Dear shareholders,

For the fourth quarter of 2014, we reported a net profit attributable to shareholders of CHF 963 million and diluted earnings per share of CHF 0.26. The result included a net tax benefit of CHF 493 million. All of our business divisions were profitable, resulting in a Group adjusted¹ profit before tax of CHF 648 million. Our performance once again demonstrated the fundamental earnings power of our business and its ability to deliver in a challenging environment.

During the quarter, heightened geopolitical tensions in Eastern Europe and the Middle East continued to influence markets and the macroeconomic environment. Economic conditions in leading developed economies differed greatly. Monetary policy in the eurozone, Switzerland and Japan contrasted notably with the Federal Reserve’s outlook. This created expectations of rising US interest rates and increased upward pressure on the US dollar. Volatility rose in all asset classes as commodity prices fell and concerns about global economic growth increased. These factors adversely influenced client confidence and activity levels, with client risk appetite remaining subdued. Uncertainty and heightened volatility continued into the new year, particularly following the Swiss National Bank’s unexpected change in monetary policy. These factors underline why our focus remains firmly on our clients and on the advice we provide to help them navigate these challenging times. We also continue to focus on the prudent management of our risk profile, which helped all our businesses to perform well during another testing quarter.

In 2014, we continued to reduce risk-weighted assets, improve our leverage ratio and maintain the best fully applied Basel III CET1 ratio in our peer group. Further, our Group net profit for the year rose by 13% to CHF 3.6 billion. Our achievements in 2014 enabled us to deliver attractive returns to our shareholders. Consequently, we intend to propose an ordinary dividend of CHF 0.50 for 2014, an increase of 100% on the prior year and a payout ratio of 53% of the Group’s reported net profit.

Reflecting progress in the establishment of our Group holding company, including the successful completion of our share-for-share exchange offer, we fully accrued a supplementary capital return of CHF 0.25 per share in the fourth quarter of 2014. Subject to shareholder approval, UBS Group AG intends to pay this one-time supplementary capital return upon successful completion of the squeeze-out procedure.

Wealth Management Americas delivered an adjusted¹ profit before tax of USD 233 million, reflecting a new quarterly record for operating income which was offset by higher operating expenses. Total operating income increased on higher transaction-based and net interest income, the latter demonstrating continued success in the business’s banking and lending initiatives. Net new money increased to USD 5.5 billion, with higher inflows from net recruiting of financial advisors leading to an annualized net new money growth rate of 2.2%, within the target range. The gross margin on invested assets and the adjusted¹ cost/income ratio also both remained within the target ranges.

Retail & Corporate recorded an adjusted¹ profit before tax of CHF 356 million. Operating income declined after a very strong third-quarter performance. Higher credit loss expenses as well as lower recurring net fee income and net interest income were partly offset by higher transaction-based income. Annualized net new business volume growth for the retail business declined, and was therefore below the target range as net new client assets were positive while net new loans were slightly negative, in line with the business’s strategy to grow selectively. The net interest margin and adjusted¹ cost/income ratio both remained within the target ranges.

Global Asset Management posted an adjusted¹ profit before tax of CHF 124 million. Higher operating income primarily reflected increased performance fees in traditional investments and global real estate. Operating expenses increased, mostly due to higher charges for litigation, regulatory and similar matters. Excluding money market flows, net new money outflows were CHF 5.8 billion, mostly from traditional investments. The gross margin and adjusted¹ cost/income ratio missed the target ranges. While negative in the quarter, the annualized net new money growth rate for the full year was within the target range.

The Investment Bank achieved an adjusted¹ profit before tax of CHF 426 million. On a reported basis, operating income was broadly unchanged from the prior quarter. In Corporate Client Solutions, advisory revenues rose on increased participation in merger and acquisition transactions, and equity capital markets benefited from higher revenues from private transactions. This was offset by declines in debt capital markets due to lower activity and higher risk management charges. In Investor Client Services, the equities business delivered a strong performance on higher cash and derivatives results, reflecting increased client activity. Costs declined, reflecting a significant decrease in charges for provisions for litigation, regulatory and similar matters, partly offset by a charge for the annual UK bank levy. While the adjusted¹ annualized return on attributed equity was below the target for the year, for the quarter it was 22.7% and above the target range. The adjusted¹ cost/income ratio was within the target. The Investment Bank was recognized with a number of awards in recent months. These included UBS being named Equity Derivatives House of the Year by International Financing Review and Most Innovative Bank for M&A by The Banker.

Corporate Center – Core Functions reported a loss before tax of CHF 387 million. Operating income was negative, mainly as a result of higher retained central funding costs partly due to new debt issuances throughout the year, as well as higher retained costs. The loss before tax in Corporate Center – Non-core and Legacy Portfolio was CHF 725 million. Balance sheet exposures were taken down ahead of targets. Fully applied Basel III risk-weighted assets were reduced by CHF 6 billion to CHF 36 billion and balance sheet assets by CHF 5 billion. The fourth quarter included losses in the Non-core rates portfolio from unwind and novation activity, and a loss from the termination of certain credit default swap contracts in the Legacy Portfolio, as well as a charge for the annual UK bank levy.

During the quarter, we continued to manage legal and regulatory issues proactively. We reached resolutions with the Swiss Financial Market Supervisory Authority, the US Commodity Futures Trading Commission and the UK Financial Conduct Authority in connection with industry-wide investigations into foreign exchange markets. Charges related to these resolutions were fully provisioned in the third quarter of 2014 and did not affect our fourth-quarter results. While these resolutions were important, we remain focused on fully resolving this matter.

We were pleased to announce that the Board of Directors intends to nominate Jes Staley for election to the Board at this year’s Annual General Meeting. We believe that his professional expertise, gained from three decades of working in several top leadership functions in global banking, would strengthen the UBS Board of Directors further.

UBS applies a sophisticated environmental and social risk framework to all of its transactions, products, services and activities in order to identify and assess environmental and social risks associated with client and supplier relationships. In the quarter, we published details of this framework in one comprehensive document. And recently we were rated best in class in both the FTSE4Good Index Series and the CDP Climate Performance Leadership Index, both of which acknowledge companies that demonstrate strong sustainability practices. Meanwhile, at the recent World Economic Forum (WEF) Annual Meeting in Davos, we launched The Davos Challenge: Walk for Education. UBS and the UBS Optimus Foundation – through World Bicycle Relief – pledged to give one bicycle to schoolchildren in rural South Africa for every 6 km walked by Davos participants during the meeting. Participants rose to the challenge, helping us reach our goal of donating 2,500 bikes. These bikes will cut children’s travel times significantly, boosting attendance and educational achievement.

Outlook – At the start of the first quarter of 2015, many of the underlying challenges and geopolitical issues that we have previously highlighted remain. The mixed outlook for global growth, the absence of sustained and credible improvements to unresolved issues in Europe, continuing US fiscal and monetary policy issues, increasing geopolitical instability and greater uncertainty surrounding the potential effects of lower and potentially volatile energy and other commodity prices would make improvements in

prevailing market conditions unlikely. In addition, recent moves by the Swiss National Bank to remove the EUR/CHF floor and by the European Central Bank to increase its balance sheet expansion via quantitative easing have added additional challenges to the financial markets and to Swiss-based financial services firms specifically. The increased value of the Swiss franc relative to other currencies, especially the US dollar and the euro, and negative interest rates in the eurozone and Switzerland will put pressure on our profitability and, if they persist, on some of our targeted performance levels. Despite ongoing and new challenges, we will continue to execute on our strategy in order to ensure the firm’s long-term success and to deliver sustainable returns for our shareholders.

Yours sincerely,

Axel A. Weber		Sergio P. Ermotti
Chairman of the		Group Chief Executive Officer
Board of Directors

Wealth Management

Wealth Management provides comprehensive financial services to wealthy private clients around the world – except those served by Wealth Management Americas. Its clients benefit from the entire spectrum of UBS resources, ranging from investment management to estate planning and corporate finance advice, in addition to specific wealth management products and services.

Wealth Management Americas

Wealth Management Americas provides advice-based solutions and banking services through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth and high net worth individuals and families. It includes the domestic US business, the domestic Canadian business and international business booked in the US.

Retail & Corporate

Retail & Corporate maintains a leading position across retail, corporate and institutional client segments in Switzerland and constitutes a central building block of UBS Switzerland’s pre-eminent universal bank model. It provides comprehensive financial products and services embedded in a true multi-channel experience, offering clients convenient access. It continues to enhance the range of life-cycle products and services offered to clients, while pursuing additional growth in advisory and execution services.

Global Asset Management

Global Asset Management is a large-scale asset manager with diversified businesses across investment capabilities, regions and distribution channels. It offers investment capabilities and styles across all major traditional and alternative asset classes including

equities, fixed income, currencies, hedge funds, real estate, infrastructure and private equity that can also be combined into multi-asset strategies. The fund services unit provides professional services including fund set-up, accounting and reporting for both traditional investment funds and alternative funds.

Investment Bank

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative financial solutions, outstanding execution and comprehensive access to the world’s capital markets. It offers financial advisory and capital markets, research, equities, foreign exchange, precious metals and tailored fixed income services in rates and credit through its two business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a range of securities.

Corporate Center

The Corporate Center comprises Core Functions and the Non-core and Legacy Portfolio. Core Functions provides Group-wide control functions such as finance (including treasury services such as funding, balance sheet and capital management), risk control (including compliance) and legal. In addition, it provides all logistics and support functions, including operations, information technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate real estate and administrative services, physical security, information security and offshoring. Core Functions allocates most of its treasury income, operating expenses and personnel associated with the abovementioned activities to the businesses. The Non-core and Legacy Portfolio comprises the non-core businesses and legacy positions that used to be part of the Investment Bank.

During 2014, we established UBS Group AG as the holding company of the UBS Group. This change is intended, along with other measures already announced, to substantially improve the resolvability of the UBS Group in response to evolving “too-big-to-fail” regulatory requirements.

UBS Group AG was incorporated on 10 June 2014 as a wholly owned subsidiary of UBS AG. On 29 September 2014, UBS Group AG launched an offer to acquire all the issued ordinary shares of UBS AG in exchange for registered shares of UBS Group AG on a one-for-one basis. Following the exchange offer and subsequent private exchanges on a one-for-one basis with various shareholders

and banks in Switzerland and elsewhere outside the United States, UBS Group AG acquired 96.68% of UBS AG shares by 31 December 2014.

UBS Group AG intends to acquire the remaining UBS AG shares through a squeeze-out procedure according to the Swiss Stock Exchanges and Securities Trading Act or through a squeeze-out merger of UBS AG into a subsidiary according to the Swiss Merger Act, and may also seek to acquire additional shares of UBS AG through any other lawful means. Completion of the squeeze-out process may take a considerable period of time.

Once the squeeze-out process is completed, we expect to pay a supplementary capital return of at least CHF 0.25 per share to shareholders of UBS Group AG.

UBS Group AG shares have been listed on the SIX Swiss Exchange (SIX) (Ticker symbol: UBSG) since 28 November 2014 and also began regular-way trading on the New York Stock Exchange (NYSE) (Ticker symbol: UBS) on the same date. UBS AG shares were delisted from the New York Stock Exchange on 17 January 2015. UBS AG shares will also be delisted from SIX Swiss Exchange upon completion of the squeeze-out process.

The changes to our legal structure do not affect our strategy, our business and the way we serve our clients. They also have no material effect on the organization, processes, roles and responsibilities with respect to how UBS is managed and governed. UBS Group AG’s Board of Directors and Group Executive Board have the same members as the UBS AG’s Board of Directors and Group Executive Board, respectively.

Key steps in the Group reorganization

Transfer of deferred compensation plans

As part of the Group reorganization, in the fourth quarter of 2014, UBS Group AG assumed all obligations of UBS AG as “grantor” in connection with outstanding awards under employee share, option, notional fund and deferred cash plans. At the same time, UBS Group AG acquired the beneficial ownership of the financial assets and 91 million treasury shares of UBS Group AG held to hedge the economic exposure arising from these plans.

Obligations relating to these deferred compensation plans’ awards, which are required to be, and have been, granted by a separate UBS subsidiary or local employing entity, have not been assumed by UBS Group AG and will continue on this basis. Furthermore, obligations related to other compensation vehicles, such as defined benefit pension plans and other local awards, have not been assumed by UBS Group AG and are retained by the relevant employing and/or sponsoring entities.

The consolidated assets and liabilities of the Group were not affected by the transaction. No cash offer was made for UBS AG shares and therefore no cash proceeds have resulted from the issue of the UBS Group AG shares in connection with the exchange offer.

The table on the next page shows the differences between UBS Group AG (consolidated) and UBS AG (consolidated) financial, capital and liquidity and funding information as of or for the period ended 31 December 2014. These differences are recorded in Corporate Center – Core Functions and relate to the following:

General requirements

Our external reporting requirements and the scope of our external reports are defined by general accounting law and principles, relevant stock and debt listing rules, and specific legal and regulatory requirements, as well as by our own financial reporting policies. As a global firm with shares listed both on the SIX and NYSE, we prepare and publish consolidated financial statements in accordance with IFRS on a quarterly basis. Management’s discussion and analysis (MD&A) complements our financial statements by providing a breakdown of results by business division and Corporate Center and disclosures relating to risk management and control, balance sheet, liquidity and funding, and capital management.

Our financial results for the fourth quarter of 2014

This report focuses on UBS Group AG (consolidated) and provides:

In addition, we have provided supplemental information for UBS AG and UBS Limited in the “Financial information” section:

UBS continues to implement additional measures to substantially improve the Group’s resolvability in response to too-big-to-fail (TBTF) requirements in Switzerland and the other countries in which the Group operates. In Switzerland, we are progressing towards the transfer of our Retail & Corporate business division and the Swiss-booked business of our Wealth Management business division into UBS Switzerland AG by mid-2015. To comply with new rules for foreign banks in the US under the Dodd-Frank Wall Street Reform and Consumer Protection Act, by 1 July 2016 we will designate an intermediate holding company that will own all of our US operations except US branches of UBS AG. In the UK, we have begun to implement a revised business and operating model for UBS Limited, which will enable UBS Limited to bear and retain a larger proportion of the risk and reward in its business activities.

Our strategy, our business and the way we serve our clients are not affected by these changes. These plans do not require UBS to raise additional common equity capital and are not expected to materially affect the firm’s capital-generating capability.

We are confident that the establishment of UBS Group AG as the holding company of the Group along with our other announced measures will substantially enhance the resolvability of the Group. We expect that the Group will qualify for a rebate on

the progressive buffer capital requirements, which should result in lower overall capital requirements. The Swiss Financial Market Supervisory Authority (FINMA) has confirmed that our proposed measures are in principle suitable to warrant a rebate, although the amount and timing will depend on the actual execution of these measures and can therefore only be specified once all measures are implemented.

We may consider further changes to the Group’s legal structure in response to regulatory requirements, including to further improve the resolvability of the Group, to respond to capital requirements, (as well as to seek any reduction in capital requirements the Group may be entitled to), and to meet any other regulatory requirements regarding our legal structure. Such changes may include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG, the transfer of shared service and support functions to service companies, and adjustments to the booking entity or location of products and services. These structural changes are being discussed on an ongoing basis with FINMA and other regulatory authorities and remain subject to a number of uncertainties that may affect their feasibility, scope or timing.

Impact of Swiss National Bank actions

On 15 January 2015, the Swiss National Bank (SNB) discontinued the minimum targeted exchange rate for the Swiss franc versus the euro, which had been in place since September 2011. At the same time, the SNB lowered the interest rate on deposit account balances at the SNB that exceed a given exemption threshold by 50 basis points to negative 0.75%. It also moved the target range for three-month Libor to between negative 1.25% and negative 0.25% (previously negative 0.75% to positive 0.25%). These decisions resulted in a considerable strengthening of the Swiss franc against the euro, US dollar, British pound, Japanese yen and several other currencies, as well as a reduction in Swiss franc interest rates. As of 31 January 2015, the Swiss franc exchange rate was 0.92 to the US dollar, 1.04 to the euro, 1.38 to the British pound and 0.78 to 100 Japanese yen. Volatility levels in foreign currency exchange and interest rates also increased.

A significant portion of the equity of UBS’s foreign operations is denominated in US dollars, euros, British pounds and other foreign currencies. The appreciation of the Swiss franc would have led to an estimated decline in total equity of approximately CHF 2.0 billion or 4% when applying currency translation rates as of 31 January 2015 to the reported balances as of 31 December 2014. This includes a reduction in recognized deferred tax assets, mainly related to the US, of approximately CHF 0.6 billion (of which CHF 0.3 billion relates to temporary differences deferred tax assets), which would be recognized in Other comprehensive income.

Similarly, a significant portion of our Basel III risk-weighted assets (RWA) are denominated in US dollars, euros, British pounds and other foreign currencies. Group Treasury is mandated with the task of minimizing adverse effects from changes in currency rates on our capital ratios. The Group Asset and Liability Management Committee, a committee of the UBS Group Executive Board, can adjust the currency mix in capital, within limits set by the Board of Directors, to balance the effect of foreign exchange movements on the fully applied CET1 capital and total capital ratio. As a result, the proportion of RWA denominated in foreign currencies outweighs the capital in these currencies, and the significant appreciation of the Swiss franc against these currencies benefited our Basel III capital ratios.

On a fully applied basis for Swiss systemically relevant banks (SRB) we would have experienced the following approximate declines in our capital balances when applying currency translation rates as of 31 January 2015 to the reported balances as of 31 December 2014: CHF 0.9 billion or 3% in fully applied common equity tier 1 (CET1) capital, CHF 1.8 billion or 4% in fully applied total capital, CHF 9.2 billion or 4% in fully applied RWA and CHF 71.4 billion or 7% in the fully applied leverage ratio denominator. Consequently, we estimate that our fully applied Swiss SRB CET1 capital ratio would have increased by approximately 20 basis points and the fully applied leverage ratio would have improved by approximately 10 basis points.

In aggregate, UBS did not experience negative revenues in its trading businesses in connection with the SNB announcement. While it is premature to draw a conclusion about the quarter, we have had a solid start to the year.

However, the portion of our operating income denominated in non-Swiss franc currencies is greater than the portion of operating expenses denominated in non-Swiss franc currencies. Therefore, appreciation of the Swiss franc against other currencies generally has an adverse effect on our earnings in the absence of any mitigating actions.

In addition to the estimated effects from changes in foreign currency exchange rates, our equity and capital are affected by changes in interest rates. In particular, the calculation of our net defined benefit assets and liabilities is sensitive to the discount rate applied. Specifically, the reduction in applicable discount rates during January would have reduced our equity and fully applied Swiss SRB CET1 capital by around CHF 1 billion. Also, the persistently low interest rate environment would continue to have an adverse effect on our replication portfolios, and our net interest income would further decrease.

Furthermore, the stronger Swiss franc may have a negative impact on the Swiss economy, which, given its reliance on exports, could impact some of the counterparties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods.

Regulatory and legal developments

FINMA publishes new leverage ratio and revised disclosure circulars, and provides further guidance on RWA calculations

In November 2014, the Swiss Financial Market Supervisory Authority (FINMA) published a new circular on the leverage ratio and a revised circular on disclosure.

The new FINMA Circular “Leverage ratio – banks” covers the calculation rules for the leverage ratio in Switzerland. For Swiss systemically relevant banks (SRB), the new circular revises the way the leverage ratio denominator (LRD) is calculated in order to be aligned with the rules issued by the Bank for International Settlements (BIS) in January 2014. This change became effective on 1 January 2015. We are making use of a one-year transition period, under which the existing Swiss SRB definition may still be used, but we are required to disclose both leverage ratio measures (based on existing Swiss SRB rules as well as on the BIS Basel III rules) starting with our first quarter 2015 reporting. The current minimum leverage ratio requirement as a percentage of the risk-based capital ratio requirement (excluding the countercyclical buffer requirement) remains unchanged for Swiss SRB.

The Basel III rules also require disclosure of the leverage ratio and liquidity coverage ratio (LCR) as of 2015. These disclosure requirements are included in the revised FINMA Circular “Disclosure – banks,” which came into force on 1 January 2015.

During 2012, FINMA began requiring banks using the internal ratings-based (IRB) approach to apply a bank-specific IRB multiplier when calculating risk-weighted assets (RWA) for owner-occupied Swiss residential mortgages. This multiplier is applied to new and renewed mortgages. The entire owner-occupied Swiss residential mortgage portfolio is subject to this multiplier, which is being phased in through 2019. FINMA has notified us that the RWA increase should be extended to Swiss income-producing residential and commercial real estate from the first quarter of 2015 with a phased implementation through 2019. FINMA also announced that the RWA levels of other asset classes are to be reviewed. We understand these reviews to be in anticipation of the Basel Committee on Banking Supervision (BCBS) expected prudential reforms (e.g., reduction in the variability of capital ratios or capital floors).

Final report of the group of experts on the further development of Switzerland’s financial market strategy

A group of senior experts representing the private sector, authorities and academia (“the Brunetti group”) was appointed by the Swiss Federal Council, and mandated to further develop the strategy of Switzerland’s financial market. In its final report, issued in December 2014, the Brunetti group made recommendations with regard to (i) safeguarding systemic stability/too-big-to-fail (TBTF), (ii) preserving market access, (iii) improving the tax environment, and (iv) efficient organization of regulatory processes. The Brunetti group stated that the Swiss TBTF approach compares favorably with the approaches of other countries and therefore no reorientation of the prevailing regulatory model is necessary. Although an international comparative analysis has confirmed that the Swiss regulatory model is, in principle, suitable to address the TBTF problem, the Brunetti group argued that certain adjustments within the model are necessary to truly eliminate the implicit government guarantee in the long term. The Brunetti group’s work on the TBTF regime serves as the basis for the Swiss Federal Council’s review report on the Swiss TBTF law to be presented to the Swiss parliament in early 2015.

The Brunetti group emphasized the importance of Swiss financial services providers’ access to foreign markets with a view to maintaining the competitiveness of the Swiss financial center. Furthermore, following a recommendation made by the Brunetti group, the Swiss Federal Council submitted a draft law on 17 December 2014 for consultation, proposing to move towards a “paying agent” principle for Swiss withholding tax. The Brunetti group also analyzed the Swiss regulatory and supervisory processes and proposed various improvements, including that the institutionalized dialogue among authorities, market participants and research be expanded.

International consultations related to the capital framework

During the fourth quarter of 2014, the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) issued a number of potentially far-reaching proposals that affect the amounts and calculation methods for regulatory capital. The FSB issued its proposed standards on Total Loss-Absorbing Capacity (TLAC) that aims to build up adequate loss-absorbing

capacity for global systemically important banks to ensure that an orderly wind-down is possible. The FSB proposes that a minimum Pillar 1 TLAC requirement be set within the range of 16% to 20% of RWA and at least twice the Basel III tier 1 leverage ratio requirement.

A second consultation covers the BCBS proposals for revising the standardized approach to credit risk, e.g., by relying less on external credit ratings, reducing the scope of national discretion or strengthening the link between the standardized and the IRB approach. One of the key aspects of the current proposal is that the corporate and bank exposures would be based on a limited number of drivers and no longer risk-weighted by reference to their external credit ratings.

The BCBS also issued a proposal on the design of a capital floor framework, which would be based on revised standardized approaches for credit, market and operational risk. The calibration of the floor is outside the scope of the consultation.

BCBS issues revised Pillar 3 disclosure requirements

In January 2015, the BCBS issued revised Pillar 3 disclosure requirements that aim to improve comparability and consistency of disclosures. To this end, the BCBS introduced harmonized templates. These include prescriptive fixed form templates for quantitative information that is considered essential for the analysis of a bank’s regulatory capital requirements as well as templates with a more flexible format for information which is considered meaningful to the market. In addition, banks may accompany the disclosure requirements in each template with a qualitative commentary that explains a bank’s particular circumstances and risk profile.

According to the BCBS timeline, banks will be required to publish their first Pillar 3 reports under the revised framework concurrently with their year-end 2016 financial reports. Under the new requirements, we will be mapping the financial statements into regulatory risk categories and we will present semiannually and annually comprehensive sets of standardized disclosure tables. Amendments to our Pillar 3 reporting will further include the quarterly disclosure of a RWA flow statement in a granularity similar to the one we have so far been disclosing annually. The standardized tables are designed to improve the comparability between banks and are expected to require significant implementation investment.

European Banking Union

The implementation of the European Banking Union (EBU) passed a milestone with the launch of the Single Supervisory Mechanism (SSM) on 4 November 2014. The European Central Bank (ECB) now directly supervises 123 significant banks in the eurozone, including UBS Luxembourg SA, which together represent 82% of total bank assets in the eurozone. Prior to the start of the SSM, the ECB published the results of the comprehensive assessment, comprising an asset quality review and stress test, of a total of 130 banks. The ECB noted there was a total capital shortfall of EUR 25 billion detected at 25 participating banks at the end of 2013. UBS Luxembourg SA successfully passed the comprehensive assessment.

US regulators amended capital rules for intermediate holding companies

The Federal Reserve Board issued a final rule adjusting the due date for large bank holding companies (BHC) to submit capital plans and stress test results from 5 January to 5 April 2016. The final rule also adopts, with some adjustments, the limitation on a BHC’s ability to make capital distributions to the extent that its actual net capital issuances are less than the amount indicated in its capital plan. The rule reaffirmed that an intermediate holding company (IHC) formed in anticipation of the IHC rule, such as that of UBS, would not be subject to risk-based capital, liquidity and risk management standards until 1 July 2016, the capital plan rule until the 2017 cycle, and the stress testing rule and Comprehensive Capital Analysis and Review (CCAR) process until the 2018 cycle.

Financial reporting and accounting changes

ETD client cash balances removed from balance sheet

We provide clearing and execution services to clients entering into exchange-traded derivatives (ETD). In the fourth quarter of 2014, we changed our accounting policy with respect to recognizing cash initial margin collected and remitted (together, client cash balances) to more closely align with evolving market practices.

Client cash balances that are legally isolated from UBS’s estate, and that UBS neither benefits from nor controls, are not deemed assets and corresponding liabilities of the Group. Consequently, they are no longer reflected within Cash collateral payables on derivative instruments for the amounts due to clients, Cash collateral receivables on derivative instruments in relation to amounts posted to central counterparties, and Due from banks for any amounts that are deposited at third-party deposit banks. The comparative balance sheets as of 30 September 2014 and 31 December 2013 have been restated accordingly.

Disclosure of regional performance in financial reports

Throughout 2014, our quarterly results presentations included disclosure of the regional performance of our business divisions, including a breakdown of regional operating income, operating expenses and performance before tax by business division.

Starting with our Annual Report 2014, which will be published on 13 March 2015, we will also provide such disclosure in our financial reports, including our interim reports.

New structure of the Corporate Center

As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new components, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM), each of which will be reported separately. In our first quarter 2015 report, we will reflect this change and provide more information. Presentation of Corporate Center – Non-core and Legacy Portfolio is not affected by this change.

Changes to our annual performance targets and key performance indicators

While our strategy remains unchanged, we have amended certain external performance targets and key performance indicators (KPI) for the Group and the business divisions for 2015 and future years. The table on the next page shows our amended annual performance targets. These performance targets exclude, where applicable, items that management believes are not representative of the underlying performance of our businesses, such as own credit gains and losses, restructuring-related charges and gains and losses on sales of businesses and real estate. The performance targets assume constant foreign currency translation rates unless otherwise indicated.

We amended the following performance targets and KPI: