which UBS
AG had an interest (USD bn)
4
5
6
31.12.22
USD m, except where indicated
Securitization
vehicles
1,2
Client Vehicles
sponsored by UBS
2
Investment
funds
Total
Maximum
exposure to loss
3
Financial assets at fair value held for trading
Derivative financial instruments
Loans and advances to customers
Financial assets at fair value not held for trading
Financial assets measured at fair value through other
comprehensive income
Other financial assets measured at amortized cost
Total assets
Derivative financial instruments
Total liabilities
Assets held by the unconsolidated structured entities in which UBS
AG had an interest (USD bn)
4
5
6
1 Includes securities issued by securitization structured entities sponsored by both UBS
and third parties.
2 Client vehicles sponsored by UBS are structured entities that do
not qualify as a securitization in line with
regulatory requirements and are not
considered an investment fund. Effective
from 31 December 2023,
bonds issued by US government-sponsored
entities included in Group Treasury‘s
HQLA and interests in third-
party funding vehicles of large multi-nationals have been excluded, with prior periods restated. The restatement resulted in a
decrease in interests in securitization vehicles of USD
m and a decrease in interests in
client vehicles of USD
m as of 31 December 2022. There was a corresponding decrease
in assets held by securitization vehicles in which UBS has an interest of USD
bn and a decrease in assets held by client
vehicles in which UBS has an interest of USD
bn as of 31 December 2022.
3 For the purpose of this disclosure, maximum exposure to loss amounts do not consider the risk-reducing effects of collateral
or other
credit enhancements.
4 Represents the principal amount outstanding.
5 Represents the market value of total assets.
6 Represents the net asset value of the investment funds sponsored by UBS and the carrying
amount of UBS’s interests in the investment funds not sponsored by UBS.
UBS AG
retains or
purchases
interests in
unconsolidated
SEs in
the form
of direct
investments, financing,
guarantees,
letters
of
credit
and
derivatives,
as
well
as
through
management
contracts.
UBS
AG’s
maximum
exposure
to
loss
is
generally equal to the
carrying amount of
UBS AG’s interest
in the given SE,
with this subject to
change over time
with
market movements.
Guarantees, letters of
credit and
credit derivatives
are an
exception, with the
given contract’s
notional
amount, adjusted for losses already incurred, representing the
maximum loss that UBS AG is exposed to.
The
maximum
exposure
to
loss
disclosed
in
the
table
above
does
not
reflect
UBS
AG’s
risk
management
activities,
including
effects
from
financial
instruments
that
may
be
used
to
economically
hedge
risks
inherent
in
the
given
unconsolidated SE or risk-reducing effects of collateral or
other credit enhancements.
In
2023
and
2022,
UBS
AG
did
not
provide
support,
financial
or
otherwise,
to
any
unconsolidated
SE
when
not
contractually obligated to do so, nor does UBS AG currently
have any intention to do so in the future.
In 2023
and 2022,
income and
expenses from
interests in
unconsolidated SEs
primarily resulted
from mark-to-market
movements
recognized
in
Other
net
income from
financial
instruments
measured
at
fair
value
through
profit or
loss
,
which were generally hedged with
other financial instruments, as well
as fee and commission income
received from UBS-
sponsored funds.
Interests in securitization vehicles
As
of
31 December
2023
and
31 December
2022,
UBS
AG
held
interests,
both
retained
and
acquired,
in
various
securitization vehicles that relate to financing,
underwriting, secondary market and derivative trading activities.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
234
Note 28
Interests in subsidiaries and other entities
(continued)
The numbers outlined in the table
above may differ from the securitization
positions presented in the 31 December 2023
Pillar 3
Report,
available
under
“Pillar 3
disclosures”
at
ubs.com/investors,
synthetic
securitizations
transacted
with
entities
that
are
not
SEs
and
transactions
in
which
UBS
AG
did
not
have
an
interest
because
it
did
not
absorb
any
risk;
(ii) a
different
measurement
basis
in
certain
cases
(e.g.,
IFRS
Accounting
Standards carrying amount within
the table above
compared with net
exposure amount at default
for Pillar 3 disclosures);
and (iii) different classification of vehicles viewed as sponsored
by UBS AG versus sponsored by third parties.
›
Refer to the 31 December 2023 Pillar 3 Report,
available under “Pillar 3 disclosures” at
ubs.com/investors,
for more information
Interests in client vehicles sponsored by UBS
UBS-sponsored
client
vehicles
are
established
predominantly
for
clients
to
gain
exposure
to
specific
assets
or
risk
exposures. Such vehicles
may enter into derivative
agreements, with UBS
or a third party,
to align the cash flows
of the
entity with the investor’s intended investment objective,
or to introduce other desired risk exposures.
As of
31 December
2023 and
31 December
2022, UBS
AG retained
interests in
client vehicles
sponsored by
UBS that
relate to financing, secondary market and derivative
trading activities,
and to hedge structured product offerings.
Interests in investment funds
Investment funds have a collective
investment objective, and are
either passively managed, so
that any decision-making
does not have a substantive effect
on variability,
or are actively managed and investors
or their governing bodies do not
have substantive voting or similar rights.
UBS AG holds interests in a number
of investment funds, primarily resulting from
seed investments or in order to
hedge
structured product
offerings.
In addition
to the
interests disclosed
in the
table
above,
UBS AG
manages
the assets
of
various pooled investment funds and receives fees based, in whole or in part, on the net asset value of the fund and / or
the performance of the fund. The specific fee structure is determined based on various market
factors and considers the
fund’s nature and the
jurisdiction
of incorporation,
as well as fee
schedules negotiated with
clients. These fee contracts
represent an
interest in
the fund,
as they
align UBS
AG’s exposure
with investors,
providing a
variable return
based on
the performance
of the
entity. Depending
on the
structure of
the fund,
these fees
may be
collected directly
from the
fund’s assets and / or from
the investors. Any amounts
due are collected on a
regular basis and are generally
backed by
the fund’s assets.
Therefore, interest
in such funds
is not represented
by the on-balance
sheet fee receivable
but rather
by
the
future
exposure
to
variable
fees.
The
total
assets
of
such
funds
were
USD
bn
and
USD
bn
as
of
31 December 2023 and 31 December 2022, respectively, and have been excluded from the table above. UBS AG
did not
have any material exposure to loss from these interests as
of 31 December 2023 or as of 31 December 2022.
Note 29
Changes in organization and acquisitions and disposals
of subsidiaries and businesses
Disposals of subsidiaries and businesses
Sale of UBS Hana Asset Management Co., Ltd.
In the fourth quarter of 2023, UBS AG completed the sale of its
% stake in UBS Hana Asset Management Co., Ltd. to
Hana Securities.
Upon completion
of the
sale, UBS
AG recorded
a pre-tax
gain of
USD
m (net
of a
foreign currency
translation loss) in Asset Management which was recognized
in
Other income
.
Changes in organization
Legal structure integration
In December 2023, the Board of Directors of UBS Group AG approved the merger of UBS AG and Credit Suisse AG, and
both entities entered into a
definitive merger agreement. The completion of
the merger is subject
to regulatory approvals
and is expected to occur by the end of the second quarter
of 2024.
UBS also expects
to complete the transition to a single US
intermediate holding company in the second quarter
of 2024
and the planned merger of UBS Switzerland AG and Credit
Suisse (Schweiz) AG in the third quarter of 2024.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
235
Note
30
Related parties
Related parties of UBS AG are:
–
entities
within
UBS Group,
i.e.,
the
parent
entity,
UBS Group AG,
and
fellow
subsidiaries
consolidated
within
UBS Group (including Credit Suisse subsidiaries from the date
of the acquisition of the Credit Suisse Group);
–
associates
(entities
that
are
under
the
significant
influence
of
UBS AG
or
other
group
entities
consolidated
within
UBS Group);
–
joint
ventures
(entities
in
which
UBS AG
or
other
group
entity
consolidated
within
UBS Group
shares
control
with
another party);
–
post-employment benefit plans for the benefit of UBS AG’s employees
or employees of entities related to UBS AG;
–
key management personnel and close family members of
key management personnel; and
–
entities over which key management personnel or their
close family members have solely or jointly a direct
or indirect
significant influence.
Key management personnel are those persons having authority
and responsibility for planning, directing, and controlling
the activities of the Group, directly or indirectly.
UBS AG considers the members of the Board of Directors
(the BoD) and
the Executive Board
(the EB) of
UBS AG and the
members of the
Board of Directors
(the BoD) and the
Group Executive
Board (the GEB) of UBS Group AG to
constitute key management personnel.
a) Remuneration of key management personnel
The
Vice Chairman
of the
BoD
has a
specific
management
employment
contract
and receives
pension
benefits
upon
retirement. Total
remuneration of the Chairman and the Vice
Chairman of the BoD and all
EB members is included in the
table below.
Remuneration of key management
personnel
USD m, except where indicated
31.12.23
31.12.22
31.12.21
Base salaries and other cash payments
1
Incentive awards – cash
2
Annual incentive award under DCCP
Employer’s contributions to retirement benefit plans
Benefits in kind, fringe benefits (at market value)
Share-based compensation
3
Total
Total (CHF m)
4
1 May include role-based allowances in line with market practice
and regulatory requirements.
2 The cash portion may also include blocked
shares in line with regulatory requirements.
3 Compensation expense
is based on
the share price
on grant date
taking into account
performance conditions.
Refer to Note
27 for more
information. For EB
members, share-based
compensation for 2023,
2022 and 2021
was entirely
composed of LTIP
awards. For the
Chairman of the BoD, the
share-based compensation for 2023, 2022
and 2021 was entirely composed
of UBS shares.
4 Swiss franc amounts disclosed represent
the respective
US dollar amounts translated at the applicable performance award currency exchange rates (2023: USD
/ CHF
; 2022: USD / CHF
; 2021: USD / CHF
).
The independent members of
the BoD, including the Chairman,
do not have employment or
service contracts with UBS
AG, and thus are not entitled to benefits upon termination of their service on the BoD. Payments to these individuals for
their
services
as
independent
members
of
the
BoD
amounted
to
USD
m
(CHF
m)
in
2023,
USD
m
(CHF
m) in 2022 and USD
m (CHF
m) in 2021.
b) Equity holdings of key management personnel
Equity holdings of key management personnel
1
31.12.23
31.12.22
Number of UBS Group AG shares held by members of the
BoD, EB and parties closely linked to them
2
1 No options were held in
2023 and 2022 by non-independent
members of the BoD and
any EB member or any of
its related parties.
2 Excludes shares granted under
variable compensation plans with
forfeiture
provisions.
Of the share totals above, no shares were held by close family members of key management personnel on 31 December
2023 and 31 December 2022.
No shares were held
by entities that
are directly or indirectly controlled or
jointly controlled
by
key
management
personnel
or
their
close
family
members
on
31 December
2023
and
31 December
2022.
As
of
31 December 2023, no member of the BoD
or EB was the beneficial owner
of more than 1% of the shares in
UBS Group
AG.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
236
Note 30
Related parties (continued)
c) Loans, advances, mortgages and deposit balances
with key management personnel
The non-independent
members
of the
BoD and
EB members
are
granted loans,
fixed advances
and mortgages
in the
ordinary
course
of
business
on
substantially
the
same
terms
and
conditions
that
are
available
to
other
employees,
including interest rates and
collateral, and neither
involve more than the
normal risk of
collectability nor contain
any other
unfavorable features for the firm. Independent BoD members are granted loans and mortgages in the ordinary course of
business at general market conditions.
Outstanding balances with key management personnel were
as follows.
Loans, advances and mortgages to key management
personnel
1
USD m, except where indicated
2023
2022
Balance at the beginning of the year
Balance at the end of the year
2
Balance at the end of the year (CHF m)
2, 3
1 All loans are secured loans.
2 There were USD
m (CHF
m) unused uncommitted credit facilities as of 31 December 2023 and no unused uncommitted credit facilities as of 31 December 2022.
3 Swiss franc
amounts disclosed represent the respective US dollar amounts translated at the relevant year-end
closing exchange rate.
In
addition,
there
were
USD
m
(CHF
m)
outstanding
deposit
balances
with
key
management
personnel
as
of
31 December 2023.
d) Other related-party transactions with entities controlled
by key management personnel
In 2023 and 2022, UBS AG did not enter into transactions with entities,
over whom key management personnel or their
close
family
members
have
solely
or
jointly
a
direct
or
indirect
significant
influence
and
as
of
31 December
2023,
31 December
2022
and
31 December
2021,
there
were
no
outstanding
balances
related
to
such
transactions.
Furthermore, in
2023 and
2022, such
entities did
not sell any
goods or
provide any
services to
UBS AG,
and therefore
did not
receive
any fees
from
UBS
AG. UBS
AG also
did not
provide
services to
such
entities
in 2023
and
2022, and
therefore also received no fees.
e) Transactions with associates and joint ventures
Loans to and outstanding receivables from associates
and joint ventures
USD m
2023
2022
Carrying amount at the beginning of the year
Additions
Reductions
(
716
)
(
438
)
Foreign currency translation
Carrying amount at the end of the year
of which: unsecured loans and receivables
Other transactions with associates and
joint ventures
As of or for the year ended
USD m
31.12.23
31.12.22
Payments to associates and joint ventures for goods and services
received
Fees received for services provided to associates and joint ventures
Liabilities to associates and joint ventures
Commitments and contingent liabilities to associates
and joint ventures
›
Refer to Note 28 for an overview of investments
in associates and joint ventures
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
237
Note 30
Related parties (continued)
f) Receivables and payables from / to UBS Group AG
and other subsidiaries of UBS Group AG
USD m
31.12.23
31.12.22
Receivables
Amounts due from banks
1
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
Financial assets at fair value held for trading
Derivative financial instruments
Payables
Amounts due to banks
Cash collateral payables on derivative instruments
Customer deposits
Funding from UBS Group AG measured at amortized cost
Other financial liabilities measured at amortized cost
Derivative financial instruments
Other financial liabilities designated at fair value
2
1 Reflects funding provided to Credit Suisse.
2 Mainly represents funding recognized from UBS Group AG that is designated at fair value.
Refer to Note 18b for more information.
Note 31
Invested assets and net new money
The following
disclosures
provide
a breakdown
of UBS AG’s
invested assets
and a
presentation
of their
development,
including net new money,
as required by the Swiss Financial Market
Supervisory Authority (FINMA).
Invested assets
Invested assets consist of all
client assets managed by or
deposited with UBS AG for investment purposes. Invested
assets
include managed
fund assets,
managed institutional
assets, discretionary
and advisory
wealth management
portfolios,
fiduciary deposits, time deposits, savings accounts, and
wealth management securities or brokerage
accounts. All assets
held
for
purely
transactional
purposes
and
custody-only
assets,
including
corporate
client
assets
held
for
cash
management and transactional purposes,
are excluded from
invested assets, as UBS AG only
administers the assets and
does not offer
advice on how they
should be invested. Also excluded
are non-bankable
assets (e.g., art collections)
and
deposits from third-party banks for
funding or trading purposes.
Discretionary assets are defined
as client assets
that UBS AG decides how
to invest. Other invested
assets are those where
the client ultimately
decides how the
assets are invested.
When a single
product is created
in one business
division and
sold
in another,
it is
counted
in
both
the
business
division
managing
the
investment
and the
one
distributing
it. This
results
in
double
counting
within
UBS AG’s
total
invested
assets
and
net
new
money,
as
both
business
divisions
are
independently providing a service to their respective clients,
and both add value and generate revenue.
Net new money
Net new money in a reporting
period is the amount of invested assets
entrusted to UBS AG by new and
existing clients,
less those withdrawn by existing clients and clients who terminated
relationships with UBS AG.
Net new
money is
calculated using the
direct method,
under which
inflows and
outflows to
/ from
invested assets are
determined at
the client level,
based on transactions.
Interest and dividend
income from
invested assets
are not counted
as
net new money inflows.
Market and currency
movements,
as well as fees, commissions
and interest on loans
charged,
are
excluded from net new money,
as are effects resulting
from any acquisition or divestment
of a UBS subsidiary or business.
Reclassifications between invested
assets
and
custody-only assets
as
a
result of
a
change
in
service level
delivered are
generally treated as net new
money flows.
However, where the change in
service level directly results from an externally
imposed regulation
or a strategic
decision by
UBS AG to exit
a market or
specific service
offering,
the one-time
net effect is
reported as
Other effects
.
The Investment Bank does not track
invested assets and net new money. However,
when a client is transferred from the
Investment Bank
to another
business division,
this may
produce net
new money
even though
the client’s
assets
were
already with UBS AG.
In 2023 UBS AG has
changed its accounting policy for net new
money and invested assets to
include its share of net new
money and
invested assets
from associates,
to better
reflect the
business strategy
and aligned
with the
equity method
accounting applied to
these entities. Comparative
figures in the tables
below have been
restated to reflect
this change,
resulting in an increase to
invested assets as of
31 December 2022 of
USD
bn and an increase
to net new money
for
2022 of USD
bn, all relating to Asset Management.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
238
Note 31
Invested assets and net new money (continued)
Invested assets and net new money
As of or for the year ended
USD bn
31.12.23
31.12.22
1
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets
2
of which: double counts
Net new money
2
1 Comparative figures have been restated to include net new money and invested assets from associates.
2 Includes double counts.
Development of invested assets
USD bn
31.12.23
31.12.22
1
Total invested assets at the beginning of the year
2
Net new money
Market movements
3
(
596
)
Foreign currency translation
(
74
)
Other effects
(
37
)
(
40
)
of which: acquisitions / (divestments)
(
25
)
(
19
)
Total invested assets at the end of the year
2
1 Comparative figures have been restated to include net new money and invested assets from associates.
2 Includes double counts.
3 Includes interest and dividend income.
Note 32
Currency translation rates
The
following
table
shows
the
rates
of
the
main
currencies
used
to
translate
the
financial
information
of
UBS
AG’s
operations with a functional currency other than the
US dollar into US dollars.
Closing exchange rate
Average rate
1
As of
For the year ended
31.12.23
31.12.22
31.12.23
31.12.22
31.12.21
1 CHF
1 EUR
1 GBP
100 JPY
1 Monthly income statement items of
operations with a functional currency
other than the US dollar
are translated into US dollars
using month-end rates.
Disclosed average rates for
a year represent an average
of
twelve month-end rates, weighted according to the income and expense
volumes of all operations of UBS AG with the
same functional currency for each month. Weighted average rates for
individual business divisions
may deviate from the weighted average rates for UBS AG.
Note 33
Main differences between IFRS Accounting Standards
and Swiss GAAP
The consolidated financial statements of UBS AG are prepared in accordance with IFRS Accounting Standards. The Swiss
Financial
Market
Supervisory
Authority
(FINMA)
requires
financial
groups
presenting
financial
statements
under
IFRS
Accounting Standards
to provide
a narrative
explanation
of the
main differences
between
IFRS Accounting
Standards
and Swiss
generally accepted
accounting principles
(GAAP)
(the FINMA
Accounting Ordinance,
FINMA Circular
2020/1
“Accounting – banks”
and the Banking
Ordinance (the
BO)). Included in
this Note are
the significant differences
in the
recognition and
measurement between
IFRS Accounting
Standards and
the provisions
of the
BO and
the guidelines
of
FINMA governing true and fair view financial statement reporting
pursuant to Art. 25 to Art. 42 of the BO.
1. Consolidation
Under
IFRS
Accounting
Standards,
all
entities
that
are
controlled
by the
holding
entity
are
consolidated.
Under
Swiss
GAAP controlled
entities deemed
immaterial to a
group or
those held only
temporarily are
exempt from
consolidation,
but
instead
are
recorded
as
participations
accounted
for
under
the
equity
method
of
accounting
or
as
financial
investments measured at the lower of cost or market
value.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
239
Note 33
Main differences between IFRS Accounting Standards
and Swiss GAAP (continued)
2. Classification and measurement of financial assets
Under
IFRS
Accounting
Standards,
debt
instruments
are
measured
at
amortized
cost,
fair
value
through
other
comprehensive
income
(FVOCI)
or
fair
value
through
profit
or
loss
(FVTPL),
depending
on
the
nature
of
the
business
model within which the
particular asset is
held and the characteristics
of the contractual cash
flows of the
asset. Equity
instruments are accounted for
at FVTPL by
UBS. Under Swiss GAAP, trading assets and derivatives are
measured at FVTPL,
in
line with
IFRS
Accounting
Standards.
However,
non-trading
debt
instruments
are
generally
measured
at
amortized
cost, even
when the
assets are
managed on
a fair
value basis.
In addition,
the measurement
of financial
assets in
the
form of securities
depends on the nature
of the asset:
debt instruments not
held to maturity,
i.e., instruments available
for sale, and equity instruments with no permanent
holding intent, are classified as
Financial investments
at the lower of
(amortized) cost or market
value. Market value adjustments
up to the original
cost amount and realized
gains or
losses upon
disposal
of the
investment are
recorded
in the
income statement
as
Other income
from
ordinary
activities.
Equity
instruments
with
a
permanent
holding
intent
are
classified
as
participations
in
Non-consolidated
investments
in
subsidiaries
and
other
participations
recorded in the
income statement as
Impairment of investments
in non-consolidated subsidiaries
and other participations.
Reversals of impairments up to the original cost amount and realized gains or losses upon disposal of the investment are
recorded as
Extraordinary income / Extraordinary expenses
.
3. Fair value option applied to financial liabilities
Under IFRS
Accounting Standards,
UBS applies
the fair
value option
to certain
financial liabilities
not held
for trading.
Instruments for which the fair value option is applied are accounted for at FVTPL. The
amount of change in the fair value
attributable to
changes in
UBS’s own
credit is
presented in
Other comprehensive
income
Retained earnings
.
The fair value option is applied primarily to issued structured
debt instruments, certain non-structured
debt instruments,
certain payables under repurchase agreements and cash collateral on securities lending agreements, amounts due under
unit-linked investment contracts, and brokerage
payables.
Under Swiss
GAAP, the
fair value
option can
only be
applied to
structured debt
instruments consisting
of a
debt host
contract and
one or
more embedded
derivatives that
do not
relate to
own equity.
Furthermore, unrealized
changes in
fair value
attributable to
changes in
UBS’s own
credit are
not recognized,
whereas realized
own credit
is recognized
in
Net trading income
.
4. Allowances and provisions for credit losses
Swiss GAAP permit use
of IFRS Accounting Standards for
accounting for allowances and
provisions for credit losses based
on an expected credit loss (ECL) model. UBS has chosen to
apply the IFRS 9 ECL approach to those exposures
that are in
the ECL scope of both frameworks, IFRS Accounting Standards
and Swiss GAAP.
For the small residual
exposures within the scope
of Swiss GAAP ECL
requirements, which are
not subject to ECL
under
IFRS Accounting Standards due to classification differences,
UBS applies alternative approaches.
–
For exposures for which Pillar 1 internal ratings-based models are applied to measure credit risk, ECL is determined by
the regulatory expected loss (EL), with an
add-on for scaling up to the
residual maturity of exposures maturing beyond
the next
12 months,
as appropriate.
For detailed
information on
regulatory EL,
refer to
the “Risk
management and
control”
section of this report.
–
For exposures for
which the
Pillar 1 standardized
approach is
used to
measure credit
risk, ECL is
determined using
a
portfolio approach
that derives
a conservative
probability of
default (PD)
and a
conservative loss
given default
(LGD)
for the entire portfolio.
5. Hedge accounting
Under IFRS Accounting
Standards, when cash
flow hedge accounting is
applied, the fair value
gain or loss
on the effective
portion of
a derivative
designated
as a
cash flow
hedge
is recognized
initially in
equity and
reclassified
to the
income
statement when
certain conditions
are met.
When fair
value hedge
accounting is
applied, the
fair value
change of
the
hedged item attributable to the hedged risk is reflected in the measurement of the hedged item and is recognized in the
income statement
along with
the change
in the
fair value
of the
hedging derivative.
Under Swiss
GAAP,
the effective
portion of the fair value change of a derivative
instrument designated as a cash flow
or as a fair value hedge is deferred
on the balance sheet as
Other assets
Other liabilities
. The carrying amount of the hedged item designated in fair value
hedges is not adjusted for fair value changes attributable
to the hedged risk.
Annual Report 2023
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AG consolidated financial statements
240
Note 33
Main differences between IFRS Accounting Standards
and Swiss GAAP (continued)
6. Goodwill and intangible assets
Under IFRS Accounting Standards,
goodwill acquired in a
business combination is not amortized
but tested annually for
impairment. Intangible
assets with
an indefinite
useful life
are
also not
amortized but
tested annually
for impairment.
Under Swiss GAAP,
goodwill and intangible assets with indefinite useful lives are
amortized over a period not exceeding
five years, unless a longer useful life, which may
not exceed
annually for impairment.
7. Post-employment benefit plans
Swiss GAAP
permit the
use of
IFRS Accounting
Standards
or Swiss
accounting standards
for post-employment
benefit
plans, with the election made on a plan-by-plan basis.
UBS has elected to
apply IAS 19 for the
non-Swiss defined benefit
plans in the UBS AG
standalone financial statements
and Swiss
GAAP (FER 16)
for the
Swiss pension
plan in
the UBS
AG and
the UBS
Switzerland
AG standalone
financial
statements. The
requirements of
Swiss GAAP
are better
aligned with
the specific
nature of
Swiss pension
plans, which
are hybrid in
that they combine
elements of defined
contribution and
defined benefit
plans, but are
treated as defined
benefit plans
under IFRS
Accounting Standards
.
Key differences
between
Swiss GAAP
and IFRS
Accounting Standards
include
the
treatment
of
dynamic
elements,
such
as
future
salary
increases
and
future
interest
credits
on
retirement
savings, which are not considered under the
static method used in accordance with
Swiss GAAP. Also, the discount rate
used to determine the defined
benefit obligation in accordance with
IFRS Accounting Standards is based
on the yield of
high-quality corporate bonds of the market in the respective pension plan country. The discount rate used in accordance
with Swiss GAAP (i.e., the technical interest rate) is determined by the Pension Foundation Board based on the expected
returns of the Board’s investment strategy.
For defined benefit plans, IFRS Accounting Standards
require the full defined benefit obligation net of the
plan assets to
be
recorded
on
the
balance
sheet
subject
to
the
asset
ceiling
rules,
with
changes
resulting
from
remeasurements
recognized
directly
in
equity.
However,
for
non-Swiss
defined
benefit
plans
for
which
IFRS
Accounting
Standards
are
elected, changes
due to
remeasurements are
recognized in
the income
statement
of UBS
AG standalone
under Swiss
GAAP.
Swiss GAAP require
employer contributions
to the pension
fund to be
recognized as personnel
expenses in the
income
statement. Swiss GAAP
also require an
assessment of whether,
based on
the pension fund’s
financial statements prepared
in accordance
with Swiss
accounting standards
(FER 26),
an economic
benefit to,
or obligation
of, the
employer arises
from
the
pension
fund
that
is
recognized
in
the
balance
sheet
when
conditions
are
met.
Conditions
for
recording
a
pension asset
or liability
would be
met if,
for example,
an employer
contribution reserve
is available or
the employer
is
required to contribute to the reduction of a pension deficit
(on an FER 26 basis).
8. Leasing
Under
IFRS
Accounting
Standards,
a
single
lease
accounting
model
applies
that
requires
UBS
to
record
a
right-of-use
(RoU) asset
and a
corresponding lease
liability on
the balance
sheet when
UBS is
a lessee
in a
lease arrangement.
The
RoU asset
and the
lease liability
are recognized
when
UBS acquires
control of
the physical
use of
the asset.
The lease
liability
is
measured
based
on
the
present
value
of
the
lease
payments
over
the
lease
term,
discounted
using
UBS’s
unsecured borrowing
rate. The
RoU asset
is recorded
at an
amount equal
to the
lease liability
but is
adjusted for
rent
prepayments, initial direct costs, any
costs to refurbish the leased
asset and / or lease
incentives received. The RoU asset
is depreciated over the shorter of the lease term or the
useful life of the underlying asset.
Under
Swiss
GAAP,
leases
that
transfer
substantially
all
the
risks
and
rewards,
but
not
necessarily
legal
title
in
the
underlying assets, are
classified as finance
leases. All other
leases are
classified as operating
leases. Whereas finance
leases
are
recognized
on
the
balance
sheet
and
measured
in
line
with
IFRS
Accounting
Standards,
operating
leases
are
not
recognized on
the balance
sheet, with
payments recognized
as
General and
administrative
expenses
basis over the lease term, which commences with control of the physical use of the asset. Lease incentives are treated as
a reduction of rental expense and recognized on a consistent
basis over the lease term.
9. Netting of derivative assets and liabilities
Under IFRS Accounting Standards
,
derivative assets, derivative liabilities
and related cash collateral
not settled to market
are
reported
on
a
gross
basis
unless
the
restrictive
netting
requirements
under
IFRS
Accounting
Standards
are
met:
(i) existence
of
master
netting
agreements
and
related
collateral
arrangements
that
are
unconditional
and
legally
enforceable,
in both
the normal
course of
business and
the event
of default,
bankruptcy
or insolvency
of UBS
and its
counterparties;
and
(ii) UBS’s
intention
to
either
settle
on
a
net
basis
or
to
realize
the
asset
and
settle
the
liability
simultaneously. Under Swiss GAAP,
derivative assets, derivative liabilities and related cash collateral not settled to
market
are
generally
reported
on
a
net
basis,
provided
the
master
netting
and
the
related
collateral
agreements
are
legally
enforceable in the event of default, bankruptcy
or insolvency of UBS’s counterparties.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
241
Note 33
Main differences between IFRS Accounting Standards
and Swiss GAAP (continued)
10. Negative interest
Under IFRS Accounting
Standards, negative
interest income
arising on a
financial asset
does not meet
the definition
of
interest
income
and,
therefore,
negative
interest
on
financial
assets
and
negative
interest
on
financial
liabilities
are
presented
within interest
expense and
interest
income,
respectively.
Under Swiss
GAAP,
negative interest
on financial
assets is presented
within interest income and
negative interest on financial
liabilities is presented within
interest expense.
11. Extraordinary income and expense
Certain non-recurring
and non-operating
income and
expense items,
such as realized
gains or
losses from
the disposal
of participations, fixed and intangible
assets, and reversals of impairments of
participations and fixed assets, are classified
as extraordinary items under Swiss GAAP.
This distinction is not available under IFRS Accounting Standards.
p
Note 34
Supplemental guarantor information required
under SEC regulations
Joint liability of UBS Switzerland AG
In 2015, the Personal & Corporate Banking
and Wealth Management businesses booked in Switzerland were transferred
from
UBS AG
to
UBS
Switzerland AG
through
an
asset
transfer
in accordance
with
the
Swiss
Merger
Act.
Under
the
terms of the asset transfer agreement,
UBS Switzerland AG assumed joint liability for
contractual obligations of UBS AG
existing on
the asset
transfer date,
including the
full and
unconditional guarantee
of certain
registered
debt securities
issued by UBS AG. To
reflect this joint liability,
UBS Switzerland AG is presented in a separate
column as a subsidiary co-
guarantor.
The
joint
liability
of
UBS
Switzerland AG
for
contractual
obligations
of
UBS AG
decreased
in
2023
by
USD
bn
to
USD
bn as of 31 December 2023. The
decrease substantially relates to a
combination of contractual maturities, early
extinguishments, fair value movements and foreign currency effects.
Supplemental guarantor consolidated
income statement
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2023
Interest income from financial instruments measured at
amortized cost and
fair value through other comprehensive income
(
5,022
)
Interest expense from financial instruments measured at
amortized cost
(
14,797
)
(
3,055
)
(
7,699
)
(
19,643
)
Net interest income from financial instruments measured
at fair value through
profit or loss and other
(
864
)
Net interest income
(
2,725
)
Other net income from financial instruments measured
at fair value through
profit or loss
(
81
)
Fee and commission income
(
598
)
Fee and commission expense
(
705
)
(
456
)
(
1,214
)
(
1,790
)
Net fee and commission income
(
13
)
Other income
(
4,198
)
Total revenues
(
4,269
)
Credit loss expense / (release)
Personnel expenses
General and administrative expenses
(
2,828
)
Depreciation, amortization and impairment of non-financial
assets
(
109
)
Operating expenses
(
2,937
)
Operating profit / (loss) before tax
(
240
)
(
1,370
)
Tax expense / (benefit)
(
48
)
Net profit / (loss)
(
463
)
(
1,321
)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
(
488
)
(
1,321
)
1 Amounts presented for UBS
AG standalone and UBS
Switzerland AG standalone represent
IFRS standalone information. Refer
to the UBS AG
standalone and UBS Switzerland
AG standalone financial statements
under “Complementary
financial information”
at ubs.com/investors
for information
prepared
in accordance
with Swiss
GAAP.
2 The
”Other subsidiaries“
column includes
consolidated information
for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
242
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
statement of comprehensive income
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2023
Comprehensive income attributable to shareholders
Net profit / (loss)
(
488
)
(
1,321
)
Other comprehensive income
Other comprehensive income that may be reclassified to the income
statement
Foreign currency translation, net of tax
(
975
)
Financial assets measured at fair value through other comprehensive
income, net of tax
3
Cash flow hedges, net of tax
(
9
)
Cost of hedging, net of tax
(
19
)
(
19
)
Total other comprehensive income that may be reclassified to the
income statement, net of tax
(
984
)
Other comprehensive income that will not be reclassified to the
income statement
Defined benefit plans, net of tax
(
82
)
(
36
)
(
19
)
(
136
)
Own credit on financial liabilities designated at fair value, net of tax
(
790
)
(
790
)
Total other comprehensive income that will not be reclassified to the
income statement, net of tax
(
872
)
(
36
)
(
19
)
(
927
)
Total other comprehensive income
(
101
)
(
984
)
Total comprehensive income attributable to shareholders
(
262
)
(
2,305
)
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
(
235
)
(
2,305
)
1 Amounts presented for UBS
AG standalone and UBS
Switzerland AG standalone represent
IFRS standalone information. Refer
to the UBS AG
standalone and UBS Switzerland
AG standalone financial statements
under “Complementary
financial information”
at ubs.com/in
vestors for
information prepared
in accordance
with Swiss
GAAP.
2 The
”Other subsidiaries“
column includes
consolidated information
for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG
significant sub-groups, as well as standalone information for other
subsidiaries.
3 Effective 1 April 2022, a portfolio of assets previously
classified as Financial assets measured at fair value through other comprehensive income was reclassified to Other financial assets
measured at amortized cost. Refer to Note 13a for more information.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
243
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
balance sheet
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
As of 31 December 2023
Assets
Cash and balances at central banks
Amounts due from banks
(
56,311
)
Receivables from securities financing transactions measured at
amortized cost
(
24,073
)
Cash collateral receivables on derivative instruments
(
12,512
)
Loans and advances to customers
(
35,093
)
Other financial assets measured at amortized cost
(
2,647
)
Total financial assets measured at amortized cost
(
130,636
)
Financial assets at fair value held for trading
(
1,412
)
of which: assets pledged as collateral that may be
sold or repledged by counterparties
(
12,731
)
Derivative financial instruments
(
41,223
)
Brokerage receivables
Financial assets at fair value not held for trading
(
22,613
)
Total financial assets measured at fair value through profit or loss
(
65,249
)
Financial assets measured at fair value
through other comprehensive income
Investments in subsidiaries and associates
(
51,190
)
Property, equipment and software
(
284
)
Goodwill and intangible assets
Deferred tax assets
(
24
)
Other non-financial assets
Total assets
(
247,298
)
Liabilities
Amounts due to banks
(
141,898
)
Payables from securities financing transactions measured at
amortized cost
(
24,171
)
Cash collateral payables on derivative instruments
(
12,430
)
Customer deposits
Funding from UBS Group AG measured at amortized cost
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
(
2,997
)
Total financial liabilities measured at amortized cost
(
145,402
)
Financial liabilities at fair value held for trading
(
1,325
)
Derivative financial instruments
(
41,225
)
Brokerage payables designated at fair value
Debt issued designated at fair value
(
69
)
Other financial liabilities designated at fair value
(
8,107
)
Total financial liabilities measured at fair value through profit or loss
(
50,726
)
Provisions
(
1
)
Other non-financial liabilities
Total liabilities
(
196,083
)
Equity attributable to shareholders
(
51,215
)
Equity attributable to non-controlling interests
Total equity
(
51,215
)
Total liabilities and equity
(
247,298
)
1 Amounts presented for UBS AG
standalone and UBS Switzerland AG
standalone represent IFRS standalone information.
Refer to the UBS AG standalone
and UBS Switzerland AG standalone
financial statements,
available under “Complementary financial information” at ubs.com/investors, for information prepared
in accordance with Swiss GAAP.
2 The ”Other subsidiaries“ column includes consolidated information for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
244
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
statement of cash flows
USD m
UBS AG
1
UBS
Switzerland AG
1
Other
1
UBS AG
(consolidated)
For the year ended 31 December 2023
Net cash flow from / (used in) operating activities
(
23,275
)
(
3,041
)
(
1,886
)
(
28,202
)
Cash flow from / (used in) investing activities
Purchase of subsidiaries, associates and intangible assets
(
1
)
(
3
)
(
4
)
Disposal of subsidiaries, associates and intangible assets
2
Purchase of property, equipment and software
(
427
)
(
287
)
(
569
)
(
1,283
)
Disposal of property, equipment and software
Net (purchase) / redemption of financial assets measured
at fair value through other comprehensive
income
Purchase of debt securities measured at amortized cost
(
9,561
)
(
1,431
)
(
3,251
)
(
14,244
)
Disposal and redemption of debt securities measured at amortized
cost
Net cash flow from / (used in) investing activities
(
4,942
)
(
94
)
(
4,924
)
Cash flow from / (used in) financing activities
Net short-term debt issued / (repaid)
(
1
)
Distributions paid on UBS AG shares
(
6,000
)
(
6,000
)
Issuance of debt designated at fair value and long-term debt measured
at amortized cost
3
Repayment of debt designated at fair value and long-term debt measured
at amortized cost
3
(
84,366
)
(
1,017
)
(
159
)
(
85,541
)
Net cash flows from other financing activities
(
249
)
(
251
)
(
501
)
Net activity related to group internal capital transactions and dividends
(
2,944
)
(
754
)
Net cash flow from / (used in) financing activities
(
1,954
)
(
532
)
Total cash flow
Cash and cash equivalents at the beginning of the year
Net cash flow from / (used in) operating, investing and financing
activities
(
6,040
)
(
5,089
)
(
2,306
)
(
13,435
)
Effects of exchange rate differences on cash and cash equivalents
Cash and cash equivalents at the end of the year
4
of which: cash and balances at central banks
4
of which: amounts due from banks
4
of which: money market paper
4,5
1 Cash flows generally represent a third-party
view from a UBS AG consolidated
perspective, except for Net activity
related to group internal capital transactions
and dividends.
2 Includes dividends received from
associates.
3 Includes funding from UBS Group AG to UBS AG.
4 Balances with an original maturity of three months or less. USD
m of cash and cash equivalents were restricted.
5 Money market paper is
included in the balance sheet under Financial assets at fair value not held for trading, Other financial assets measured at amortized
cost and Financial assets at fair value held for trading.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
245
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
income statement
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2022
Interest income from financial instruments measured at
amortized cost and
fair value through other comprehensive income
(
1,575
)
Interest expense from financial instruments measured at
amortized cost
(
5,449
)
(
736
)
(
2,604
)
(
6,696
)
Net interest income from financial instruments measured
at fair value through
profit or loss and other
(
449
)
Net interest income
Other net income from financial instruments measured
at fair value through
profit or loss
Fee and commission income
(
660
)
Fee and commission expense
(
684
)
(
464
)
(
1,327
)
(
1,823
)
Net fee and commission income
(
8
)
Other income
(
8,382
)
Total revenues
(
8,210
)
Credit loss expense / (release)
(
17
)
(
3
)
(
1
)
Personnel expenses
General and administrative expenses
(
2,660
)
Depreciation, amortization and impairment of non-financial
assets
(
109
)
Operating expenses
(
2,769
)
Operating profit / (loss) before tax
(
5,440
)
Tax expense / (benefit)
(
28
)
Net profit / (loss)
(
5,592
)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
(
5,592
)
1 Amounts presented for UBS AG
standalone and UBS Switzerland AG
standalone represent IFRS standalone
information. Refer to the UBS
AG standalone and UBS Switzerland
AG standalone financial statements
under “Complementary financial
information” at ubs.com/investors
for information prepared
in accordance with
Swiss GAAP.
2 The
”Other subsidiaries“
column includes consolidated
information for
the UBS
Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Supplemental guarantor consolidated statement
of comprehensive income
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2022
Comprehensive income attributable to shareholders
Net profit / (loss)
(
5,592
)
Other comprehensive income
Other comprehensive income that may be reclassified to the income
statement
Foreign currency translation, net of tax
(
114
)
(
197
)
(
506
)
(
519
)
Financial assets measured at fair value through other comprehensive
income, net of tax
3
(
3
)
Cash flow hedges, net of tax
(
2,791
)
(
1,359
)
(
631
)
(
12
)
(
4,793
)
Cost of hedging, net of tax
Total other comprehensive income that may be reclassified to the
income statement, net of tax
(
2,863
)
(
1,555
)
(
1,128
)
(
5,260
)
Other comprehensive income that will not be reclassified to the
income statement
Defined benefit plans, net of tax
(
112
)
Own credit on financial liabilities designated at fair value, net of tax
Total other comprehensive income that will not be reclassified to the
income statement, net of tax
(
112
)
Total other comprehensive income
(
1,897
)
(
1,667
)
(
1,104
)
(
4,383
)
Total comprehensive income attributable to shareholders
(
5,306
)
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
(
5,306
)
1 Amounts presented for UBS
AG standalone and UBS
Switzerland AG standalone represent
IFRS standalone information. Refer
to the UBS AG
standalone and UBS Switzerland
AG standalone financial statements
under “Complementary
financial information”
at ubs.com/investors
for information
prepared in
accordance
with Swiss
GAAP.
2
The
”Other subsidiaries“
column includes
consolidated information
for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG
significant sub-groups, as well as standalone information for other
subsidiaries.
3 Effective 1 April 2022, a portfolio of assets previously
classified as Financial assets measured at fair value through other comprehensive income was reclassified to Other financial assets
measured at amortized cost. Refer to Note 13a for more information.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
246
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
balance sheet
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
As of 31 December 2022
Assets
Cash and balances at central banks
Amounts due from banks
(
50,441
)
Receivables from securities financing transactions measured at
amortized cost
(
18,691
)
Cash collateral receivables on derivative instruments
(
11,856
)
Loans and advances to customers
(
31,233
)
Other financial assets measured at amortized cost
(
2,029
)
Total financial assets measured at amortized cost
(
114,250
)
Financial assets at fair value held for trading
(
1,848
)
of which: assets pledged as collateral that may be
sold or repledged by counterparties
(
9,892
)
Derivative financial instruments
(
40,368
)
Brokerage receivables
Financial assets at fair value not held for trading
(
17,091
)
Total financial assets measured at fair value through profit or loss
(
59,308
)
Financial assets measured at fair value
through other comprehensive income
Investments in subsidiaries and associates
(
53,255
)
Property, equipment and software
(
267
)
Goodwill and intangible assets
Deferred tax assets
(
16
)
Other non-financial assets
Total assets
(
227,087
)
Liabilities
Amounts due to banks
(
118,477
)
Payables from securities financing transactions measured at
amortized cost
(
18,774
)
Cash collateral payables on derivative instruments
(
11,800
)
Customer deposits
Funding from UBS Group AG measured at amortized cost
Debt issued measured at amortized cost
(
173
)
Other financial liabilities measured at amortized cost
(
2,287
)
Total financial liabilities measured at amortized cost
(
128,903
)
Financial liabilities at fair value held for trading
(
1,570
)
Derivative financial instruments
(
40,363
)
Brokerage payables designated at fair value
(
7
)
Debt issued designated at fair value
(
110
)
Other financial liabilities designated at fair value
(
2,928
)
Total financial liabilities measured at fair value through profit or loss
(
44,977
)
Provisions
(
2
)
Other non-financial liabilities
Total liabilities
(
173,785
)
Equity attributable to shareholders
(
53,303
)
Equity attributable to non-controlling interests
Total equity
(
53,303
)
Total liabilities and equity
(
227,087
)
1 Amounts presented for UBS AG
standalone and UBS Switzerland AG
standalone represent IFRS standalone information.
Refer to the UBS AG
standalone and UBS Switzerland AG standalone
financial statements,
available under “Complementary financial information” at ubs.com/investors, for information prepared
in accordance with Swiss GAAP.
2 The ”Other subsidiaries“ column includes consolidated information for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
247
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
statement of cash flows
USD m
UBS AG
1
UBS
Switzerland AG
1
Other
1
UBS AG
(consolidated)
For the year ended 31 December 2022
Net cash flow from / (used in) operating activities
(
1,165
)
(
5,491
)
Cash flow from / (used in) investing activities
Purchase of subsidiaries, associates and intangible assets
(
3
)
(
3
)
Disposal of subsidiaries, associates and intangible assets
2
Purchase of property, equipment and software
(
562
)
(
292
)
(
624
)
(
1,478
)
Disposal of property, equipment and software
Net (purchase) / redemption of financial assets measured
at fair value through other comprehensive
income
(
943
)
(
699
)
Purchase of debt securities measured at amortized cost
(
22,602
)
(
2,690
)
(
5,500
)
(
30,792
)
Disposal and redemption of debt securities measured at amortized
cost
Net cash flow from / (used in) investing activities
(
9,346
)
(
1,663
)
(
1,274
)
(
12,283
)
Cash flow from / (used in) financing activities
Net short-term debt issued / (repaid)
(
12,215
)
(
3
)
(
31
)
(
12,249
)
Distributions paid on UBS AG shares
(
4,200
)
(
4,200
)
Issuance of debt designated at fair value and long-term debt measured
at amortized cost
3
Repayment of debt designated at fair value and long-term debt measured
at amortized cost
3
(
66,526
)
(
860
)
(
284
)
(
67,670
)
Net cash flows from other financing activities
(
258
)
(
337
)
(
595
)
Net activity related to group internal capital transactions and dividends
(
2,088
)
(
3,128
)
Net cash flow from / (used in) financing activities
(
2,401
)
(
3,740
)
(
5,257
)
Total cash flow
Cash and cash equivalents at the beginning of the year
Net cash flow from / (used in) operating, investing and financing
activities
(
5,229
)
(
10,505
)
(
6,911
)
Effects of exchange rate differences on cash and cash equivalents
(
3,111
)
(
1,338
)
(
1,196
)
(
5,645
)
Cash and cash equivalents at the end of the year
4
of which: cash and balances at central banks
4
of which: amounts due from banks
4
of which: money market paper
4,5
1 Cash flows generally represent
a third-party view from a UBS
AG consolidated perspective,
except for Net activity related
to group internal capital transactions
and dividends.
2 Includes cash proceeds from
the
sales of: UBS AG’s shareholding
in Mitsubishi Corp.-UBS Realty Inc.; UBS
AG’s wholly owned subsidiary
UBS Swiss Financial Advisers AG (including
a loan portfolio in UBS Switzerland AG);
UBS AG’s US alternative
investments administration
business; and
UBS AG’s
domestic wealth
management business
in Spain.
Also includes
dividends received
from associates.
3 Includes
funding from
UBS Group
AG to
UBS AG.
4 Balances with an original maturity
of three months or less.
USD
m of cash and cash equivalents
were restricted.
5 Money market paper is
included in the balance sheet under
Financial assets at fair value
held for trading, Financial assets measured at fair value through other comprehensive income,
Financial assets at fair value not held for trading and Other financial assets measured at amortized cost.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
248
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
income statement
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2021
Interest income from financial instruments measured at
amortized cost and
fair value through other comprehensive income
(
703
)
Interest expense from financial instruments measured at
amortized cost
(
2,847
)
(
520
)
(
1,024
)
(
3,366
)
Net interest income from financial instruments measured
at fair value through
profit or loss and other
(
274
)
Net interest income
Other net income from financial instruments measured
at fair value through
profit or loss
(
83
)
Fee and commission income
(
770
)
Fee and commission expense
(
810
)
(
481
)
(
1,450
)
(
1,985
)
Net fee and commission income
(
14
)
Other income
(
8,396
)
Total revenues
(
8,445
)
Credit loss expense / (release)
(
65
)
(
98
)
(
10
)
(
148
)
Personnel expenses
General and administrative expenses
(
2,696
)
Depreciation, amortization and impairment of non-financial
assets
(
114
)
Operating expenses
(
2,809
)
Operating profit / (loss) before tax
(
5,660
)
Tax expense / (benefit)
(
11
)
Net profit / (loss)
(
5,649
)
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
(
5,649
)
1 Amounts presented for UBS
AG standalone and UBS
Switzerland AG standalone represent
IFRS standalone information. Refer
to the UBS AG
standalone and UBS Switzerland
AG standalone financial statements
under “Complementary financial
information” at
ubs.com/investors for
information prepared
in accordance
with Swiss GAAP.
2 The
”Other subsidiaries“
column includes consolidated
information for
the UBS
Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Supplemental guarantor consolidated
statement of comprehensive income
USD m
UBS AG
(standalone)
1
UBS
Switzerland AG
(standalone)
1
Other
subsidiaries
2
Elimination
entries
UBS AG
(consolidated)
For the year ended 31 December 2021
Comprehensive income attributable to shareholders
Net profit / (loss)
(
5,649
)
Other comprehensive income
Other comprehensive income that may be reclassified to the income
statement
Foreign currency translation, net of tax
(
1
)
(
419
)
(
607
)
(
510
)
Financial assets measured at fair value through other
comprehensive income, net of tax
(
157
)
(
157
)
Cash flow hedges, net of tax
(
1,129
)
(
279
)
(
250
)
(
17
)
(
1,675
)
Cost of hedging, net of tax
(
26
)
(
26
)
Total other comprehensive income that may be reclassified to the
income statement, net of tax
(
1,155
)
(
699
)
(
1,014
)
(
2,368
)
Other comprehensive income that will not be reclassified to the
income statement
Defined benefit plans, net of tax
(
135
)
Own credit on financial liabilities designated at fair value, net of tax
Total other comprehensive income that will not be reclassified to
the income statement, net of tax
(
135
)
Total other comprehensive income
(
939
)
(
834
)
(
947
)
(
2,220
)
Total comprehensive income attributable to shareholders
(
5,149
)
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
(
5,149
)
1 Amounts presented for UBS AG
standalone and UBS Switzerland AG
standalone represent IFRS standalone information.
Refer to the UBS AG
standalone and UBS Switzerland AG
standalone financial statements
under “Complementary
financial information”
at ubs.com/investors
for information
prepared in
accordance with
Swiss GAAP.
2 The
”Other subsidiaries“
column
includes consolidated
information
for the
UBS Americas Holding LLC, UBS Europe SE and UBS Asset Management AG significant sub-groups,
as well as standalone information for other subsidiaries.
Annual Report 2023
| Consolidated financial statements | UBS
AG consolidated financial statements
249
Note 34
Supplemental guarantor information required
under SEC regulations (continued)
Supplemental guarantor consolidated
statement of cash flows
USD m
UBS AG
1
UBS
Switzerland AG
1
Other
1
UBS AG
(consolidated)
For the year ended 31 December 2021
Net cash flow from / (used in) operating activities
Cash flow from / (used in) investing activities
Purchase of subsidiaries, associates and intangible assets
(
1
)
(
1
)
Disposal of subsidiaries, associates and intangible assets
2
Purchase of property, equipment and software
(
656
)
(
276
)
(
650
)
(
1,581
)
Disposal of property, equipment and software
Net (purchase) / redemption of financial assets measured
at fair value through other comprehensive
income
(
817
)
(
750
)
Purchase of debt securities measured at amortized cost
(
1,840
)
(
45
)
(
3,038
)
(
4,922
)
Disposal and redemption of debt securities measured at amortized
cost
Net cash flow from / (used in) investing activities
(
1,970
)
(
385
)
(
1,860
)
Cash flow from / (used in) financing activities
Net short-term debt issued / (repaid)
(
3,073
)
(
21
)
(
3,093
)
Distributions paid on UBS AG shares
(
4,539
)
(
4,539
)
Issuance of debt designated at fair value and long-term debt measured
at amortized cost
3
Repayment of debt designated at fair value and long-term debt measured
at amortized cost
3
(
78,385
)
(
1,093
)
(
320
)
(
79,799
)
Net cash flows from other financing activities
(
280
)
(
261
)
Net activity related to group internal capital transactions and dividends
(
537
)
(
4,702
)
Net cash flow from / (used in) financing activities
(
475
)
(
4,811
)
Total cash flow
Cash and cash equivalents at the beginning of the year
Net cash flow from / (used in) operating, investing and financing
activities
Effects of exchange rate differences on cash and cash equivalents
(
1,462
)
(
2,693
)
(
1,151
)
(
5,306
)
Cash and cash equivalents at the end of the year
4
of which: cash and balances at central banks
4
of which: amounts due from banks
4
of which: money market paper
4,5
1 Cash flows generally represent
a third-party view from a UBS
AG consolidated perspective,
except for Net activity related
to group internal capital transactions
and dividends.
2 Includes cash proceeds from
the
sale of the minority stake in Clearstream Fund Centre AG and dividends received from
associates.
3 Includes funding from UBS Group AG to UBS AG.
4 Balances with an original maturity of three months or less.
USD
m of cash and cash equivalents were restricted.
5 Money market paper is included in the balance sheet under Financial assets at fair value held for trading, Financial assets measured at fair value through
other comprehensive income, Financial assets at fair value not held for trading and Other financial
assets measured at amortized cost.
p
Annual Report 2023 |
Additional regulatory information
250
Additional regulatory
information
Table of contents
251
251
251
251
251
252
252
252
253
253
253
255
257
257
258
258
258
es
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
251
UBS AG consolidated supplemental disclosures
required under SEC regulations
A
–
The
following
pages
contain
supplemental
UBS
AG
disclosures
that
are
required
under
US
Securities
and
Exchange
Commission (SEC) regulations. UBS
AG’s consolidated financial statements have
been prepared in accordance
with IFRS
Accounting
Standards
as
issued
by
the
International
Accounting
Standards
Board
(the
IASB)
and
are
denominated
in
US dollars.
B – Selected financial data
Selected information
As of or for the year ended
31.12.23
31.12.22
31.12.21
Registered ordinary shares (number)
Treasury shares (number)
Dividends received from investments in subsidiaries and associates
In 2023, UBS
AG received
dividends of USD 5,430m
(2022: USD 6,465m; 2021:
USD 6,401m) from
its subsidiaries and
associates. Dividends disclosed
have been translated
to US dollars
from the functional
currency of the
entity paying the
dividend, using the closing exchange rate of the month the
dividend was received.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
252
Balance sheet data
USD m
31.12.23
31.12.22
31.12.21
Assets
Cash and balances at central banks
Amounts due from banks
Receivables from securities financing transactions at amortized cost
Cash collateral receivables on derivative instruments
Loans and advances to customers
Other financial assets measured at amortized cost
54,334
53,389
26,236
Total financial assets measured at amortized cost
Financial assets at fair value held for trading
of which: assets pledged as collateral that may be sold or repledged
by counterparties
Derivative financial instruments
Brokerage receivables
Financial assets at fair value not held for trading
Total financial assets measured at fair value through profit or loss
Financial assets measured at fair value through other comprehensive income
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other non-financial assets
Total assets
Liabilities
Amounts due to banks
Payables from securities financing transactions at amortized cost
Cash collateral payables on derivative instruments
Customer deposits
555,673
527,171
544,834
Funding from UBS Group AG measured at amortized cost
Debt issued measured at amortized cost
Other financial liabilities measured at amortized cost
12,713
10,391
9,765
Total financial liabilities measured at amortized cost
Financial liabilities at fair value held for trading
Derivative financial instruments
Brokerage payables designated at fair value
Debt issued designated at fair value
Other financial liabilities designated at fair value
Total financial liabilities measured at fair value through profit or loss
Provisions
Other non-financial liabilities
Total liabilities
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Total liabilities and equity
C – Information about the company
Property, plant and equipment
As
of
31
December
2023,
UBS
AG
operated
in
about
644
business
and
banking
locations
worldwide,
of
which
approximately
33% were
in Switzerland,
50% in
the Americas,
9% in
the rest
of Europe,
the Middle
East and
Africa,
and 8% in Asia Pacific.
Of the business and banking locations in
Switzerland, 22% were owned directly by UBS AG, with
the
remainder,
along
with
most
of UBS
AG’s
offices
outside
Switzerland,
being
held
under
commercial
leases.
These
premises are
subject to
continuous maintenance
and upgrading
and are
considered
suitable and
adequate for
current
and anticipated operations.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
253
D – Information required by Subpart 1400 of Regulation
S-K
Selected statistical information
The
tables
below
set
forth
selected
statistical
information
regarding
UBS
AG’s
banking
operations
extracted
from
its
financial statements. Unless otherwise indicated,
average balances for the
years ended 31
December 2023, 31 December
2022
and
31 December
2021
are
calculated
from
monthly
data.
Unless
otherwise
indicated,
the
distinction
between
domestic (Swiss) and foreign (non-Swiss) is generally
based on the booking location.
Average balances and interest rates
The tables below set forth average interest-earning assets and average interest-bearing liabilities, along with the average
yield, for
2023, 2022
and 2021.
Refer to
“Note 3
Net interest income and other net income from financial instruments
measured at fair value through profit or loss”
in the “Consolidated
financial statements”
section of this
report for
more
information about interest income and interest
expense.
For the year ended
31.12.23
31.12.22
31.12.21
USD m, except where indicated
Average
balance
Interest
income
Average
yield (%)
Average
balance
Interest
income
Average
yield (%)
Average
balance
Interest
income
Average
yield (%)
Assets
Balances at central banks
Domestic
Foreign
Amounts due from banks
Domestic
Foreign
Receivables from securities financing transactions measured
at amortized cost
1
Domestic
Foreign
Loans and advances to customers
Domestic
Foreign
Financial assets at fair value
1,2
Domestic
Foreign
Other interest-earning assets
Domestic
Foreign
Total interest-earning assets
3
Net interest income on swaps
Interest income on off-balance sheet securities and other
Interest income and average interest-earning assets
4
4
4
Non-interest-earning assets
5
Total average assets
1 Reverse repurchase agreements are presented on a gross basis and therefore, for the purpose of this disclosure, do not reflect the effect of netting permitted under IFRS Accounting Standards.
2 Includes financial
assets at fair
value held for
trading, financial assets
at fair value
not held for
trading, financial assets
at fair value
through other comprehensive
income and brokerage
receivables.
3 Non-taxable positions and
amounts were not material for the years presented.
4 For the purpose of this disclosure, negative interest income on assets is presented as
a reduction to interest income, while in the consolidated income statement
negative interest
income on
assets is
presented as
interest expense.
Refer to
“Note 3
Net interest
income and
other net
income from
financial instruments
measured at
fair value
through profit
or loss”
in the
“Consolidated financial statements” section of this report for more information.
5 Mainly includes derivative financial instruments, equity instruments at fair value held for trading and financial assets for unit-linked
investment contracts.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
254
Average balances and interest rates (continued)
For the year ended
31.12.23
31.12.22
31.12.21
USD m, except where indicated
Average
balance
Interest
expense
Average
interest
rate (%)
Average
balance
Interest
expense
Average
interest
rate (%)
Average
balance
Interest
expense
Average
interest
rate (%)
Liabilities and equity
Amounts due to banks
Domestic
Foreign
Payables from securities financing transactions measured at
amortized cost
1
Domestic
Foreign
Customer deposits
Domestic
of which: demand deposits
of which: savings and sweep deposits
of which: time deposits
Foreign
of which: demand deposits
of which: savings and sweep deposits
of which: time deposits
Funding from UBS Group AG
Domestic
Commercial paper
Domestic
Foreign
Other short-term debt issued measured at amortized cost
Domestic
Foreign
Long-term debt issued measured at amortized cost
Domestic
Foreign
Financial liabilities at fair value (excluding debt issued
designated at fair value)
1,2
Domestic
Foreign
Debt issued designated at fair value
Domestic
Foreign
Other interest-bearing liabilities
Domestic
Foreign
Total interest-bearing liabilities
Swap interest on hedged debt instruments and other
swaps
Interest expense on off-balance sheet securities and other
Interest expense and average interest-bearing liabilities
3
3
3
Non-interest-bearing liabilities
4
Total liabilities
Total equity
Total average liabilities and equity
Net interest income
Net yield on interest-earning assets
1 Repurchase agreements are presented on a gross
basis and therefore, for the purpose of this disclosure, do not reflect
the effect of netting permitted under IFRS Accounting Standards.
2 Includes financial liabilities
at fair value held for trading, other financial liabilities
designated at fair value and brokerage payables designated at fair value.
3 For the purpose of this disclosure, negative interest expense on
liabilities is presented
as a reduction to interest expense, while in the consolidated income statement negative interest
income on liabilities is presented as interest income. Refer to “Note 3 Net interest
income and other net income from
financial instruments measured at fair value through
profit or loss” in the “Consolidated financial statements”
section of this report for more information.
4 Mainly includes derivative financial instruments,
equity
instruments at fair value held for trading and financial liabilities related to unit-linked investment
contracts.
The percentage of total average interest-earning assets attributable
to foreign activities was 61% for 2023 (2022: 61%;
2021: 60%).
The
percentage
of total
average
interest-bearing
liabilities
attributable
to foreign
activities
was
61% for
2023 (2022: 60%;
2021: 59%). All
assets and liabilities
are translated into
US dollars
at uniform
month-end rates. Interest
income and expense are translated at monthly average
rates.
Average rates earned and
paid on assets and
liabilities can change from
period to period based
on the changes in
interest
rates in
general, but
are also
affected by
changes in
the currency
mix included
in the
assets and
liabilities. Tax-exempt
income is
not recorded
on a
tax-equivalent basis.
For all
three years
presented, tax-exempt
income is
considered to
be
insignificant, and the effect from such income is therefore
negligible.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
255
Analysis of changes in interest income and expense
The tables below
provide information,
by categories of
interest-earning assets and
interest-bearing liabilities,
about the
changes in
interest income
and expense
due to
changes in
volume and
interest rates
for the
year ended
31 December
2023 compared with the year ended 31 December 2022, and for the year ended 31 December 2022 compared with the
year
ended 31 December
2021. The
change in
average volume
represents
the change
in the
current
average balance
compared with the average balance from the prior year with respect to the average rate of the prior year.
The change in
average rate represents the
difference between the net
change in interest
income and expense
and the change
in average
volume.
2023 compared with 2022
2022 compared with 2021
Increase / (decrease)
due to changes in
1
Increase / (decrease)
due to changes in
USD m
Average
volume
Average
interest rate
Net
change
Average
volume
Average
interest rate
Net
change
Interest income from interest-earning assets
Balances at central banks
Domestic
Foreign
Amounts due from banks
Domestic
Foreign
Receivables from securities financing transactions measured at amortized
cost
Domestic
Foreign
Loans and advances to customers
Domestic
Foreign
Financial assets at fair value
Domestic
Foreign
Other interest-earning assets
Domestic
Foreign
Interest income
Domestic
Foreign
Total interest income from interest-earning assets
Net interest income on swaps
Interest income on off-balance sheet securities and other
Total interest income
1 In 2023, the Swiss franc and the euro strengthened significantly against the US dollar.
This effect is included within the variances disclosed in this table.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
256
Analysis of changes in interest income and expense
(continued)
2023 compared with 2022
2022 compared with 2021
Increase / (decrease)
due to changes in
1
Increase / (decrease)
due to changes in
USD m
Average
volume
Average
interest rate
Net
change
Average
volume
Average
interest rate
Net
change
Interest expense on interest-bearing liabilities
Amounts due to banks
Domestic
Foreign
Payables from securities financing transactions measured at amortized cost
Domestic
Foreign
Customer deposits
Domestic
of which: demand deposits
of which: savings and sweep deposits
of which: time deposits
Foreign
of which: demand deposits
of which: savings and sweep deposits
of which: time deposits
Funding from UBS Group AG
Domestic
Commercial paper
Domestic
Foreign
Other short-term debt issued measured at amortized cost
Domestic
Foreign
Long-term debt issued measured at amortized cost
Domestic
Foreign
Financial liabilities at fair value (excluding debt issued designated
at fair value)
Domestic
Foreign
Debt issued designated at fair value
Domestic
Foreign
Other interest-bearing liabilities
Domestic
Foreign
Interest expense
Domestic
Foreign
Total interest expense on interest-bearing liabilities
Swap interest on hedged debt instruments and other swaps
Interest expense on off-balance sheet securities and other
Total interest expense
1 In 2023, the Swiss franc and the euro strengthened significantly against the US dollar.
This effect is included within the variances disclosed in this table.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
257
Deposits
The table below analyzes average deposits and
average rates on each deposit category for the years
ended 31 December
2023, 31 December 2022 and 31 December 2021.
For the purpose of this
disclosure, foreign deposits represent deposits
from
depositors
who
are
based
outside
of
Switzerland.
Deposits
by
foreign
depositors
in
domestic
offices
were
USD 60,596m as of 31 December 2023 (31 December
2022: USD 59,897m; 31 December 2021: USD 77,070m)
.
31.12.23
31.12.22
31.12.21
USD m, except where indicated
Average
deposits
Average
rate (%)
Average
deposits
Average
rate (%)
Average
deposits
Average
rate (%)
Due to banks
Domestic
Demand deposits
Time deposits
Total domestic
Foreign
1
Demand deposits
Time deposits
Total Foreign
Total due to banks
Customer deposits
Domestic
Demand deposits
Savings and sweep deposits
Time deposits
Total domestic
Foreign
1
Demand deposits
Savings and sweep deposits
Time deposits
Total foreign
Total customer deposits
1 For the
purpose of this
table, the distinction
between foreign and
domestic deposits is
based on the
domicile of the
depositor, while
foreign and domestic
deposits disclosed in
previous tables are
based on the
booking location.
Uninsured deposits
From the
combined total
of Due
to banks
and Customer
deposits as
of 31 December
2023, total
estimated uninsured
deposits were
USD 415bn (31
December
2022: USD 365bn;
31 December
2021: USD
395bn).
Uninsured
deposits are
deposits that
are in excess
of local
deposit insurance
or protection
scheme limits
in the
key locations
in which
UBS AG
operates, calculated based
on the respective
local regulations, as
well as deposits
in uninsured accounts.
The main deposit
insurance
schemes
applicable
to
UBS
AG
deposits
are
the
Swiss
depositor
protection
scheme
in
Switzerland
(which
protects
applicable
deposits
up
to
a
maximum
of
CHF 100,000
per
client
and
per
bank
or
securities
firm),
the
Compensation Scheme of German Banks in combination with the Deposit Protection Fund of the
Association of German
Banks in Germany (which
protects applicable deposits up to
a maximum of EUR 5m per client
and EUR 50m per
business)
and the Federal Deposit Insurance Corporation (the FDIC) scheme in the Americas (which
protects applicable deposits up
to a maximum of USD 250,000 per depositor, per insured bank,
for each account ownership category).
The table below presents the maturity of
estimated uninsured time deposits as of 31 December 2023. Where a
depositor
holds multiple accounts, which in aggregate are
in excess of a deposit insurance or protection
limit, the insured amount
is first allocated to the account with the shortest time to
maturity.
USD m
1
Within 3 months
3 to 6 months
6 to 12 months
Over 12 months
Total uninsured time deposits as of 31 December 2023
1 Amounts are estimated based on the methodologies defined in each local jurisdiction. As of 31 December 2023, there were no US time deposits subject to the FDIC scheme that
were in excess of the FDIC insurance
limit.
Annual Report 2023 |
Additional regulatory information | UBS
AG consolidated supplemental disclosures
required under SEC regulations
258
Investments in debt instruments
The table below presents the
carrying amount and weighted
average yield of debt
instruments presented within Financial
assets measured
at fair
value through
other comprehensive
income and
Other financial
assets
measured
at amortized
cost on the balance sheet by contractual maturity bucket. The yield for each
range of maturities is calculated by dividing
the annualized interest
income by the average
balance of the investment
per contractual maturity
bucket. The maturity
information presented
does not consider
any early
redemption features
,
and debt
instruments without
fixed maturities
are not included.
Within 1 year
1 to 5 years
5 to 10 years
Over 10 years
USD m, except where indicated
Carrying
amount
Yield (%)
Carrying
amount
Yield (%)
Carrying
amount
Yield (%)
Carrying
amount
Yield (%)
Total
Carrying
amount
Debt instruments measured at fair value
through other comprehensive income
Government bills / bonds
Corporate and other
Subtotal as of 31 December 2023
Debt securities measured at amortized cost
Asset-backed securities
Government bills / bonds
Corporate and other
Subtotal as of 31 December 2023
Total as of 31 December 2023
Loan portfolio
The table below provides the
maturity profile of UBS AG’s
core loan portfolio as of
31 December 2023. The contractual
maturity
is
based
on
carrying
amounts
and
includes
the
effect
of
callable
features.
For
loans
due
after
one
year,
a
breakdown between fixed and adjustable or floating
interest rates is also provided.
USD m
31.12.23
Within 1 year
1 to 5 years
5 to 15 years
Over 15 years
Total
of which: over 1 year
Fixed rate
Adjustable or
floating rate
Private clients with mortgages
Real estate financing
Large corporate clients
SME clients
Lombard
Credit cards
Commodity trade finance
Other loans and advances to customers
Loans to financial advisors
Total
Allowance for credit losses
For the years
ended 31 December
2023, 31 December
2022 and 31
December 2021,
the ratio of
net charge-offs
(i.e.,
write-offs
of
expected
credit
loss
allowances
to
gross
carrying
amount
of
the
average
loans
outstanding)
during
the
period was
not material
for UBS
AG’s core
loan portfolio,
both on
an overall
basis and
on an
individual loan
category
basis.
Total
write-offs
for
31 December
2023
were
USD 77m
(31 December
2022:
USD 95m,
31 December
2021:
USD 137m). Refer to the coverage ratio tables in “Note 9 Financial assets
at amortized cost and other positions in scope
of expected credit
loss measurement”
in the “Consolidated
financial statements”
section of this
report for
the ratio of
expected credit loss allowances to total loans
outstanding at each period end.
Annual Report 2023 |
Appendix
259
Appendix
Alternative performance measures
Alternative performance measures
An alternative
performance measure (an
APM) is
a financial
measure of
historical or
future financial
performance, financial
position
or
cash
flows
other
than
a
financial
measure
defined
or
specified
in
the
applicable
recognized
accounting
standards
or
in
other
applicable
regulations.
A
number
of
APMs
are
reported
in
the
discussion
of
the
financial
and
operating performance
of the
external reports
(annual, quarterly
and other
reports). APMs
are used
to provide
a more
complete picture of operating performance and
to reflect management’s view of
the fundamental drivers of the business
results.
A
definition
of
each
APM,
the
method
used
to
calculate
it
and
the
information
content
are
presented
in
alphabetical order
in the table
below. These
APMs may
qualify as non-GAAP
measures as
defined by US
Securities and
Exchange Commission (SEC) regulations.
APM label
Calculation
Information content
Active Digital Banking clients in
Corporate & Institutional Clients (%)
– Personal & Corporate Banking
Calculated as the average number of active
clients for
each month in the relevant period divided by the
average number of total clients. “Clients” refers
to
the number of unique business relationships or legal
entities operated by Corporate & Institutional
Clients,
excluding clients that do not have an account,
mono-
product clients and clients that have defaulted on
loans or credit facilities. At the end of each month,
any client that has logged on at least once in
that
month is determined to be “active” (a log-in
time
stamp is allocated to all business relationship numbers
or per legal entity in a digital banking contract).
This measure provides information about the
proportion of active Digital Banking clients in the total
number of UBS clients (within the aforementioned
meaning) which are serviced by Corporate &
Institutional Clients.
Active Digital Banking clients in
Personal Banking (%)
– Personal & Corporate Banking
Calculated as the average number of active
clients for
each month in the relevant period divided by the
average number of total clients. “Clients” refers
to
the number of unique business relationships operated
by Personal Banking, excluding persons
under the age
of 15, clients who do not have a private account,
clients domiciled outside Switzerland and clients
who
have defaulted on loans or credit facilities. At the
end
of each month, any client that has logged on
at least
once in that month is determined to be “active”
(a
log-in time stamp is allocated to all business
relationship numbers in a digital banking contract).
This measure provides information about the
proportion of active Digital Banking clients in the total
number of UBS clients (within the aforementioned
meaning) who are serviced by Personal Banking.
Active Mobile Banking clients in
Personal Banking (%)
– Personal & Corporate Banking
Calculated as the average number of active
clients for
each month in the relevant period divided by the
average number of total clients. “Clients” refers
to
the number of unique business relationships operated
by Personal Banking, excluding persons
under the age
of 15, clients who do not have a private account,
clients domiciled outside Switzerland and clients
who
have defaulted on loans or credit facilities. At the
end
of each month, any client that has logged on
via the
mobile app at least once in that month is determined
to be “active” (a log-in time stamp is allocated
to all
business relationship numbers in a digital banking
contract).
This measure provides information about the
proportion of active Mobile Banking clients in the
total number of UBS clients (within the
aforementioned meaning) who are serviced by
Personal Banking.
Cost / income ratio (%)
Calculated as operating expenses divided by
total
revenues.
This measure provides information about the
efficiency of the business by comparing operating
expenses with gross income.
Fee and trading income for Corporate
&
Institutional Clients (USD and CHF)
– Personal & Corporate Banking
Calculated as the total of recurring net fee and
transaction-based income for Corporate &
Institutional Clients.
This measure provides information about the amount
of fee and trading income for Corporate
&
Institutional Clients.
Annual Report 2023 |
Appendix
260
APM label
Calculation
Information content
Fee-generating assets (USD)
– Global Wealth Management
Calculated as the sum of discretionary and
nondiscretionary wealth management portfolios
(mandate volume) and assets where generated
revenues are predominantly of a recurring nature, i.e.,
mainly investment, mutual, hedge and private-market
funds where we have a distribution agreement,
including client commitments into closed-ended
private-market funds from the date that recurring
fees are charged. Assets related to our Global
Financial Intermediaries business are excluded, as
are
assets of sanctioned clients.
This measure provides information about the volume
of invested assets that create a revenue stream,
whether as a result of the nature of the contractual
relationship with clients or through the fee structure
of the asset. An increase in the level of fee-generating
assets results in an increase in the associated revenue
stream. Assets of sanctioned clients are excluded from
fee-generating assets.
Fee-pool-comparable revenues (USD)
– the Investment Bank
Calculated as the total of revenues from: merger-and-
acquisition-related transactions; Equity Capital
Markets,
excluding derivatives; Leveraged Capital
Markets, excluding the impact of mark-to-market
movements on loan portfolios; and Debt
Capital
Markets, excluding revenues related to debt
underwriting of UBS instruments.
This measure provides information about the amount
of revenues in the Investment Bank that are
comparable with the relevant global fee pools.
Gross margin on invested assets (bps)
– Asset Management
Calculated as total revenues (annualized as applicable)
divided by average invested assets.
This measure provides information about the total
revenues of the business in relation to invested assets.
Impaired loan portfolio as a percentage
of total loan portfolio, gross (%)
– Global Wealth Management,
Personal & Corporate Banking
Calculated as impaired loan portfolio divided by
total
gross loan portfolio.
This measure provides information about the
proportion of impaired loan portfolio in the total gross
loan portfolio.
Integration-related expenses (USD)
Generally include costs of internal staff
and
contractors substantially dedicated to integration
activities, retention awards, redundancy costs,
incremental expenses from the shortening of useful
lives of property, equipment and software, and
impairment charges relating to these assets.
Classification as integration-related expenses does
not
affect the timing of recognition and measurement of
those expenses or the presentation thereof in the
income statement. Integration-related expenses
incurred by Credit Suisse also included expenses
associated with restructuring programs that existed
prior to the acquisition.
This measure provides information about expenses
that are temporary, incremental and directly related to
the integration of Credit Suisse into UBS.
Invested assets (USD and CHF)
– Global Wealth Management,
Personal & Corporate Banking,
Asset Management
Calculated as the sum of managed fund
assets,
managed institutional assets, discretionary and
advisory wealth management portfolios, fiduciary
deposits, time deposits, savings accounts,
and wealth
management securities or brokerage accounts.
This measure provides information about the volume
of client assets managed by or deposited with
UBS for
investment purposes.
Investment products for Personal
Banking (USD and CHF)
– Personal & Corporate Banking
Calculated as the sum of investment funds
(including
UBS Vitainvest third-pillar pension funds, as
well as
money market funds), mandates and third-party life
insurance operated in Personal Banking.
This measure provides information about the volume
of investment funds (including UBS Vitainvest
third-
pillar pension funds, as well as money
market funds),
mandates and third-party life insurance operated in
Personal Banking.
Net interest margin (bps)
– Personal & Corporate Banking
Calculated as net interest income (annualized
as
applicable) divided by average loans.
This measure provides information about the
profitability of the business by calculating the
difference between the price charged for lending and
the cost of funding, relative to loan value.
Net new assets (USD)
– Global Wealth Management
Calculated as the net amount of inflows and
outflows
of invested assets (as defined in UBS policy) recorded
during a specific period, plus interest and dividends.
Excluded from the calculation are movements due to
market performance, foreign exchange translation,
fees, and the effects on invested assets of strategic
decisions by UBS to exit markets or services.
This measure provides information about the
development of invested assets during a
specific
period as a result of net new asset flows, plus the
effect of interest and dividends.
Net new assets growth rate (%)
– Global Wealth Management
Calculated as the net amount of inflows and
outflows
of invested assets (as defined in UBS policy) recorded
during a specific period (annualized as applicable),
plus interest and dividends, divided by total invested
assets at the beginning of the period.
This measure provides information about the growth
of invested assets during a specific period
as a result
of net new asset flows.
Annual Report 2023 |
Appendix
261
APM label
Calculation
Information content
Net new fee-generating assets (USD)
– Global Wealth Management
Calculated as the net amount of fee-generating
asset
inflows and outflows, including dividend
and interest
inflows into mandates and outflows from mandate
fees paid by clients during a specific period.
Excluded
from the calculation are the effects on fee-generating
assets of strategic decisions by UBS to exit
markets or
services.
This measure provides information about the
development of fee-generating assets during
a
specific period as a result of net flows, excluding
movements due to market performance and
foreign
exchange translation, as well as the effects on fee-
generating assets of strategic decisions by UBS
to exit
markets or services.
Net new investment products for
Personal Banking (USD and CHF)
– Personal & Corporate Banking
Calculated as the net amount of inflows and
outflows
of investment products during a specific period.
This measure provides information about the
development of investment products during a specific
period as a result of net new investment product
flows.
Net new money (USD)
– Global Wealth Management,
Asset Management
Calculated as the net amount of inflows and
outflows
of invested assets (as defined in UBS policy) recorded
during a specific period. Excluded from the calculation
are movements due to market performance, foreign
exchange translation, dividends, interest and fees,
as
well as the effects on invested assets of strategic
decisions by UBS to exit markets
or services. Net new
money is not measured for Personal & Corporate
Banking.
This measure provides information about the
development of invested assets during a
specific
period as a result of net new money flows.
Net new money growth rate (%)
– Global Wealth Management
Calculated as the net amount of inflows and
outflows
of invested assets (as defined in UBS policy) recorded
during a specific period (annualized as applicable)
divided by total invested assets at the beginning
of
the period.
This measure provides information about the growth
of invested assets during a specific period
as a result
of net new money flows.
Net profit growth (%)
Calculated as the change in net profit attributable
to
shareholders from continuing operations between
current and comparison periods divided by net profit
attributable to shareholders from continuing
operations of the comparison period.
This measure provides information about profit
growth since the comparison period.
Operating expenses (underlying)
(USD)
Calculated by adjusting operating expenses
as
reported in accordance with IFRS Accounting
Standards for items that management believes
are
not representative of the underlying performance of
the businesses.
›
Refer to the “Group performance” section of the
UBS Group Annual Report 2023 for more
information
This measure provides information about the amount
of operating expenses, while excluding items
that
management believes are not representative of the
underlying performance of the businesses.
Operating profit / (loss) before tax
(underlying) (USD)
Calculated by adjusting operating profit / (loss) before
tax as reported in accordance with IFRS Accounting
Standards for items that management believes
are
not representative of the underlying performance of
the businesses.
›
Refer to the “Group performance” section of the
UBS Group Annual Report 2023 for more
information
This measure provides information about the amount
of operating profit / (loss) before tax, while excluding
items that management believes are not
representative of the underlying performance of the
businesses.
Pre-tax profit growth (%)
– Global Wealth Management,
Personal & Corporate Banking,
Asset Management,
the Investment Bank
Calculated as the change in net profit before tax
attributable to shareholders from continuing
operations between current and comparison periods
divided by net profit before tax attributable to
shareholders from continuing operations of the
comparison period.
This measure provides information about pre-tax
profit growth since the comparison period.
Pre-tax profit growth (underlying) (%)
– Global Wealth Management,
Personal & Corporate Banking,
Asset Management,
the Investment Bank
Calculated as the change in net profit before tax
attributable to shareholders from continuing
operations between current and comparison periods
divided by net profit before tax attributable to
shareholders from continuing operations of the
comparison period. Net profit before tax attributable
to shareholders from continuing operations excludes
items that management believes are not
representative of the underlying performance of the
businesses and also excludes related tax impact.
This measure provides information about pre-tax
profit growth since the comparison period, while
excluding items that management believes
are not
representative of the underlying performance of the
businesses.
Recurring net fee income
(USD and CHF)
– Global Wealth Management,
Personal & Corporate Banking
Calculated as the total of fees for services provided
on
an ongoing basis, such as portfolio management
fees,
asset-based investment fund fees and custody
fees,
which are generated on client assets, and
administrative fees for accounts.
This measure provides information about the amount
of recurring net fee income.
Annual Report 2023 |
Appendix
262
APM label
Calculation
Information content
Return on attributed equity (%)
Calculated as annualized business division
operating
profit before tax divided by average attributed equity.
This measure provides information about the
profitability of the business divisions in relation to
attributed equity.
Return on common equity tier 1
capital (%)
Calculated as annualized net profit attributable to
shareholders divided by average common equity
tier 1
capital.
This measure provides information about the
profitability of the business in relation to common
equity tier 1 capital.
Return on equity (%)
Calculated as annualized net profit attributable to
shareholders divided by average equity attributable
to
shareholders.
This measure provides information about the
profitability of the business in relation to equity.
Return on leverage ratio denominator,
gross (%)
Calculated as annualized total revenues divided by
average leverage ratio denominator.
This measure provides information about the revenues
of the business in relation to the leverage ratio
denominator.
Return on tangible equity (%)
Calculated as annualized net profit attributable to
shareholders divided by average equity attributable
to
shareholders less average goodwill and intangible
assets.
This measure provides information about the
profitability of the business in relation to tangible
equity.
Tangible book value per share
(USD)
Calculated as equity attributable to shareholders less
goodwill and intangible assets divided by the
number
of shares outstanding.
This measure provides information about tangible net
assets on a per-share basis.
Total book value per share
(USD)
Calculated as equity attributable to shareholders
divided by the number of shares outstanding.
This measure provides information about net assets
on a per-share basis.
Total revenues (underlying)
(USD)
Calculated by adjusting total revenues as reported in
accordance with IFRS
Accounting Standards for items
that management believes are not representative of
the underlying performance of the businesses.
›
Refer to the “Group performance” section of the
UBS Group Annual Report 2023 for more
information
This measure provides information about the amount
of total revenues, while excluding items that
management believes are not representative of the
underlying performance of the businesses.
Transaction-based income
(USD and CHF)
– Global Wealth Management,
Personal & Corporate Banking
Calculated as the total of the non-recurring portion
of
net fee and commission income, mainly composed
of
brokerage and transaction-based investment fund
fees, and credit card fees, as well as fees for payment
and foreign-exchange transactions, together with
other net income from financial instruments
measured at fair value through profit or loss.
This measure provides information about the amount
of the non-recurring portion of net fee and
commission income, together with other net
income
from financial instruments measured at fair value
through profit or loss.
Underlying cost / income ratio (%)
Calculated as underlying operating expenses
(as
defined above) divided by underlying total
revenues
(as defined above).
This measure provides information about the
efficiency of the business by comparing operating
expenses with total revenues, while excluding items
that management believes are not representative of
the underlying performance of the businesses.
Underlying net profit growth (%)
Calculated as the change in net profit attributable
to
shareholders from continuing operations between
current and comparison periods divided by net profit
attributable to shareholders from continuing
operations of the comparison period.
Net profit
attributable to shareholders from continuing
operations excludes items that management
believes
are not representative of the underlying performance
of the businesses and also excludes related tax
impact.
This measure provides information about profit
growth since the comparison period,
while excluding
items that management believes are not
representative of the underlying performance of the
businesses.
Underlying return on common equity
tier 1 capital (%)
Calculated as annualized net profit attributable to
shareholders divided by average common equity
tier 1
capital. Net profit attributable to shareholders
excludes items that management believes
are not
representative of the underlying performance of the
businesses and also excludes related tax impact.
This measure provides information about the
profitability of the business in relation to common
equity tier 1 capital,
while excluding items that
management believes are not representative of the
underlying performance of the businesses.
Underlying return on tangible equity
(%)
Calculated as annualized net profit attributable to
shareholders divided by average equity attributable
to
shareholders less average goodwill and intangible
assets.
Net profit attributable to shareholders excludes
items that management believes are not
representative of the underlying performance of the
businesses and also excludes related tax impact.
This measure provides information about the
profitability of the business in relation to tangible
equity, while excluding items that management
believes are not representative of the underlying
performance of the businesses.
This is a general list of the APMs used in our
financial reporting. Not all of the APMs
listed above may appear in
this particular report.
Annual Report 2023 |
Appendix
263
Abbreviations frequently used in our financial reports
A
ABS
asset-backed securities
AG
Aktiengesellschaft
AGM
Annual General Meeting of
shareholders
A-IRB
advanced internal ratings-
based
AIV
alternative investment
vehicle
ALCO
Asset and Liability
Committee
AMA
advanced measurement
approach
AML
anti-money laundering
AoA
Articles of Association
APM
alternative performance
measure
ARR
alternative reference rate
ARS
auction rate securities
ASF
available stable funding
AT1
additional tier 1
AuM
assets under management
B
BCBS
Basel Committee on
Banking Supervision
BIS
Bank for International
Settlements
BoD
Board of Directors
C
CAO
Capital Adequacy
Ordinance
CCAR
Comprehensive Capital
Analysis and Review
CCF
credit conversion factor
CCP
central counterparty
CCR
counterparty credit risk
CCRC
Corporate Culture and
Responsibility Committee
CDS
credit default swap
CEA
Commodity Exchange Act
CEO
Chief Executive Officer
CET1
common equity tier 1
CFO
Chief Financial Officer
CGU
cash-generating unit
CHF
Swiss franc
CIO
Chief Investment Office
C&ORC
Compliance & Operational
Risk Control
CRM
credit risk mitigation (credit
risk) or comprehensive risk
measure (market risk)
CST
combined stress test
CUSIP
Committee on Uniform
Security Identification
Procedures
CVA
credit valuation adjustment
D
DBO
defined benefit obligation
DCCP
Deferred Contingent
Capital Plan
DE&I
diversity, equity and
inclusion
DFAST
Dodd–Frank Act Stress Test
DM
discount margin
DOJ
US Department of Justice
DTA
deferred tax asset
DVA
debit valuation adjustment
E
EAD
exposure at default
EB
Executive Board
EC
European Commission
ECB
European Central Bank
ECL
expected credit loss
EGM
Extraordinary General
Meeting of shareholders
EIR
effective interest rate
EL
expected loss
EMEA
Europe, Middle East and
Africa
EOP
Equity Ownership Plan
EPS
earnings per share
ESG
environmental, social and
governance
ESR
environmental and social
risk
ETD
exchange-traded derivatives
ETF
exchange-traded fund
EU
European Union
EUR
euro
EURIBOR
Euro Interbank Offered Rate
EVE
economic value of equity
EY
Ernst & Young Ltd
F
FA
financial advisor
FCA
UK Financial Conduct
Authority
FDIC
Federal Deposit Insurance
Corporation
FINMA
Swiss Financial Market
Supervisory Authority
FMIA
Swiss Financial Market
Infrastructure Act
FSB
Financial Stability Board
FTA
Swiss Federal Tax
Administration
FVA
funding valuation
adjustment
FVOCI
fair value through other
comprehensive income
FVTPL
fair value through profit or
loss
FX
foreign exchange
G
GAAP
generally accepted
accounting principles
GBP
pound sterling
GCRG
Group Compliance,
Regulatory & Governance
GDP
gross domestic product
GEB
Group Executive Board
GHG
greenhouse gas
GIA
Group Internal Audit
GRI
Global Reporting Initiative
G-SIB
global systemically
important bank
H
HQLA
high-quality liquid assets
I
IAS
International Accounting
Standards
IASB
International Accounting
Standards Board
IBOR
interbank offered rate
IFRIC
International Financial
Reporting Interpretations
Committee
IFRS
Accounting Standards
Accounting
issued by the IASB
Standards
IRB
internal ratings-based
IRRBB
interest rate risk in the
banking book
ISDA
International Swaps and
Derivatives Association
ISIN
International Securities
Identification Number
Annual Report 2023 |
Appendix
264
Abbreviations frequently used in our financial reports (continued)
K
KRT
Key Risk Taker
L
LAS
liquidity-adjusted stress
LCR
liquidity coverage ratio
LGD
loss given default
LIBOR
London Interbank Offered
Rate
LLC
limited liability company
LoD
lines of defense
LRD
leverage ratio denominator
LTIP
Long-Term
Incentive Plan
LTV
loan-to-value
M
M&A
mergers and acquisitions
MRT
Material Risk Taker
N
NII
net interest income
NSFR
net stable funding ratio
NYSE
New York Stock Exchange
O
OCA
own credit adjustment
OCI
other comprehensive
income
OECD
Organisation for Economic
Co-operation and
Development
OTC
over-the-counter
P
PCI
purchased credit impaired
PD
probability of default
PIT
point in time
PPA
purchase price allocation
P&L
profit or loss
Q
QCCP
Qualifying central
counterparty
R
RBC
risk-based capital
RbM
risk-based monitoring
REIT
real estate investment trust
RMBS
residential mortgage-
backed securities
RniV
risks not in VaR
RoCET1
return on CET1 capital
RoU
right-of-use
rTSR
relative total shareholder
return
RWA
risk-weighted assets
S
SA
standardized approach or
société anonyme
SA-CCR
standardized approach for
counterparty credit risk
SAR
Special Administrative
Region of the People’s
Republic of China
SDG
Sustainable Development
Goal
SEC
US Securities and Exchange
Commission
SFT
securities financing
transaction
SI
sustainable investing or
sustainable investment
SIBOR
Singapore Interbank
Offered Rate
SICR
significant increase in credit
risk
SIX
SIX Swiss Exchange
SME
small and medium-sized
entities
SMF
Senior Management
Function
SNB
Swiss National Bank
SOR
Singapore Swap Offer Rate
SPPI
solely payments of principal
and interest
SRB
systemically relevant bank
SRM
specific risk measure
SVaR
stressed value-at-risk
T
TBTF
too big to fail
TCFD
Task
Force on Climate-
related Financial Disclosures
TIBOR
Tokyo
Interbank Offered
Rate
TLAC
total loss-absorbing capacity
TTC
through the cycle
U
USD
US dollar
V
VaR
value-at-risk
VAT
value added tax
This is a general list of the abbreviations frequently used in our financial reporting. Not all of
the listed abbreviations may
appear in this particular report.
Annual Report 2023 |
Appendix
265
Information sources
Reporting publications
Annual publications
UBS AG Annual
Report
: Published in
English,
this report provides
descriptions of: the
UBS AG
(consolidated) performance;
the strategy
and performance
of the
business divisions
and Group Items;
risk, treasury
and capital
management; corporate
governance; and financial information, including the financial
statements.
Compensation Report
: This report discusses the
compensation framework and provides information about compensation
for
the
Board
of
Directors
and
the
Group
Executive
Board
members.
It
is
available
in
English
and
German
(
“Vergütungsbericht
”) and represents a component of the UBS Group Annual
Report.
Sustainability
Report
:
Published
in
English,
the
Sustainability
Report
provides
disclosures
on
environmental,
social
and
governance topics related to the UBS Group. It also provides
certain disclosures related to diversity, equity and inclusion.
Quarterly publications
Quarterly
financial
report
:
This
report
provides
an
update
on
performance
and
strategy
(where
applicable)
for
the
respective quarter. It is available in English.
The
annual and
quarterly
publications
are
available
in
.pdf
and
online
formats
at
ubs.com/investors
,
under
“Financial
information.”
Starting
with
the
Annual
Report
2022,
printed
copies,
in
any
language,
of the
aforementioned
annual
publications are no longer provided.
Other information
Website
The “Investor Relations”
website at
ubs.com/investors
releases;
financial
information,
including
results-related
filings
with
the
US
Securities
and
Exchange
Commission
(the
SEC); information for
shareholders, including
UBS share
price charts,
as well as
data and dividend
information, and
for
bondholders; the corporate calendar; and presentations by management for investors and
financial analysts. Information
is available online in English, with some information also
available in German.
Results presentations
Quarterly
results
presentations
are
webcast
live.
Recordings
of
most
presentations
can
be
downloaded
from
ubs.com/presentations
.
Messaging service
Email
alerts
to
news
about
UBS
can
be
subscribed
for
under
“UBS
News
Alert”
at
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Form 20-F and other submissions to the US Securities
and Exchange Commission
UBS files
periodic
reports
with
and submits
other
information
to
the
SEC.
Principal
among
these
filings
is the
annual
report on Form 20-F, filed pursuant to
the US Securities Exchange Act of 1934.
The filing of Form 20-F is structured
as a
wraparound document. Most sections of the filing
can be satisfied by referring to the
UBS AG Annual Report. However,
there is a
small amount of
additional information in Form 20-F
that is not
presented elsewhere and is
particularly targeted
at readers in the US. Readers are encouraged to refer to this additional disclosure. Any document that filed with the SEC
is available on the SEC’s website:
sec.gov
. Refer to
ubs.com/investors
Annual Report 2023 |
Appendix
266
Cautionary statement
regarding forward-looking statements
|
not limited to management’s
outlook for UBS’s financial performance,
statements relating to the
anticipated effect of transactions
and strategic initiatives on
UBS’s
business and
future
development and
goals
or
intentions to
achieve climate,
sustainability and
other social
objectives. While
these
forward-looking
statements represent
UBS’s judgments,
expectations and
objectives concerning the
matters described,
a number
of risks,
uncertainties and
other important
factors could cause actual developments and results to differ materially from UBS’s expectations. In particular,
terrorist activity and conflicts
in the Middle East,
as well as the continuing Russia–Ukraine
war, may have significant impacts on global markets,
exacerbate global inflationary pressures, and slow
global growth.
In addition,
the ongoing
conflicts may
continue to
cause significant
population displacement,
and lead
to shortages
of vital
commodities, including
energy
shortages and food insecurity outside the areas immediately involved in armed conflict. Governmental responses to the armed conflicts, including, with
respect
to the Russia–Ukraine war, coordinated successive
sets of sanctions on
Russia and Belarus,
and Russian and Belarusian
entities and nationals, and
the uncertainty
as to whether
the ongoing conflicts will
widen and intensify,
may continue to
have significant adverse effects
on the market and
macroeconomic conditions,
including in
ways that
cannot be
anticipated. UBS’s
acquisition of
the Credit
Suisse Group
has materially
changed our
outlook and
strategic direction
and
introduced new operational challenges. The integration
of the Credit Suisse entities into the UBS structure is expected
to take between three and five years and
presents significant
risks, including
the risks that
UBS Group AG
may be unable
to achieve
the cost reductions
and other benefits
contemplated by
the transaction.
This creates significantly greater uncertainty about forward-looking statements. Other factors that may affect our performance and ability to achieve our plans,
outlook and other objectives also
include, but are not limited to:
(i) the degree to which UBS is successful
in the execution of its
strategic plans, including its cost
reduction and efficiency initiatives
and its ability to manage
its levels of risk-weighted
assets (RWA) and leverage ratio
denominator (LRD), liquidity
coverage ratio
and other financial resources,
including changes in RWA assets
and liabilities arising from higher
market volatility and the size
of the combined Group; (ii) the
degree to which UBS is successful in implementing changes to its businesses to meet changing market, regulatory
and other conditions, including as a result of
the acquisition of the Credit Suisse
Group; (iii) increased inflation and interest rate
volatility in major markets; (iv) developments in the macroeconomic climate
and in the markets in
which UBS operates or
to which it is
exposed, including movements
in securities prices or liquidity, credit spreads, currency
exchange rates,
deterioration or slow recovery in residential and commercial real estate markets, the effects of economic conditions, including increasing inflationary pressures,
market developments, increasing geopolitical tensions, and changes to national trade policies on the financial position or creditworthiness of
UBS’s clients and
counterparties, as well as on client sentiment and levels of activity; (v) changes in the availability of capital and funding, including
any adverse changes in UBS’s
credit spreads and credit ratings of UBS, Credit Suisse, sovereign issuers, structured credit products or
credit-related exposures, as well as availability and cost of
funding to
meet requirements
for debt
eligible for
total loss-absorbing
capacity (TLAC),
in particular
in light
of the
acquisition of
the Credit
Suisse Group;
(vi) changes in central
bank policies or
the implementation
of financial legislation
and regulation in
Switzerland, the
US, the UK,
the EU and
other financial
centers
that have imposed, or resulted
in, or may do so
in the future, more stringent
or entity-specific capital,
TLAC, leverage ratio, net
stable funding ratio, liquidity
and
funding
requirements,
heightened
operational
resilience
requirements,
incremental
tax
requirements,
additional
levies,
limitations
on
permitted
activities,
constraints on remuneration, constraints
on transfers of capital
and liquidity and sharing of
operational costs across the
Group or other measures, and the
effect
these will
or would
have on
UBS’s business
activities; (vii) UBS’s
ability to
successfully implement
resolvability and
related regulatory requirements
and the
potential
need to make further changes to the
legal structure or booking model of
UBS in response to legal and regulatory requirements
and any additional requirements
due to its acquisition of the Credit Suisse Group, or other developments; (viii) UBS’s ability to maintain and improve its systems and controls for complying
with
sanctions in a timely
manner and for the detection
and prevention of money
laundering to meet evolving
regulatory requirements and expectations,
in particular
in current geopolitical turmoil; (ix)
the uncertainty arising from domestic
stresses in certain major economies;
(x) changes in UBS’s competitive
position, including
whether differences in regulatory capital and other requirements among the major financial centers adversely affect UBS’s ability to
compete in certain lines of
business; (xi) changes in the standards of conduct applicable to our businesses that may result from new regulations or new enforcement of existing standards,
including measures to impose new and enhanced duties when interacting with customers and in the execution and handling of customer transactions; (xii) the
liability to which UBS may be exposed, or possible
constraints or sanctions that regulatory authorities
might impose on UBS, due to litigation, contractual
claims
and regulatory
investigations, including the
potential for
disqualification from
certain businesses, potentially
large fines
or monetary
penalties, or
the loss
of
licenses or privileges as
a result of
regulatory or other governmental sanctions, as
well as the effect
that litigation, regulatory and similar
matters have on the
operational risk component of our RWA, including as a result of
its acquisition of the Credit Suisse Group, as well as
the amount of capital available for return
to shareholders; (xiii) the effects on UBS’s business, in particular cross-border
banking, of sanctions, tax or regulatory developments and of possible changes in
UBS’s policies
and practices;
(xiv) UBS’s ability
to retain
and attract
the employees
necessary to
generate revenues
and to
manage, support
and control
its
businesses, which may be
affected by competitive factors;
(xv) changes in accounting
or tax standards or
policies, and determinations
or interpretations affecting
the
recognition
of
gain
or
loss,
the
valuation
of
goodwill,
the
recognition
of
deferred
tax
assets
and
other matters;
(xvi) UBS’s ability
to
implement new
technologies and business methods, including digital services and technologies, and ability to successfully compete with both existing
and new financial service
providers, some of which may not be
regulated to the same extent; (xvii) limitations on the
effectiveness of UBS’s internal processes for risk management, risk
control, measurement and modeling,
and of financial models
generally; (xviii) the occurrence of
operational failures, such as
fraud, misconduct, unauthorized
trading, financial crime, cyberattacks,
data leakage and systems failures,
the risk of which is increased
with cyberattack threats from both
nation states and non-
nation-state actors targeting
financial institutions; (xix) restrictions
on the ability of UBS
Group AG and UBS AG
to make payments or
distributions, including due
to restrictions on the ability of
its subsidiaries to make loans or distributions, directly
or indirectly,
or, in
the case of financial difficulties, due to
the exercise by
FINMA or the regulators of UBS’s operations in other countries of their broad statutory powers in relation
to protective measures, restructuring and liquidation
proceedings; (xx) the degree to which
changes in regulation, capital or
legal structure, financial results or
other factors may affect UBS’s ability
to maintain its
stated capital return objective;
(xxi) uncertainty over the scope
of actions that may
be required by UBS, governments
and others for UBS to
achieve goals relating
to climate, environmental and social matters, as well as the evolving
nature of underlying science and industry and the possibility of conflict
between different
governmental standards and regulatory regimes; (xxii) the ability of UBS to
access capital markets; (xxiii) the ability of UBS to successfully
recover from a disaster
or other
business continuity
problem due
to a
hurricane, flood,
earthquake, terrorist
attack, war,
conflict (e.g.,
the Russia–Ukraine
war), pandemic,
security
breach, cyberattack, power
loss, telecommunications failure or
other natural or
man-made event, including
the ability to
function remotely during
long-term
disruptions such as the COVID-19 (coronavirus) pandemic; (xxiv) the level
of success in the absorption of Credit Suisse, in the integration of the two groups
and
their businesses, and in the execution of the planned strategy regarding cost reduction and divestment of any non-core assets, the existing assets and liabilities
of Credit Suisse, the level
of resulting impairments and write-downs, the effect of
the consummation of the integration on the operational results,
share price
and credit
rating of UBS
– delays,
difficulties, or
failure in
closing the transaction
may cause market
disruption and challenges
for UBS
to maintain
business,
contractual and operational relationships;
and (xxv) the effect that these or other
factors or unanticipated events,
including media reports and speculations,
may
have on our
reputation and the
additional consequences that this
may have on
our business and
performance. The sequence in
which the factors
above are
presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences.
Our business and financial performance could be
affected by other factors identified in our past and
future filings and reports, including those filed with the
US Securities and Exchange Commission (the SEC).
More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with
the SEC, including the UBS Group AG
and UBS AG Annual Reports
on Form 20- F for the year
ended 31 December 2023. UBS
is not under any obligation
to (and expressly disclaims any
obligation to)
update or alter its forward-looking statements, whether
as a result of new information, future events, or otherwise.
Rounding |
disclosed in text and tables are
calculated on the basis of unrounded
figures. Absolute changes between reporting periods disclosed in
the text, which can be
derived from numbers presented in related tables, are calculated on
a rounded basis.
Tables |
available as of the relevant date or for the relevant period. Zero values generally indicate that the respective figure is zero on an actual or rounded basis.
Values
that are zero on a rounded basis can be either negative
or positive on an actual basis.
Websites |
of any such websites into this report.
UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
ubs.com
TABLE OF CONTENTS
Item 16D. Exemptions FromItem 10. Additional InformationItem 19. ExhibitsNote 1 Summary Of Material Accounting PoliciesNote 1 Summary Of Material Accounting Policies (continued)Item 2J in This Note For More Information)Item and Recognized in The Income Statement Along with The Change in The Fair Value Of The Hedging Instrument. TheNote 2A Segment ReportingNote 2A Segment Reporting (continued)Note 2B Segment Reporting By Geographic LocationNote 3 Net Interest Income and Other Net Income From Financial Instruments Measured At Fair Value Through Profit Or LossNote 3 Net Interest Income and Other Net Income From Financial Instruments Measured At Fair Value ThroughNote 4 Net Fee and Commission IncomeNote 5 Other IncomeNote 6 Personnel ExpensesNote 7 General and Administrative ExpensesNote 8 Income TaxesNote 8 Income Taxes (continued)Note 9 Financial Assets At Amortized Cost and Other Positions in Scope Of Expected Credit Loss MeasurementNote 10 Derivative InstrumentsNote 10 Derivative Instruments (continued)Note 11 Property, Equipment and SoftwareNote 12 Goodwill and Intangible AssetsNote 12 Goodwill and Intangible Assets (continued)Note 13 Other AssetsNote 13 Other Assets (continued)Note 14 Customer Deposits, and Funding From Ubs Group AgNote 15 Debt Issued Designated At Fair ValueNote 16 Debt Issued Measured At Amortized CostNote 17 Provisions and Contingent Liabilities A) Provisions The Table Below Presents An Overview Of Total ProvisionsNote 17 Provisions and Contingent LiabilitiesNote 17 Provisions and Contingent Liabilities (continued)Note 18 Other Liabilities A) Other Financial Liabilities Measured At Amortized CostNote 18 Other LiabilitiesNote 19 Expected Credit Loss MeasurementNote 19 Expected Credit Loss Measurement (continued)Note 20 Fair Value MeasurementNote 20 Fair Value Measurement (continued)Note 21 Offsetting Financial Assets and Financial LiabilitiesNote 21 Offsetting Financial Assets and Financial Liabilities (continued)Note 22 Restricted and Transferred Financial AssetsNote 22 Restricted and Transferred Financial Assets (continued)Note 23 Maturity Analysis Of Assets and LiabilitiesNote 23 Maturity Analysis Of Assets and Liabilities (continued)Note 24 Interest Rate Benchmark ReformNote 25 Hedge AccountingNote 25 Hedge Accounting (continued)Note 26 Post-employment Benefit PlansNote 26 Post-employment Benefit Plans (continued)Note 27 Employee Benefits: Variable CompensationNote 27 Employee Benefits: Variable Compensation (continued)Note 28 Interests in Subsidiaries and Other EntitiesNote 28 Interests in Subsidiaries and Other Entities (continued)Note 29 Changes in Organization and Acquisitions and Disposals Of Subsidiaries and BusinessesNote 30 Related Parties (continued)Note 31 Invested Assets and Net New MoneyNote 31 Invested Assets and Net New Money (continued)Note 32 Currency Translation RatesNote 33 Main Differences Between Ifrs Accounting Standards and Swiss GaapNote 33 Main Differences Between Ifrs Accounting Standards and Swiss Gaap (continued)Note 34 Supplemental Guarantor Information Required Under Sec RegulationsNote 34 Supplemental Guarantor Information Required Under Sec Regulations (continued)