UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

 

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

 

Date: January 22, 2019

 

UBS Group AG

Commission File Number: 1-36764

 

UBS AG

Commission File Number: 1-15060

 

 

(Registrants' Name)

 

Bahnhofstrasse 45, Zurich, Switzerland

Aeschenvorstadt 1, Basel, Switzerland

(Address of principal executive offices)

 

Indicate by check mark whether the registrants file or will file annual reports under cover of Form 20‑F or Form 40-F.

 

This Form 6-K consists of the Fourth Quarter 2018 Report of UBS Group AG, which appears immediately following this page.

 

  

  

Our financial results

 

Fourth quarter 2018 report 

 

  

1.	UBS Group
4	Recent developments
10	Group performance
2.	UBS business divisions and Corporate Center
20	Global Wealth Management
23	Personal & Corporate Banking
27	Asset Management
30	Investment Bank
33	Corporate Center
3.	Risk, treasury and capital management
42	Risk management and control
47	Balance sheet, liquidity and funding management
49	Capital management
4.	Consolidated financial information
62	UBS Group AG interim consolidated financial information (unaudited)
75	UBS AG interim consolidated financial information (unaudited)
	Appendix
80	Abbreviations frequently used in our financial reports
82	Information sources
83	Cautionary statement

Publication of the Annual Report 2018:                               Friday, 15 March 2019
Publication of the first quarter 2019 report:                          Thursday, 25 April 2019
Annual General Meeting 2019:                                           Thursday, 2 May 2019
Publication of the second quarter 2019 report:                     Tuesday, 23 July 2019
Publication of the third quarter 2019 report:                         Tuesday, 22 October 2019

Publication of the Annual Report 2018:                               Friday, 15 March 2019

*Publication dates of further quarterly and annual reports and results will be made available as part of the corporate calendar of UBS AG at www.ubs.com/investors

 

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Hotline +41-44-235 6652
Fax +41-44-235 8220

Shareholder Services

UBS’s Shareholder Services team, a unit
of the Group Company Secretary Office,
is responsible for the registration of UBS Group AG registered shares.

UBS Group AG, Shareholder Services
P.O. Box, CH-8098 Zurich, Switzerland

sh-shareholder-services@ubs.com

Hotline +41-44-235 6652
Fax +41-44-235 8220

US Transfer Agent

For global registered share-related
inquiries in the US.

Computershare Trust Company NA
P.O. Box 505000
Louisville, KY 40233-5000, USA

Shareholder online inquiries:
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Shareholder website:
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Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com
Language: English

© UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

 

 

  

Our key figures

 

UBS Group

Management report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terms used in this report, unless the context requires otherwise

“UBS,” “UBS Group,” “UBS Group AG consolidated,”                                  UBS Group AG and its consolidated subsidiaries
 “Group,” “the Group,” “we,” “us” and “our”                                             

“UBS AG consolidated”                                                                                       UBS AG and its consolidated subsidiaries

“UBS Group AG” and “UBS Group AG standalone”                                       UBS Group AG on a standalone basis

“UBS AG” and “UBS AG standalone”                                                               UBS AG on a standalone basis

“UBS Switzerland AG” and “UBS Switzerland AG standalone”                     UBS Switzerland AG on a standalone basis

“UBS Limited” and “UBS Limited standalone”                                                 UBS Limited on a standalone basis

“UBS Americas Holding LLC” and                                                                       UBS Americas Holding LLC and its
“UBS Americas Holding LLC consolidated”                                                       consolidated subsidiaries  

  

Recent developments

Changes to our functional and presentation currencies

As a consequence of many legal entity structural changes over recent years – notably the transfer of our Personal & Corporate Banking and Global Wealth Management businesses booked in Switzerland from UBS AG to UBS Switzerland AG and the creation of UBS Business Solutions AG, which houses a significant portion of the employees and associated costs that were previously held in UBS AG’s Head Office in Switzerland and UBS AG’s London branch – there is now a concentration of US dollar-influenced and -managed business activities in UBS AG’s Head Office in Switzerland and UBS AG’s London Branch. In addition, from the fourth quarter of 2018, for risk management purposes we adopted the US dollar as our risk neutral currency and have adjusted our structural risk positions accordingly. As a result of these changes, effective from 1 October 2018, the functional currency of UBS Group AG and UBS AG’s Head Office in Switzerland changed from Swiss francs to US dollars and that of UBS AG’s London Branch from British pounds to US dollars, in compliance with the requirements of International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates.  

The presentation currency of UBS Group AG’s consolidated financial information, beginning with this fourth quarter report, has changed from Swiss francs to US dollars to align with the functional currency changes of significant group entities. Prior periods have been restated for this presentation currency change. Assets, liabilities and total equity were converted to US dollars at closing exchange rates prevailing on the respective balance sheet dates, and income and expenses were translated at the respective average rates prevailing for the relevant periods. Additionally, Other income was restated to reflect releases of foreign currency translation (FCT) gains or losses from Other comprehensive income (OCI) to the income statement when calculated under US dollars as the presentation currency. The effect of such restatements for the first nine months of 2018 and full year 2017 was not material to these periods. The restatement of FCT balances in OCI will be provided in the Annual Report 2018, which will be published in March 2019. We did not restate our Basel III capital information due to immateriality.

We will continue to publish select financial and regulatory information in Swiss francs as part of our quarterly and annual reporting at www.ubs.com/investors. Business division results of Personal & Corporate Banking are presented in both Swiss francs and US dollars, and its management’s discussion and analysis is provided in Swiss francs, as its business activities are mainly managed in Swiss francs.

We expect that these functional and presentation currency changes, together with the related changes to our risk management framework and certain hedging programs, should increase our reporting Group operating income by approximately USD 300 million based on market implied forwards.

Regulatory and legal developments

TBTF framework in Switzerland

In November 2018, the Swiss Federal Council adopted a revision of the Capital Adequacy Ordinance (CAO), which featured the following elements: (i) gone concern capital requirements for the three Swiss domestic systemically important banks are set at 40% of the going concern capital requirements already in force; (ii) introduction of a risk-weighting approach for the treatment of systemically important banks’ participations in their subsidiaries; (iii) group entities that provide services necessary for the continuation of a bank’s business processes, including UBS Business Solutions AG, will now be subject to consolidated supervision by the Swiss Financial Market Supervisory Authority (FINMA).

The Federal Council is expected to initiate a separate consultation in the first half of 2019 regarding potential revisions to the gone concern capital requirements for the two Swiss global systemically important banks, including UBS.

Separately, in December 2018 the Swiss parliament approved changes to the tax treatment of too big to fail (TBTF) instruments issued by the holding companies of Swiss systemically important banks. The related new law aims to eliminate the additional tax burden imposed on systemically important banks as a result of required issuances of TBTF instruments at the holding company level.

Once the change is effective, we will issue new loss-absorbing additional tier 1 (AT1) capital instruments and total loss-absorbing capacity (TLAC) eligible senior unsecured debt directly out of UBS Group AG. At that point, we also expect UBS Group AG to assume outstanding capital and debt instruments previously issued by UBS Group Funding (Switzerland) AG as a means to manage the aforementioned tax burden.

NSFR implementation in Switzerland

In November 2018, the Swiss Federal Council announced that it would consider finalization of the net stable funding ratio (NSFR) requirement at the end of 2019. The NSFR requirement as originally proposed in 2017 could result in a significant increase in long-term funding requirements on a legal entity level.

 

Adjustments to the market risk framework

The Basel Committee has issued final revisions of the market risk framework. The revisions include adjustments to the risk sensitivity of the standardized approach, the calibration of certain elements of the framework and adjustments of the internal models approach. The revised standard comes into effect on 1 January 2022 along with the overall revised Basel III capital framework.

Basel Committee developments on the leverage ratio

The Basel Committee on Banking Supervision (BCBS) consulted on a targeted and limited revision of the leverage ratio’s treatment of client cleared derivatives, outlining three options, two of which would recognize initial margin offset and could lead to a reduction of the Group Leverage Ratio Denominator (LRD) compared with Basel III requirements. The BCBS is also consulting on additional leverage ratio disclosure requirements to address leverage ratio window-dressing concerns, with proposed implementation no later than 1 January 2022.

Consultation on ordinance specifying FinSA

In October 2018, the Swiss government initiated a consultation on, among other items, the proposed Financial Services Ordinance (FinSO), which would specify the details of the Financial Services Act (FinSA).The act will come into force on 1 January 2020, as would the ordinances.

FinSO, together with FinSA and the Financial Institutions Act (FinIA), would introduce new investor protection rules, including significantly enhanced information and documentation requirements. We have begun preparing for implementation of the new rules.

Proposed BEAT regulations issued

In December 2018, the US Department of Treasury issued proposed regulations in connection with the base erosion and anti-abuse tax (BEAT), which was introduced into law as part of the Tax Cuts and Jobs Act in December 2017. BEAT is calculated on modified taxable income that includes otherwise tax-deductible payments made by a US taxpayer to non-US related parties. BEAT applies in a given year when it is higher than the regular federal corporate tax for that same year. The proposed regulations clarify that payments made by a US entity to a non-US related party are not subject to BEAT provided the income from such payments is either taxable in the hands of the non-US related party as US effectively connected income or the income relates to TLAC instruments. Consistent with our previous guidance, and taking the proposed regulations into account, we do not expect to incur material BEAT expenses for the foreseeable future.

EU equivalence for Swiss trading venues

In December 2018, the European Commission (EC) extended its equivalence decision for Swiss trading venues by six months, until the end of June 2019. The EC has stated that any further extension of its equivalence decision will be contingent upon the Federal Council’s endorsement of a framework agreement.

If the EC does not extend recognition of Switzerland’s trading venues beyond June 2019, the Swiss contingency measure would come into effect, which would introduce a new Swiss standard recognizing non-EU foreign trading venues that admit Swiss shares to trading, but disallowing trading in Swiss shares on EU trading venues. We would then be required to significantly alter our trading arrangements, a circumstance for which we have appropriately prepared. We expect that EU trading venues would comply with the Swiss measure, resulting in a shift of liquidity in shares issued in Switzerland from EU trading venues to Swiss trading venues.

UK withdrawal from the EU

We continue to prepare for the UK withdrawal from the EU in the expectation that the UK will leave the EU at the end of March 2019. Our plans are intended to ensure that we can continue to serve our clients (including in the event the UK leaves the EU without a binding withdrawal agreement).

As the expected effective date of the UK’s exit approaches, it appears increasingly likely that any transition arrangements may be significantly limited in scope and may only be agreed upon close to the exit date, if at all.

We expect to complete the previously announced combined UK business transfer and cross-border merger of UBS Limited into UBS Europe SE on 1 March 2019, or shortly thereafter. Clients and other counterparties of UBS Limited who can be serviced by UBS AG’s London Branch were generally migrated to UBS AG’s London Branch in the fourth quarter of 2018.

The EC has adopted an equivalence decision that will permit UK authorized central counterparties (CCPs) to continue to provide clearing services in the EU for one year in a no-deal scenario. This would allow us to maintain derivatives exposures to UK CCPs in UBS Europe SE after the business transfer and merger.

We may vary our plans depending on developments and evolving regulatory requirements.

Developments related to the transition away from IBORs

In December 2018, FINMA issued guidance on risks related to a potential replacement of the interbank offered rates (IBORs), outlining legal and valuation risks as well as risks related to operational readiness for supervised institutions. FINMA will discuss risks with supervised institutions and, from January 2019 onwards, will contact those that are particularly affected, to assess how risks related to a possible replacement of IBORs are identified, mitigated and monitored.

We have a substantial number of contracts linked to IBORs. The new risk-free Alternative Reference Rates do not provide a term structure, which will require a change in the contractual terms of products currently indexed on terms other than overnight. We have established a cross-divisional, cross-regional governance structure and change program to address the scale and complexity of the transition.

 

Other developments

Increase of stake in and consolidation of UBS Securities China

In December 2018, we increased our shareholding in UBS Securities Co. Limited (UBSS) from 24.99% to 51% by completing a share purchase from existing shareholders. As a result we have consolidated UBSS in our financial statements under International Financial Reporting Standards (IFRS) and for regulatory capital purposes.

Through the acquisition and subsequent consolidation, we remeasured our former 24.99% holding at fair value, resulting in a pre-tax loss of USD 270 million recognized in Other income. The remeasurement loss is treated as an adjusting item and recognized within Corporate Center – Services. Common equity tier 1 (CET1) capital is not materially affected as the loss is offset by the release of a capital deduction for goodwill related to the former holding.

Worldline’s acquisition of SIX Payment Services

On 30 November 2018, SIX and Worldline entered into a strategic partnership in the cards business under which SIX transferred its existing cards business to Worldline and received a 27% stake in Worldline.

In the income statement we recognized a gain of USD 460 million based on Worldline’s share price at the closing date in proportion to our 17.31% equity ownership in SIX. The gain, of which 78% is reflected in Personal & Corporate Banking and 22% in Global Wealth Management, is treated as an adjusting item. Two thirds of the gain has been recognized in CET1 capital.

IFRS 16, Leases 

We have adopted IFRS 16, Leases, as of 1 January 2019, fundamentally changing how we account for operating leases when acting as a lessee. Upon adoption, assets and liabilities will increase by approximately USD 3.5 billion, with a corresponding increase in risk-weighted assets (RWA) and leverage ratio denominator (LRD). As permitted by IFRS 16, we elected not to restate prior period information.

 

Changes to performance targets,
allocations and in segment reporting in the first quarter of 2019

 

Changes to our performance targets

At our 2018 Investor Update we announced changes to our annual performance targets, ambitions and capital and resource guidelines effective in 2019.

 

The table on the next page shows these for the Group and the business divisions. Our updated targets and ambitions take into account the effects of the changes in Corporate Center allocations, equity attribution and Corporate Center segment reporting. Performance targets and ambitions exclude, where applicable, items that management believes are not representative of the underlying performance of our businesses, such as restructuring-related charges and gains and losses on sales of businesses and real estate. The performance targets assume constant foreign currency translation rates unless indicated otherwise.

Changes in Corporate Center cost and resource allocation to business divisions

In order to further align Group and divisional performance, we are adjusting our methodology for the allocation of Corporate Center – Services funding costs and expenses to the business divisions.

 

At the same time, we are updating our funds transfer pricing (FTP) framework to better reflect the sources and usage of funding.

 

Together, these changes will increase the business divisions’ adjusted cost / income ratios by approximately 2 percentage points and result in an increase of approximately USD 0.7 billion in Corporate Center operating profit / (loss) before tax, offset by higher expense allocations to the business divisions.

 

We will retain in Corporate Center funding costs for deferred tax assets, costs relating to our legal entity transformation program and other costs not attributable to or representative of the performance of the business divisions.

 

Alongside the update to allocations and our FTP framework, we are increasing the allocation of balance sheet resources from Corporate Center to the business divisions. For 2018, this will result in approximately USD 26 billion of additional risk-weighted assets (RWA) and approximately USD 100 billion of additional leverage ratio denominator (LRD) allocated from Corporate Center to the business divisions, consisting of:

–   approximately USD 9 billion additional RWA and LRD associated with property, equipment and software, which will be allocated from Corporate Center – Services to business divisions;

–   approximately USD 14 billion of operational risk RWA previously allocated to Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM); and

–   incremental RWA of approximately USD 3 billion and LRD of approximately USD 90 billion moved from Corporate Center – Group ALM to the business divisions, due to an increase in the allocation of high-quality liquid assets (HQLA) to the business divisions, reflecting the HQLA levels we expect to maintain, as well as the allocation of certain other assets centrally managed on behalf of the business divisions.

 

 

In addition to these changes and upon adoption of IFRS 16, Leases, as of 1 January 2019, we intend to additionally allocate approximately USD 3.5 billion of RWA and LRD from Corporate Center to the business divisions.

 

All of these changes are effective as of 1 January 2019 and we will provide restated prior-period information in advance of our first quarter results.

Alignment with the revised resource allocation methodology and further changes to our equity attribution framework

The aforementioned changes in resource allocation from Corporate Center to the business divisions will be reflected in the equity attribution to the business divisions. Furthermore, we are updating our equity attribution framework, revising the capital ratio for RWA from 11% to 12.5% and allocating to business divisions approximately USD 3 billion of attributed equity, which is related to certain common equity tier 1 (CET1) deduction items which were previously held centrally. In aggregate, we expect to allocate approximately USD 7.5 billion of additional attributed equity to the business divisions, of which approximately
 USD 3 billion will be allocated to the Investment Bank. The remaining attributed equity retained in Corporate Center will primarily relate to deferred tax assets, dividend accruals and Corporate Center – Non-core and Legacy Portfolio.

 

All of these changes are effective as of 1 January 2019 and we will provide restated prior-period information in advance of our first quarter results.

Changes in Corporate Center segment reporting

As announced in our third quarter 2018 report, as of 1 January 2019, we no longer separately assess the performance of Non-core and Legacy Portfolio, given its substantially reduced size and resource consumption. In addition, following the aforementioned changes to our methodology for allocating funding costs and expenses from Corporate Center – Services and Corporate Center – Group ALM to the business divisions, the operating loss retained in Corporate Center – Services and Corporate Center – Group ALM will be significantly reduced. As a consequence and in compliance with IFRS 8, Operating Segments, beginning with our first quarter 2019 report, we will provide results for total Corporate Center
only and will not separately report Group ALM and Non-core and Legacy Portfolio. Furthermore, we will combine Group Treasury with Group ALM and the net retained operating income from our Group Treasury operations, including Group ALM, will be reported as a separate line item within Corporate Center; management’s discussion and analysis for Group Treasury performance will be included in the Corporate Center section of our quarterly and annual reporting. Prior-period information will be restated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Group performance

 

 

 

 

Results: 2018

We recorded net profit attributable to shareholders of USD 4,897 million in 2018, which included a net tax expense of USD 1,468 million. In 2017, net profit attributable to shareholders was USD 969 million, which included a net tax expense of USD 4,305 million.

Profit before tax was USD 6,373 million in 2018 compared with USD 5,351 million in 2017, and adjusted profit before tax was USD 6,445 million compared with USD 6,295 million.

UBS’s Board of Directors intends to propose a dividend of CHF 0.70 per share to shareholders for the financial year 2018. Subject to shareholder approval at the Annual General Meeting on 2 May 2019, the dividend will be paid out of capital contribution reserves on 8 May 2019 to shareholders of record as of 7 May 2019. The ex-dividend date will be 6 May 2019.

We are targeting repurchases of up to USD one billion of shares in 2019 under our announced share repurchase program.

Results: 4Q18 vs 4Q17

Profit before tax increased by USD 17 million or 2% to USD 862 million, mainly reflecting a decrease in operating expenses, largely offset by lower operating income. Operating income decreased by USD 235 million or 3%, mainly reflecting USD 172 million lower net interest income and other net income from fair value changes on financial instruments and a USD 94 million decrease in net fee and commission income. Operating expenses decreased by USD 252 million or 4%, primarily due to USD 177 million lower general and administrative expenses and USD 141 million lower personnel expenses, partly offset by USD 66 million higher depreciation, amortization and impairment of property, equipment, software and intangible assets.

In addition to reporting our results in accordance with International Financial Reporting Standards (IFRS), we report adjusted results that exclude items that management believes are not representative of the underlying performance of our businesses. Such adjusted results are non-GAAP financial measures as defined by US Securities and Exchange Commission (SEC) regulations. These adjustments include restructuring expenses related to our CHF 2.1 billion cost reduction program that was completed at the end of 2017 (referred to as our “legacy cost programs” in this report). We incurred residual restructuring expenses in connection with such legacy cost programs, as well as expenses relating to new restructuring initiatives, of USD 561 million for the full year 2018 and expect such amounts to be approximately USD 0.2 billion for the full year 2019.

For the purpose of determining adjusted results for the fourth quarter of 2018, we excluded a gain of USD 460 million related to investments in associates and a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities Co. Limited, as well as net restructuring expenses of USD 188 million. For the fourth quarter of 2017, we excluded gains of USD 153 million on sale of subsidiaries and businesses, gains of USD 29 million on sale of financial assets at fair value through OCI, expenses of USD 26 million related to the modification of terms for Deferred Contingent Capital Plan (DCCP) awards granted for the performance years 2012 and 2013, and net restructuring expenses of USD 387 million.

On this adjusted basis, profit before tax for the fourth quarter of 2018 decreased by USD 216 million or 20% to USD 860 million, mainly driven by USD 243 million or 3% lower operating income.

Operating income: 4Q18 vs 4Q17

Total operating income decreased by USD 235 million or 3% to USD 6,972 million. On an adjusted basis, total operating income decreased by USD 243 million or 3% to USD 6,782 million, mainly reflecting a USD 172 million decrease in net interest income and other net income from fair value changes on financial instruments and USD 94 million lower net fee and commission income.

Net interest income and other net income from fair value changes on financial instruments

Total combined net interest income and other net income from fair value changes on financial instruments decreased by USD 172 million to USD 2,524 million, mainly driven by a decrease in the Investment Bank, primarily due to lower client activity in Equities and lower revenues in Corporate Client Solutions. This was partly offset by an increase in Corporate Center, mainly in Corporate Center – Group Asset and Liability Management.

The fourth quarter of 2018 included net interest income of USD 83 million, mainly in the Investment Bank, Global Wealth Management and Personal & Corporate Banking, which resulted from functional and presentation currency changes, together with related changes to our risk management framework and certain hedging programs.

Net fee and commission income

Net fee and commission income was USD 4,261 million compared with USD 4,355 million, primarily reflecting decreases in M&A and corporate finance fees, other fee and commission income and net brokerage fees, as well as higher other fee and commission expense. This was partly offset by higher investment fund fees and fees for portfolio management and related services.

 

Credit loss expense / recovery

We adopted IFRS 9, Financial Instruments effective 1 January 2018. IFRS 9 introduces a forward-looking expected credit loss (ECL) approach, which is intended to result in an earlier recognition of credit losses based on an ECL impairment approach compared with the incurred-loss impairment approach for financial instruments under IAS 39, Financial Instruments: Recognition and Measurement and the loss-provisioning approach for financial guarantees and loan commitments under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. 

Total net credit loss expenses were USD 53 million in the fourth quarter of 2018, almost entirely reflecting a USD 52 million increase in losses from credit-impaired (stage 3) positions, mainly in Personal & Corporate Banking and to a lesser extent in the Investment Bank.

Other income

Other income was USD 241 million compared with USD 247 million. The fourth quarter of 2018 included a valuation gain of USD 460 million on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline and a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities Co. Limited. The fourth quarter of 2017 included a gain of USD 153 million on sale of Asset Management’s fund administration business in Luxembourg and Switzerland to Northern Trust and a gain of USD 29 million on the sale of our investment in the London Clearing House. Excluding these items, adjusted other income decreased by USD 14 million.

Operating expenses: 4Q18 vs 4Q17

Total operating expenses decreased by USD 252 million or 4% to USD 6,110 million. Excluding net restructuring expenses of USD 188 million (fourth quarter of 2017: USD 387 million), as well as expenses of USD 26 million in the Investment Bank related to modification of terms of DCCP awards granted for the performance years 2012 and 2013 in the fourth quarter of 2017, adjusted total operating expenses decreased by USD 27 million to USD 5,922 million.

Personnel expenses

Personnel expenses decreased by USD 141 million to USD 3,839 million on a reported basis, primarily due to a decrease in expenses for variable compensation and social security as well as lower net restructuring expenses.

On an adjusted basis, personnel expenses decreased by USD 47 million to USD 3,744 million, mainly due to the aforementioned decrease in expenses for variable compensation and social security.

General and administrative expenses

General and administrative expenses decreased by USD 177 million to USD 1,911 million. This was primarily due to lower net restructuring expenses. The fourth quarter of 2018 included a net expense for the UK bank levy of USD 85 million compared with an expense of USD 90 million in the fourth quarter of 2017.

On an adjusted basis, general and administrative expenses decreased by USD 26 million to USD 1,839 million.

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 “Provisions and contingent liabilities” in the “Consolidated financial information” section of this report and to “Material legal and regulatory risks arise in the conduct of our business” in the “Risk factors” section of our Annual Report 2017 for more information on litigation, regulatory and similar matters

Depreciation, amortization and impairment

Depreciation, amortization and impairment of property, equipment, software and intangible assets was USD 360 million compared with USD 294 million, mainly reflecting higher expenses related to internally generated capitalized software.

On an adjusted basis, depreciation, amortization and impairment of property, equipment, software and intangible assets increased by USD 46 million, primarily due to the aforementioned increase in expenses for internally generated capitalized software.

 

Tax: 4Q18 vs 4Q17

We recognized an income tax expense of USD 165 million for the fourth quarter of 2018 compared with an income tax expense of USD 3,234 million for the fourth quarter of 2017.

The fourth quarter 2018 income tax expense reflects current tax expenses of USD 235 million, which primarily relate to taxable profits of UBS Switzerland AG and other entities.

It also includes a net deferred tax expense of USD 205 million, which primarily relates to the amortization of DTAs previously recognized in relation to tax losses carried forward and deductible temporary differences to reflect their offset against profits for the quarter.

In addition, following corporate tax reform in the US at the end of 2017 and the reduction in timeframe between the end of our seven-year profit forecast period and the expiry of our brought-forward US tax losses, we have reviewed our approach to the remeasurement of our US DTAs. This review resulted in the recognition of a net tax benefit during the quarter of USD 275 million, comprised of the following:

–   The write-off of a Swiss temporary difference DTA of USD 1,617 million relating to UBS AG’s investment in our US intermediate holding company (US IHC), UBS Americas Holding LLC. The write-off occurred because the temporary difference between the tax and accounting values in respect of UBS AG’s investment in the US IHC is no longer expected to reverse in the foreseeable future, reflecting the expected repatriation of a significant portion of future after-tax US earnings.

–   A net increase in DTAs of USD 1,180 million, which is the sum of two items. The recognition of new US temporary difference DTAs of USD 2,134 million as a result of tax elections made in the quarter to capitalize certain historic real estate costs for US tax purposes that will be amortized over a period of up to 39 years. These elections also resulted in a reduction in recognized US tax loss DTAs of USD 954 million because expected future taxable profits that were otherwise available against which to utilize brought-forward tax losses were reduced by the expected future amount of capitalized real estate cost amortization.

–   A current US state and local tax expense of USD 160 million resulting from the real estate capitalization elections described above.

–   An increase in recognized US DTAs recorded at the level of UBS Americas Inc. of USD 1,367 million, reflecting the elimination of the seven-year profit forecast period limit for US tax loss DTAs as well as the transfer by UBS AG of US shareholdings in certain profitable subsidiaries to UBS Americas Inc.

–   A decrease in recognized US DTAs for UBS AG of USD 495 million, which mainly relates to the transfer of the shareholdings referred to above.

 

The fourth quarter 2017 income tax expense of USD 3,234 million included a deferred tax expense of USD 3,025 million, which primarily related to a net write-down of DTAs in respect of the US federal corporate tax rate reduction included in the Tax Cuts and Jobs Act that was enacted in that quarter. It also included a current tax expense of USD 209 million, which related to taxable profits of UBS Switzerland AG and other entities.

Tax loss DTAs at the level of UBS Americas Inc. will begin to be amortized with effect from 1 January 2019. For 2019, we expect a full-year tax rate of approximately 25%.

Total comprehensive income attributable to shareholders: 4Q18 vs 4Q17

Total comprehensive income attributable to shareholders was positive USD 1,588 million compared with negative USD 2,844 million. Net profit attributable to shareholders was USD 696 million compared with a net loss of USD 2,417 million and other comprehensive income (OCI) attributable to shareholders, net of tax, was positive USD 892 million compared with negative USD 428 million.

OCI related to cash flow hedges was USD 616 million in the fourth quarter of 2018, mainly reflecting a decrease in unrealized losses on US dollar hedging derivatives resulting from decreases in the relevant US dollar long-term interest rates. In the fourth quarter of 2017, OCI related to cash flow hedges was negative USD 274 million.

OCI related to own credit on financial liabilities designated at fair value was positive USD 368 million compared with negative USD 23 million and mainly reflected a widening of credit spreads in the fourth quarter of 2018.

Foreign currency translation OCI was negative USD 105 million in the fourth quarter of 2018, mainly resulting from the movement of the British pound, the Swiss franc and the euro against the US dollar during the quarter. OCI related to foreign currency translation in the same quarter last year was negative USD 96 million.

Defined benefit plan OCI was negative USD 31 million compared with positive USD 4 million. We recorded net pre-tax OCI losses of USD 224 million related to the non-Swiss pension plans, mainly driven by the UK defined benefit plans that recorded OCI losses of USD 156 million, primarily due to a negative return on plan assets. Net pre-tax OCI losses related to the Swiss pension plan amounted to USD 28 million. This reflected OCI losses of USD 702 million from the remeasurement of the defined benefit obligation, primarily due to an experience loss, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred, and a decrease in the applicable discount rate. An additional OCI loss of USD 580 million was due to a negative return on plan assets. These losses were largely offset by an OCI gain of USD 1,253 million due to a decrease in the effect of the IFRS asset ceiling.

The total pre-tax OCI loss of USD 252 million was largely offset by a net tax benefit of USD 221 million due to the recognition of temporary difference DTAs in the US following our review of the approach used to remeasure our US DTAs and the timing for recognizing deferred taxes.

 

OCI associated with financial assets measured at fair value through OCI was positive USD 44 million compared with negative USD 39 million and reflected net unrealized gains following decreases in the relevant US dollar long-term interest rates in the fourth quarter of 2018.

®   Refer to “Statement of comprehensive income” in the “Consolidated financial information” section of this report for more information

®   Refer to “Note 26 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of our Annual Report 2017 for more information on other comprehensive income related to defined benefit plans

Sensitivity to interest rate movements

As of 31 December 2018, we estimate that a parallel shift in yield curves by +100 basis points could lead to a combined increase in annual net interest income of approximately USD 0.7 billion in Global Wealth Management and Personal & Corporate Banking. Of this increase, approximately USD 0.3 billion and USD 0.2 billion would result from changes in US dollar and euro interest rates, respectively.

The immediate effect on shareholders’ equity of such a shift in yield curves would be a decrease of approximately USD 2.0 billion recognized in OCI, of which approximately USD 1.5 billion would result from changes in US dollar interest rates. The immediate effect on regulatory capital would be immaterial as OCI from cash flow hedges is not recognized in capital and the impact from debt instruments measured at fair value through OCI would be offset by a positive effect from pension fund assets and liabilities.

The aforementioned estimates are based on a hypothetical scenario of an immediate increase in interest rates, equal across all currencies and relative to implied forward rates applied to our banking book and financial assets measured at fair value through OCI. These estimates further assume no change to balance sheet size and structure, constant foreign exchange rates and no specific management action.

Key figures and personnel

Return on tangible equity: 4Q18 vs 4Q17

The annualized return on tangible equity (RoTE) was positive 6.2% compared with negative 20.3%, as the fourth quarter of 2017 included a net write-down of DTAs following a reduction
in the US federal corporate tax rate after the enactment of the TCJA in the US. The annualized adjusted RoTE excluding deferred tax expense / benefit and DTAs was 4.9% compared with 8.3%.

Return on common equity tier 1 (CET1) capital

The annualized return on CET1 capital (RoCET1) was positive 8.0% in the fourth quarter of 2018 compared with negative 28.8% in the fourth quarter of 2017.

The RoCET1 for the full year 2018 was 14.2% compared with 3.0% for the full year 2017, mainly as the fourth quarter of 2017 included the aforementioned net write-down of DTAs.

Cost / income ratio: 4Q18 vs 4Q17

The cost / income ratio was 87.0% compared with 87.2%. On an adjusted basis, the cost / income ratio was 86.6% compared with 83.6%.

Risk-weighted assets: 4Q18 vs 3Q18

During the fourth quarter of 2018, risk-weighted assets (RWA) increased by USD 6.7 billion to USD 263.7 billion, reflecting increases from asset size and other movements of USD 6.9 billion and regulatory add-ons of USD 2.0 billion, partly offset by decreases driven by model updates of USD 1.4 billion, currency effects of USD 0.5 billion and methodology and policy changes of USD 0.3 billion.

®   Refer to the “Capital management” section of this report for more information

Common equity tier 1 capital ratio: 4Q18 vs 3Q18

Our CET1 capital ratio decreased 0.5 percentage points to 13.1% during the fourth quarter of 2018, reflecting a USD 6.7 billion increase in RWA.

®   Refer to the “Capital management” section of this report for more information

Leverage ratio denominator: 4Q18 vs 3Q18

During the fourth quarter of 2018, the leverage ratio denominator (LRD) decreased by USD 10 billion to USD 905 billion. This decrease was driven by asset size and other movements of USD 8 billion and by currency effects of USD 2 billion.

®   Refer to the “Capital management” section of this report for more information

 

Common equity tier 1 leverage ratio: 4Q18 vs 3Q18

Our CET1 leverage ratio increased from 3.80% to 3.81% in the fourth quarter of 2018, reflecting a USD 10 billion decrease in the LRD.

®   Refer to the “Capital management” section of this report for more information

Going concern leverage ratio: 4Q18 vs 3Q18

Our going concern leverage ratio increased 0.2 percentage points to 5.2% as of 31 December 2018, reflecting an increase of USD 0.7 billion in going concern capital and the aforementioned USD 10 billion decrease in LRD.

®   Refer to the “Capital management” section of this report for more information

Net new money and invested assets

Management’s discussion and analysis of net new money and invested assets is provided in the “UBS business divisions and Corporate Center” section of this report.

Personnel: 4Q18 vs 3Q18

We employed 66,888 personnel as of 31 December 2018, a net increase of 1,332 compared with 30 September 2018. Corporate Center – Services personnel increased by 1,047, primarily due to higher staffing levels related to continued insourcing of certain activities from third-party vendors to our Business Solutions Centers, mainly in Group Technology. As a result, we have seen a decrease of 1,650 in outsourced personnel. Investment Bank and Global Wealth Management personnel increased by 248 and 65, respectively.

 

 

Outlook

While global economic activity continues to moderate, the overall outlook for economic growth remains positive, and asset prices have improved from the fourth quarter of 2018. Lack of progress in resolving geopolitical tensions, rising protectionism and trade disputes along with increased volatility, which affected investor sentiment and confidence in the second half of the year and particularly in the fourth quarter of 2018, would affect client activity in the first quarter of 2019.

Lower invested assets as a result of market declines in the fourth quarter of 2018 are expected to affect recurring revenues in Global Wealth Management and Asset Management. Further improvements in market levels, as well as improvements in investor sentiment and client activity would contribute to mitigating revenue and profit growth headwinds.

We remain well positioned to capitalize on global wealth creation, which we expect will continue to sustain our strategy and financial performance. We will continue to execute our strategy with discipline, while focusing even more on balancing efficiency and investments for growth, to deliver on our capital return objectives and to create sustainable long-term value for our shareholders.