UBS Group AG (UBS) Risk Factors

The COVID-19 pandemic and the governmental measures takento manage it, as well as labor market displacements, supply chaindisruptions, and inflationary pressures, may continue to adverselyaffect global and regional economic conditions, resulting incontraction in the global economy, substantial volatility in thefinancial markets, crises in markets for goods and services, as wellas significant disruptions in certain regional real estate markets,increased unemployment, increased credit and counterparty risk,and operational challenges. Governments and central banksaround the world reacted to the economic crisis caused by thepandemic by implementing stimulus and liquidity programs andcutting interest rates and have begun to phase out pandemicrelief. In addition, while vaccination campaigns have hadsignificant success in some regions and a number of economiesare recovering, outbreaks in locations where vaccination rates arelow or vaccines are unavailable on a large scale, as well as thespread of new variants of COVID-19, create uncertainty around asustainable recovery. Resurgence of the pandemic, ineffectivenessof vaccines and continuance or imposition of new pandemiccontrol measures may result in additional adverse effects on theglobal economy negatively affecting UBS’s results of operationsand financial condition. The COVID-19 pandemic affected all of UBS’s businesses, andthese effects could be greater in the future if adverse conditionspersist or worsen. These effects included declines in some assetprices, spikes in volatility, inflationary pressures, supply chaindisruptions, lower or negative interest rates, widening of creditspreads and credit deterioration. These effects have resulted indecreases in the valuation of loans and commitments, an increasein the allowance for credit losses and lower valuations of certainclasses of trading assets. While many of these effects havereversed as economies have reopened and economic stimulus hasbeen maintained, or were offset by high levels of client activityand by improved asset prices in many sectors in 2021, thesefavorable conditions may not persist. In particular, real estatemarkets in some regions may be significantly disrupted as a resultof repeated temporary closures of business, sheltering-in-placedirectives, and remote work protocols enacted to respond toseasonal increases in infection rates of COVID-19. Should inflationary pressures or other adverse global marketconditions persist, or should the pandemic lead to additionaleconomic or market disruptions, we may experience reducedclient activity and demand for our products and services, increasedutilization of lending commitments, significantly increased clientdefaults, continued and increasing credit and valuation losses inour loan portfolios, loan commitments and other assets, andimpairments of other financial assets. A fall in equity markets and consequent decline in investedassets would also reduce recurring fee income in our GlobalWealth Management and Asset Management businesses. Thesefactors and other consequences of the COVID-19 pandemic maynegatively affect our financial condition, including possibleconstraints on capital and liquidity, as well as a higher cost ofcapital, and possible downgrades to our credit ratings.The extent to which the pandemic, and the related adverseeconomic conditions, affect our businesses, results of operations and financial condition, as well as our regulatory capital andliquidity ratios, will depend on future developments, including thescope and duration of the pandemic and any recovery period, theadequacy of vaccine distribution plans and execution of thoseplans, as well as the efficacy of vaccines against potential virusvariants, future actions taken by governmental authorities, centralbanks and other third parties in response to the pandemic, andthe effects on our customers, counterparties, employees and third-party service providers.

Our effective tax rate is highly sensitive to our performance, ourexpectation of future profitability and any potential increases ordecreases in statutory tax rates, such as any potential increase inthe US federal corporate tax rate. Further, based on prior years’tax losses, we have recognized deferred tax assets (DTAs)reflecting the probable recoverable level based on future taxableprofit as informed by our business plans. If our performance isexpected to produce diminished taxable profit in future years,particularly in the US, we may be required to write down all or aportion of the currently recognized DTAs through the incomestatement in excess of anticipated amortization. This would havethe effect of increasing our effective tax rate in the year in whichany write-downs are taken. Conversely, if we expect theperformance of entities in which we have unrecognized tax lossesto improve, particularly in the US or the UK, we could potentiallyrecognize additional DTAs. The effect of doing so would be toreduce our effective tax rate in years in which additional DTAs arerecognized and to increase our effective tax rate in future years.Our effective tax rate is also sensitive to any future reductions instatutory tax rates, particularly in the US, which would cause theexpected future tax benefit from items such as tax loss carry-forwards in the affected locations to diminish in value. This, inturn, would cause a write-down of the associated DTAs. Forexample, the reduction in the US federal corporate tax rate to21% from 35% introduced by the US Tax Cuts and Jobs Actresulted in a USD 2.9 billion net write-down in the Group’s DTAsin the fourth quarter of 2017. Conversely, an increase in UScorporate tax rates would result in an increase in the Group’sDTAs.We generally revalue our DTAs in the fourth quarter of thefinancial year based on a reassessment of future profitabilitytaking into account our updated business plans. We consider theperformance of our businesses and the accuracy of historicalforecasts, tax rates and other factors in evaluating therecoverability of our DTAs, including the remaining tax loss carry-forward period and our assessment of expected future taxableprofits over the life of DTAs. Estimating future profitability isinherently subjective and is particularly sensitive to futureeconomic, market and other conditions, which are difficult topredict. Our results in past years have demonstrated that changes inthe recognition of DTAs can have a very significant effect on ourreported results. Any future change in the manner in which UBSremeasures DTAs could affect UBS’s effective tax rate, particularlyin the year in which the change is made.Our full-year effective tax rate could change if aggregate taxexpenses in respect of profits from branches and subsidiarieswithout loss coverage differ from what is expected, or if branchesand subsidiaries generate tax losses that we cannot benefit fromthrough the income statement. In particular, losses at entities orbranches that cannot offset for tax purposes taxable profits inother group entities, and which do not result in additional DTArecognition, may increase our effective tax rate. In addition, taxlaws or the tax authorities in countries where we have undertaken legal structure changes may cause entities to be subject totaxation as permanent establishments or may prevent the transferof tax losses incurred in one legal entity to newly organized orreorganized subsidiaries or affiliates or may impose limitations onthe utilization of tax losses that relate to businesses formerlyconducted by the transferor. Were this to occur in situationswhere there were also limited planning opportunities to utilize thetax losses in the originating entity, the DTAs associated with suchtax losses may be required to be written down through theincome statement.Changes in tax law may materially affect our effective tax rate,and, in some cases, may substantially affect the profitability ofcertain activities. In addition, statutory and regulatory changes, aswell as changes to the way in which courts and tax authoritiesinterpret tax laws, including assertions that we are required to paytaxes in a jurisdiction as a result of activities connected to thatjurisdiction constituting a permanent establishment or similartheory, 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.

Our businesses depend on our ability to process a large numberof transactions, many of which are complex, across multiple anddiverse markets in different currencies, to comply withrequirements of many different legal and regulatory regimes towhich we are subject and to prevent, or promptly detect and stop,unauthorized, fictitious or fraudulent transactions. We also relyon access to, and on the functioning of, systems maintained bythird parties, including clearing systems, exchanges, informationprocessors and central counterparties. Any failure of our or third-party systems could have an adverse effect on us. These risks maybe greater as we deploy newer technologies, such as blockchain,or products that rely on these technologies. Our operational riskmanagement and control systems and processes are designed tohelp ensure that the risks associated with our activities – includingthose arising from process error, failed execution, misconduct,unauthorized trading, fraud, system failures, financial crime,cyberattacks, breaches of information security, inadequate orineffective access controls and failure of security and physicalprotection – are appropriately controlled. If our internal controlsfail or prove ineffective in identifying and remedying these risks,we could suffer operational failures that might result in materiallosses, such as the substantial loss we incurred from theunauthorized trading incident announced in September 2011.As a significant proportion of our staff have been and willcontinue working from outside the offices as a consequence ofthe COVID-19 pandemic, we have faced, and will continue toface, new challenges and operational risks, includingmaintenance of supervisory and surveillance controls, as well asincreased fraud and data security risks. While we have takenmeasures to manage these risks, such measures have never beentested on the scale or duration that we are currently experiencing,and there is risk that these measures will prove not to have beeneffective in the current unprecedented operating environment. We use automation as part of our efforts to improve efficiency,reduce the risk of error and improve our client experience. Weintend to expand the use of robotic processing, machine learningand artificial intelligence to further these goals. Use of these toolspresents their own risks, including the need for effective designand testing; the quality of the data used for development andoperation of machine learning and artificial intelligence tools mayadversely affect their functioning and result in errors and otheroperational risks.For financial institutions, cybersecurity risks have increased dueto the widespread use of digital technologies, cloud computingand mobile devices to conduct financial business and transactions.In addition, cyberattacks by hackers, terrorists, criminalorganizations, nation states and extremists have also increased infrequency and sophistication. Current geopolitical tensions alsomay lead to increased risk of cyberattack from foreign state actors.In particular, the Russian invasion of Ukraine and the impositionof significant sanctions on Russia by Switzerland, the US, the EU,the UK and others may result in an increase in the risk ofcyberattacks. We and other financial services firms have been subject tobreaches of security and to cyber- and other forms of attack, someof which are sophisticated and targeted attacks intended to gainaccess to confidential information or systems, disrupt service ordestroy data. These attacks may be attempted through theintroduction of viruses or malware, phishing and other forms ofsocial engineering, distributed denial of service attacks and othermeans. These attempts may occur directly, or using equipment orsecurity passwords of our employees, third-party service providersor other users. In addition to external attacks, we haveexperienced loss of client data from failure by employees andothers to follow internal policies and procedures and frommisappropriation of our data by employees and others. We maynot be able to anticipate, detect or recognize threats to oursystems or data and our preventative measures may not beeffective to prevent an attack or a security breach. In the event ofa security breach, notwithstanding our preventative measures, wemay not immediately detect a particular breach or attack. Once aparticular attack is detected, time may be required to investigateand assess the nature and extent of the attack. A successfulbreach or circumvention of security of our systems or data couldhave significant negative consequences for us, includingdisruption of our operations, misappropriation of confidentialinformation concerning us or our customers, damage to oursystems, financial losses for us or our customers, violations of dataprivacy and similar laws, litigation exposure and damage to ourreputation. We may be subject to enforcement actions asregulatory focus on cybersecurity increases and regulators haveannounced new rules, guidance and initiatives on ransomwareand other cybersecurity-related issues.We are subject to complex and frequently changing laws andregulations governing the protection of client and personal data,such as the EU General Data Protection Regulation. Ensuring thatwe comply with applicable laws and regulations when we collect,use and transfer personal information requires substantialresources 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 othersanctions. We may also incur such penalties if our vendors orother service providers or clients or counterparties fail to complywith these laws or to maintain appropriate controls over protecteddata. In addition, any loss or exposure of client or other data mayadversely damage our reputation and adversely affect ourbusiness.A major focus of US and other countries’ governmental policiesrelating to financial institutions in recent years has been onfighting money laundering and terrorist financing. We arerequired to maintain effective policies, procedures and controls todetect, prevent and report money laundering and terroristfinancing, and to verify the identity of our clients under the lawsof many of the countries in which we operate. We are also subjectto laws and regulations related to corrupt and illegal payments togovernment officials by others, such as the US Foreign CorruptPractices Act and the UK Bribery Act. We have implementedpolicies, procedures and internal controls that are designed tocomply with such laws and regulations. Notwithstanding this, USregulators have found deficiencies in the design and operation ofanti-money laundering programs in our US operations. We haveundertaken a significant program to address these regulatoryfindings with the objective of fully meeting regulatoryexpectations for our programs. Failure to maintain and implementadequate programs to combat money laundering, terroristfinancing or corruption, or any failure of our programs in theseareas, could have serious consequences both from legalenforcement action and from damage to our reputation. Frequentchanges in sanctions imposed and increasingly complex sanctionsimposed on countries, entities and individuals, as exemplified bythe breadth and scope of the sanctions imposed in relation theRussian invasion of Ukraine, increase our cost of monitoring andcomplying with sanctions requirements and increase the risk thatwe will not identify in a timely manner client activity that is subjectto a sanction.As a result of new and changed regulatory requirements andthe changes we have made in our legal structure, the volume,frequency and complexity of our regulatory and other reportinghas remained elevated. Regulators have also significantlyincreased expectations regarding our internal reporting and dataaggregation, as well as management reporting. We have incurredand continue to incur significant costs to implement infrastructureto meet these requirements. Failure to meet external reportingrequirements accurately and in a timely manner or failure to meetregulatory expectations of internal reporting, data aggregationand management reporting could result in enforcement action orother adverse consequences for us.In addition, despite the contingency plans that we have inplace, our ability to conduct business may be adversely affectedby a disruption in the infrastructure that supports our businessesand the communities in which we operate. This may include adisruption due to natural disasters, pandemics, civil unrest, war orterrorism and involve electrical, communications, transportationor other services that we use or that are used by third parties with whom we conduct business.

The financial services industry is characterized by intensecompetition, continuous innovation, restrictive, detailed, andsometimes fragmented regulation and ongoing consolidation. Weface competition at the level of local markets and individualbusiness lines, and from global financial institutions that arecomparable to us in their size and breadth, as well as competitionfrom new technology-based market entrants, which may not besubject to the same level of regulation. Barriers to entry inindividual markets and pricing levels are being eroded by newtechnology. We expect these trends to continue and competitionto increase. Our competitive strength and market position couldbe eroded if we are unable to identify market trends anddevelopments, do not respond to such trends and developmentsby devising and implementing adequate business strategies, donot adequately develop or update our technology including ourdigital channels and tools, or are unable to attract or retain thequalified people needed.The amount and structure of our employee compensation isaffected not only by our business results, but also by competitivefactors and regulatory considerations. In response to the demands of various stakeholders, includingregulatory authorities and shareholders, and in order to betteralign the interests of our staff with other stakeholders, we haveincreased average deferral periods for stock awards, expandedforfeiture provisions and, to a more limited extent, introducedclawback provisions for certain awards linked to businessperformance. We have also introduced individual caps on theproportion of fixed to variable pay for the Group Executive Board(GEB) members, as well as certain other employees. Constraints on the amount or structure of employeecompensation, higher levels of deferral, performance conditionsand other circumstances triggering the forfeiture of unvestedawards may adversely affect our ability to retain and attract keyemployees, particularly where we compete with companies thatare not subject to these constraints. The loss of key staff and theinability to attract qualified replacements could seriouslycompromise our ability to execute our strategy and to successfully improve our operating and control environment, and could affectour business performance. Swiss law requires that shareholdersapprove the compensation of the Board of Directors (the BoD) andthe GEB each year. If our shareholders fail to approve thecompensation for the GEB or the BoD, this could have an adverseeffect on our ability to retain experienced directors and our senior management.

Our reputation is critical to the success of our strategic plans,business and prospects. Reputational damage is difficult toreverse, and improvements tend to be slow and difficult tomeasure. In the past, our reputation has been adversely affectedby our losses during the financial crisis, investigations into ourcross-border private banking services, criminal resolutions ofLIBOR-related and foreign exchange matters, as well as othermatters. We believe that reputational damage as a result of theseevents was an important factor in our loss of clients and clientassets across our asset-gathering businesses. New events thatcause reputational damage could have a material adverse effecton our results of operation and financial condition, as well as ourability to achieve our strategic goals and financial targets.