20-F 1 y75024e20vf.htm FORM 20-F 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                .
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-15060
UBS AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland
(Jurisdiction of Incorporation or Organization)
Bahnhofstrasse 45
CH-8001 Zurich, Switzerland
and
Aeschenvorstadt 1
CH-4051 Basel, Switzerland

(Address of Principal Executive Offices)
Niall O’Toole
UBS AG
1285 Avenue of the Americas
New York, NY 10019
Telephone: (212) 713-3000
Fax: (212) 713-6211
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 


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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Please see page 3.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Please see page 4.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Please see page 4.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 December 2008:
Ordinary shares, par value CHF 0.10 per share: 2,932,580,549* ordinary shares (including 61,903,121 treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
     
Yes þ   No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
     
Yes o   No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
     
Yes þ   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check One):
         
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
         
U.S. GAAP o   International Financial Reporting Standards
as issued by the International Accounting
Standards Board þ
  Other o
 
*   As of December 31, 2008, UBS had two outstanding mandatory convertible notes (“MCNs”), one in the face amount of CHF 13 billion and the other CHF 6 billion. Upon their conversion or settlement, these MCNs are expected to lead to the issuance of 270,438,942 and a maximum of 329,447,681 new shares out of conditional capital, respectively.

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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
     
Item 17 o   Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
     
Yes o
  No þ
 
 

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Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
    Name of each exchange on
Title of each class   which registered
Ordinary Shares (par value of CHF 0.10 each)   New York Stock Exchange
     
$300,000,000 Floating Rate Noncumulative Trust Preferred Securities   New York Stock Exchange
     
$300,000,000 Floating Rate Noncumulative Company Preferred Securities   New York Stock Exchange*
     
$1,000,000,000 6.243% Noncumulative Trust Preferred Securities   New York Stock Exchange
     
$1,000,000,000 6.243% Noncumulative Company Preferred Securities   New York Stock Exchange*
     
Subordinated Guarantee of UBS AG with respect to each of the
Noncumulative Company Preferred Securities above
  New York Stock Exchange*
     
$9,000,000 PPNs due April 2009   NYSE Alternext US
     
$6,900,000 PPNs due May 2009   NYSE Alternext US
     
$5,100,000 PPNs due September 2009   NYSE Alternext US
     
$24,223,000 PPNs due October 2009   NYSE Alternext US
     
$30,000,000 PPNs due April 2010   NYSE Alternext US
     
$31,000,000 PPNs due May 2010   NYSE Alternext US
     
$23,000,000 PPNs due June 2010   NYSE Alternext US
     
$10,000,000 PPNs due July 2010   NYSE Alternext US
     
$7,750,000 PPNs due August 2010   NYSE Alternext US
     
$12,660,000 PPNs due September 2010   NYSE Alternext US
     
$8,000,000 PPNs due November 2010   NYSE Alternext US
     
$17,842,000 PPNs due October 2011   NYSE Alternext US
     
$100,000,000 E-TRACS UBS Bloomberg CMCI Food ETN due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Bloomberg CMCI Agriculture ETN due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Bloomberg CMCI Energy ETN due April 2038   NYSE Arca
     
$100,000,000 E-TRACS UBS Bloomberg CMCI ETN due April 2038   NYSE Arca
     
$100,000,000 E-TRACS UBS Bloomberg Gold ETN due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Bloomberg CMCI Industrial Metals due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Bloomberg CMCI Livestock ETN due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038   NYSE Arca
     
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018   NYSE Arca
     
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018   NYSE Arca
 
* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.  

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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Auction Rate Securities Rights Series A-1, A-2, B-1, B-2, C-1, C-2 and G (non-transferable)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

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CONTENTS
         
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 EX-1.1: ARTICLES OF ASSOCIATION
 EX-1.2: ORGANIZATION REGULATIONS
 EX-7: STATEMENT REGARDING RATIO OF EARNINGS TO FIXED CHARGES
 EX-12: CERTIFICATIONS
 EX-13: CERTIFICATIONS
 EX-15: CONSENT OF ERNST & YOUNG LTD

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     This report contains statements that constitute “forward-looking statements,” including but not limited to statements relating to the anticipated effect of transactions described herein, risks arising from the current market crisis and other risks specific to UBS’s business, strategic initiatives, future business development and economic performance. While these forward-looking statements represent UBS’s judgments and expectations concerning the development of its business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) the extent and nature of future developments in the market segments that have been or may be affected by the current market crisis and their effect on UBS’s assets and exposures, including UBS’s remaining net and gross exposures related to the United States mortgage market; (2) developments affecting the availability of capital and funding to UBS and other financial institutions, including any changes in UBS’s credit spreads and ratings; (3) other market and macroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates; (4) changes in internal risk control and limitations in the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (5) the possible consequences of governmental investigations of certain of UBS’s past business activities, including the possibility that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions; (6) the degree to which UBS is successful in implementing its remediation plans and strategic and organizational changes, and whether those plans and changes will have the effects anticipated; (7) changes in the financial position or creditworthiness of UBS’s customers, obligors and counterparties, and developments in the markets in which they operate, including possible failures resulting from the current market crisis and adverse economic environment; (8) management changes and changes to the internal or overall structure of UBS’s business divisions; (9) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures; (10) legislative, governmental and regulatory developments, including the effect of new and more stringent capital requirements and of direct or indirect regulatory constraints on UBS’s business activities; (11) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other assets or other matters; (12) changes in and the effect of competitive pressures, including the possible loss of key employees as a result of compensation issues or for other reasons; (13) technological developments; and (14) the impact of all such future developments on positions held by UBS, on its short-term and longer-term earnings, on the cost and availability of funding and on UBS’s capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this report and in documents furnished by UBS and other filings made by UBS with the SEC. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
The effect of future changes in accounting standards
     Included in the Notes to the Financial Statements is a description of the expected effect of IFRS accounting standards that have been issued but have not yet been adopted.
     Although we believe that description includes all significant matters that have been approved, the International Accounting Standards Board has a large number of projects in process that could result in significant new accounting standards or significant changes to existing standards.
     This increased level of activity includes normal ongoing development and efforts to improve the existing body of accounting standards, and also is in response to a number of perceived deficiencies in accounting standards exemplified by reported abuses by various companies.

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     We believe it is likely that several new accounting standards will be issued in the near future, and that those new standards could have a significant effect on our reported results of operations and financial position, but we cannot predict the precise nature or amounts of any such changes.

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PART I
Item 1.   Identity of Directors, Senior Management and Advisors.
     Not required because this Form 20-F is filed as an annual report.
Item 2.   Offer Statistics and Expected Timetable.
     Not required because this Form 20-F is filed as an annual report.
Item 3.   Key Information.
A—Selected Financial Data.
     Please see Selected Financial Data on pages 394 to 397 and Statement of Changes in Equity on pages 258 to 260 of the Financial information report.
(a) Ratio of Earnings to Fixed Charges
     Please see page 397 of the Financial information report and Exhibit 7 to this Form 20-F.
B—Capitalization and Indebtedness.
     Not required because this Form 20-F is filed as an annual report.
C—Reasons for the Offer and Use of Proceeds.
     Not required because this Form 20-F is filed as an annual report.
D—Risk Factors.
     Please see pages 23 to 27 of the Strategy, performance and responsibility report.
Item 4.   Information on the Company.
A—History and Development of the Company.
     
1-3
  Please see Corporate Information on page 6 of the Annual Report 2008.
 
   
4-6
  Please see The Making of UBS on page 18 and Key factors affecting UBS’s financial positions and results of operations in 2008 on pages 29 to 30 of the Strategy, performance and responsibility report.
 
   
7
  None.
B—Business Overview.
     
1, 2, 5, 7
  Please refer to the UBS business divisions and Corporate Center report on pages 74 to 76 with respect to Global Wealth Management & Business Banking, pages 77 to 79 with respect to Wealth Management International & Switzerland, pages 83 to 85 with respect to Wealth Management US, pages 89 to 90 with respect to Business Banking Switzerland, pages 94 to 98 with respect to Global Asset Management, pages 102 to 104 with respect to the Investment Bank, and

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  pages 110 to 112 with respect to the Corporate Center. For a breakdown of revenues by category of activity and geographic market for each of the last three financial years, please refer to Notes 2a and 2b to the Financial information report Segment Reporting by Business Division on pages 281 to 287 and Segment Reporting by Geographic Location on page 288.
 
   
3
  Please refer to Seasonal Characteristics on page 30 of the Strategy, performance and responsibility report.
 
   
4
  Not applicable.
 
   
6
  Please see Item 10.C of this Form 20-F.
 
   
8
  Please see Regulation and Supervision on pages 218 to 220 of the Corporate governance and compensation report.
C—Organizational Structure.
     Please see Note 34 to the Financial Statements Significant Subsidiaries and Associates on pages 347 to 350 of the Financial information report.
D—Property, Plant and Equipment.
     Please see Property, Plant and Equipment on page 398 of the Financial information report.
Information Required by Industry Guide 3
     Please see Information Required by Industry Guide 3 on pages 399 to 413 of the Financial information report. See also Selected Financial Data on pages 395 and 396 of the Financial information report for the return on equity attributable to UBS shareholders, return on average equity, return on average assets, dividend payout ratio and ratio of average equity to average assets.
Item 4.A.   Unresolved Staff Comments.
     None.
Item 5.   Operating and Financial Review and Prospects.
A—Operating Results.
     Please see Financial Performance on pages 28 to 53 of the Strategy, performance and responsibility report. For a discussion of operating results by business division, please refer to the UBS business divisions and Corporate Center report, pages 80 to 82 with respect to Wealth Management International & Switzerland, pages 86 to 88 with respect to Wealth Management US, pages 91 to 93 with respect to Business Banking Switzerland, pages 99 to 101 with respect to Global Asset Management, pages 105 to 109 with respect to the Investment Bank and pages 113 to 115 with respect to the Corporate Center.
     For information regarding the impact of foreign currency fluctuations, see Corporate currency management on pages 160 to 161 of the Risk and treasury management report.
     Please also see Exposure to monoline insurers, Exposure to auction rate securities and Exposure to leverage finance deals on pages 125 to 127 of the Risk and treasury management report.

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B—Liquidity and Capital Resources.
     We believe that our working capital is sufficient for the company’s present requirements. UBS liquidity and capital management is undertaken at UBS as an integrated asset and liability management function. For detailed discussion, please see Liquidity and funding management on pages 151 to 157 and Capital management on pages 162 to 167 of the Risk and treasury management report.
     For a discussion of UBS’s borrowings and cash flows, please see Balance sheet on pages 44 to 46 and Cash flows on pages 52 to 53 of the Strategy, performance and responsibility report.
     Please see also Interest Rate and Currency Management on pages 159 to 161 and Shares and capital instruments on pages 168 to 171 of the Risk and treasury management report and Note 19 to the Financial Statements Financial Liabilities Designated at Fair Value and Debt Issued on pages 303 to 304 of the Financial information report.
     For a discussion of UBS’s long-term credit ratings, please see Credit Ratings on page 158 of the Risk and treasury management report.
C—Research and Development, Patents and Licenses, etc.
     Not applicable.
D—Trend Information.
     Please see Current Market Climate and Industry Drivers on pages 20 to 22 of the Strategy, performance and responsibility report.
E—Off-balance Sheet Arrangements.
     Please see Off-balance sheet arrangements on pages 47 to 51 of the Strategy, performance and responsibility report and Notes 24 and 25, Pledgeable off-balance sheet securities and Operating lease commitments, respectively, on pages 319 to 320 of the Financial information report.
F—Tabular Disclosure of Contractual Obligations.
     Please see Contractual obligations on page 47 of the Strategy, performance and responsibility report.
Item 6.   Directors, Senior Management and Employees.
A—Directors and Senior Management.
     
1, 2, 3
  Please see pages 199 to 202 and pages 206 to 209 of the Corporate governance and compensation report.
 
   
4 and 5
  None.
B—Compensation.
     
1
  Please see pages 225 to 234 of Compensation, shareholdings and loans in the Corporate governance and compensation report and also Note 31 to the Financial Statements Equity Participation and Other Compensation Plans on pages 339 to

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  343 and Note 32 to the Financial Statements Related Parties on pages 344 to 346 of the Financial information report.
 
   
2
  Please see Note 30 to the Financial Statements Pension and Other Post-Employment Benefits Plans on pages 333 to 338 of the Financial information report.
C—Board Practices.
     
1
  Please see pages 199 to 202 and pages 206 to 209 in the Corporate governance and compensation report.
 
   
2
  Please see pages 226 to 228 of Compensation, shareholdings and loans in the Corporate governance and compensation report and Note 32 to the Financial Statements Related Parties on pages 344 to 346 of the Financial Information report.
 
   
3
  Please see Audit committee on page 203 and Human resources and compensation committee on pages 203 to 204 of the Corporate governance and compensation report.
D—Employees.
     Please see UBS Employees on pages 54 to 59 of the Strategy, performance and responsibility report.
E—Share Ownership.
     Please see Shares, options and loans for the Board of Directors and Group Executive Board on pages 230 to 233 in the Corporate governance and compensation report, Note 31 of the Financial Statements Equity Participation and Other Compensation Plans on pages 339 to 343 of the Financial information report and “Equity holdings” in Note 32 to the Financial Statements Related Parties on pages 344 to 346 of the Financial information report.
Item 7.   Major Shareholders and Related Party Transactions.
A—Major Shareholders.
     Please see Group structure and shareholders on pages 195 to 196 of the Corporate governance and compensation report. At December 31, 2008, the portion of UBS ordinary shares held in the United States was 275,845,594 by 1,039 record holders.
B—Related Party Transactions.
     Please see Loans on page 236 of Compensation, shareholdings and loans in the Corporate governance and compensation report and Note 32 to the Financial Statements Related Parties on pages 344 to 346 of the Financial information report.
C—Interests of Experts and Counsel.
     Not applicable because this Form 20-F is filed as an annual report.

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Item 8.   Financial Information.
A—Consolidated Statements and Other Financial Information.
     Please see Item 18 of this Form 20-F. Please refer to Distributions to shareholders on pages 170 to 171 of the Risk and treasury management report for a description of UBS’s dividend policy.
B—Significant Changes.
     UBS is not aware of any significant change that has occurred since the date of the annual financial statements included in this Form 20-F. Please see Key factors affecting UBS’s financial positions and results of operations in 2008 on pages 29 to 30 of the Strategy, performance and responsibility report and Note 33 to the Financial Statements Post-Balance Sheet Events on page 347 of the Financial information report.
Item 9.   The Offer and Listing.
A—Offer and Listing Details.
     
1, 2, 3, 5, 6, 7
  Not required because this Form 20-F is filed as an annual report.
 
   
4
  Please see Stock exchange prices on page 175 of the Risk and treasury management report.
B—Plan of Distribution.
     Not required because this Form 20-F is filed as an annual report.
C—Markets.
     UBS’s shares are listed on the SIX Swiss Exchange (but traded on SWX Europe), the New York Stock Exchange and the Tokyo Stock Exchange. The symbols are shown on page 172 of the Risk and treasury management report.
(a) Trading on SWX Europe
     Since July 2001, Swiss blue chip stocks have not been traded on the SIX Swiss Exchange (formerly SWX Swiss Exchange). All trading in the shares of members of the Swiss Market Index now takes place on SWX Europe, although these stocks remain listed on the SIX Swiss Exchange.
     SWX Europe is wholly owned by the SIX Group. It is a cross-border platform providing a pan-European blue-chip market. It addresses the increasing requirement for equity investment to be conducted on a sectoral basis across Europe rather than being limited to national markets.
     SWX Europe is a Recognized Investment Exchange supervised by the Financial Services Authority in the United Kingdom. It is delivered on the modern, scalable SIX trading platform.
     Trading is possible on all target days, as specified by the European Central Bank. The opening hours are 06:00 to 22:00 CET and the trading hours are 09:00 to 17:30 CET. During the after-hours trading phase from 17:30 to 22:00 CET and in the pre-trading phase from 06:00 to 09:00 CET, orders can be entered or deleted. From 09:00 CET, once the opening price is set, trading begins. Orders are executed automatically according to established rules that match bid and ask prices. Regardless of their size or origin, incoming orders are executed on a price/time priority, i.e., in the order of price (first priority) and

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time received (second priority). Depending on the type of transaction, the order and trade details are also transmitted to data vendors (Reuters, Bloomberg, Telekurs, etc.).
     In most cases, each trade triggers an automatic settlement instruction which is routed through one of three central securities depositories (CSD); SIS SegaInterSettle AG, CrestCo or Euroclear. Members can choose to settle from one or more accounts within these CSD’s and when counterparties have selected different CSD’s, settlement will be cross-border. Additionally, SWX Europe offers a choice of Central Counterparties (CCP) for cross-border trading.
     All trades executed through the order book settle on a uniform “T+3” basis, meaning that delivery and payment of exchange transactions occur three days after the trade date. The buyer is able to ask SWX Europe to enforce settlement if the seller has not delivered within three days of the intended settlement date.
     Any transaction executed under the rules of SWX Europe must be reported to SWX Europe. Order book executions are automatically reported by the trading system. There are separate provisions for the delayed reporting of certain qualifying trades. Individual elements of portfolio trades must be reported within one hour while block trades and enlarged risk trades must be reported when the business is substantially (80%) complete, or by the end of order book trading that day, unless the trade is agreed one hour or less before the market close, when the trade must be reported by the end of order book trading on the following market day. Block trades and enlarged risk trades are subject to minimum trade size criteria. During normal trading hours, all other transactions must be reported within three minutes. The enlarged risk trades provisions enable a member to protect a client’s interest while the member works a large trade on behalf of the client. The block trade provisions allow a member a publication delay when the member has executed a large transaction for a client; the delay gives the member time in which to offset the risk of the large trade.
     In the event of extraordinary situations such as large price fluctuations and other situations likely to hamper fair and orderly trading, SWX Europe may take whatever measures it deems necessary to maintain fair and orderly markets. A listed security may be suspended, the opening of trading in that security may be delayed or continuous trading may be interrupted.
(b) Trading on the New York Stock Exchange
     UBS listed its shares on the New York Stock Exchange (the “NYSE”) on May 16, 2000.
     As of 31 December 2008, the securities of over 3,500 corporations were listed on the NYSE, of which approximately 412 were non-U.S. issuers with a combined market valuation of approximately USD 15 trillion.
     The NYSE is open Monday through Friday, 9:30 A.M. to 4:00 P.M., EST.
     The NYSE is an agency auction market. Trading at the NYSE takes place by open bids and offers by Exchange members, acting as agents for institutions or individual investors. Buy and sell orders meet directly on the trading floor, and prices are determined by the interplay of supply and demand. In contrast, in the U.S. over-the-counter market, the price is determined by a dealer who buys and sells out of inventory.
     At the NYSE, each listed stock is assigned to a single post where the specialist manages the auction process. NYSE members bring all orders for NYSE-listed stocks to the Exchange floor either electronically or through a floor broker. As a result, the flow of buy and sell orders for each stock is funneled to a single location.

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     This heavy stream of diverse orders is one of the great strengths of the NYSE. It provides liquidity — the ease with which securities can be bought and sold without wide price fluctuations.
     When an investor’s transaction is completed, the best price will have been exposed to a wide range of potential buyers and sellers.
     Every transaction made at the NYSE is under continuous surveillance during the trading day. Stock Watch, a computer system that searches for unusual trading patterns, alerts the NYSE’s regulatory personnel to possible insider trading abuses or other prohibited trading practices. The NYSE’s other regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on brokers’ sales practices, and the continuous monitoring of specialist operations.
(c) Trading on the Tokyo Stock Exchange
     The volume of UBS shares traded on the Tokyo Stock Exchange is negligible in comparison to the volume on SWX Europe or on the NYSE.
D—Selling Shareholders.
     Not required because this Form 20-F is filed as an annual report.
E—Dilution.
     Not required because this Form 20-F is filed as an annual report.
F—Expenses of the Issue.
     Not required because this Form 20-F is filed as an annual report.
Item 10.   Additional Information.
A—Share Capital.
     Not required because this Form 20-F is filed as an annual report.
B—Memorandum and Articles of Association.
     Please see the Articles of Association of UBS AG and the Organization Regulations of UBS AG (Exhibits 1.1 and 1.2, respectively, of this Form 20-F).
     Set forth below is a summary of the material provisions of our Articles of Association, which we call the “Articles” throughout this document, Organization Regulations and the Swiss Code of Obligations relating to our shares. This description does not purport to be complete and is qualified in its entirety by references to Swiss law, including Swiss company law, and to the Articles and Organization Regulations.
     The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid up.
     Each share carries one vote at our shareholders’ meetings. Voting rights may be exercised only after a shareholder has been recorded in our share register as a shareholder with voting rights. Registration with voting rights is subject to certain restrictions. See “— Transfer of Shares” and “—Shareholders’ Meeting”.

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     The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, request at any time that we print and deliver such certificates free of charge.
Transfer of Shares
     The transfer of shares is effected by corresponding entry in the books of a bank or depository institution following an assignment in writing by the selling shareholder and notification of such assignment to us by the bank or depository institution. The transfer of shares further requires that the purchaser file a share registration form in order to be registered in our share register as a shareholder. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.
     A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name, citizenship and address. However, we may decline a registration with voting rights if the shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights.
     There is no limitation under Swiss law or our Articles on the right of non-Swiss residents or nationals to own or vote our shares.
Shareholders’ Meeting
     Under Swiss law, annual ordinary shareholders’ meetings must be held within six months after the end of our fiscal year, which is 31 December. Shareholders’ meetings may be convened by the Board of Directors (BoD) or, if necessary, by the statutory auditors, with twenty-days’ advance notice. The BoD is further required to convene an extraordinary shareholders’ meeting if so resolved by a shareholders’ meeting or if so requested by shareholders holding in aggregate at least 10% of our nominal share capital. Shareholders holding shares with an aggregate par value of at least CHF 62,500 have the right to request that a specific proposal be put on the agenda and voted upon at the next shareholders’ meeting. A shareholders’ meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty days prior to such meeting.
     The Articles do not require a minimum number of shareholders to be present in order to hold a shareholders’ meeting.
     Resolutions generally require the approval of an “absolute majority” of the votes cast at a shareholders’ meeting. Shareholders’ resolutions requiring a vote by absolute majority include:
    amendments to the Articles;
    elections of directors and statutory auditors;
    approval of the annual report and the consolidated statements of accounts;
    approval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);
    decisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting; and
    passing resolutions on matters which are by law or by the Articles reserved to the shareholders’ meeting (e.g., the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting).

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     Under the Articles, a resolution passed at a shareholders’ meeting with a supermajority of at least two thirds of the Shares represented at such meeting is required to:
    change the limits on BoD size in the Articles;
    remove one fourth or more of the members of the BoD; or
    delete or modify the above supermajority voting requirements.
     Under Swiss corporate law, a resolution passed by at least two thirds of votes represented and an absolute majority of the par value of the shares represented must approve:
    a change in our stated purpose in the Articles;
    the creation of shares with privileged voting rights;
    a restriction of transferability;
    an increase in authorized capital;
    an increase of capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights;
    changes to pre-emptive rights;
    a change of domicile of the corporation; or
    dissolution of the corporation without liquidation.
     At shareholders’ meetings, a shareholder can be represented by his or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, by the independent proxy or by a custodial proxy. Votes are taken electronically, by written ballot or by a show of hands. If a written ballot is requested by at least 3% of the votes present at the shareholders’ meeting or such ballot is ordered by the Chairman of the meeting, a written ballot will be conducted.
Net Profits and Dividends
     Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as general reserves for so long as these reserves amount to less than 20% of the corporation’s nominal share capital. Any net profits remaining are at the disposal of the shareholders’ meeting, except that, if an annual dividend exceeds 5% of the nominal share capital, then 10% of such excess must be retained as general reserves.
     Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous business years or if the reserves of the corporation are sufficient to allow distribution of a dividend. In either event, dividends may be paid out only after approval by the shareholders’ meeting. The BoD may propose that a dividend be paid out, but cannot itself set the dividend. The auditors must confirm that the dividend proposal of the Board conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the BoD.

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     Dividends are usually due and payable after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statue of limitations in respect of dividend payments is five years.
     U.S. holders of shares will receive dividend payments in U.S. dollars, unless they provide notice to our U.S. transfer agent, Mellon Investor Services, that they wish to receive dividend payments in Swiss francs. Mellon Investor Services will be responsible for paying the U.S. dollars or Swiss francs to registered holders, and for withholding any required amounts for taxes or other governmental charges. If Mellon Investor Services determines, after consultation with us, that in its judgment any foreign currency received by it cannot be converted into U.S. dollars or transferred to U.S. holders, it may distribute the foreign currency received by it, or an appropriate document evidencing the right to receive such currency, or in its discretion hold such foreign currency for the accounts of U.S. holders.
Preemptive Rights
     Under Swiss law, any share issue, whether for cash or non-cash consideration or for no consideration, is subject to the prior approval of the shareholders’ meeting. Shareholders of a Swiss corporation have certain preemptive rights to subscribe for new issues of shares in proportion to the nominal amount of shares held. The Articles or a resolution adopted at a shareholders’ meeting with a supermajority may, however, limit or suspend preemptive rights in certain limited circumstances.
Borrowing Power
     Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds. No shareholders’ resolution is required.
Conflicts of Interests
     Swiss law does not have a general provision on conflicts of interests. However, the Swiss Code of Obligations requires directors and members of senior management to safeguard the interests of the corporation and, as such, imposes a duty of care and a duty of loyalty on directors and officers. This rule is generally understood as disqualifying directors and senior officers from participating in decisions that directly affect them. Directors and officers are personally liable to the corporation for any breach of these provisions. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person associated therewith, other than at arm’s length, must be repaid to us if the shareholder or director was acting in bad faith.
     In addition, our Organization Regulations prohibit any member of the BoD from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest.
Repurchase of Shares
     Swiss law limits a corporation’s ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have sufficient free reserves to pay the purchase price and if the aggregate nominal value of the shares does not exceed 10% of our nominal share capital. Furthermore, we must create a special reserve on our balance sheet in the amount of the purchase price of the acquired shares. Such shares held by us or our subsidiaries do not carry any rights to vote at shareholders’ meetings.
Notices
     Notices to shareholders are made by publication in the Swiss Official Gazette of Commerce. The BoD may designate further means of communication for publishing notices to shareholders.

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     Notices required under the listing rules of the SIX Swiss Exchange will be published in two Swiss newspapers in German and French. We or the SIX Swiss Exchange may also disseminate the relevant information on the online exchange information systems.
Registration and Business Purpose
     We are registered as a corporation in the commercial registers of Canton Zurich and Canton Basle-City under the registration number CH-270.3.004.646-4 and have registered offices in Zurich and Basel, Switzerland.
     Our business purpose, as set forth in our Articles, is the operation of a bank, with a scope of operations extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad.
Duration, Liquidation and Merger
     Our duration is unlimited.
     Under Swiss law, we may be dissolved at any time by a shareholders’ resolution which must be passed by (1) an absolute majority of the shares represented at the meeting in the event we are to be dissolved by way of liquidation, or (2) a supermajority of at least two thirds of the votes represented and an absolute majority of the par value of the shares represented at the meeting in other events (for example, in a merger where we are not the surviving entity). Dissolution by court order is possible if we become bankrupt.
     Under Swiss law, any surplus arising out of a liquidation (after the settlement of all claims of all creditors) is distributed to shareholders in proportion to the paid-up nominal value of shares held.
Disclosure of Principal Shareholders
     Under the applicable provisions of the new Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who reach, exceed or fall below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation must notify the corporation and the SIX Swiss Exchange on which such shares are listed of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the corporation has the obligation to inform the public. The corporation must disclose in an attachment to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.
Mandatory Tender Offer
     Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3% of the voting rights of a listed Swiss company will have to submit a takeover bid to all remaining shareholders. A waiver from the mandatory bid rule may be granted by our supervisory authority. If no waiver is granted, the mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and implementing ordinances.
Other
     Ernst & Young Ltd, Aeschengraben 9, CH-4051 Basel, Switzerland, have been appointed as statutory auditors and as auditors of the consolidated accounts of UBS. The auditors are subject to confirmation by the shareholders at the ordinary general meeting on an annual basis.

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     Please see Capital structure on pages 197 and 198, Shareholders’ participation rights on pages 211 and 212 and Election and terms of office on page 202 of the Corporate governance and compensation report.
C—Material Contracts.
     None.
D—Exchange Controls.
     There are no restrictions under UBS’s Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS’s securities freely. There are currently no Swiss foreign exchange controls or other Swiss laws restricting the import or export of capital by UBS or its subsidiaries. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities.
E—Taxation.
     This section outlines the material Swiss tax and U.S. federal income tax consequences of the ownership of UBS ordinary shares by a U.S. holder (as defined below) who holds UBS ordinary shares as capital assets. It is designed to explain the major interactions between Swiss and U.S. taxation for U.S. persons who hold UBS shares.
     The discussion does not address the tax consequences to persons who hold UBS ordinary shares in particular circumstances, such as tax-exempt entities, banks, financial institutions, life insurance companies, broker-dealers, traders in securities that elect to mark to market, holders liable for alternative minimum tax, holders that actually or constructively own 10% or more of the voting stock of UBS, holders that hold UBS ordinary shares as part of a straddle or a hedging or conversion transaction or holders whose functional currency for U.S. tax purposes is not the U.S. dollar. This discussion also does not apply to holders who acquired their UBS ordinary shares through a tax-qualified retirement plan, nor generally to unvested UBS ordinary shares held under deferred compensation arrangements.
     The discussion is based on the tax laws of Switzerland and the United States, including the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, as in effect on the date of this document, as well as the convention between the United States and Switzerland, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.
     For purposes of this discussion, a “U.S. holder” is any beneficial owner of UBS ordinary shares that is for U.S. federal income tax purposes:
    a citizen or resident of the United States,
    a domestic corporation or other entity taxable as a corporation,
    an estate, the income of which is subject to U.S. federal income tax without regard to its source, or

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    a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
     The discussion does not generally address any aspects of Swiss taxation other than income and capital taxation or of U.S. taxation other than federal income taxation. Holders of UBS shares are urged to consult their tax advisors regarding the U.S. federal, state and local and the Swiss and other tax consequences of owning and disposing of these shares in their particular circumstances.
(a) Ownership of UBS Ordinary Shares-Swiss Taxation
Dividends and Distributions
     Dividends paid by UBS to a holder of UBS ordinary shares (including dividends on liquidation proceeds and stock dividends) are subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution, and be paid to the Swiss Federal Tax Administration.
     A U.S. holder that qualifies for Treaty benefits may apply for a refund of the withholding tax withheld in excess of the 15% Treaty rate (or for a full refund in case of qualifying retirement arrangements). The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, CH-3003 Berne, Switzerland no later than December 31 of the third year following the end of the calendar year in which the income subject to withholding was due. The form used for obtaining a refund is Swiss Tax Form 82 (82 C for companies; 82 E for other entities; 82 I for individuals; 82 R for regulated investment companies), which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.
     Mellon Investor Services, the registrar for UBS AG shares in the United States, is offering tax reclamation services for the cash dividends.
     Repayment of capital in the form of a par value reduction is not subject to Swiss withholding tax.
Transfers of UBS Ordinary Shares
     The purchase or sale of UBS ordinary shares, whether by Swiss resident or non-resident holders (including U.S. holders), may be subject to a Swiss securities transfer stamp duty of up to 0.15% calculated on the purchase price or sale proceeds if it occurs through or with a bank or other securities dealer in Switzerland as defined in the Swiss Federal Stamp Tax Act. In addition to the stamp duty, the sale of UBS ordinary shares by or through a member of a recognized stock exchange may be subject to a stock exchange levy.
     Capital gains realized by a U.S. holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such U.S. holder holds such shares as business assets of a Swiss business operation qualifying as a permanent establishment for the purposes of the Treaty. In the latter case, gains are taxed at ordinary Swiss individual or corporate income tax rates, as the case may be, and losses are deductible for purposes of Swiss income taxes.

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(b) Ownership of UBS Ordinary Shares-U.S. Federal Income Taxation
Dividends and Distribution
     Subject to the passive foreign investment company rules discussed below, U.S. holders will include in gross income the gross amount of any dividend paid, before reduction for Swiss withholding taxes, by UBS out of its current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, as ordinary income when the dividend is actually or constructively received by the U.S. holder. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a return of capital to the extent of the U.S. holder’s basis in its UBS ordinary shares and thereafter as capital gain.
     Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 15%, provided that the holder has a holding period in the shares of more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid by UBS with respect to the shares will generally be qualified dividend income.
     For U.S. federal income tax purposes, a dividend will include a distribution characterized as a repayment of capital in the form of a par value reduction, if the distribution is made out of current or accumulated earnings and profits, as described above.
     Dividends will be income from sources outside the United States for foreign tax credit limitation purposes. Dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income,” and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for foreign tax credit limitation purposes. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
     The amount of the dividend distribution included in income of a U.S. holder will be the U.S. dollar value of the Swiss franc payments made, determined at the spot Swiss franc/U.S. dollar rate on the date such dividend distribution is included in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend distribution is included in income to the date such dividend distribution is converted into U.S. dollars will be treated as ordinary income or loss. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
     Subject to U.S. foreign tax credit limitations, the nonrefundable Swiss tax withheld and paid over to Switzerland will be creditable against the U.S. holder’s U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S. holder under the laws of Switzerland or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s U.S. federal income tax liability, whether or not the refund is actually obtained.
     Stock dividends to U.S. holders that are made as part of a pro rata distribution to all shareholders of UBS generally will not be subject to U.S. federal income tax. Whether a stock dividend is considered to be such a nontaxable pro rata distribution for U.S. federal income tax can be a complex inquiry. U.S. holders that received a stock dividend that is subject to Swiss tax but not U.S. tax may not have enough foreign income from other sources to receive the benefit of the foreign tax credit associated with that tax.

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Transfers of UBS Ordinary Shares
     Subject to the passive foreign investment company rules discussed below, a U.S. holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount realized and the tax basis, determined in U.S. dollars, in the UBS ordinary shares. Capital gain of a non-corporate U.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% if the UBS ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
     UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for U.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a U.S. holder if, for any taxable year in which the U.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, then unless a U.S. holder were to make a mark-to-market election, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, a U.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends received from UBS would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS were to be treated as a passive foreign investment company either in the taxable year of the distribution or the preceding taxable year, but would instead be taxable at rates applicable to ordinary income.
F—Dividends and Paying Agents.
     Not required because this Form 20-F is filed as an annual report.
G—Statement by Experts.
     Not required because this Form 20-F is filed as an annual report.
H—Documents on Display.
     UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the United States) or at +1 202 942 8088 (outside the United States) for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs.com/investors.
I—Subsidiary Information.
     Not applicable.

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Item 11.   Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.
     Please see Market risk on pages 128 to 133 of the Risk and treasury management
report.
(b) Qualitative Information About Market Risk.
     Please see Market risk on pages 128 to 133 of the Risk and treasury management report.
(c) Interim Periods.
     Not applicable.
Item 12.   Description of Securities Other than Equity Securities.
     Not required because this Form 20-F is filed as an annual report.

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PART II
Item 13.   Defaults, Dividend Arrearages and Delinquencies.
     There has been no material default in respect of any indebtedness of UBS or any of its significant subsidiaries or any arrearages of dividends or any other material delinquency not cured within 30 days relating to any preferred stock of UBS AG or any of its significant subsidiaries.
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds.
     Not applicable.
Item 15.   Controls and Procedures.
(a) Disclosure Controls and Procedures.
     Please see US regulatory disclosure requirements on pages 216 and 217 of the Corporate governance and compensation report. See also Exhibit 12 to this Form 20-F.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
     Please see Management’s Report on Internal Control over Financial Reporting on page 251 of the Financial information report.
(c) Attestation Report of the Registered Public Accounting Firm.
     Please see Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting on pages 252 to 253 of the Financial information report.
(d) Changes in Internal Control over Financial Reporting.
     None.
Item 15.T.   Controls and Procedures.
     Not applicable.
Item 16.A.   Audit Committee Financial Expert.
     Please see Audit committee on page 203 and Compliance with New York Stock Exchange listing standards on corporate governance on pages 221 to 222 of the Corporate governance and compensation report.
Item 16.B.   Code of Ethics.
     Please see “Code of Business Conduct and Ethics” under Independence of Directors on page 221 of the Corporate governance and compensation report. The code of business conduct and ethics is published on our website under http://www.ubs.com/1/e/about/cg/business_conduct.html.
Item 16.C.   Principal Accountant Fees and Services.
     Please see Auditors on pages 214 to 215 of the Corporate governance and compensation report. Fees for non-audit services approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X were CHF 45,000 and are included under Total Non-Audit Fees (of which CHF 29,000 audit-related fees and CHF 16,000 other non audit fees) in the table on page 214.

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Item 16.D.   Exemptions from the Listing Standards for Audit Committee.
     Not applicable.
Item 16.E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     Please see Share buyback programs on page 169 of the Risk and treasury management report.
Item 16.F.   Change in Registrant’s Certifying Accountant.
     Not applicable.
Item 16.G.   Corporate Governance.
     Please see Compliance with New York Stock Exchange listing standards on corporate governance on pages 221 to 222 of the Corporate governance and compensation report.
PART III
Item 17.   Financial Statements.
     Not applicable.
Item 18.   Financial Statements.
     Please see the Financial Statements and the Notes to the Financial Statements on pages 251 to 370 of the Financial information report.
Item 19.   Exhibits.
     
Exhibit    
Number   Description
1.1.
  Articles of Association of UBS AG.
 
   
1.2.
  Organization Regulations of UBS AG.
 
   
2(b).
  Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
 
   
7.
  Statement regarding ratio of earnings to fixed charges.
 
   
8.
  Significant Subsidiaries of UBS AG.

Please see Note 34 to the Financial Statements Significant Subsidiaries and Associates on pages 347 to 350 of the Financial information report.

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Exhibit    
Number   Description
12.
  The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).
 
   
13.
  The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
 
   
15.
  Consent of Ernst & Young Ltd.

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SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
         
  UBS AG  
     
  /s/ Oswald Grübel  
  Name:   Oswald Grübel   
  Title:   Group Chief Executive Officer
         
     
Date: March 11, 2009  /s/ John Cryan  
  Name:   John Cryan   
  Title:   Group Chief Financial Officer   
 

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INDEX TO EXHIBITS
     
Exhibit    
Number   Description
1.1.
  Articles of Association of UBS AG.*
 
   
1.2.
  Organization Regulations of UBS AG.*
 
   
2(b).
  Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
 
   
7.
  Statement regarding ratio of earnings to fixed charges.*
 
   
8.
  Significant Subsidiaries of UBS AG.

Please see Note 34 to the Financial Statements Significant Subsidiaries and Associates on pages 347 to 350 of the Financial information report.
 
   
12.
  The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).*
 
   
13.
  The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).*
 
   
15.
  Consent of Ernst & Young Ltd.*

*   Filed as exhibit herewith

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annual report
2008

 

 

 

 

 

 

 

 

 

 

1 | Strategy, performance and responsibility
2 | UBS business divisions and Corporate Center
3 | Risk and treasury management
4 | Corporate governance and compensation
5 | Financial information

(UBS LOGO)

 


Table of Contents

 


Table of Contents

Contents



     
1.
  Strategy, performance
and responsibility
 
   
12
  Strategy and structure
18
  The making of UBS
20
  Current market climate and industry drivers
23
  Risk factors
28
  Financial performance
29
  Measurement and analysis of performance
32
  UBS reporting structure
33
  Accounting changes
35
  Key performance indicators
38
  UBS results
44
  Balance sheet
47
  Off-balance sheet
52
  Cash flows
54
  UBS employees
60
  Corporate responsibility
 
   
2.
  UBS business divisions and
Corporate Center
 
   
74
  Global Wealth Management & Business Banking
77
  Wealth Management International & Switzerland
83
  Wealth Management US
89
  Business Banking Switzerland
94
  Global Asset Management
102
  Investment Bank
110
  Corporate Center
 
   
3.
  Risk and treasury
management
 
   
120
  Risk management and control
125
  Risk concentrations
128
  Market risk
134
  Credit risk
149
  Operational risk
150
  Treasury management
151
  Liquidity and funding management
159
  Interest rate and currency management
162
  Capital management
168
  Shares and capital instruments
176
  UBS shares in 2008
180
  Basel II Pillar 3
     
4.
  Corporate governance and
compensation
 
   
194
  Corporate governance
195
  Group structure and shareholders
197
  Capital structure
199
  Board of Directors
206
  Group Executive Board
210
  Senior leadership
211
  Shareholders’ participation rights
213
  Change of control and defense measures
214
  Auditors
216
  Information policy
218
  Regulation and supervision
221
  Compliance with New York Stock Exchange listing standards on corporate governance
223
  Compensation, shareholdings and loans
224
  Compensation governance
225
  2008 compensation for the Board of Directors and Group Executive Board
230
  Shares, options and loans for the Board of Directors and Group Executive Board (at end of 2008)
237
  Compensation principles 2009 and beyond for UBS senior executives
 
   
5.
  Financial
information
 
   
244
  Introduction
245
  Accounting principles
246
  Critical accounting policies
251
  Consolidated financial statements
263
  Notes to the consolidated financial statements
371
  UBS AG (Parent Bank)
371
  Parent Bank review
372
  Parent Bank financial statements
374
  Notes to the Parent Bank financial statements
393
  Additional disclosure required under SEC regulations
393
  A – Introduction
394
  B – Selected financial data
398
  C – Information on the company
399
  D – Information required by industry guide 3


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Annual Report 2008

Letter to shareholders

Dear Shareholders,

UBS recorded a net loss attributable to shareholders of CHF 20.9 billion in 2008. This extremely poor result stemmed primarily from the results of the fixed income trading business of the Investment Bank, mainly due to losses and writedowns on exposures related to US real estate and other credit positions. The loss has affected all stakeholders in UBS: in 2008, in US dollar terms, shareholders suffered a 58% fall in market capitalization, compared with the average 47% decline of the other members of the Dow Jones Banks Titans 30 Index; the total number of employees was reduced by 7%; and employee compensation was cut 36%. Clients have, understandably, expressed to us their disappointment about our losses, while at the same time stressing their appreciation for the advice and service levels they receive from their advisors.

For financial markets as a whole, 2008 was an extraordinary year in economic and financial history: world stock markets fell 42% (the MSCI world index), interest rates reached the lowest levels ever in the US and the UK, and a major investment bank failed. Responses to the crisis included the injection of new capital into many of the world’s major financial institutions by governments. With hindsight, it is clear that UBS was not prepared for this. Our balance sheet was too large and the systems of risk control and risk management that should have limited our exposure failed. We placed too much emphasis on growth and not enough on controlling risks and costs, particularly in regards to our compensation systems, performance targets and indicators and executive governance structures. Imponderable levels of cross-subsidy and confusion about accountability resulted from complex relationships between our business divisions.

In 2008, we focused on addressing our structural and strategic weaknesses and on establishing the long-term financial stability of UBS. Activities centered on the key areas we identified as requiring change: corporate governance, risk management and control processes, the liquidity and funding framework and management compensation. As a result, 2008 saw the introduction of new organization regulations to clarify the responsibilities of the Board of Directors (BoD) and the Group Executive Board (GEB), the establishment of an Executive Committee (EC) to allocate and monitor the use of capital and risk in each of the business divisions, and the formation of a dedicated BoD risk committee. We also merged the credit and market risk functions of the Investment Bank into a single unit led by the newly es-

tablished Chief Risk Officer position and a new liquidity and funding framework was introduced that requires each business division to be charged market-based rates for funding from other UBS divisions. We will continue to make changes in 2009, including the implementation of a new compensation model for senior executives that aligns compensation with the creation of sustainable results for shareholders. In addition, management compensation within business divisions will be based largely on divisional results and the responsible and independent management of each division’s resources and balance sheet.

Changes in our business divisions will play a vital role in the transformation of our firm. As announced on 10 February 2009, UBS now operates with four business divisions and a Corporate Center. The former Global Wealth Management & Business Banking division has been split into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. We will continue to reposition the Investment Bank as a client-orientated and fee- and commission-earning business – in other words, the Investment Bank is moving away from the proprietary trading business that adversely affected our capital. A new unit has been established within the Investment Bank to manage the positions of those fixed income businesses we have decided to exit.

We took active steps to increase the financial stability of UBS in 2008. The issuance of two Mandatory Convertible Notes (MCNs) and a rights issue raised CHF 34.6 billion of new capital. During the year, our total balance sheet was reduced 11% to CHF 2,015 billion, risk-weighted assets fell 19% to CHF 302.3 billion and our identified risk concentrations fell sharply – with these reductions assisted by an agreement made in 2008 to sell a large portfolio of illiquid securities and other positions to a fund owned and controlled by the Swiss National Bank. Operating expenses fell 19% and the year-end tier 1 ratio was 11.0%, compared with 9.1% for year-end 2007 under the different standards that were then applicable under Basel I.

As announced on 18 February 2009, UBS settled a US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) by entering into a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the SEC. As part of these agreements, we will complete our previously announced exit of our US cross-border business and implement an enhanced program of internal controls to



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(KURER-GRUEBEL PHOTO)

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Annual Report 2008

ensure compliance with the Qualified Intermediary Agreement with the Internal Revenue Service. In addition, pursuant to an order issued by the Swiss Financial Market Supervisory Authority, information was transferred to the DOJ regarding accounts of certain US clients as set forth in the DPA, who, based on evidence available to UBS, committed tax fraud or the like within the meaning of the Swiss-US Double Taxation Treaty. The total cost for the settlement of USD 780 million has been fully charged to our 2008 results. This episode makes it particularly clear that our control framework must be extremely robust and that employee incentives must be aligned with risk management and control and the creation of long-term value for shareholders.

Outlook – The recent worsening of financial conditions and UBS-specific factors have adversely affected our results, particularly in the Investment Bank. Even after substantial risk reduction, our balance sheet remains exposed to illiquid and

volatile markets and our earnings will therefore remain at risk for some time to come. Net new money remains positive for our Wealth Management Americas division, but this is being partially offset by net outflows in Wealth Management & Swiss Bank. Global Asset Management has also experienced further net outflows.

More generally, financial market conditions remain fragile as company and household cash flows continue to deteriorate, notwithstanding the very substantial measures governments are taking to ease fiscal and monetary conditions. Our near-term outlook remains extremely cautious.
For 2009, we will continue to implement our program to strengthen our financial position by reducing our risk positions, our overall balance sheet size, and our operating costs. Management will also focus on securing and building the firm’s core client businesses and on returning the Group as soon as possible to a sustainable level of overall profit-ability.


 

11 March 2009

UBS

     
(-s- Peter Kurer)
  (-s- Oswald J. Gruebel)
Peter Kurer
  Oswald J. Gruebel
Chairman
  Group Chief Executive Officer


On 26 February 2009, Oswald J. Gruebel joined UBS in the capacity of Group Chief Executive Officer, replacing Marcel Rohner. Mr. Gruebel brings to UBS his deep understanding of banking and the markets and proven management skills. He also brings a strong determination to restore the bank’s sustained profitability and regain client trust. As announced on 4 March 2009, Peter Kurer, Chairman of the UBS Board of Directors, has decided not to stand for re-election at the annual general meeting on 15 April 2009. The UBS Board of Directors is nominating Kaspar Villiger for the role of Chairman.

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UBS reporting at a glance

Annual publications

Annual report (SAP no. 80531)

Published in both German and English, this single volume report provides a letter to shareholder and a description of:
  UBS’s strategy, performance and responsibility;
  the strategy and performance of the business divisions and the Corporate Center;
  risk, treasury and capital management at UBS;
  corporate governance and executive compensation; and
  financial information, including the financial statements.

Review (SAP no. 80530)

The booklet contains key information on UBS’s strategy and fi-nancials. It is published in English, German, French and Italian.

Compensation report (SAP no. 82307)

Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. It is published in English and German.

Quarterly publications

Letter to shareholders

The letter provides a quarterly update from UBS’s executive management on the firm’s strategy and performance. The letter is published in English, German, French and Italian.

Financial report (SAP no. 80834)

This report provides a detailed description of UBS’s strategy and performance for the respective quarter. It is published in English.

How to order reports

The annual and quarterly publications are available in PDF format on the internet at www.ubs.com/investors/topics in the reporting section. Printed copies can be ordered from the services section of the website. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



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Annual Report 2008

Other sources of information

Website

The “Analysts & Investors” website at www.ubs.com/investors provides the following information on UBS: financial information (including SEC documents); corporate information; UBS share price charts and data; the UBS event calendar and dividend information; and the latest presentations by management for investors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian.

Result presentations

UBS’s quarterly results presentations are webcast live. A
playback of the most recent presentation is downloadable
at www.ubs.com/presentations.

Messaging service / UBS news alert

On the www.ubs.com/newsalert website, it is possible to subscribe to receive news alerts about UBS via SMS or e-mail. Messages are sent in English, German, French or Italian and it is possible to state preferences for the theme of the alerts received.

Form 20-F and other submissions to the US Securities and Exchange Commission

UBS files periodic reports and submits other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.

UBS’s Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the annual report. However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. Readers are encouraged to refer to this additional disclosure.
Any document that UBS files with the SEC is available to read and copy on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs. com/investors, and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations team, whose contact details are listed on the next page of this report.


 
Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates

under Swiss Company Law and Swiss Federal Banking Law as an Aktieng-esellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of UBS’s two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 1111;

and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 2020. UBS AG shares are listed on the SIX Swiss Exchange (traded through its trading platform SWX Europe, formerly virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).



 

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Contacts

Switchboards

             
For all general queries.
  Zurich   +41-44-234 1111    
   
 
 
  London   +44-20-7568 0000    
   
 
 
  New York   +1-212-821 3000    
   
 
 
  Hong Kong   +852-2971 8888    
   
 

Investor Relations

             
UBS’s Investor Relations team supports
  Hotline   +41-44-234 4100   UBS AG
institutional, professional and retail  
 
investors from our offices in Zurich
  New York   +1-212-882 5734   Investor Relations
and New York.  
 
 
  Fax (Zurich)   +41-44-234 3415   P.O. Box
   
 
www.ubs.com/investors
          CH-8098 Zurich, Switzerland
   
 
 
          sh-investorrelations@ubs.com
   
 

Media Relations

             
UBS’s Media Relations team supports
  Zurich   +41-44-234 8500   mediarelations@ubs.com
global media and journalists from  
 
offices in Zurich, London, New York
  London   +44-20-7567 4714   ubs-media-relations@ubs.com
and Hong Kong.  
 
 
  New York   +1-212-882 5857   mediarelations-ny@ubs.com
   
 
www.ubs.com/media
  Hong Kong   +852-2971 8200   sh-mediarelations-ap@ubs.com
   
 

Shareholder Services

             
UBS Shareholder Services, a unit of the
  Hotline   +41-44-235 6202   UBS AG
Company Secretary, is responsible for  
 
the registration of the global registered
  Fax   +41-44-235 3154   Shareholder Services
shares.  
 
 
          P.O. Box
   
 
 
          CH-8098 Zurich, Switzerland
   
 
 
          sh-shareholder-services@ubs.com
   
 

US Transfer Agent

             
For all global registered share-related
  Calls from the US   +866-541 9689   BNY Mellon Shareowner Services
queries in the US.  
 
 
  Calls outside the US   +1-201-680 6578   480 Washington Boulevard
   
 
www.melloninvestor.com
  Fax   +1-201-680 4675   Jersey City, NJ 07310, USA
   
 
 
          sh-relations@melloninvestor.com
   
 

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Table of Contents

Strategy, performance and responsibility

Strategy, performance and responsibility

 

 

 

 

 

 

 

 

 

 

 

 

 


Table of Contents

   Strategy and performance

       
    UBS is a global firm providing financial services to private, corporate and institutional clients
       
    Its strategy is to concentrate on three global core businesses – wealth management, asset management and investment banking – and retail and corporate banking services in Switzerland

 

UBS’s strategic priorities

Client focus

UBS’s purpose is to serve clients and give them confidence in making financial decisions. Whether it serves individual, corporate or institutional clients, UBS puts their success and interests first and strives to truly understand their goals. As client needs and the financial services industry constantly evolve, UBS makes a systematic effort to capture client feedback, identify potential for improvement and adapt its offerings accordingly.

Profitable growth and earnings quality

UBS shareholders expect the firm to achieve profitable growth. Fulfilling this expectation requires UBS to establish sustainable earning streams based on client benefit. It therefore strives to build a strong and growing client base and to continuously develop its unique assets and capabilities.

Risk and capital management

Taking, managing and controlling risk is a core element of UBS’s business activities. UBS’s aim is not, therefore, to eliminate all risks, but to achieve an appropriate balance between risk and return. Risk reduction and capital measures taken in 2008 aimed at maintaining UBS’s capital strength as a source of competitive advantage. Adapting risk exposures to the current market environment and managing UBS’s balance sheet remain strategic priorities for the firm.

Measures taken in 2008

In August 2008, UBS launched a comprehensive program to help the firm adjust to the new realities in the financial industry. It aims to capitalize on the strengths inherent in its leading client franchises across its business divisions, to further grow these franchises, and to address certain weaknesses in its business model that had become apparent both before and as a result of the financial crisis.

A significant reduction in risk exposures has been achieved during the year. UBS reduced its risk positions very significantly during the year, including through a transaction with the Swiss National Bank. UBS also took several measures to strengthen its risk organization.

The Investment Bank is in the process of repositioning itself toward client-driven growth, combined with a further reduction of its balance sheet and risk positions.

UBS has implemented new corporate governance guidelines, actively reinforcing a clear separation of the roles and responsibilities of the Board of Directors and its committees, from those of the Group Executive Board.

Senior management compensation has been reviewed. In November 2008, UBS announced the new compensation model that is directly aligned with sustainable value creation within each manager’s area of responsibility, and incorporates a longer performance evaluation horizon.

 



 


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UBS financial highlights  
    For the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
 
                               
Performance indicators from continuing operations
                               
 
Diluted earnings per share (CHF)1
    (7.60 )     (2.61 )     4.64       (191 )
 
Return on equity attributable to UBS shareholders (%)2
    (57.9 )     (11.7 )     23.9       (395 )
 
Cost/income ratio (%)3
    680.4       111.0       70.5          
 
Net new money (CHF billion)4
    (226.0 )     140.6       151.7          
 
 
                               
Group results
                               
 
Operating income
    1,201       31,721       47,484       (96 )
 
Operating expenses
    28,555       35,463       33,365       (19 )
 
Operating profit before tax (from continuing and discontinued operations)
    (27,155 )     (3,597 )     15,007       (655 )
 
Net profit attributable to UBS shareholders
    (20,887 )     (5,247 )     11,527       (298 )
 
Personnel (full-time equivalents)5
    77,783       83,560       78,140       (7 )
 
Invested assets (CHF billion)
    2,174       3,189       2,989       (32 )
 
 
                               
UBS balance sheet and capital management
                               
 
Balance sheet key figures
                               
 
Total assets
    2,015,098       2,274,891       2,348,733       (11 )
 
Equity attributable to UBS shareholders
    32,800       36,875       51,037       (11 )
 
Market capitalization6
    43,519       108,654       154,222       (60 )
 
BIS capital ratios7
                               
 
Tier 1 (%)
    11.0       9.1 8     12.2 8        
 
Total BIS (%)
    15.1       12.2 8     15.0 8        
 
Risk-weighted assets
    302,273       374,421 8     344,015       (19 )
 
Long-term ratings
                               
 
Fitch, London
    A+     AA     AA+          
 
Moody’s, New York
  Aa2     Aaa     Aa2          
 
Standard & Poor’s, New York
    A+     AA     AA+          
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.    2 Net profit attributable to UBS shareholders from continuing operations/average equity attributable to UBS shareholders.    3 Operating expenses/operating income before credit loss expense or recovery.    4 Excludes interest and dividend income.    5 Excludes personnel from private equity (part of the Corporate Center).  6 Refer to the “UBS shares in 2008” section of this report for 2008 for further information.    7 Refer to the “Capital management” section of this report for further information.    8 The calculation prior to 2008 is based on the Basel I approach.

 

 

 

The 2008 results and the balance sheet in this report differ from those presented in UBS’s fourth quarter 2008 report issued on 10 February 2009 due to: (1) the settlement agreements with the US Department of Justice and Securities and Exchange Commission related to the US cross-border case, as described in the “Settlement regarding the US cross-border case” sidebar in the “Wealth Management International & Switzerland” section of this report; and (2) the determination by the Swiss National Bank (SNB) of the 30 September 2008 valuation of approximately USD 7.8 billion of securities not yet transferred by UBS to the SNB StabFund, as described in the “Transaction with the Swiss National Bank” sidebar in the “Strategy and structure” section of this report. The full effect of the settlement agreements, and all but approximately CHF 0.1 billion of the SNB pricing adjustment, are taken into account in UBS’s 2008 results and the balance sheet in this report. The total impact on net profit after tax was negative CHF 1,190 million.

 

 

 


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Strategy, performance and responsibility
Strategy and structure

Strategy and structure

UBS is a global firm providing financial services to private, corporate and institutional clients. Its strategy is to concentrate on three global core businesses – wealth management, asset management and investment banking – and to provide retail and corporate banking services in Switzerland. By delivering valuable advice, products and services to its clients, the firm aims to generate sustainable earnings and create value for its shareholders.

UBS strategy and business model

UBS has crafted its business strategy to benefit from one underlying global trend: the growth of wealth. Despite the current financial crisis, the firm believes that over the long term wealth creation will continue to be a prominent characteristic of the world economy. UBS’s three core businesses of wealth management, asset management and investment banking are geared to take advantage of this trend.

Organizationally, UBS has operated throughout 2008 as a Group with three business divisions: Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. Each business division is accountable for its own results, but co-operates to provide a broad palette of cross-business solutions for clients. UBS considers the breadth and depth of its offering to be one of its main strengths, and a key to its ability to create value for clients and shareholders.

Wealth Management & Swiss Bank
UBS’s wealth management business caters to high net worth and affluent individuals around the world (except those served by Wealth Management Americas) whether they are investing internationally or in their home country. UBS offers these clients a complete range of tailored advice and investment services. Its Swiss Bank business provides a complete set of banking services for Swiss individual and corporate clients.

Wealth Management Americas
Wealth Management Americas offers sophisticated products and services specifically designed to address the needs of high net worth and affluent individuals. It includes Wealth Management US, domestic Canada, domestic Brazil and the international business booked in the United States.

Global Asset Management
As a worldwide asset manager, UBS offers innovative investment management solutions in nearly every asset class to

private, corporate and institutional clients, as well as through financial intermediaries. Investment capabilities include traditional assets (for instance equities, fixed income and asset allocation), alternative and quantitative investments (multi-manager funds, funds of hedge funds and hedge funds) and real estate.

Investment Bank
In the investment banking and securities businesses, UBS provides securities products and research in equities, fixed income, rates, foreign exchange and metals. It also provides advisory services as well as access to the world’s capital markets for corporate, institutional, intermediary and alternative asset management clients.
  è   Refer to the “Reporting structure” and “UBS business divisions and Corporate Center” sections of this report for more information on UBS’s business divisions and the Corporate Center

UBS competitive profile

UBS’s current business mix is a result of many decades of development, internal growth initiatives and acquisitions. Since 1998, UBS has progressively divested non-core businesses and participations, and invested in growing its core businesses and creating a balanced reach worldwide.

UBS is now a leading global wealth manager: it is a market leader (by client assets) in both Europe and Asia Pacific, in sixth position in the US and one of the only firms of global scale focusing on wealth management as a core business. In 2008, UBS was among the top five firms globally in mergers and acquisitions based on deal volume. The asset management business is one of the leading active asset managers globally and one of the largest mutual fund managers in Europe based on assets under management.
In Switzerland, UBS is the leading firm for retail and commercial banking. It serves around 2.5 million individual clients and 133,500 corporations, institutional investors, public entities and foundations, collectively. The bank has chosen to limit its retail and commercial banking business to the Swiss market, concentrating on domestic opportunities and growing selected market segments.


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Strategy, performance and responsibility

UBS corporate governance

As mandated by Swiss banking law, UBS operates under a strict dual board structure comprising the Board of Directors (BoD) and the Group Executive Board (GEB).

The BoD is UBS’s most senior body and is ultimately responsible for the firm’s strategy and the supervision of its executive management. The BoD sets the mid- and long-term strategic direction of the Group, is responsible for appointments and dismissals at top management levels and for defining the firm’s risk principles and risk capacity. A clear majority of its members are non-executive and fully independent.
The management of the business is delegated by the BoD to the GEB. Under the auspices of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development and the implementation of the Group’s and the business divisions’ strategies and for the exploitation of synergies across the firm.
The Executive Committee (EC) consists of the Group Chief Executive Officer (CEO), the Group Chief Financial Officer (CFO), the Group Chief Risk Officer (CRO) and the Group General Counsel, and is responsible for the allocation of the Group’s financial resources to the business divisions. These resources include capital, funding, and risk capacity and parameters within the limits set by the BoD.
  è   Refer to the “Corporate governance” section of this report for more information

UBS’s strategic priorities

Client focus
UBS’s purpose is to serve clients and give them confidence in making financial decisions. Whether it serves individual, corporate or institutional clients, UBS puts their success and interests first and strives to truly understand their goals. As client needs and the financial services industry constantly evolve, UBS makes a systematic effort to capture client feedback, identify potential for improvement and adapt its offerings accordingly.

Profitable growth and earnings quality
UBS shareholders expect the firm to achieve profitable growth. Fulfilling this expectation requires UBS to establish sustainable earning streams based on client benefit. It therefore strives to

build a strong and growing client base and to continuously develop its unique assets and capabilities.

In order to fulfill these requirements, UBS needs to ensure that it efficiently manages its financial resources. By making continuous efficiency improvements – that is, by looking for ways to achieve the same or a better result or service with fewer resources – UBS strives both to manage costs in a disciplined manner and to optimize its spending across economic and business cycles.

Risk and capital management
Taking, managing and controlling risk is a core element of UBS’s business activities. UBS’s aim is not, therefore, to eliminate all risks, but to achieve an appropriate balance between risk and return. Risk reduction and capital measures taken in 2008 aimed at maintaining UBS’s capital strength as a source of competitive advantage. Adapting risk exposures to the current market environment and managing UBS’s balance sheet remain strategic priorities for the firm.
  è   Refer to the “Risk and treasury management” section of this report for more information on risk and capital management

Business divisions’ franchises
UBS continues to develop the platform and reach of the business divisions known since 10 February 2009 as Wealth Management & Swiss Bank and Wealth Management Americas. This includes the expansion of its global presence in international wealth management growth markets. UBS’s leading position in Switzerland, both as a wealth manager and as the largest retail bank, will remain a cornerstone of UBS’s strategy and a source of sustainable profit growth.

UBS also continues to develop the platform and reach of its Global Asset Management business division. This includes focusing on developing innovative products and managing toward sustainable investment performance.
The Investment Bank is in the process of repositioning itself toward client-driven growth, combined with a further reduction of its balance sheet and risk positions. This will allow the Investment Bank to build on its global coverage and distribution capability and to ensure maximum accountability for the creation of shareholder value. This repositioning includes the downsizing or exiting of certain businesses.
  è   Refer to the “UBS business divisions and Corporate Center” section of this report for more information on UBS’s business divisions and the Corporate Center


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Strategy, performance and responsibility
Strategy and structure

Measures taken

In August 2008, UBS launched a comprehensive program to re-engineer its businesses and to adjust to the new realities in the financial industry. It aims to capitalize on the strengths inherent in its leading client franchises across its business divisions, to further grow these franchises, and to address certain weaknesses in its business model that had become apparent both before and as a result of the financial crisis.

Executive governance
Controls have been improved and accountability and transparency increased at the level of top management. One result has been the creation of an Executive Committee to allocate and continuously monitor the use of capital and risk in each of the business divisions. Other wide-ranging changes to the Group’s governance have been proposed and implemented. Refer to the “Corporate governance” section of this report for more information on corporate governance.

Liquidity and funding framework
The business divisions have been incentivized to manage their balance sheets with greater autonomy and responsibility. A new liquidity and funding concept has been approved and is being implemented. Refer to the “Liquidity and funding management” section of this report for more information on liquidity and funding.

Senior management compensation
Senior management compensation is now aligned to sustainable value creation within each manager’s area of responsibility and a longer performance evaluation horizon has been introduced. UBS announced a new compensation model for senior executives in November 2008 (effective 1 January 2009). Refer to the “Compensation, shareholdings and loans” section of this report for more information on senior management compensation.

Transformation of UBS’s wealth management business
As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank and Wealth Management Americas.



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Strategy, performance and responsibility

 

Key performance indicators: 2009 and beyond

UBS uses key performance indicators (KPIs) to monitor the firm’s performance and the delivery of returns to shareholders. Until the end of 2008, UBS focused on four KPIs at the Group level, as described in the discussion of performance measures in the “Measurement and analysis of performance” section of this report. In response to the changing market environment, UBS conducted a detailed review of its KPI framework in 2008. The objective of this review was to adjust these indicators – which are used by the firm to evaluate its economic performance as a whole and the contribution of individual employ-

ees to that performance – to more closely reflect the firm’s strategic priorities.

This review focused on the identification of the key drivers of total shareholder return (TSR) – defined as the change in the share price and any dividend yield – which represents the ultimate measure of performance for UBS shareholders. However, several factors driving TSR cannot be directly influenced by UBS management, such as valuation multiples and short-term market trends. Therefore, on a day-to-day basis, UBS management measures performance in the form of profitability after the cost of
equity or economic profit. Consequently, the KPI framework has been designed to explicitly incorporate the drivers of economic profit at the Group and business division level. UBS manages its businesses based on its KPI framework, which is used for internal performance measurement to ensure management accountability and consistency. Both Group and business division KPIs are used to determine variable compensation of executives and staff.
The Group and business division KPIs shown in the table below will be disclosed beginning in first quarter 2009 and going forward.


                 
Key performance indicators
    Wealth Management &   Wealth Management        
Group   Swiss Bank   Americas   Investment Bank   Global Asset Management
 
Net profit growth
  Pre-tax profit growth   Pre-tax profit growth   Pre-tax profit growth   Pre-tax profit growth
 
               
Cost / income ratio
  Cost / income ratio   Cost / income ratio   Cost / income ratio   Cost / income ratio
 
               
 
  Gross margin (RoIA)1   Gross margin (RoIA)       Gross margin (RoIA)
 
               
Return on equity (RoE)
          Return on attributed equity    
 
               
Return on assets, gross
          Return on assets, gross    
 
               
Return on risk-weighted assets, gross
               
 
               
FINMA leverage ratio2
               
 
               
 
  Impaired lending portfolio3       Value at Risk4    
 
               
Tier 1 ratio
               
 
               
Net new money rate
  Net new money rate   Net new money rate       Net new money rate
 
               
Economic profit
               
 
1 For International clients segment only. RoIA: return on invested assets.   2 FINMA: Swiss Financial Market Supervisory Authority.  3  Impaired lending portfolio as a % of total lending portfolio. For Swiss clients segment only.  4 Regulatory VaR.

 

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Strategy and structure

Risk management in 2008

UBS entered 2008 with significant legacy risk positions which exceeded the firm’s risk bearing capacity. While UBS incurred substantial writedowns on its risk positions, it pursued an active risk reduction program through sales in 2008. Significant transactions included the sale in May of US residential mortgage-backed securities to a fund managed by BlackRock for proceeds of USD 15 billion and the agreement reached in October with the Swiss National Bank (SNB) (see details below).

UBS identified significant weaknesses in its risk management and control organization. In order to address these weaknesses, UBS launched an extensive remediation plan, which included the overhaul of its risk governance, significant changes to risk management and control personnel, as well as improvements in risk capture, risk representation and risk monitoring. Implementation of this plan is ongoing and remains a high priority for UBS.



 
Transaction with the Swiss National Bank

As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS reached an agreement to transfer illiquid securities and other positions from UBS’s balance sheet to a fund owned and controlled by the SNB. From the originally agreed USD 60 billion, the transaction size has been reduced to USD 38.6 billion (including the effect of price adjustments so far totaling USD 0.7 billion). With this transaction, UBS caps future potential losses from these assets, reduces its risk-weighted assets, materially de-risks its balance sheet and is no longer exposed to the funding risk of the assets to be transferred.

Transaction structure
The SNB will finance the fund with a loan in the amount of 90% of the purchase price to be paid by the fund, secured by the assets of the fund. 10% of the purchase price will be financed through an equity contribution by the SNB. The loan will be non-recourse to UBS and will be priced at LIBOR plus 250 basis points. The fund and loan facility will terminate in eight years, but the termination date may be extended to 10 or 12 years. The cash flow from the assets, including interest, rental income, principal repayments and proceeds from asset sales (net of expenses and working capital requirements),

will be applied to service the loan until full repayment.

At the closing of each asset transfer, UBS will purchase, for an amount equal to the SNB’s equity contribution on that date, an option to acquire the fund’s equity once the loan has been fully repaid. The option exercise price will be USD 1 billion plus 50% of the amount by which the equity value exceeds USD 1 billion at the time of exercise. This option will be carried on UBS’s balance sheet at its fair value. In the event of a change of control of UBS, the SNB will have the right but not the obligation to require UBS to purchase the outstanding loans at par plus accrued interest and to purchase the fund equity at 50% of its value at the time.
If, upon the fund’s termination, the SNB incurs a loss on the loan it has made to the fund, the SNB will be entitled to receive 100 million UBS ordinary shares against payment of the par value of those shares (currently CHF 0.10 per share).

Governance
In fourth quarter 2008, the fund was established under the name SNB StabFund as a Swiss limited partnership for collective investments. Its objective is to manage the acquired positions based on fundamental value considerations. The SNB StabFund is owned by a general partner and a limited partner,

both of which are wholly owned by the SNB. The general partner has a board of directors with five members, of which three are designated by the SNB and two by UBS.

UBS acts as the investment manager of the SNB StabFund, subject to the oversight of the board of directors of the general partner which must approve certain types of decisions. The board also retains the right to remove UBS as the investment manager of the SNB StabFund.

Portfolio composition and size
The overall portfolio valuation of positions already transferred or still expected to be transferred to the SNB StabFund is USD 38.6 billion, as shown in the table opposite, subject to any further pricing adjustments. The SNB StabFund acquired a first tranche of 2,042 securities positions from UBS on 16 December 2008 for USD 16.4 billion. The remaining positions identified for sale to the fund are planned to be transferred in March 2009 in one or more additional transfers.

The purchase price for the securities transferred to the fund on 16 December 2008 was the value of these securities as of 30 September 2008 as determined by the SNB based on a valuation conducted by third-party valuation experts. On the same basis, the SNB has since determined the purchase price to


 

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be paid for a further USD 7.8 billion in securities and other positions that have not yet been transferred to the fund. So far, the determined purchase prices for securities and other positions transferred to or to be transferred to the fund were, in the aggregate, USD 0.7 billion lower than the value UBS assigned to these positions on 30 September 2008. All but approximately CHF 0.1 billion of this difference is accounted for in UBS’s results for 2008. Purchase prices have not yet been determined for the other positions not yet transferred to the fund, valued at USD 14.4 billion by UBS on 30 September 2008. Any difference between the purchase prices to be determined by the SNB and the value UBS assigned to these positions will affect UBS’s results in first quarter 2009.

Implications for UBS’s 2008
income statement

The overall impact on UBS’s 2008 income statement of the SNB transaction and the placement of the mandatory convertible notes (MCNs) with the Swiss Confederation was a net charge of CHF 4.5 billion. This reflects a net loss arising from the acquisition of the equity purchase option, the loss referred to above arising from valuation differences determined to date on
securities sold or to be sold to the SNB StabFund, losses on hedges that were subject to trading restrictions as a result of the SNB transaction, and the impact of the contingent issuance of UBS shares in connection with the transaction. The fair valuation impact of the issuance of the MCNs, as described in “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report, is also included in this total.


Issuance of MCNs to the
Swiss Confederation

In connection with the transaction with the SNB, UBS raised CHF 6 billion of new capital in the form of mandatory convertible notes (MCNs) convertible into UBS registered shares. These were placed with the Swiss Confederation and issued on 9 December 2008. Refer to the “Capital management” section of this report and “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.

                         
Positions affected by the transfer to the Swiss National Bank StabFund
      Valuation as of 30 September 2008  
USD million   Priced     Not yet priced     Total  
 
US sub-prime
    4.0       1.6       5.6  
 
US Alt-A
    1.5       0.8       2.4  
 
US prime
    1.2       0.7       1.9  
 
US reference-linked note program
    5.8       0.0       5.8  
 
Commercial real estate
    3.4       2.3       5.7  
 
Student loan-backed securities
    0.5       0.0       0.5  
 
Other positions
    8.5       9.0       17.5  
 
Price difference
    (0.7 )       1     (0.7 )
 
Total
    24.2       14.4       38.6  
 
1 To be determined.


 

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The making of UBS

The making of UBS

All the firms that have come to make up today’s UBS look back on a long and diverse history. Both the two Swiss predecessor banks and PaineWebber Group Inc. (PaineWebber) came into being in the second half of the 19th century, while S.G. Warburg’s roots go back to 1934. But it was in the 1990s when UBS’s current identity began to form.

In the early 1990s, the two Swiss banks that came to form the current UBS, Swiss Bank Corporation (SBC) and Union Bank of Switzerland, were commercial banks operating mainly out of Switzerland. The two banks shared a similar vision: to become a world leader in wealth management and a global bulge-bracket investment bank with a strong position in global asset management, while remaining an important commercial and retail bank in Switzerland.
Union Bank of Switzerland, the largest and best-capitalized Swiss bank of its time, opted to pursue a strategy of organic growth, or expansion by internal means. In contrast, SBC, then the third-largest Swiss bank, decided to take another route by starting a joint venture with O’Connor, a leading US derivatives firm that was fully acquired by SBC in 1992. O’Connor was noted for its young, dynamic and innovative culture, meritocracy and its team orientation. It brought state-of-the-art risk management and derivatives technology to SBC. In 1994, SBC acquired Brinson Partners, one of the leading US-based institutional asset management firms. Both the O’Connor and Brinson deals represented fundamental steps in the development of the firm.

The next major move was in 1995, when SBC acquired S.G. Warburg, the British merchant bank. The deal helped to fill SBC’s strategic gaps in corporate finance, brokerage and research and, most importantly, brought with it an institutional client franchise, which is still crucial to today’s equities business.

The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland brought together these two leading Swiss financial institutions, creating a leading global wealth manager and improving the new firm’s chances of becoming a global bulge bracket investment bank and a leading global institutional asset manager.
Still, in order to become a truly global player in investment banking and wealth management, UBS needed to establish a significant presence in the key US market. UBS advanced towards this objective when it acquired PaineWebber in 2000.
Since the acquisition of PaineWebber, UBS’s main priority has been to develop and grow organically. Smaller acquisitions have helped to accelerate and complement the firm’s growth. In 2006, for instance, UBS enhanced its presence in Brazil and Latin America by acquiring Brazil’s largest independent investment bank and asset manager, Banco Pactual. Today, UBS has significant scale in its areas of focus, with strong positions in large, mature markets as well as a growing presence in emerging markets.
  è   Refer to www.ubs.com/history for more information


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(ROAD MAP)

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Current market climate and industry drivers

Current market climate and industry drivers

The current crisis and its aftermath will have profound implications for the financial services industry and the world economy.

Market crisis and economic downturn

2008 was one of the most difficult years ever for the financial services industry. As the crisis deepened over the course of the year, the problems in the financial industry spread to other parts of the world economy. A precipitous drop in prices across most main asset classes, coupled with deleveraging, resulted in poorly functioning lending markets and a lack of inter-bank liquidity. Banks were forced to recapitalize, sometimes with the help of governments. Hopes that the crisis might be short-lived were dashed after the failure of one of the major US investment banks in mid-September, which resulted in very severe liquidity issues for many financial institutions. Banks experienced a scarcity of equity, credit supply further contracted and numerous countries fell into recession.

Recessions characterized by a simultaneous fall in prices across asset classes, an increase in consumer savings rates and contractions in lending caused by a shortage of bank capital are very rare, and have always been severe. There have in fact only been four recorded instances of such recessions in the past century: the “bankers’ panic” in 1907, the “great depression” in 1929–39, the Swedish economic crisis in 1992, and most recently the “lost decade” in Japan from 1990–2000.
Changes in consumer demand drive capital expenditures by companies and consequently affect capital goods indus-

tries, sometimes very rapidly. Even countries which have not experienced high leverage growth and significant asset price increases have been affected as investment spending and exports dropped. In particular, countries which relied on foreign capital inflows (either to the government or to the private sector) are at risk of seeing foreign investment and exports fall, which could in turn hurt the value of their currency.

There were radical changes to monetary and fiscal policy during 2008. Government borrowing and spending (through “stimulus packages”, transfer payments, loans, guarantees and purchases of bank capital) increased dramatically and led to higher deficits. Central bank balance sheets expanded, both as a result of traditional central bank activity and through unconventional measures such as the purchase of distressed assets from financial institutions (for example, mortgage backed securities). Interest rates have fallen to historically low levels in most countries as central banks attempt to support private and corporate spending.

Macro economic perspectives

The macro economic outlook for 2009 is not positive. A modest recovery can be expected only if the measures taken by governments and central banks prove to be both effective and efficient. Few observers expect the financial services industry to rebound quickly from this crisis.



Market capitalization of the components of the Dow Jones Banks Titans 30 Index, 2008 versus 20071

(BAR CHART)

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Stock market indices development
 

(GRAPH)

Industry drivers

A number of drivers are expected to have a significant impact on banks’ earnings and the structure of the financial services industry in the short to medium term. The most relevant factors are described below.

De-leveraging
The current downturn is different from previous ones not only in terms of its severity and wide geographical reach, but also in terms of the de-leveraging process that lies at its heart. De-leveraging is the process through which households, companies and the banks that intermediate between them simultaneously attempt to sell real and financial assets to pay back their debts. This unleashes two strong deflationary forces.

First, there is a reduction and restructuring of banks’ balance sheets, which may affect their capacity to lend money. Such a restructuring is already well under way, having started in 2007 when banks began recording losses on their asset portfolios, disposing of assets and raising capital. This trend gathered pace in the course of 2008 and has continued in the early part of 2009 as several banks disclosed more losses and raised further capital.
Second, household and corporate balance sheets are also in effect being restructured and reduced, depressing consumer and capital spending and appetite for risk. This process has just started and may last several years, as households address the need to permanently increase their savings. It may be particularly long and painful in countries with historically low savings rates, such as the US.
While debt levels are lower among non-financial corporations than in previous recessions, these companies will also have to restructure their balance sheets as they face falling demand for their products and services, and funding becomes increasingly scarce and more expensive.
The process of de-leveraging is expected to have, on balance, a negative impact on banks’ earnings. While increased

savings can provide opportunities for certain banks, risk aversion and the downward pressure it exerts on asset prices tend to reinforce each other.

Government intervention and re-regulation
The financial crisis has sparked heavy public intervention in the global financial system. State intervention packages have included a mix of capital injections by governments, public guarantees for selected bank liabilities such as deposits and commercial paper, and maximum loss guarantees for illiquid assets held in banks’ balance sheets. Governments have increasingly attached conditions to the measures they have taken, providing them the opportunity to at least temporarily influence the business activities of certain banks.

At the same time, the financial industry and its regulators are analyzing the lessons learned and implementing measures to adjust their business practices and the regulatory framework. This will fundamentally impact and likely transform the industry. While many details of the regulatory response to the financial crisis are still to be worked out, new regulation will likely focus on ways of mitigating the negative effects of the business cycle through regulatory policy, as well as on measures to increase the transparency of financial markets and to strengthen their resilience. Regulators are also likely to try to better identify and address systemic risks, for example by adapting regulatory requirements to the size and profile of certain financial institutions.
Specific measures are likely to include adjustments to the following six broad areas of direct relevance to international banks: higher capital requirements and the introduction of leverage limitations; more robust liquidity buffers and risk management; management and partial reintegration of off-balance sheet exposure onto firms’ balance sheets; review of valuation and accounting practices; increased cooperation between stronger and better-equipped supervisors and central banks, especially from an international perspective; and alignment of compensation programs and pay levels with long-term, firm-wide profitability. Some national regulators have moved quickly, including the Swiss Financial Market Supervisory Authority (FINMA; until 31 December 2008 Swiss Federal Banking Commission), which has already defined new transitional capital requirements for UBS and Credit Suisse.
Overall, the regulatory changes prompted by the current market turmoil will have lasting effects on the industry in terms of bank size, business portfolios, controls, capital requirements, profitability and compensation. These will result in significant changes to the competitive landscape. At the product level, regulatory restrictions and greater supervision in areas such as structured products, credit default swaps, and securitization are likely to result in lower margins for banks. Enhanced transparency requirements and disclosure standards for investment products are also likely.


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Current market climate and industry drivers

Client behavior and demand
The relationship between financial firms and their clients has seen accelerating change over the past couple of years, for example with the rise of increasingly sophisticated clients (such as leveraged finance investors and hedge funds). However, the corporate and institutional client segment as a whole is expected to continue requiring innovative solutions which cater to specific and unique needs, and span product groups and geographies.

2008 has marked a turning point with regard to the investment behavior of many private clients, and fundamental changes in this behavior are expected in the future. Returns have been negative in most asset classes and many investors have grown suspicious of hedge funds and complex products in general, especially as these proved to be more correlated with equity and credit markets than originally thought.
Internal UBS research shows that private clients’ risk appetite is changing, moving towards more “traditional” asset classes such as equities, bonds, cash or precious metals. This trend is expected to have, on balance, a negative impact on banks’ income as it results in lower gross margins.

Wealth preservation
The financial crisis has already resulted in a substantial destruction of wealth as the price of many real and financial assets has fallen from the peaks of 2007. Many investors see a risk of further wealth destruction in the current economic climate. During this phase business opportunities for the financial services industry will mostly be in the realm of value preservation rather than return maximization.

Investors have reacted to the current crisis by selling assets, paying back debt and accumulating cash or deemed equivalent. History shows that investors generally need several years to return to more risky asset allocations following periods of financial distress. Therefore, capital preservation is likely to remain a priority for investors and most will seek to do this by holding cash before considering a diversification across a wider range of asset classes and products. On the other hand, an increase in savings by individuals, particularly in countries where household saving rates have been historically low, such as the US, represents an opportunity for banks.

Retirement provisions
The economic crisis does not fundamentally alter the private retirement industry’s growth drivers, namely the demographic shift related to falling birth rates and aging and the falling coverage provided by public pension schemes. Despite the drop in the value of their assets in 2008, private fully funded schemes will continue providing individuals with the best investment tools to accumulate wealth for

retirement, and savings will continue to flow into them. The ability of public pension schemes to fund themselves over the long term may be limited as several countries are already heavily indebted and running large deficits, including some driven by measures taken to help their economy in the current downturn, while demographics indicate that the ratio of workers to retirees will decrease in the foreseeable future. In some countries, particularly those which have experienced the largest destruction of accumulated wealth due to the crisis (for example, the US and UK, where pension funds are comparatively more exposed to equity markets than in other countries), a pick-up in individual savings rates would provide additional funds, which will partly be invested in private retirement schemes. This, combined with continued demand for specialist advice in wealth management, continues to represent an opportunity for wealth and asset managers.

Corporate restructuring
The corporate sector is generally better equipped to deal with the negative impact of a slowing economy than in previous downturns, mostly due to a relatively lower level of debt. However, a sharp reduction in demand for goods and services across developed and emerging markets and a continued lack of liquidity in credit markets will inevitably impact the corporate sector. Over the medium term, default rates are expected to rise from the historically low levels prevailing before the crisis, and further major bankruptcies are likely. The internationalization of business – particularly expansion in emerging markets – is likely to slow down as the attractiveness of new markets remains subdued and cash flows previously available for expansion are used to restructure balance sheets. In such a corporate environment, most of the opportunities for the banking sector are likely to arise from simple financing requirements, balance-sheet restructuring and asset disposals.

Emerging markets
Strong growth in emerging markets has been a key feature of the boom years in the global economy prior to the crisis, and banks have benefited greatly from strong growth in these markets. Growth in emerging markets is expected to slow markedly in 2009, reflecting the increased interconnections between economies in the era of globalization. Export surplus countries, including those relying on commodities exports, are most vulnerable to a further deterioration in the global economic environment, but also best placed to benefit from a potential recovery. Over the long term, however, banks which have built up a significant presence in emerging markets and serve a wide range of institutional and private clients are likely to continue benefiting from above-average economic growth in these countries.



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Strategy, performance and responsibility
Risk factors

Risk factors

Certain risks, including those described below, can impact UBS’s ability to carry out its business strategies and directly affect its business activities, financial condition, results of operations and prospects. Because the business of a broad-based international financial services firm such as UBS is inherently exposed to risks that only become apparent with the benefit of hindsight, risks of which UBS is not presently aware could also materially affect its business activities, financial condition, results of operations and prospects. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.

Risks related to the current market crisis

UBS, like many other financial market participants, was severely affected by the financial crisis that unfolded in 2007 and worsened in 2008. The deterioration of financial markets in 2008 was extremely severe by historical standards, and UBS recorded substantial losses on legacy risk positions. UBS has taken a series of measures to reduce its risk exposures, including the sale of up to USD 38.6 billion of illiquid and other positions to a fund owned and controlled by the Swiss National Bank (SNB) as announced in the fourth quarter. However, UBS continues to hold positions identified as risk concentrations (refer to the “Risk concentrations” section of this report for more information on these positions, as well as positions in other asset classes that might be negatively affected by the current market crisis). In addition, UBS is exposed to the general systemic and counterparty risks that are exacerbated by the ongoing market crisis and related instability of financial institutions and of the financial system as a whole.

UBS holds positions which may be adversely affected by the ongoing financial crisis and economic climate
As discussed in the paragraphs below on general risk factors, the development of market conditions and the overall economic environment, as well as factors affecting particular assets, may lead to reductions in the market or carrying value of UBS’s assets. Although UBS’s exposure to the US mortgage market (including residential sub-prime, Alt-A and prime) was reduced dramatically in 2008, UBS remains exposed to that market, albeit on a reduced scale. In addition, certain of its monoline-insured positions are exposed to the US residential mortgage market as described below. The markets for most US mortgage-related securities have so far remained illiquid and it is impossible to determine

whether and how long current market conditions will persist, or whether they will further deteriorate.

UBS relies on credit protection from third parties, including monoline insurers, that may not be effective
UBS’s business entails exposure to counterparty credit risk, including to monoline insurers and other providers of credit protection. UBS’s credit exposure to the monoline sector arises from over-the-counter (OTC) derivative contracts – mainly credit default swaps (CDSs) which are carried at fair value – in respect of mortgage related and “monoline-wrapped” securities. The fair value of these CDSs – and thus UBS’s exposure to the counterparties – depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Monoline insurers have been very adversely affected by their exposure to US residential mortgage-linked products, resulting in credit rating downgrades and the need to raise additional capital. UBS has recorded large credit valuation adjustments on its claims against monoline counterparties. If the financial condition of these counterparties or their perceived creditworthiness deteriorates further, UBS could record further credit valuation adjustments on the CDSs bought from monoline insurers.

UBS could also incur losses in connection with restructurings of monoline insurers, including possible losses on third party hedge protection which UBS may incur as a result of changes in the corporate structure of the insurers. UBS also trades securities issued by and derivatives related to monoline insurers, including CDSs, and the value of these securities and derivatives is subject to market volatility.

UBS holds positions in asset classes that have been or might be negatively affected by the current market crisis
In 2007 and 2008, UBS incurred substantial losses (realized and mark-to-market) on its holdings of securities related to the US residential mortgage market. The market dislocation that began in 2007 has been progressively felt in asset classes beyond US residential mortgages. In 2008, UBS recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged finance commitments, commercial mortgages in the United States and non-US mortgage- and asset-backed securities (ABSs). UBS has recorded and in the future could record negative fair value adjustments on these assets and on other asset classes which may be affected by the crisis in the credit markets. Such securities may also be wrapped by monoline insurers and therefore could give rise to losses if the difficulties in the monoline sector persist or increase (see the previous risk factor on monoline exposures).



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Risk factors

UBS’s inventory of ARS is likely to increase in the future as a result of its commitment to repurchase client-owned ARS, as further described in the “Risk management” section of this report. UBS is also exposed to the risk of losses and write-downs on its leveraged finance commitments. UBS holds positions related to real estate markets in countries other than the United States on which it could also suffer losses. These include exposures to non-US residential and commercial real estate and mortgages and non-US ABS programs. For example, as described in the “Credit risk” section of this report, UBS has a very substantial Swiss mortgage portfolio which is booked in Global Wealth Management & Business Banking. UBS is also exposed to risk when it provides financing against the affected asset classes such as in its prime brokerage, reverse repo and lombard lending activities.

Risk factors related to UBS’s business activity

Performance in the financial services industry depends on the economic climate – negative developments can adversely affect UBS’s business activities
The financial services industry prospers in conditions of economic growth, stable geopolitical conditions, capital markets that are transparent, liquid and buoyant and positive investor sentiment. An economic downturn, inflation or a severe financial crisis (as seen in 2008) can negatively affect UBS’s revenues and it may be unable to immediately adjust all of its costs to the resulting deterioration in market or business conditions.

A market downturn can be precipitated by a number of factors, including geopolitical events, changes in monetary or fiscal policy, trade imbalances, natural disasters, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and regional events can have widespread impact well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruption in emerging markets, which are particularly susceptible to macro-economic and geopolitical developments, or as a result of the failure of a major market participant. As UBS’s presence and business in emerging markets increases, it becomes more exposed to these risks.
Adverse and extreme developments of this kind have affected UBS’s businesses in a number of ways, and may continue to have further adverse effect on the firm’s businesses:
  a general reduction in business activity and market volumes affects fees, commissions and margins from market-making and customer-driven transactions and activities;
  a market downturn is likely to reduce the volume and valuations of assets UBS manages on behalf of clients, reducing its asset- and performance-based fees;
  reduced market liquidity limits trading and arbitrage opportunities and impedes UBS’s ability to manage risks, impacting both trading income and performance-based fees;
  assets UBS holds for its own account as investments or trading positions could continue to fall in value;
  impairments and defaults on credit exposures and on trading and investment positions could increase, and losses may be exacerbated by falling collateral values; and
  if individual countries impose restrictions on cross-border payments or other exchange or capital controls, UBS could suffer losses from enforced default by counterparties, be unable to access its own assets, or be impeded in – or prevented from – managing its risks.
The developments mentioned above can affect the performance of both the Group and its business units. As such, there is a risk that the carrying value of goodwill of a business unit might suffer impairments.

Due to its sizeable trading inventory, trading activities and the counterparty credit risks in many of its businesses, UBS is dependent upon its risk management and control processes to avoid or limit potential losses
Controlled risk-taking is a major part of the business of a financial services firm. Credit is an integral part of many of UBS’s retail, wealth management and Investment Bank activities. This includes lending, underwriting and derivatives businesses and positions.

Changes in interest rates, equity prices, foreign exchange levels and other market fluctuations can adversely affect UBS’s earnings. Some losses from risk-taking activities are inevitable but, to be successful over time, UBS must balance the risks it takes with the returns it generates. It must therefore diligently identify, assess, manage and control its risks, not only in normal market conditions but also as they might develop under more extreme (“stressed”) conditions, when concentrations of exposure can lead to severe losses.
As seen in 2008, UBS is not always able to prevent losses arising from extreme or sudden market events that are not anticipated by its risk measures and systems and affect sizeable inventory positions and therefore lead to serious losses. Value at Risk (VaR), a statistical measure for market risk, is derived from historical market data, and thus, by definition, could not have predicted the losses seen in the stressed conditions in 2008. Moreover, stress loss and concentration controls, and the dimensions in which UBS aggregates risk to identify potentially highly correlated exposures, proved to be inadequate.
UBS’s tools and processes for market and credit risk control, including country risk, its approach to risk management and control, and the steps UBS has taken to strengthen its risk management and control framework are described in the “Risk management” section of this report.
Notwithstanding such steps, UBS could suffer further losses in the future if, for example:
  it does not fully identify the risks in its portfolio, in particular risk concentrations and correlated risks;


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  its assessment of the risks identified, or its response to negative trends, proves to be inadequate or incorrect;
  markets move in ways that are unexpected – in terms of their speed, direction, severity or correlation – and UBS’s ability to manage risks in the resultant environment is therefore restricted;
  third-parties to whom UBS has credit exposure or whose securities it holds for its own account are severely affected by events not anticipated by UBS’s models and the bank accordingly suffers defaults and impairments beyond the level implied by its risk assessment; or
  collateral or other security provided by its counterparties proves inadequate to cover their obligations at the time of their default.
UBS also manages risk on behalf of its clients in its asset and wealth management businesses. Its performance in these activities could be harmed by the same factors. If clients suffer losses or the performance of their assets held with UBS is not in line with relevant benchmarks against which clients assess investment performance, UBS may suffer reduced fee income and a decline in assets under management or withdrawal of mandates.
If UBS decided to support a fund or another investment sponsored by UBS in its asset or wealth management business it might, depending on the facts and circumstances, incur charges that could increase to material levels. UBS does not currently foresee the likelihood of material losses as a result, but the possibility cannot be definitively ruled out.
Investment positions – such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds managed by UBS – may also be affected by market risk factors. These investments are often not liquid and are generally intended or required to be held beyond a normal trading horizon. They are subject to a distinct control framework (described in the “Risk and treasury management” section of this report). Deteriorations in the fair value of these positions would have a negative impact on UBS’s earnings.

The valuation of certain assets relies on models. For some or all of the inputs to these models there is no observable source
Where possible, UBS marks its trading book assets at their quoted market price in an active market. In the current environment, such price information is not available for certain instruments and UBS applies valuation techniques to measure such instruments. Valuation techniques use “market observable inputs” where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. For positions for which some or all of the reference data is not observable or has limited observability, UBS uses valuation models with non-market observable inputs. “Note 27 Fair value of financial instruments” in the financial statements of this

report provides detailed information on the determination of fair value from valuation techniques. There is no single market standard for valuation models in this area. Such models have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on UBS’s financial results. UBS regularly reviews and updates its valuation models to incorporate all factors that market participants would consider in setting a price, including factoring in current market conditions. Judgment is an important component of this process. Changes in model inputs or in the models themselves could have a material impact on UBS’s financial results.

Credit ratings and liquidity and funding management are critical to UBS’s ongoing performance
Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all lowered their long-term credit rating of UBS, on one or more times in 2008 and 2009. A further reduction in UBS’s credit rating could increase its funding costs, in particular with regard to funding from wholesale unsecured sources, and reduce access to capital markets. Some of these ratings downgrades have resulted, and additional reductions in the credit ratings would result, in UBS having to make additional cash payments or post additional collateral. These events may increase UBS’s need for funding to ensure that it will always have sufficient liquidity to meet liabilities when due, while reducing its ability to obtain such funding. UBS’s credit ratings also have an impact on the performance of UBS’s businesses. Along with UBS’s capital strength and reputation, both of which are described in greater detail in the risk factors below, UBS’s credit ratings contribute to maintaining client and counterparty confidence in UBS.

Liquidity is essential to UBS’s businesses. A substantial part of UBS’s liquidity and funding requirements are met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issuance of money market securities. The volume of these funding sources has generally been stable, but may change in the future due, among other things, to general market disruptions. Any such change could occur quickly and without notice. If such a change were to occur, UBS could be forced to liquidate assets, in particular from its trading portfolio, to meet maturing liabilities or deposit withdrawals. Given the depressed prices of many asset classes in current market conditions, UBS might be forced to sell assets at discounts that could adversely affect its profitability and its business franchises.
In 2008, UBS’s credit spreads increased substantially, in line with the general trend for the financial services industry. If these trends continue, or if UBS maintains substantially elevated levels of liquidity for an extended period of time, the combination of an increase in UBS’s borrowing costs and lower margins could have an adverse impact on the firm’s profitability.
  è   Refer to the “Risk and treasury management” section of this report for more information on UBS’s approach to liquidity and funding management


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Risk factors

UBS’s capital strength is important to support its client franchise
UBS’s capital position measured by the BIS capital ratios is and has traditionally been strong, both in absolute terms and relative to its competitors. Capital ratios are determined by (1) risk-weighted assets (RWAs) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (2) eligible capital.

Both RWAs and eligible capital are subject to change. Eligible capital, for example, could experience a reduction in case of financial losses, acquired goodwill or as a result of foreign exchange movements. RWAs, on the other hand, will be driven by UBS’s business activities and by changes in the risk profile of these assets. They could furthermore be subject to a change in regulatory requirements or the interpretation thereof. For instance, substantial market volatility, a widening of credit spreads (the major driver of UBS’s VaR), a change in regulatory treatment of certain positions (including, but not limited to, the definitions of assets allocated to the trading or the banking books), stronger foreign currencies, increased counter-party risk or a further deterioration in the economic environment could result in a rise in RWAs or a change in capital requirements and thereby potentially reduce UBS’s capital ratios.

Operational risks may affect UBS’s business
All UBS’s businesses are dependent on the bank’s ability to process a large number of complex transactions across multiple and diverse markets in different currencies, in addition to being subject to the many different legal and regulatory regimes of these countries. UBS’s operational risk management and control systems and processes, which are described in the “Operational risk” section of this report, are designed to ensure that the risks associated with the bank’s activities, including those arising from process error, failed execution, unauthorized trading, fraud, systems failure and failure of security and physical protection, are appropriately controlled. If these internal controls fail or prove ineffective in identifying and remedying such risks, UBS could suffer operational failures that might result in losses.

Legal claims and regulatory risks and restrictions arise in the conduct of UBS’s business
In the ordinary course of its business, UBS is subject to regulatory oversight and liability risk. It is involved in a variety of other claims, disputes and legal proceedings and government investigations in jurisdictions where UBS is active, including the United States and Switzerland. These types of proceedings expose UBS to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on UBS’s businesses. The outcome of these matters cannot be predicted and they could adversely affect UBS’s future busi-

ness. Currently, UBS is responding to a number of government inquiries and investigations, and is involved in a number of litigations and disputes, related to the sub-prime crisis, sub-prime securities, and structured transactions involving sub-prime securities. These matters concern, among other things, UBS’s valuations, disclosures, writedowns, underwriting and contractual obligations.

UBS has been in active dialogue with its regulators concerning remedial actions that it is taking to address deficiencies in its risk management and control, funding and certain other processes and systems. UBS will for some period be subject to increased scrutiny by the Swiss Financial Market Supervisory Authority and its other major regulators, and accordingly will be subject to regulatory measures that might affect the implementation of its strategic plans.
UBS recently announced that it had entered into a Deferred Prosecution Agreement with the US Department of Justice and a Consent Order with the US Securities and Exchange Commission in connection with its cross-border private banking services provided to US private clients. The US Internal Revenue Service has issued a civil summons seeking information concerning UBS’s cross-border business, including records located in Switzerland, and recently filed a petition for enforcement of this summons. It is possible that this and other governmental actions will lead to changes which could affect cross-border financial services and the application of Swiss financial privacy law, and this could adversely affect the future profitability of UBS’s cross-border banking businesses. Following disclosure of the US cross-border matter, moreover, it is possible that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions. It is premature to speculate as to the scope or effect of any such reviews.
  è   Refer to “Note 21 provisions and litigation” in the financial statements of this report for more information on legal proceedings in which UBS is involved

UBS might be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees

The financial services industry is characterized by intense competition, continuous innovation, detailed (and sometimes fragmented) regulation and ongoing consolidation. UBS faces competition at the level of local markets and individual business lines, and from global financial institutions comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. UBS expects these trends to continue and competition to increase in the future.
The competitive strength and market position of UBS could be eroded if the firm is unable to identify market trends and developments, does not respond to them by devising and implementing adequate business strategies or


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is unable to attract or retain the qualified people needed to carry them out.

In particular, the efforts required to address the current market crisis and related challenges might diminish the attention UBS devotes to managing other risks including those arising from its competitive environment. The changes recently introduced with regard to UBS’s balance sheet management, funding framework and risk management and control, as well as the repositioning of the fixed income, currencies and commodities business, are likely to reduce the revenue contribution of certain activities that require substantial funding or focus on proprietary trading.
Following the losses incurred in 2008, UBS very significantly reduced the variable compensation granted to its employees for that year. It is possible that, as a result of this reduction or other factors, key employees will be attracted by competitors and decide to leave UBS, or that UBS may be less successful in attracting qualified employees.

UBS’s reputation is key to its business
UBS’s reputation is critical in maintaining its relationships with clients, investors, regulators and the general public. The reputation of UBS can be damaged, for instance, by misconduct by its employees, by activities of business partners over which UBS has limited or no control, by severe or prolonged financial losses or by uncertainty about its financial soundness and its reliability. This could result in client attrition in different parts of UBS’s business and could negatively impact its financial performance. Maintaining the firm’s reputation and addressing adverse reputational developments are therefore key factors in UBS’s risk management efforts.

UBS’s global presence exposes the bank to other risks, including currency fluctuation
UBS operates in more than 50 countries, earns income and holds assets and liabilities in many different currencies and is subject to many different legal, tax and regulatory regimes.

UBS’s ability to execute its global strategy depends on obtaining and maintaining local regulatory approvals. This includes the approval of acquisitions or other transactions and the ability to obtain and maintain the necessary licenses to operate in a local market. Changes in local tax laws or regulations and their enforcement may affect the ability or the willingness of UBS’s clients to do business with the bank, or the viability of the bank’s strategies and business model.
In its financial accounts, UBS accrues taxes but the final effect of taxes on earnings is only determined after completion of tax audits (which generally takes a number of years) or the expiration of statutes of limitations. In addition, changes in tax laws, judicial interpretation of tax laws or policies and practices of tax authorities could have a material impact on taxes paid by UBS and cause the amount of taxes ultimately paid by UBS to differ from the amount accrued.
Because UBS prepares its accounts in Swiss francs, while a substantial part of its assets, liabilities, assets under management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar income represents the major part of UBS’s non-Swiss franc income) have an effect on its reported income and shareholders’ equity. UBS’s approach to management of this currency risk is explained in the “Treasury management” section of this report.


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Financial performance

Financial performance

UBS’s performance is reported in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. This section provides a discussion and analysis of UBS’s results for 2008, commenting on the underlying operational performance of the business, with a focus on continuing operations.

                                 
UBS financial highlights  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
 
                               
Performance indicators from continuing operations
                               
 
Diluted earnings per share (CHF)1
    (7.60 )     (2.61 )     4.64       (191 )
 
Return on equity attributable to UBS shareholders (%)2
    (57.9 )     (11.7 )     23.9       (395 )
 
Cost/income ratio (%)3
    680.4       111.0       70.5          
 
Net new money (CHF billion)4
    (226.0 )     140.6       151.7          
 
 
                               
Group results
                               
 
Operating income
    1,201       31,721       47,484       (96 )
 
Operating expenses
    28,555       35,463       33,365       (19 )
 
Operating profit before tax (from continuing and discontinued operations)
    (27,155 )     (3,597 )     15,007       (655 )
 
Net profit attributable to UBS shareholders
    (20,887 )     (5,247 )     11,527       (298 )
 
Personnel (full-time equivalents)5
    77,783       83,560       78,140       (7 )
 
Invested assets (CHF billion)
    2,174       3,189       2,989       (32 )
 
 
                               
UBS balance sheet and capital management
                               
 
Balance sheet key figures
                               
 
Total assets
    2,015,098       2,274,891       2,348,733       (11 )
 
Equity attributable to UBS shareholders
    32,800       36,875       51,037       (11 )
 
Market capitalization6
    43,519       108,654       154,222       (60 )
 
BIS capital ratios7
                               
 
Tier 1 (%)
    11.0       9.1 8     12.2 8        
 
Total BIS (%)
    15.1       12.2 8     15.0 8        
 
Risk-weighted assets
    302,273       374,421 8     344,015       (19 )
 
Long-term ratings
                               
 
Fitch, London
    A+     AA     AA+          
 
Moody’s, New York
  Aa2     Aaa     Aa2          
 
Standard & Poor’s, New York
    A+     AA     AA+          
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.  2 Net profit attributable to UBS shareholders from continuing operations/average equity attributable to UBS shareholders.  3 Operating expenses/operating income before credit loss expense or recovery.  4 Excludes interest and dividend income.  5 Excludes personnel from private equity (part of the Corporate Center).  6 Refer to the “UBS registered shares” section of this report for further information.  7 Refer to the “Capital management” section of this report for further information.  8 The calculation prior to 2008 is based on the Basel I approach.

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Measurement and analysis of performance

Key factors affecting UBS’s financial position and
results of operations in 2008

 
  In 2008, UBS continued to be severely affected by negative revenues in the Investment Bank due to trading losses on risk positions. Refer to the “Risk concentrations” section and “Note 3 Net interest and trading income” in the financial statements of this report for more information on risk positions and associated losses.
  UBS recorded a significant increase in credit losses from CHF 238 million in the prior year to CHF 2,996 million. This reflects the deteriorating economic environment and impairment charges taken on reclassified financial assets in fourth quarter 2008. Refer to the “Credit risk” section of this report for more information.
  On 5 March 2008, UBS issued mandatory convertible notes (MCNs) with a face value of CHF 13 billion to two investors. This transaction resulted in an accounting gain of CHF 3,860 million in first quarter 2008 and in an increase in share premium of CHF 7.0 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
  On 23 April 2008, the annual general meeting of shareholders approved a proposal that UBS strengthen its shareholders’ equity by way of an ordinary capital increase. The capital increase was completed in June 2008 by means of a rights offering and resulted in the issue of 760,295,181 new fully paid registered shares with a par value of CHF 0.10 each. Net proceeds from the capital increase were approximately CHF 15.6 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
  On 20 May 2008, UBS completed the sale of a portfolio of US residential mortgage-backed securities (RMBSs) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc. The portfolio had a notional value of approximately USD 22 billion and comprised primarily Alt-A and sub-prime related assets. The fund was capitalized with approximately USD 3.75 billion in equity raised by BlackRock from third-party investors and an eight-year amortizing USD 11.25 billion senior secured loan provided by UBS (balance at year-end 2008 was USD 9.2 billion).
  As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS have reached an agreement to transfer, in one or more sales, up to USD 60 billion of illiquid and other positions from UBS’s balance sheet to a sepa-

    rate fund entity controlled and owned by the SNB. The size of the transaction has since been reduced to USD 38.6 billion. This transaction allowed UBS to reduce its exposure to certain asset classes and potential associated losses. In parallel, UBS placed CHF 6 billion of MCNs with the Swiss Confederation on 9 December 2008. The overall impact on UBS’s income statement of the SNB transaction and the placement of the MCNs with the Swiss Confederation was a net charge of CHF 4.5 billion. This reflects a net loss arising from the acquisition of the equity purchase option, a loss arising from valuation differences determined to date on securities sold or to be sold to the SNB StabFund, losses on hedges that were subject to trading restrictions as a result of the SNB transaction, and the impact of the contingent issuance of UBS shares in connection with the transaction. The fair valuation impact of the issuance of the MCNs, as described in “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report, is also included in this total.
  In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF 2,032 million, resulting from the widening of UBS’s credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. The cumulative own credit balance for such debt held at 31 December 2008 amounts to CHF 2,953 million. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. Financial liabilities designated at fair value are liabilities for which UBS applied the option granted by IFRS to fair value them through profit or loss, predominately issued structured products. The gain reflects an increase in the difference between the market value of UBS’s debt accounted for under the fair value option (which is presented on the balance sheet line “Financial liabilities designated at fair value”) and the amount it would cost UBS to issue this debt at current market terms. As a general rule, the market value of UBS’s outstanding debt decreases if UBS’s own credit spread widens and increases if UBS’s credit spread tightens. Therefore, if UBS’s credit spread were to tighten again in the future, the market value of UBS’s outstanding fair valued debt would increase accordingly, resulting in the reversal of some or all of the gains on own credit recorded so far, unless UBS redeems own debt before maturity.
  Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were in-


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Financial performance

    cluded in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, Wealth Management US agreed to purchase ARS from clients at their par value. Up to fourth quarter 2008, the ARS settlement liability represented a provision. The liability was reclassified from provisions to negative replacement values in fourth quarter 2008, when ARS settlement rights, which are treated as derivative instruments, were issued to and accepted by clients. Losses incurred post-reclassification represented trading losses.
  As announced on 18 February 2009, UBS settled the US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC), by entering into a deferred prosecution agreement with the DOJ and a consent order with the SEC. As part of these settlement agreements, UBS agreed to pay an amount of CHF 917 million (USD 780 million) to the United States. Refer to the “Settlement regarding the US cross-border case” sidebar in the “Wealth Management International & Switzerland” section of this report for more information.
  UBS recognized an income tax benefit of CHF 6,837 million in 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incremental deferred tax assets on available tax losses. The incremental deferred tax assets relate mainly to Swiss tax losses incurred during 2008 (primarily due to the writedown of investments in US subsidiaries) but was reduced by a decrease in the deferred tax assets recognized for US tax losses. Refer to “Note 22 Income taxes” in the financial statements of this report for more information.

Discontinued operations

As discontinued activities are no longer relevant to the management of the company, UBS does not consider them to be indicative of its future potential performance and they are therefore not included in its business planning decisions. This assists in comparing UBS’s performance against that of its peers, and in the estimation of future results. In the last three years, one such item had a significant impact on UBS’s consolidated financial statements: On 23 March 2006, UBS sold its 55.6% stake in Motor-Columbus to a consortium representing Atel’s Swiss minority shareholders, EOS Holding, Atel and French utility Electricité de France (EDF) for a sale price of approximately CHF 1,295 million, leading to an after-tax gain on sale of CHF 387 million.

Seasonal characteristics

The main businesses of UBS do not generally show significant seasonal patterns, although the Investment Bank’s revenues have been affected in some years by the seasonal characteristics of general financial market activity and deal

flows in investment banking. Other business divisions are only slightly impacted by seasonal components, such as asset withdrawals that tend to occur in fourth quarter and lower client activity levels related to the end-of-year holiday season.

Performance measures

Key performance indicators (2008)
Until the end of 2008, UBS consistently assessed its performance against indicators designed to measure the delivery (on average and through periods of varying market conditions) of returns to its shareholders. At the Group level, these indicators were: after-tax return on equity; net new money; diluted earnings per share (EPS); and cost / income ratio. Business division key performance indicators (KPIs) were also used for internal performance measurement and planning as well as external reporting.
  è   A new key performance indicator framework was introduced in first quarter 2009 and will be used to measure performance in 2009 and forward. Refer to the “Key performance indicators: 2009 and beyond” sidebar in the “Strategy and structure” section of this report for more information

Client/invested assets reporting
UBS reports two distinct metrics for client funds:
  Client assets are all client assets managed by or deposited with UBS, including custody-only assets and assets held for purely transactional purposes.
  Invested assets is a more restrictive term and includes all client assets managed by or deposited with UBS for investment purposes.

Of the two, invested assets is the central measure for UBS and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes as UBS only administers the assets and does not offer advice on how these assets should be invested. Non-bankable assets (for example, art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.
Net new money in a reported period is the net amount of invested assets that are entrusted to UBS by new and existing clients less those withdrawn by existing clients and clients who terminate their relationship with UBS. Negative net new money means that there are more outflows than inflows. Interest and dividend income from invested assets is not counted as net new money inflow. Market and currency movements as well as fees, commissions and interest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invest-


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Business division / business unit key performance indicators (2008)
Business   Key performance indicators   Definition
 
Business divisions and business units (excluding Corporate Center)
  Cost/income ratio (%)   Total operating expenses/total operating income
before credit loss (expense)/recovery
   
 
 
  Return on attributed equity (%)   Performance before tax/average attributed equity
 
Wealth and asset management businesses and Business Banking Switzerland
  Invested assets (CHF billion)   Client assets managed by or deposited with UBS for investment purposes only (for further details please see “Client/invested assets reporting”)
   
 
 
  Net new money (CHF billion)   Inflow of invested assets from new clients
 
      + inflows from existing clients
 
      – outflows from existing clients
 
      – outflows due to client defection
 
Wealth and asset management businesses
  Gross margin on invested assets (bps)   Total operating income before credit loss
(expense)/recovery/average invested assets
 
Wealth Management International & Switzerland
  Client advisors   Expressed in full-time equivalents
   
 
 
  Revenues per advisor (CHF thousand)   Total operating income before credit loss (expense)/recovery/average number of client advisors
   
 
 
  Net new money per advisor (CHF thousand)   Net new money/average number of client advisors
   
 
 
  Invested assets per advisor (CHF thousand)   Average invested assets/average number of client advisors
 
Wealth Management US
  Recurring income (CHF million)   Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees (as opposed to transactional revenues)
   
 
 
  Revenues per advisor (CHF thousand)   Total operating income before credit loss (expense)/recovery/average number of financial advisors
   
 
 
  Net new money per advisor (CHF thousand)   Net new money/average number of financial advisors
   
 
 
  Invested assets per advisor (CHF thousand)   Average invested assets/average number of financial advisors
 
Business Banking Switzerland
  Impaired lending portfolio as a % of total lending portfolio, gross   Impaired lending portfolio, gross/total lending
portfolio, gross
 
Investment Bank
  Compensation ratio (%)   Personnel expenses/total operating income before
credit loss (expense)/recovery
   
 
 
  Impaired lending portfolio as a % of total lending portfolio, gross   Impaired lending portfolio, gross/total lending
portfolio, gross
   
 
 
  Average regulatory VaR (10-day, 99% confidence, based on 5 years of historical data)   Value at Risk (VaR) expresses maximum potential loss measured to a 99% confidence level, over a 10-day time horizon and based on 5 years of historical data
 

ed assets and client assets as a result of a change in the service level delivered are treated as net new money inflow or outflow.

When products are managed in one business division and sold in another, they are counted in both the investment management unit and the distribution unit. This results in double counting within UBS’s total invested assets as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises where

mutual funds are managed by the Global Asset Management business division and sold by Global Wealth Management & Business Banking. Both businesses involved count these funds as invested assets. This approach is in line with both finance industry practices and UBS’s open architecture strategy and allows the firm to accurately reflect the performance of each individual business. Overall, CHF 273 billion of invested assets were double counted in 2008 (CHF 392 billion in 2007).



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Financial performance

 

UBS reporting structure

Changes to reporting structure and
presentation in 2008

Industrial Holdings reported in the Corporate Center
As UBS has continuously reduced its private equity business in Industrial Holdings over the last three years to a very low level, it was decided to report these activities under the Corporate Center from 2008 onwards.

Exiting of the municipal securities business by the
Investment Bank

In June 2008, UBS announced the closure of its Investment Bank’s institutional municipal securities business. This hap-

pened with immediate effect and the retail operations of the municipal securities business, including secondary market activities, were transferred to Wealth Management US. A goodwill impairment charge of CHF 341 million was recorded in second quarter 2008 in relation to the exiting of this business and was attributed to the Investment Bank.

Exiting of certain commodities businesses by the
Investment Bank

In October 2008, UBS announced that the Investment Bank would exit the commodities business, with the exception of precious metals. This resulted in an expense of CHF 133 million in fourth quarter 2008.



UBS reporting structure in 2008

 
 
 
                 
  Global Wealth Management &     Global Asset Management     Investment Bank     Corporate Center
  Business Banking                  
 
 
                 
 
Wealth Management
International & Switzerland

 

                 
 
 
                 
 
Wealth Management US
 
                 
 
 
                 
 
 
                 
 
Business Banking Switzerland
                 
 
 
                 

Changes to the reporting structure in 2009

Wealth Management & Swiss Bank and Wealth Management Americas
On 10 February 2009, UBS announced with immediate effect the split of Global Wealth Management & Business Banking into two divisions: Wealth Management & Swiss Bank and Wealth Management Americas. UBS will start reporting results based on this new structure with the first quarter 2009 results.

Investment Bank
As announced on 3 October 2008 and reiterated on 10 February 2009, the Investment Bank is being repositioned to focus on its core franchises. The fixed income, currencies and commodities (FICC) business unit of the Investment Bank has exited several businesses including institutional municipal securities, proprietary trading, commodities (excluding

precious metals, exchange-traded derivatives and indices) and real estate and securitization activities, as well as exotic structured products. The internal organization of the FICC business unit has changed to reflect this repositioning, but these changes are not expected to have an immediate impact on the Investment Bank’s or UBS’s reporting structure.



 

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Accounting changes

Share-based payments: revisions to International
Financial Reporting Standard 2

UBS adopted amended IFRS 2 on 1 January 2008. As a result, from 1 January 2008, UBS’s share-based awards that are not generally forfeited upon the employee leaving UBS are expensed in the performance year. In contrast, share-based awards featuring stringent forfeiture rules are amortized over the shorter of the legal vesting period and the period from grant through to the retirement eligibility date of the employee.

UBS has fully restated the two prior years (2006 and 2007), with net profit attributable to UBS shareholders declining by CHF 863 million in 2007 and declining by CHF 730 million in 2006. The net increase in compensation expense was CHF 797 million for 2007 and CHF 516 million for 2006, mainly affecting the Investment Bank. Refer to “Note 1 Summary of significant accounting policies” in the financial statements of this report for more information.

Recognition of a defined benefit asset for the
Swiss pension plan

In third quarter 2008, UBS concluded that it meets the requirements of IAS 19 Employee Benefits for recognizing a defined benefit asset associated with its Swiss pension plan. Prior to this, it had been UBS policy to disclose only this amount in “Note 30 Pension and other post-employment benefit plans” in the financial statements of UBS’s annual reports. UBS concluded that recognition of an asset should also consider unrecognized net actuarial losses and past service cost as permitted by IAS 19 as this results in a better reflection of the corridor approach. At the end of third quarter 2008, the measurement of the defined benefit asset represented the total cumulative unrecognized net actuarial losses plus unrecognized past service cost plus the present value of economic benefits available in the form of refunds of the plan or reductions in future contributions to the plan.

The change in accounting policy resulted in the following effects on the balance sheet for 30 September 2008, the date on which the change in policy occurred, 31 December 2007 and 31 December 2006: an increase of approximately CHF 2.1 billion in other assets, an increase of approximately

CHF 0.5 billion in deferred tax liabilities and an increase of approximately CHF 1.6 billion in retained earnings. Refer to “Note 1 Summary of significant accounting policies” in the financial statements and the “Capital management” section of this report for more information.

IAS 39 Reclassification of financial instruments

The markets for many financial instruments began to dry up in 2007 and many instruments that previously traded in active and liquid markets ceased to trade actively by mid-2008. In an effort to address accounting concerns arising from the global credit crisis, the International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39 Financial Instruments: Recognition and Measurement) on 13 October 2008.

Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment prospectively with effect from 1 October 2008 following an assessment of the implications on its financial statements.
Subject to certain conditions being met, the amendments to IAS 39 permit financial assets to be reclassified out of the “held for trading” category if the firm has the intent and ability to hold them for the foreseeable future or until maturity. Eligible assets may be reclassified to the “loans and receivables” category, carried at amortized cost less impairment, or the “available-for-sale” category, carried at fair value through equity, with impairment recognized in profit or loss. Assets designated at fair value through profit or loss (“fair value option”) and derivatives may not be reclassified.
Effective 1 October 2008, UBS reclassified eligible assets which it intends to hold for the foreseeable future with a fair value of CHF 17.6 billion on that date from “held for trading” to the “loans and receivables” category. In addition, student loan auction rate securities (ARS) with a fair value of CHF 8.4 billion have been reclassified as of 31 December 2008. In fourth quarter 2008, an impairment charge of CHF 1.3 billion was recognized as credit loss expense on reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of CHF 4.8 billion would have been recorded in UBS’s fourth quarter income statement. In


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Financial performance

the fourth quarter, the operating profit before taxes would have been CHF 3.8 billion lower if the reclassification had not occurred. Refer to “Note 29 Measurement categories of financial assets and liabilities” in the financial statements of this report for more information on the reclassification of financial assets in 2008.

Discontinuation of the adjusted expected
credit loss concept

In first quarter 2008, UBS ceased using the adjusted expected credit loss concept in its internal management reporting and began to book, in line with IFRS, actual credit losses (recoveries) instead. Prior year results have been restated. This change had no impact on the Group’s overall net profit.



 
Accounting changes in 2009

IFRS 8 Operating Segments
The new standard on segment reporting, IFRS 8 Operating Segments, came into force on 1 January 2009 and replaced IAS 14 Segment Reporting. The external segmental reporting is based on internal reporting within UBS to the Group Executive Board (or, the “chief operating decision maker”) which makes decisions on the allocation of resources and assesses the performance of the reportable segments. Based on the new UBS structure which was announced on 10 February 2009 and following IFRS 8 guidance, UBS will show in 2009 four reportable segments. The business divisions Wealth Management & Swiss Bank, Wealth

Management Americas, Global Asset Management and the Investment Bank represent one reportable segment each. The Corporate Center, which does not meet the requirements of an operating segment, will also be shown separately. In addition, the new standard requires UBS to provide descriptive information about the types of products and services from which each reportable segment derives its revenue. As UBS’s reportable segment operations are mainly financial, the total interest income and expense for all reportable segments will be presented on a net basis.

Based on the present arrangement of revenue-sharing agreements, the inter-segment revenue for UBS is

unlikely to be material. Going forward, the segment assets and segment liabilities will be disclosed without the intercompany balances and this basis is in line with the internal reporting. An explanation of the basis on which the segment information is prepared, and reconciliations to the amounts presented in the statement of comprehensive income and the statement of financial position are also required by the new standard. UBS will be providing geographical information about total operating income and total non-current assets based on the following new geographical breakdown: Switzerland, UK, Rest of Europe, USA, Asia Pacific and Rest of the World.



 

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Key performance indicators

Until the end of 2008, UBS focused on four key performance indicators: return on equity, diluted earnings per share, cost / income ratio and net new money. These indica-

Return on equity

(BAR CHART)

Diluted earnings per share

(BAR CHART)

tors are designed to monitor the returns UBS delivers to shareholders and are calculated using results from continuing operations.

Cost/income ratio

(BAR CHART)

 

 

Net new money

(BAR CHART)



                         
Key performance indicators
 
 
    For the year ended  
    31.12.08     31.12.07     31.12.06  
 
Return on equity (RoE) (%)1
    (57.5 )     (10.9 )     25.7  
 
RoE from continuing operations (%)1
    (57.9 )     (11.7 )     23.9  
 
Diluted earnings per share (EPS) (CHF)2
    (7.55 )     (2.43 )     4.99  
 
Diluted EPS from continuing operations (CHF)2
    (7.60 )     (2.61 )     4.64  
 
Cost/income ratio (%)3
    680.4       111.0       70.5  
 
Net new money (CHF billion)4
    (226.0 )     140.6       151.7  
 
1 Net profit attributable to UBS shareholders/average equity attributable to UBS shareholders less distributions (where applicable).  2 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report for more information on EPS calculation.  3 Operating expenses/operating income before credit loss expense or recovery.  4 Excludes interest and dividend income.

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Financial performance

2008

The key performance indicators show:
  return on equity from continuing operations for full-year 2008 at negative 57.9%, down from negative 11.7% in 2007. The profits recorded by UBS’s wealth and asset management businesses were more than offset by substantial losses in the Investment Bank.
  negative diluted earnings per share from continuing operations of CHF 7.60, compared with negative CHF 2.61 in 2007.
  a cost/income ratio of 680.4%, compared with 111.0% a year ago.
  net new money at negative CHF 226.0 billion, down from positive CHF 140.6 billion in 2007. Net new money outflows were most pronounced in the Global Wealth Management & Business Banking division, which recorded total net new money outflows of CHF 123.0 billion. Wealth

Management International & Switzerland contributed to the majority of this total with net outflows of CHF 101.0 billion, the most significant outflows occurring in the Latin America, Mediterranean, Middle East & Africa regions. Wealth Management US reported net new money outflows of CHF 10.6 billion, mainly due to net outflows in the second and third quarters. The Swiss retail business recorded net new money outflows of CHF 11.4 billion. Global Asset Management saw total net outflows of CHF 103.0 billion. Of this, outflows in institutional were CHF 55.6 billion and occurred primarily via third-party distribution channels. Institutional net outflows were observed in all categories except money market funds, infrastructure and real estate. Wholesale intermediary had total net outflows of CHF 47.4 billion, reflecting higher outflows mainly in multi-asset, equities and fixed income. Approximately three-fourths of the wholesale intermediary outflows were through UBS distribution channels.



                         
Net new money1  
    For the year ended  
CHF billion   31.12.08     31.12.07     31.12.06  
 
Wealth Management International & Switzerland
    (101.0 )     125.1       97.6  
 
Wealth Management US
    (10.6 )     26.6       15.7  
 
Business Banking Switzerland
    (11.4 )     4.6       1.2  
 
Global Wealth Management & Business Banking
    (123.0 )     156.3       114.5  
 
Institutional
    (55.6 )     (16.3 )     29.8  
 
Wholesale intermediary
    (47.4 )     0.6       7.4  
 
Global Asset Management
    (103.0 )     (15.7 )     37.2  
 
UBS
    (226.0 )     140.6       151.7  
 
1 Excludes interest and dividend income.
                                 
Invested assets  
    As of     % change from  
CHF billion   31.12.08     31.12.07     31.12.06     31.12.07  
 
Wealth Management International & Switzerland
    870       1,294       1,138       (33 )
 
Wealth Management US
    600       840       824       (29 )
 
Business Banking Switzerland
    129       164       161       (21 )
 
Global Wealth Management & Business Banking
    1,599       2,298       2,123       (30 )
 
Institutional
    335       522       519       (36 )
 
Wholesale intermediary
    240       369       347       (35 )
 
Global Asset Management
    575       891       866       (35 )
 
UBS
    2,174       3,189       2,989       (32 )
 

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2007

Key performance indicators show:
  return on equity from continuing operations for full-year 2007 at negative 11.7%, down from positive 23.9% in 2006. The strong results posted by UBS’s wealth and asset management businesses were more than offset by substantial losses in the Investment Bank;
  negative diluted earnings per share from continuing operations of CHF 2.61, compared with positive CHF 4.64 in 2006;
  a cost/income ratio of 111.0%, compared with 70.5% in the prior year;
  net new money at CHF 140.6 billion, down from a record in 2006 of CHF 151.7 billion. The decrease was mostly driven by full-year outflows in Global Asset Management, mainly in institutional which had net new money outflows of CHF 16.3 billion. The net new money out-flows in core / value equity mandates and, to a lesser extent, in fixed income mandates were only partly offset by net new money inflows into all other asset classes, particularly alternative and quantitative investments and money market funds. Record net new money inflows were seen in Wealth Management International & Switzerland, particularly in Europe and Asia Pacific. Net new money inflows of CHF 26.6 billion in Wealth Management US reflected the recruitment of experienced advisors and reduced outflows from existing clients. The Swiss retail business recorded net new money inflows of CHF 4.6 billion.

 

 

 



 
New key performance indicator framework

A new key performance indicator (KPI) framework was introduced in first quarter 2009 and will be used to

measure performance in 2009 and forward. Refer to the “Key performance indicators: 2009 and beyond”

sidebar in the “Strategy and structure” section of this report for more information on UBS’s new KPIs.



 

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Financial performance

UBS results

                                 
Income statement  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
 
                               
Continuing operations
                               
 
Interest income
    65,890       109,112       87,401       (40 )
 
Interest expense
    (59,687)       (103,775 )     (80,880 )     (42 )
 
Net interest income
    6,203       5,337       6,521       16  
 
Credit loss (expense) / recovery
    (2,996)       (238 )     156          
 
Net interest income after credit loss expense
    3,207       5,099       6,677       (37 )
 
Net fee and commission income
    22,929       30,634       25,456       (25 )
 
Net trading income
    (25,818)       (8,353 )     13,743       (209 )
 
Other income
    884       4,341       1,608       (80 )
 
Total operating income
    1,201       31,721       47,484       (96 )
 
Cash components
    16,356       22,342       21,346       (27 )
 
Share-based components
    (94)       3,173       2,685          
 
Total personnel expenses
    16,262       25,515       24,031       (36 )
 
General and administrative expenses
    10,498       8,429       7,942       25  
 
Depreciation of property and equipment
    1,241       1,243       1,244       0  
 
Impairment of goodwill
    341       0       0          
 
Amortization of intangible assets
    213       276       148       (23 )
 
Total operating expenses
    28,555       35,463       33,365       (19 )
 
Operating profit from continuing operations before tax
    (27,353)       (3,742 )     14,119       (631 )
 
Tax expense
    (6,837)       1,369       2,998          
 
Net profit from continuing operations
    (20,517)       (5,111 )     11,121       (301 )
 
 
                               
Discontinued operations
                               
 
Profit from discontinued operations before tax
    198       145       888       37  
 
Tax expense
    1       (258 )     (11 )        
 
Net profit from discontinued operations
    198       403       899       (51 )
 
 
                               
Net profit
    (20,319)       (4,708 )     12,020       (332 )
 
Net profit attributable to minority interests
    568       539       493       5  
 
from continuing operations
    520       539       390       (4 )
 
from discontinued operations
    48       0       103          
 
Net profit attributable to UBS shareholders
    (20,887)       (5,247 )     11,527       (298 )
 
from continuing operations
    (21,037)       (5,650 )     10,731       (272 )
 
from discontinued operations
    150       403       796       (63 )
 
 
                               
Earnings per share
                               
 
Basic earnings per share (CHF)
    (7.54)       (2.42 )     5.19       (212 )
 
from continuing operations
    (7.60)       (2.61 )     4.83       (191 )
 
from discontinued operations
    0.05       0.19       0.36       (74 )
 
Diluted earnings per share (CHF)
    (7.55)       (2.43 )     4.99       (211 )
 
from continuing operations
    (7.60)       (2.61 )     4.64       (191 )
 
from discontinued operations
    0.05       0.19       0.34       (74 )
 
 
                               
Additional information
                               
 
Personnel (full-time equivalents)1
    77,783       83,560       78,140       (7 )
 
1 Excludes personnel from private equity (part of the Corporate Center).

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Strategy, performance and responsibility

2008

Results

2008 saw the unfolding of a global financial crisis that affected UBS deeply. While UBS’s wealth and asset management businesses contributed positively to UBS results despite extremely difficult conditions, losses on the Investment Bank’s risk positions were very significant and led to an overall negative result.

In 2008, UBS reported a Group net loss attributable to UBS shareholders (“attributable loss”) of CHF 20,887 million – a loss of CHF 21,037 million from continuing operations and a profit of CHF 150 million from discontinued operations. In 2007, UBS recorded an attributable loss of CHF 5,247 million.

Operating income

Total operating income was CHF 1,201 million in 2008, down from CHF 31,721 million in 2007. Net interest income at CHF 6,203 million was up 16% compared with CHF 5,337 million a year earlier. Net trading income was negative CHF 25,818 million, sharply down from negative CHF 8,353 million in 2007.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). The dividend income component of interest income is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, their total is analyzed below under the relevant business activities.

Net income from trading businesses

Net income from trading businesses dropped to negative CHF 26,883 million for full-year 2008. This compares with income of negative CHF 10,658 million in the prior year, with the decline mainly due to losses on disclosed risk con-

Trading versus non-trading income

(BAR CHART)

centrations in the fixed income, currencies and commodities (FICC) area of the Investment Bank in 2008.

Within FICC, trading losses were experienced in difficult markets marked by a significant increase in volatility and an extreme scarcity of liquidity which negatively affected many trades and positions. Real estate and securitization, and credit and proprietary strategies all had a significant negative impact on FICC trading revenues. These losses obscured good results in select areas, notably foreign exchange and money markets, which had a strong year with revenues up from 2007. Rates had positive revenues but were down from the prior year.
Trading revenues from the equities business were down from the previous year, mainly as a result of lower revenues in derivatives, especially in Europe and Asia. Equity-linked saw negative revenues in difficult equity and credit markets. The exchange-traded derivatives business was up as it benefited from significant volatility in the market. Prime brokerage services had a solid performance but revenues were down overall from 2007 as clients deleveraged their positions. Proprietary trading contributed a limited loss for the year.
In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF


                                 
Net interest and trading income  
    For the year ended     % change from  
CHF million   31.12.08     31.12.07     31.12.06     31.12.07  
 
Net interest income
    6,203       5,337       6,521       16  
 
Net trading income
    (25,818)       (8,353 )     13,743       (209 )
 
Total net interest and trading income
    (19,615)       (3,016 )     20,264       (550 )
 
 
                               
Breakdown by businesses
                               
 
Net income from trading businesses1
    (26,883)       (10,658 )     13,730       (152 )
 
Net income from interest margin businesses
    6,160       6,230       5,718       (1 )
 
Net income from treasury activities and other
    1,107       1,412       816       (22 )
 
Total net interest and trading income
    (19,615)       (3,016 )     20,264       (550 )
 
1 Includes lending activities of the Investment Bank.

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Financial performance

2,032 million, resulting from the widening of UBS’s credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. In 2007, the Investment Bank recorded a gain of CHF 659 million on own credit.

Net income from interest margin businesses

Net income from interest margin businesses decreased 1% to CHF 6,160 million from CHF 6,230 million. This slight decrease was primarily due to lower income from mortgages.

Net income from treasury activities and other

Net income from treasury activities and other was CHF 1,107 million compared with CHF 1,412 million. Gains from the accounting treatment of the MCNs issued on 5 March 2008 and 9 December 2008 were offset by negative income from the transaction with the SNB.

Credit loss expense

A credit loss expense of CHF 2,996 million was recorded in full-year 2008, compared with a credit loss expense of CHF 238 million in full-year 2007. The difference mainly reflects impairment charges taken on reclassified financial assets in fourth quarter 2008 and a further deterioration of the credit environment.
Net credit loss expense at Global Wealth Management & Business Banking amounted to CHF 421 million in 2008 compared with a net credit loss recovery of CHF 28 million in 2007. This result was mainly due to provisions made for lombard loans in 2008, particularly in the fourth quarter. The Investment Bank recorded a net credit loss expense of CHF 2,575 million in 2008, compared with a net credit loss expense of CHF 266 million in 2007. This increase mainly re-flects impairment charges taken on reclassified instruments in fourth quarter 2008, of which the majority was related to leveraged finance commitments.
  è   Refer to the “Risk management and control” section of this report for more information on UBS’s risk management approach, method of credit risk measurement and the development of credit risk exposures

Net fee and commission income

Net fee and commission income was CHF 22,929 million, down 25% from CHF 30,634 million. Income declined in all major fee categories, as outlined below:
  Underwriting fees fell 48% to CHF 1,957 million, driven by a 56% decline in equity underwriting fees and a 31% decline in debt underwriting fees.
  Mergers and acquisitions and corporate finance fees fell 40% to CHF 1,662 million, in an environment of reduced market activity and lower mandated deal volumes.
  Net brokerage fees fell 16% to CHF 6,445 million, mainly due to lower client transaction volumes in the wealth management businesses and the Investment Bank’s cash equities and Asian equity derivatives business.
  Investment fund fees fell 25% to CHF 5,583 million due to lower asset-based fees from the asset management and wealth management businesses.
  Fiduciary fees increased 1% to CHF 301 million, reflecting an increase in business volume.
  Custodian fees fell 12% to CHF 1,198 million, mainly due to the lower asset base.
  Portfolio and other management and advisory fees fell 21% to CHF 6,169 million mainly due to the lower asset base in the wealth management businesses and reduced performance fees in the asset management business.
  Insurance-related and other fees, at CHF 317 million in 2008, decreased by 25% from a year earlier mainly due to lower commission income from life insurance products at Wealth Management US.

Other income

Other income decreased to CHF 884 million from CHF 4,341 million. The main driver for this change was UBS’s sale of its 20.7% stake in Julius Baer during second quarter 2007, which gave rise to the recognition in second quarter 2007 of a CHF 1,950 million pre-tax gain, attributed to the Corporate Center. 2008 included a gain of CHF 168 million from the sale of a stake in Adams Street Partners in the third quarter and a gain of CHF 360 million on the sale of UBS’s stake in Bank of China in the fourth quarter.


                                 
Credit loss (expense) / recovery
    For the year ended     % change from  
CHF million   31.12.08     31.12.07     31.12.06     31.12.07  
 
Global Wealth Management & Business Banking
    (421)       28       109          
 
Investment Bank
    (1,246)       (266 )     47       368  
 
Investment Bank – credit losses from reclassified financial instruments
    (1,329)                          
 
UBS
    (2,996)       (238 )     156          
 

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Net fee and commission income  
    For the year ended     % change from  
CHF million   31.12.08     31.12.07     31.12.06     31.12.07  
 
Equity underwriting fees
    1,138       2,564       1,834       (56 )
 
Debt underwriting fees
    818       1,178       1,279       (31 )
 
Total underwriting fees
    1,957       3,742       3,113       (48 )
 
Mergers and acquisitions and corporate finance fees
    1,662       2,768       1,852       (40 )
 
Brokerage fees
    8,355       10,281       8,053       (19 )
 
Investment fund fees
    5,583       7,422       5,858       (25 )
 
Fiduciary fees
    301       297       252       1  
 
Custodian fees
    1,198       1,367       1,266       (12 )
 
Portfolio and other management and advisory fees
    6,169       7,790       6,622       (21 )
 
Insurance-related and other fees
    317       423       449       (25 )
 
Total securities trading and investment activity fees
    25,540       34,090       27,465       (25 )
 
Credit-related fees and commissions
    273       279       269       (2 )
 
Commission income from other services
    1,010       1,017       1,064       (1 )
 
Total fee and commission income
    26,823       35,386       28,798       (24 )
 
Brokerage fees paid
    1,909       2,610       1,904       (27 )
 
Other
    1,984       2,142       1,438       (7 )
 
Total fee and commission expense
    3,894       4,752       3,342       (18 )
 
Net fee and commission income
    22,929       30,634       25,456       (25 )
 

Operating expenses

Total operating expenses were down 19% to CHF 28,555 million from CHF 35,463 million. The decline was mainly due to significantly lower performance-related compensation, partly offset by provisions for auction rate securities and the provision made in connection with the US cross-border case.

Personnel expenses

Personnel expenses decreased 36% to CHF 16,262 million from CHF 25,515 million. This was primarily due to lower accruals on performance-related compensation, mainly in the Investment Bank, as well as lower salary costs due to reduced staff levels. Full-year results for 2007 included accruals for share-based compensation for performance during the year. These are not reflected in full-year 2008 as, starting in 2009, they will be amortized over the vesting period of these awards.
Contractors’ expenses, at CHF 423 million, were down 33% from 2007. This was due to a lower number of contractors employed, mainly at the Investment Bank. Insurance and social security contributions declined 45% to CHF 706 million in 2008, driven by lower performance-related compensation. Contributions to retirement benefit plans increased CHF 4 million to CHF 926 million as changes in contributions to various plans largely offset each other. At CHF 2,000 million in 2008, other personnel expenses increased 2%, mainly due to severance payments relating to the reduction in staff levels.

General and administrative expenses

At CHF 10,498 million, general and administrative expenses increased CHF 2,069 million from CHF 8,429 million. This increase was mainly due to provisions related to auction rate se-

curities of CHF 1,464 million, the provision of CHF 917 million made in connection with the US cross-border case and restructuring charges. These offset cost reductions in all other categories during 2008. In absolute terms, the largest reductions came from lower travel and entertainment expenses, reduced costs from outsourcing of IT and other services and lower marketing and public relations expenses.

Depreciation, amortization and impairment of goodwill

Depreciation of property and equipment declined CHF 2 million to CHF 1,241 million. Amortization of intangible assets declined to CHF 213 million from CHF 276 million.
A goodwill impairment charge of CHF 341 million was recorded in second quarter 2008, relating to the Investment Bank’s exit from the municipal securities business. There was no goodwill impairment charge for full-year 2007.

Income tax

UBS recognized an income tax benefit in the income statement of CHF 6,837 million for 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incremental deferred tax assets on available tax losses.

The incremental deferred tax assets mainly relate to Swiss tax losses incurred during 2008 (primarily due to the writedown of investments in US subsidiaries) but was reduced by a decrease in the deferred tax assets recognized for US tax losses.
The Swiss tax losses can be utilized to offset taxable income in Switzerland arising in the seven years following the year in which the losses are incurred.
UBS recognized a net income tax expense of CHF 1,369 million for full year 2007.


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Financial performance

2007

Results

In 2007, UBS reported a Group net loss attributable to UBS shareholders (“attributable loss”) of CHF 5,247 million – a loss of CHF 5,650 million from continuing operations and a profit of CHF 403 million from discontinued operations. In 2006, UBS recorded a Group net profit attributable to UBS shareholders (“attributable profit”) of CHF 11,527 million.

Operating income

Total operating income was CHF 31,721 million in 2007, down 33% from CHF 47,484 million in 2006. Net interest income at CHF 5,337 million was down 18% compared with CHF 6,521 million a year earlier. Net trading income was negative CHF 8,353 million, sharply down from positive CHF 13,743 million in 2006.

Net income from trading businesses

Net income from trading businesses was down significantly from a positive CHF 13,730 million in 2006 to a negative CHF 10,658 million in 2007. FICC results were very weak. The credit business in FICC delivered negative revenues, especially in proprietary strategies. Structured products results were down, especially in Europe and the US, reflecting the decrease in customer demand for complex derivatives transactions. Markdowns on leveraged finance commitments also had a negative impact. The result for emerging markets was helped by gains from the sale of UBS’s stake in Brazil Mercantile & Futures Exchange after demutualization.
Revenues from the equities business were up, mainly as a result of very strong gains in the derivatives business in China. Equity capital markets and equity prime brokerage revenues were up in Latin America following the acquisition of Banco Pactual at the end of 2006. Exchange-traded derivatives profited from the acquisition of ABN AMRO’s global futures and options business towards the end of 2006. Mark-to-market gains on UBS’s stake in Bovespa, the Brazil-ian stock exchange, helped the equities result. These positive performances were partially offset by losses recorded in proprietary trading as all regions were impacted by the market dislocation.
As a result of the widening of UBS’s credit spread in 2007, the Investment Bank recorded a gain on own credit of CHF 659 million on financial liabilities designated at fair value in net trading income. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. No gain or loss was recorded on own credit on financial liabilities designated at fair value in net trading income in 2006.

Net income from interest margin businesses

Net income from interest margin businesses was CHF 6,230 million, up 9% from CHF 5,718 million in 2006, reflecting an increase in spreads for Swiss franc, euro and US dollar deposits and growth in wealth management’s collateralized lending business. Wealth Management US also benefited from increased levels of deposits.

Net income from treasury activities and other

At CHF 1,412 million, net income from treasury activities and other in 2007 was up CHF 596 million, or 73% higher than the CHF 816 million of 2006. The accounting treatment of interest rate swaps, which hedge the economic interest rate risk of accrual-accounted balance sheet items (for example, loans or money market and retail banking products), positively affected income. They are carried on the balance sheet at fair value and, if they qualify for cash flow hedge accounting under IAS 39, changes in fair value are recorded in equity, thereby avoiding volatility in the Group income statement. In 2007, these hedges were not fully effective, leading to a gain that was booked to UBS’s income statement. Higher interest income was also recorded as a result of increased yield on a slightly higher average capital base.
In 2007, UBS experienced a net credit loss expense of CHF 238 million, compared to a net credit loss recovery of CHF 156 million in 2006. The market dislocations stemming from the US sub-prime mortgage market during the second half of 2007 were the main reasons for the significant increase, mainly in the Investment Bank.
Net credit loss recovery at Global Wealth Management & Business Banking amounted to CHF 28 million in 2007 compared with a net credit loss recovery of CHF 109 million in 2006. The reduced level of credit loss recovery was a consequence of the continued reduction in the impaired lending portfolio and related allowances to a level such that recoveries realized from work-outs continue to trend lower and no longer compensate for the ongoing need to establish new allowances. The US mortgage market dislocation had no impact on these figures.
The Investment Bank realized a net credit loss expense of CHF 266 million in 2007, compared with a net credit loss recovery of CHF 47 million in 2006. This mainly relates to valuation adjustments taken in connection with the securitization of certain US commercial real estate assets.

Net fee and commission income

In 2007, net fee and commission income was CHF 30,634 million, up 20% or CHF 5,178 million from CHF 25,456 million in 2006. Income increased in nearly all major categories, as outlined below:
  Underwriting fees, at their highest level ever, were CHF 3,742 million, up 20% from 2006. Equity underwriting fees were up significantly and offset a decrease in fixed income underwriting fees.


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  At CHF 2,768 million, mergers and acquisitions and corporate finance fees in 2007 were up significantly by 49% compared with 2006, in a brisk merger and acquisition environment.
  Net brokerage fees were CHF 7,671 million in 2007, up 25% from 2006, mainly driven by higher revenues in Europe, the US and Asia, due to additional services from a new equities trading platform, and a considerable increase in client activity in all client segments. Additionally, the equity derivatives business also posted higher revenues due to increased business volume.
  Investment fund fees, at their highest level ever, were CHF 7,422 million in 2007, up 27% from 2006, mainly reflecting higher asset-based fees for the wealth management businesses and higher management and performance fees at Global Asset Management.
  Fiduciary fees increased 18% to CHF 297 million due to an increase in business volume.
  At CHF 1,367 million, custodian fees in 2007 were up 8% compared with 2006. This increase was due to an enlarged asset base.
  Portfolio and other management and advisory fees increased by 18% to CHF 7,790 million in 2007. The increase was again the result of rising invested asset levels and to a lesser extent higher management fees.
  Insurance-related and other fees, at CHF 423 million in 2007, decreased by 6% from a year earlier.

Other income

Other income was up significantly in 2007 by CHF 2,733 million, or 170%, to CHF 4,341 million from CHF 1,608 million in 2006. This mainly related to the sale of a 20.7% stake in Julius Baer in second quarter 2007. The demutualization of UBS’s stake in Bovespa, the Brazilian stock exchange, and in the Brazil Mercantile & Futures Exchange positively affected the other income line as well. In 2006 UBS recorded gains on its New York Stock Exchange membership seats, which were exchanged into shares when it went public in March 2006. In the same year UBS sold its stakes in the London Stock Exchange, Babcock & Brown and EBS group.

Operating expenses

Total operating expenses increased 6% to CHF 35,463 million in 2007 from CHF 33,365 million in 2006.

Personnel expenses

Personnel expenses increased CHF 1,484 million, or 6%, to CHF 25,515 million in 2007 from CHF 24,031 million in 2006. The rise was driven by higher salaries due to the 7% increase in personnel over the year, mainly in the wealth management businesses which added client and financial

advisors. Performance-related compensation decreased, reflecting the losses incurred in the Investment Bank. Share-based components were up 18%, or CHF 488 million, to CHF 3,173 million from CHF 2,685 million, mainly reflecting accelerated amortization of deferred compensation awarded for senior managers who have left UBS. Contractors’ expenses, at CHF 630 million, were CHF 192 million below 2006 levels, mainly due to the transfer of contractors into permanent staff. Insurance and social security contributions declined by 8% to CHF 1,290 million in 2007 compared with CHF 1,398 million in 2006, reflecting lower bonus payments. Contributions to retirement benefit plans rose 15% or CHF 120 million to CHF 922 million in 2007 as a result of both higher salaries paid and the increased staff levels. At CHF 1,958 million in 2007, other personnel expenses increased by CHF 390 million from 2006, mainly driven by severance payments relating to the reduction in staff levels.

General and administrative expenses

At CHF 8,429 million in 2007, general and administrative expenses increased 6% from CHF 7,942 million a year ago. Administration costs increased due to elevated business volumes in Latin America related to the acquisition of Banco Pactual in 2006 and higher levels of UBS staff. The increased number of employees pushed occupancy costs, as well as travel and entertainment expenditures, higher. Professional fees were up on higher legal fees and IT and other outsourcing expenses were higher in all UBS businesses. This increase was only partially offset by lower provisions.

Depreciation, amortization and impairment of goodwill

Depreciation was CHF 1,243 million in 2007, almost unchanged from CHF 1,244 million in 2006. Lower depreciation on IT and communication equipment was offset by higher real estate charges. At CHF 276 million, amortization of intangible assets was up 86% from CHF 148 million a year earlier, related to acquisitions made at the end of 2006, mainly Banco Pactual. There was no goodwill impairment charge in 2007 or 2006.

Income tax

UBS recognized a tax expense in the income statement of CHF 1,369 million for 2007, compared with a tax expense for 2006 of CHF 2,998 million.

The tax charge for 2007 reflects tax expenses on profits earned outside the US during the year, partially offset by US and Swiss tax benefits on the writedowns related to the US sub-prime crisis. The US tax benefits recognized arose mainly as a result of the ability to carry back losses against US profits earned in the two prior years.


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Financial performance

Balance sheet

                         
% change from  
CHF million   31.12.08     31.12.07     31.12.07  
 
 
                       
Assets
                       
 
Cash and balances with central banks
    32,744       18,793       74  
 
Due from banks
    64,451       60,907       6  
 
Cash collateral on securities borrowed
    122,897       207,063       (41 )
 
Reverse repurchase agreements
    224,648       376,928       (40 )
 
Trading portfolio assets
    271,838       660,182       (59 )
 
Trading portfolio assets pledged as collateral
    40,216       114,190       (65 )
 
Positive replacement values
    854,100       428,217       99  
 
Financial assets designated at fair value
    12,882       11,765       9  
 
Loans
    340,308       335,864       1  
 
Financial investments available-for-sale
    5,248       4,966       6  
 
Accrued income and prepaid expenses
    6,141       11,953       (49 )
 
Investments in associates
    892       1,979       (55 )
 
Property and equipment
    6,706       7,234       (7 )
 
Goodwill and intangible assets
    12,935       14,538       (11 )
 
Other assets
    19,094       20,312       (6 )
 
Total assets
    2,015,098       2,274,891       (11 )
 
 
                       
Liabilities
                       
 
Due to banks
    125,628       145,762       (14 )
 
Cash collateral on securities lent
    14,063       31,621       (56 )
 
Repurchase agreements
    102,561       305,887       (66 )
 
Trading portfolio liabilities
    62,431       164,788       (62 )
 
Negative replacement values
    851,803       443,539       92  
 
Financial liabilities designated at fair value
    101,546       191,853       (47 )
 
Due to customers
    474,774       641,892       (26 )
 
Accrued expenses and deferred income
    10,196       22,150       (54 )
 
Debt issued
    197,254       222,077       (11 )
 
Other liabilities
    34,040       61,496       (45 )
 
Total liabilities
    1,974,296       2,231,065       (12 )
 
 
                       
Equity
                       
 
Share capital
    293       207       42  
 
Share premium
    25,250       12,433       103  
 
Net income recognized directly in equity, net of tax
    (4,471 )     (1,161 )     (285 )
 
Revaluation reserve from step acquisitions, net of tax
    38       38       0  
 
Retained earnings
    14,892       35,795       (58 )
 
Equity classified as obligation to purchase own shares
    (46 )     (74 )     38  
 
Treasury shares
    (3,156 )     (10,363 )     70  
 
Equity attributable to UBS shareholders
    32,800       36,875       (11 )
 
Equity attributable to minority interests
    8,002       6,951       15  
 
Total equity
    40,802       43,826       (7 )
 
Total liabilities and equity
    2,015,098       2,274,891       (11 )
 

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2008 asset development

(BAR CHART)

31.12.08 vs 31.12.07:

UBS’s total assets stood at CHF 2,015 billion on 31 December 2008, down from CHF 2,275 billion on 31 December 2007. These shifts were driven by deliberate reductions of CHF 462 billion in the trading portfolio and of CHF 236 billion in collateral trading, led by the Investment Bank. These substantial reductions were, however, partly offset by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet as discussed under “Replacement values” below) during 2008, as market movements drove up positive replacement values by 99%, or CHF 426 billion, to reach CHF 854 billion at year-end. Excluding positive replacement values, UBS’s total assets dropped CHF 686 billion in 2008.
Currency effects for 2008 included a strengthening of the Swiss franc against the British pound, US dollar and euro. These effects deflated the balance sheet, excluding positive replacement values, by CHF 75 billion, implying an underlying reduction of effectively CHF 611 billion.
Excluding positive replacement values, the Investment Bank significantly reduced its balance sheet assets by CHF 664 billion during 2008, and the positions of Global Wealth Management & Business Banking and Global Asset Management remained relatively stable at CHF 291 billion and CHF 25 billion, respectively.

Lending and borrowing

Lending

Cash and balances with central banks was CHF 33 billion on 31 December 2008, an increase of CHF 14 billion from the prior year-end. Due from banks and loans to customers both increased CHF 4 billion, rising to CHF 64 billion and CHF 340 billion, respectively. The customer loan increase stemmed mainly from the BlackRock collateralized funding transaction (a USD 11.25 billion eight-year amortizing loan; balance on 31 December 2008 USD 9.2 billion) in second quarter 2008 and the reclassification of illiquid trading assets from the trading portfolio in fourth quarter 2008, par-

tially offset by lower volumes from the Investment Bank prime brokerage business and from lombard lending in Global Wealth Management & Business Banking. The Swiss loan portfolio remained stable during 2008 at around CHF 163 billion.

Borrowing

The reduction of the Investment Bank’s assets led to lower unsecured borrowing needs during a continued difficult market environment for term debt issuance and decreasing client deposits. Money market paper issuance was CHF 112 billion in 2008, a considerable reduction of CHF 41 billion from the prior year, as UBS decreased its reliance on these funding sources (in line with the firm’s lower overall funding needs) amid a reduced access to these markets for issuers in general. Financial liabilities designated at fair value stood at CHF 102 billion on 31 December 2008, a drop of CHF 90 billion from 31 December 2007, as a lower demand for structured debt was accompanied by declining market values, in particular of equity-linked notes as major stock indices fell. Long-term debt grew CHF 16 billion to CHF 86 billion as new issues of senior straight bonds, the CHF 6 billion MCN issuance to the Swiss Confederation and around CHF 2 billion of mortgage bonds issued via the Swiss Mortgage Bond Bank combined to outweigh maturing senior straight bonds. Interbank borrowing (due to banks) was CHF 126 billion on 31 December 2008, down CHF 20 billion from 31 December 2007. Customer deposits (due to customers) amounted to CHF 475 billion on 31 December 2008, a decrease of CHF 167 billion for the year, or CHF 134 billion, on a currency-adjusted basis. Global Wealth Management & Business Banking client deposits declined CHF 109 billion with reductions in fixed deposits, fiduciary investments and current accounts. Savings and personal accounts dropped CHF 10 billion over the course of 2008, though the last quarter recorded net inflows of CHF 3 billion. Investment Bank deposits declined CHF 58 billion, mainly driven by lower business funding needs and a decline in the prime brokerage business.

Repurchase/reverse repurchase agreements
and securities borrowing/lending

Secured lending on the asset side of the balance sheet, the sums of cash collateral on securities borrowed and reverse repurchase agreements declined during 2008 to CHF 348 billion on 31 December 2008. The CHF 236 billion decline occurred almost entirely in the Investment Bank, where the matched book was reduced as part of its overall balance sheet reduction (the matched book is a repurchase agreement portfolio comprised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out). Furthermore, as part of the Investment Bank’s balance sheet reduction measures, its trad-



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Financial performance

ing short positions were reduced CHF 102 billion, which resulted in lower short-coverings via reverse repurchase agreements and securities borrowing transactions.

A significant amount of trading assets are funded via repurchase agreements, so, in addition to the matched book reduction, the yearly decrease in trading assets also contributed to the drop in repurchase agreements. These reductions are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral declined CHF 221 billion, standing at CHF 117 billion on 31 December 2008.

Trading portfolio

Significant reductions were achieved in the trading portfolio, which declined CHF 462 billion during 2008, or CHF 445 billion on a currency-adjusted basis. At the end of 2008, the trading portfolio stood at CHF 312 billion. The majority of the decrease related to the Investment Bank’s overall balance sheet reductions and occurred within the fixed income, currencies and commodities (FICC) business area and the equities business area. In FICC, trading inventories in a number of areas, including real estate, securitization and commodities, were substantially reduced, including USD 16.4 billion of illiquid assets transferred to the Swiss National Bank StabFund and approximately CHF 26 billion (represents fair values at the reclassification dates) of trading assets reclassified in fourth quarter 2008 to banking book as “Loans and receivables”. The reduction in equities inventories was mainly a result of stock market declines. Reductions occurred across all trading products, with debt instruments declining CHF 278 billion, equity instruments falling CHF 130 billion, traded loans falling CHF 35 billion and precious metals falling CHF 19 billion.

Replacement values

The positive and the negative replacement values (RVs) of derivative instruments developed in parallel, showing continued strong rises during 2008, driven by increased market valuations, while notional values declined 2% year-on-year. Positive RVs grew CHF 426 billion to CHF 854 billion in 2008, while the negative RVs of derivative instruments increased CHF 408 billion to CHF 852 billion. In both cases, the increases were largely driven by movements in currencies (for example, the weakening of the US dollar), lower interest rates and widening credit spreads. Increases occurred across almost all derivative products, with interest rate contracts growing by CHF 211 billion, foreign exchange contracts by CHF 123 billion and credit derivative contracts by CHF 92 billion.

Shareholders’ equity

On 31 December 2008, equity attributable to UBS shareholders was CHF 32.8 billion, representing a decrease of CHF 4.1 billion compared with 31 December 2007.

The decline in 2008 reflects mainly the net loss attributable to shareholders of CHF 20.9 billion combined with other losses recognized directly in equity (including foreign currency translation) of CHF 3.3 billion. Refer to the “Statement of recognized income and expense” in the financial statements of this report for more information about the losses recognized directly in equity.
These equity reductions were largely offset by UBS’s capital strengthening measures taken in 2008 (see the table below showing the impact by equity attributable to UBS shareholders accounts).


Equity attributable to UBS shareholders development

   
                    Net income                     Equity  
                    recognized                     attributable  
            Share     directly     Retained     Treasury     to UBS  
CHF billion   Share capital     premium     in equity     earnings     shares     shareholders  
 
Starting balance
    0.2       12.4       (1.2 )     35.8       (10.4 )     36.9  
 
Net loss attributable to UBS shareholders
                            (20.9 )             (20.9 )
 
of which: amount relates to MCNs issued in March 20081
                            3.7                  
 
of which: amount relates to MCNs issued in December 20082
                            0.7                  
 
Rights issue
    0.1       15.5                               15.6  
 
MCNs issued in March 20081
            7.0                               7.0  
 
MCNs issued in December 20082
            (3.6 )                             (3.6 )
 
Share-based compensation plans/sale of treasury shares
            (6.6 )                     7.2       0.6  
 
Others
            0.5       (3.3 )                     (2.8 )
 
Ending balance
    0.3       25.2       (4.5 )     14.9       (3.2 )     32.8  
 
1 Of the CHF 13 billion MCN1, CHF 2.3 billion, being the outstanding coupon liability recorded in “Debt issued”.  2 Of the CHF 6 billion MCN2, a balance of CHF 8.8 billion was recorded as financial liabilities on balance sheet.

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Off-balance sheet

Contractual obligations

The table below includes contractual obligations as of 31 December 2008.

All contracts included in the table below, with the exception of purchase obligations (those where UBS is committed to purchasing determined volumes of goods and services), are either recognized as liabilities on UBS’s balance sheet or, in the case of operating leases, disclosed in “Note 25 Operating lease commitments” in the financial statements of this report.
The following liabilities are recognized on the balance sheet and excluded from the table: provisions (as disclosed in “Note 21 Provisions and litigation” in the financial statements of this report), current and deferred tax liabilities (refer to “Note 22 Income taxes” in the financial statements of this report for more information), liabilities to employees for equity participation plans, settlement and clearing accounts and amounts due to banks and customers.
Within purchase obligations, the obligation to employees under the mandatory notice period is excluded (this is the period in which UBS must pay employees leaving the firm contractually-agreed salaries).

Off-balance sheet arrangements

In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards, lead to either de-recognition of financial assets and liabilities for which UBS has transferred substantially all risks and rewards, or the non-recognition of financial assets (and liabilities) received for which UBS has not assumed the related risks and rewards. UBS recognizes these types of arrangements on the balance sheet to the extent of its involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights.

     When UBS, through these arrangements, incurs an obligation or becomes entitled to an asset, it recognizes them

on the balance sheet, with the resulting loss or gain recorded in the income statement. It should be noted that in many instances the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements. Generally, these arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS.

Off-balance sheet arrangements include purchased and retained interests, derivatives and other involvements in non-consolidated entities and structures. UBS has originated such structures and has acquired interests in structures set up by third parties.
The following paragraphs discuss several distinct areas of off-balance sheet arrangements.

Risk positions

UBS’s main concentrations of risk and other relevant risk positions are disclosed in detail in the audited parts of the “Risk management and control” section of this report. These positions include monoline insurers, auction rate securities and leveraged finance deals. The quantitative summary about each of these risk positions includes exposures of on- and off-balance sheet arrangements.
The importance and the potential impact of such positions to UBS (with respect to liquidity, capital resources or market and credit risk support), including off-balance sheet structures, are also described in the “Risk and treasury management” section of this report.

Liquidity facilities and similar obligations

On 31 December 2008 and 31 December 2007, UBS had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other types of special purpose entities (SPEs). Losses resulting from such obligations were not significant in 2008 and 2007.


                                 
Contractual obligations  
    Payment due by period  
CHF million   <1 year     1–3 years     3–5 years     >5 years  
 
Long-term debt
    36,024       42,188       31,869       77,100  
 
Capital lease obligations
    63       104       40       0  
 
Operating leases
    1,034       1,799       1,405       2,573  
 
Purchase obligations
    202       166       85       0  
 
Other liabilities
    3,718       121       1,406       0  
 
Total
    41,041       44,378       34,805       79,673  
 

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Financial performance

           
 
  Off-balance sheet arrangements, risks,     Disclosure in the annual report  
  consolidation and fair value measurements        
 
Contractual obligations
    Strategy, performance and responsibility, “Off-balance sheet” section  
 
Credit guarantees, performance guarantees, undrawn irrevocable credit facilities, and similar instruments
    Strategy, performance and responsibility, “Off-balance sheet” section  
 
Private equity funding commitments and equity underwriting commitments
    Strategy, performance and responsibility, “Off-balance sheet” section  
 
Derivative financial instruments
    Financial statements, “Note 23 Derivative instruments and hedge accounting”  
 
Credit derivatives
    Financial statements, “Note 23 Derivative instruments and hedge accounting”  
 
Leases
    Financial statements, “Note 25 Operating lease commitments”  
 
Non-consolidated securitization vehicles and collaterialized debt obligations – non-agency transactions
    Strategy, performance and responsibility, “Off-balance sheet” section  
 
Support to non-consolidated investment funds
    Strategy, performance and responsibility, “Off-balance sheet” section  
 
Securitizations (banking book only)
    Risk and treasury management, “Basel II Pillar 3 disclosures” section  
 
Risk concentrations
    Risk and treasury management, “Risk concentrations” section  
 
Credit risk information
    Risk and treasury management, “Credit risk” section  
 
Market risk information
    Risk and treasury management, “Market risk” section  
 
Liquidity risk information
    Risk and treasury management, “Liquidity and funding management” section  
 
Consolidation
    Financial statements, “Critical accounting policies” section  
 
Fair value measurements, including sensitivity and level 3 impact on the income statement consolidation
    Financial statements, “Note 27 Fair value of financial instruments”  
 

Non-consolidated securitization vehicles and collateralized debt obligations

UBS sponsored the creation of SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. UBS also securitized customers’ debt obligations in transactions involving SPEs which issued collateralized debt obligations. A typical securitization transaction of this kind involved the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Financial assets held by such trusts and corporations are no longer reported in the consolidated financial statements of UBS once their risks and rewards are transferred to a third-party, e.g. in a sales transaction. Refer to “Note 1 Summary of significant accounting policies” in the financial statements of this report for more information about UBS’s accounting policies regarding securitization activities.
Generally, UBS intended to sell the beneficial interests to third parties shortly after securitization but beginning in the second half of 2007 and continuing in 2008, certain retained interests could not be sold due to illiquid markets for certain instruments, mainly those linked to the US mortgage market.
The volume and size of interests held in securitization structures originated by UBS and asset-backed securities purchased from third parties declined significantly in 2008, mainly due to the following factors:
  Sale and expected sale of positions to a fund owned and controlled by the Swiss National Bank (for a total volume of USD 38.6 billion).
  Sale of a portfolio of US residential mortgage-backed securities for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc.
  Several other true sales of asset-backed securities portfolios to third parties without recourse.
  In addition, UBS announced the repositioning of its fixed income, currencies and commodities (FICC) business around client servicing and facilitation. The repositioning includes a substantial downsizing or exiting of real estate, securitization, and proprietary trading activities.
UBS’s involvements in non-consolidated securitization vehicles and CDOs disclosed here are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The table on the next page does not include these offsetting factors and does not represent a measure of risk. Refer to the “Risk management and control” section of this report for information on UBS’s risk positions and risks.
UBS’s involvement in vehicles whose residential and commercial mortgage securities are backed by an agency of the US government – the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corpora-


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tion (FHLMC) – is not included in the table below, due to the comprehensive involvement of the US government in these organizations and the significantly lower risk profile.
The numbers in the table are different to the numbers disclosed on securitizations in the “Basel II Pillar 3” section, predominately due to different scopes (for example Pillar 3 disclosures are on banking book positions only, and the consolidation status is different for several vehicles), and to some extent due to a different measurement basis.

Consolidation of securitization vehicles and CDOs

UBS continually evaluates whether triggering events require the reconsideration of the consolidation conclusions made at the inception of its involvement with securitization vehicles and CDOs. Triggering events generally include items such as major restructurings, the vesting of potential rights and the acquisition, disposition or expiration of interests. In these instances, SPEs may be consolidated or de-consolidated in light of the changed conditions. Starting in December 2007 and during 2008, due to adverse market conditions, various non-consolidated vehicles in which UBS held a majority stake in super senior securities were declared to have
breached default provisions pursuant to the entities’ governing documents. In these instances, various contingent decision-making rights became immediately vested in the super-senior class holders. As a consequence, UBS determined that, in certain instances, the rights arising from such events caused it to be in control of these entities and therefore UBS had to consolidate the affected entities. The consolidation had no material incremental impact on UBS’s income statement and balance sheet.

Risks resulting from non-consolidated securitization vehicles and CDOs

The “Risk management and control” section of this report provides detailed disclosure of UBS’s main risk concentrations, as well as risks associated with UBS’s involvement in consolidated and non-consolidated US mortgage securitization vehicles and CDOs. If future consolidation of additional securitization vehicles is required by accounting standards, UBS does not expect this would have a significant impact on its risk exposure, capital, financial position or results of operations. Positions with significant impact on the income statement are disclosed in “Note 3 Net interest and trading income” in the financial statements of this report.


                                                 
Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1
CHF billion   Total SPE assets   Involvements in non-consolidated SPEs held by UBS  
                            Purchased and        
    Original     Current             retained interests, and        
    principal     principal     Delinquency     loans held by UBS 2     Derivatives held by UBS
 
 
 
As of 31 December 2008   outstanding     outstanding     amounts     Fair value     Fair value     Nominal value  
 
Originated by UBS3
                                               
 
CDOs and CLOs
                                               
 
Residential mortgage
    23.1       8.8       0.5       1.1       0.6       4.0  
 
Commercial mortgage
    0.0       0.0       0.0       0.1       (0.5 )     0.7  
 
Other ABS
    0.5       0.5       0.0       0.0       0.1       0.1  
 
Securitizations
                                               
 
Residential mortgage
    57.3       43.1       2.3       0.0       (0.3 )     12.7  
 
Commercial mortgage
    21.2       17.3       1.4       0.2       0.0       0.0  
 
Other ABS
    3.8       1.1       0.1       0.0       0.0       5.1  
 
Total
    105.9       70.8       4.3       1.4       (0.1 )     22.6  
 
Not originated by UBS
                                               
 
CDOs and CLOs
                                               
 
Residential mortgage
    330.8       169.5       17.1       3.4       1.9       8.7  
 
Commercial mortgage
    6.7       1.3       0.0       0.6       0.1       0.9  
 
Other ABS
    53.1       18.6       0.7       4.8       1.2       3.4  
 
Securitizations
                                               
 
Residential mortgage
    1,259.7       616.5       81.6       3.5       (2.4 )     29.1  
 
Commercial mortgage
    555.0       476.1       3.7       4.2       0.0       0.0  
 
Other ABS
    301.7       142.8       5.5       3.4       0.0       2.2  
 
Total
    2,507.0       1,424.8       108.6       19.9       0.8       44.3  
 
1 Includes all purchased and retained interests and derivatives held by UBS which are considered involvements in non-consolidated securitization vehicles and CDOs (under IFRS). This implies for example that UBS would include an insignificant involvement in such a vehicle into the table (under “Involvements in non-consolidated SPEs held by UBS”), whereas the pool assets held by such vehicle would be included under “Total SPE assets”. The size of the pool assets of such vehicle can be very high, but relates to third parties, if UBS’s involvement is insignificant. The “Total SPE assets” include information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to receive (in sufficient quality), especially for structures originated by third parties.  2 Loans and receivables have been included in this column with a carrying value of CHF 1.0 billion for structures originated by UBS and CHF 9.9 billion for structures not originated by UBS.  3 Structures originated by UBS include transactions within the scope of US GAAP, Financial Accounting Standard 140, paragraph 17.

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Financial performance

Support to non-consolidated investment funds

In the ordinary course of business, UBS issues investment cer-tificates to third parties that are linked to the performance of non-consolidated investment funds. Such investment funds are originated either by UBS or by third parties. For hedging purposes, UBS generally invests in the funds to which its obligations from the certificates are linked. Risks resulting from these contracts are considered minimal, as the full performance of the funds is passed on to third parties. The Investment Bank is involved in similar structures, such as those due to the issuance of notes, index certificates and related hedging activities.
In 2008, as a result of the financial markets crisis which caused declining asset values, market illiquidity and de-leveraging by investors, UBS supported several non-consolidated investment funds that it manages in its wealth and asset management businesses. UBS provided this support primarily to facilitate redemption requests of fund investments by clients. Material support was provided in the form of collateralized financing, direct acquisition of fund units and purchases of assets from the funds. The support provided by UBS to these investment funds was made where there are regulatory or other legal requirements or other exceptional considerations. During 2008, material support has been provided as follows: fund units were acquired in the amount of CHF 0.8 billion; assets purchased from such funds amounted to CHF 0.7 billion; and fully collateralized financing provided to the funds was CHF 2.4 billion at 31 December 2008 and decreased significantly in early 2009. Guarantees granted to third-parties in the context of these non-consolidated funds were immaterial at 31 December 2008. Losses incurred in 2008 as a result of such fund support were immaterial.
Acquired fund units and fund assets are generally accounted for as financial investments available-for-sale, and are included into the respective risk disclosures in the “Risk management and control” section of this report. Financing provided by UBS at 31 December 2008 was included in the credit risk disclosures.
In 2007, UBS Global Asset Management purchased financial assets, predominately US RMBS, from investment funds managed by UBS. The total loss resulting from the purchases, writedowns and sales amounted to approximately USD 0.1 billion in 2007, of which the majority related to transactions with a fund consolidated at 31 December 2007 and 2008 in UBS’s financial statements.
In addition, in the ordinary course of business, UBS’s wealth and asset management businesses provide short-term funding facilities to UBS-managed investment funds. This bridges time lags in fund unit redemptions and subscriptions. These bridge financings did not incur losses and are expected to be paid without significant losses.
Should UBS be required to consolidate previously unconsolidated investment funds in the future, it expects no significant impact on debt covenants, capital ratios, credit rat-
ings and dividends. However, future fund support itself, depending on its size, could impact these measures.
Depending on market developments in 2009 and beyond, it is possible that UBS may decide to provide financial support to one or more of its investment funds. Such decisions will be taken on a case-by-case basis depending upon market and other circumstances pertaining at the time. The risks incurred by providing such support will depend on the type of support provided and the riskiness of the assets held by the fund(s) in question. If UBS were to provide extensive financial support to some of its investment funds, losses incurred as a result of such support could become material.

Guarantees and similar obligations

UBS issues the following in the normal course of business: various forms of guarantees; commitments to extend credit; standby and other letters of credit to support its customers; commitments to enter into repurchase agreements; note issuance facilities; and revolving underwriting facilities. With the exception of related premiums, these guarantees and similar obligations are kept off-balance sheet unless a provision to cover probable losses is required.
On 31 December 2008, the net exposure to credit risk for credit guarantees and similar instruments, based on IFRS numbers, was CHF 18.5 billion compared with CHF 19.3 billion one year earlier. Fee income from issuing guarantees is not material to total revenues.
Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that the Group will make payment in the event that customers fail to fulfill their obligations to third parties. The Group also enters into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of customers but have not yet been drawn on by them, the majority of which range in maturity from one month to five years. If customers fail to meet their obligations, the maximum amount at risk for the Group is the contractual amount of these instruments. The risk is similar to the risk involved in extending loan facilities and is subject to the same risk management and control framework. For the year ended 31 December 2008, the Group recognized net credit loss recoveries of CHF 18 million; and for the years ended 31 December 2007 and 2006, the Group recognized net credit loss recoveries of CHF 3 million and CHF 10 million respectively, related to obligations incurred for contingencies and commitments. Provisions recognized for guarantees, documentary credits and similar instruments were CHF 31 million at 31 December 2008 and CHF 63 million at 31 December 2007.
The Group partially enters into sub-participations to mitigate the risks from commitments and contingencies. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of


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the credit facility. The Group retains the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. The Group will only enter into sub-participation agreements with banks to which UBS ascribes a credit rating equal to or better than that of the obligor.
Furthermore, UBS provides representations, warranties and indemnifications to third parties in connection with numerous transactions, such as asset securitizations.

Clearinghouse and future exchange memberships

UBS is a member of numerous securities and futures exchanges and clearinghouses. In connection with some of those memberships, UBS may be required to pay a share of the financial obligations of another member who defaults, or otherwise be exposed to additional financial obligations as a result. While the membership rules vary, obligations generally would arise only if the exchange or clearinghouse had exhausted its resources. UBS considers the probability of a material loss due to such obligations to be remote.

Swiss deposit insurance

Swiss banking law and the deposit insurance system require Swiss banks and securities dealers to jointly guarantee an
amount of up to CHF 6 billion for privileged client deposits in the event that a Swiss bank or securities dealer becomes insolvent. For the period from 20 December 2008 to 30 June 2009, FINMA estimates UBS’s share in the deposit insurance system to be CHF 1.2 billion. The deposit insurance is a guarantee and exposes UBS to additional risk which is not reflected in the “Exposure to credit risk – UBS Group” table in the “Credit risk” section of this report. At 31 December 2008, UBS considers the probability of a material loss from its obligation to be remote.

Private equity funding commitments and equity underwriting commitments

The Group enters into commitments to fund external private equity funds and investments, which typically expire within five to ten years. The commitments generally require the Group to fund external private equity funds and investments at market value at the time the commitments are drawn. The amount committed to fund these investments at 31 December 2008 and 31 December 2007 was CHF 0.5 billion and CHF 0.4 billion respectively. Equity underwriting commitments in the Investment Bank amounted to CHF 0.4 billion at 31 December 2008.


Commitments1

 

The table below shows the maximum committed amount of commitments.

                                                 
    31.12.08     31.12.07  
            Sub-                     Sub-        
CHF million   Gross     participations     Net     Gross     participations     Net  
 
Credit guarantees and similar instruments
    13,124       (344 )     12,780       13,381       (593 )     12,788  
 
Performance guarantees and similar instruments
    3,596       (446 )     3,150       3,969       (464 )     3,505  
 
Documentary credits
    2,979       (415 )     2,564       3,474       (517 )     2,957  
 
Total commitments
    19,699       (1,205 )     18,494       20,824       (1,574 )     19,250  
 
Undrawn irrevocable credit facilities
    60,316       (1 )     60,315       83,980       (2 )     83,978  
 
1 Includes only credit and performance guarantees and similar instruments, documentary credits, and undrawn irrevocable credit facilities. On 31 December 2008, the commitment to repurchase auction rate securities was recognized on UBS’s balance sheet as a negative replacement value for CHF 1,028 million (USD 964 million). It is not included into this table. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentrations” section of this report for more information.

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Financial performance

Cash flows

2008

At 31 December 2008, the level of cash and cash equivalents rose to CHF 179.7 billion, up CHF 30.6 billion from CHF 149.1 billion at the end of 2007.

Operating activities

Operating activities generated a cash inflow of CHF 77.2 billion in 2008 compared with a cash outflow of CHF 52.1 billion in 2007. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 71.2 billion in 2008, an increase of CHF 67.5 billion from 2007. Net profit decreased CHF 15.6 billion compared with 2007.
Cash inflow of CHF 402.8 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 253.5 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabilities. Payments to tax authorities were CHF 0.9 billion in 2008, down CHF 2.8 billion from a year earlier.

Investing activities

Net cash flow used in investing activities was CHF 1.7 billion compared with an overall cash inflow of CHF 2.8 billion in 2007. The net cash outflow for investments in subsidiaries and associates was CHF 1.5 billion, compared with CHF 2.3 billion in 2007, due to the acquisitions of Caisse Centrale de Réescompte Group (CCR) and VermogensGroep and a net increase in the purchase of property and equipment of CHF 1.1 billion. The net investment of financial investments available for sale was CHF 0.7 billion, whereas in 2007 the divestments generated cash inflows of CHF 6 billion. Disposals of subsidiaries and associates in 2008 generated a cash inflow of CHF 1.7 billion. Refer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the financial statements of this report for more information about UBS’s investing activities in 2008 and 2007.

Financing activities

In 2008, financing activities generated cash outflows of CHF 5.6 billion. This reflected the net repayment of money market paper of CHF 40.6 billion and the issuance of CHF 103.1 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 92.9 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 23.1 billion, including CHF 15.6 billion from rights issues and CHF 7.6 billion from
mandatory convertible notes. In 2007, UBS had a net cash inflow of CHF 74.6 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt repayments and money market paper repaid, amounting to CHF 111.6 billion in 2008, were only partially compensated by the cash increase due to the capital issuances.

2007

At 31 December 2007, the level of cash and cash equivalents rose to CHF 149.1 billion, up CHF 13.0 billion from CHF 136.1 billion at the end of 2006.

Operating activities

Net cash flow used in operating activities was CHF 52.1 billion in 2007 compared with a cash outflow of CHF 5.4 billion in 2006. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 3.7 billion in 2007, a decrease of CHF 18.2 billion from 2006. Net profit decreased CHF 16.7 billion compared with 2006.
Cash inflow of CHF 218.9 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 263.6 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabilities. Payments to tax authorities were CHF 3.7 billion in 2007, up CHF 1.1 billion from a year earlier.

Investing activities

Investing activities generated a cash inflow of CHF 2.8 billion. The net cash outflow for investments in subsidiaries and associates was CHF 2.3 billion due to the acquisitions of the branch network of McDonalds Investments and 51% of Daehan Investment Trust Management Company Ltd. and a net increase in the purchase of property and equipment of CHF 1.8 billion. The net divestment of financial investments available for sale was CHF 6.0 billion, mainly due to UBS’s sale of its 20.7% stake in Julius Baer for CHF 3.9 billion. Disposals of subsidiaries and associates in 2007 generated a cash inflow of CHF 0.9 billion. In 2006, the net cash inflow from investing activities was CHF 4.4 billion. Cash inflows of CHF 6.4 billion were offset by acquired new businesses worth CHF 3.5 billion. Purchases of property and equipment totaled CHF 1.8 billion and the net divestment of financial investments available for sale was CHF 1.7 billion. Disposals of subsidiaries and associates in 2006 generated a cash inflow of CHF 1.2 billion.


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Financing activities

In 2007, financing activities generated cash flows of CHF 74.6 billion, which was used to finance the expansion of business activities. This reflected the net issuance of money market paper of CHF 32.7 billion and the issuance of CHF 110.9 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 62.4 billion. That
inflow was partly offset by outflows attributable to net movements in treasury shares and own equity derivative activity (CHF 2.8 billion), and dividend payments (CHF 4.3 billion). In 2006, UBS had a net cash inflow of CHF 48.1 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt issuance and money market paper increased CHF 26.3 billion in 2007.


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UBS employees

UBS employees

UBS relies on the expertise and commitment of its employees to meet clients’ needs. For employees, UBS’s wide range of businesses, global career opportunities and an open and collaborative culture offer a platform for individual success.

Investing in UBS employees

UBS relies on the expertise, talent and commitment of its employees to meet clients’ needs and deliver results for the firm. Engaging, developing and retaining a high-value workforce is therefore a priority, and in 2008 UBS continued to judiciously invest in its personnel. This investment will help ensure that the firm has the range of skills and experience necessary to meet client needs now and to grow the firm when market conditions improve. UBS invests in its employees whether they are new hires, seasoned staff, key talent or senior managers. The graph below highlights the most important factors driving the value created by UBS personnel.

UBS workforce

Staff levels decreased in most UBS businesses over the course of the year, with the number of people employed on 31 December 2008 at 77,783, down 5,777 or 7% from year-end 2007. In 2008, UBS personnel worked in 60 countries, with about 38% of staff employed in the Americas, 34% in Switzerland, 15% in Europe, the Middle East & Africa and 13% in Asia Pacific.
Internal job mobility encourages business innovation and individual career development. Mobility across regions increased slightly in 2008, with 1,285 employees moving to roles in a different region, versus 1,062 in 2007. The highest

Gender distribution by geographical region1

 
(BAR CHART)

number of employees transferred from Switzerland, with 143 going to Asia Pacific, 92 going to the Americas, 63 to the UK and 57 to locations in Europe, the Middle East & Africa. Cross-division mobility was lower in 2008 than in 2007, with 784 employees changing divisions during the course of



Investing in employees

 
(CHART)

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Personnel
Regional distribution

(BAR CHART)

Business unit distribution

(BAR CHART)

the year, versus 903 in 2007. At 238 employees, transfers from the Investment Bank to Global Wealth Management & Business Banking were most common.

Recruiting staff

In 2008, UBS continued to recruit staff in the key markets in which it operates, although the firm sought throughout the

year to reduce personnel costs, increase personnel efficiency and improve the ratio of front-office to back-office staff. As UBS believes the long-term trends for wealth and asset management remain positive, particular emphasis was placed on hiring client advisors in 2008. Among other things, a new “Fast Forward” initiative was introduced to improve the hiring, retention and productivity of client advisors and front-office managers. More effective recruitment, integration, and skill and competency development processes are supported by line manager coaching.

To further improve the quality of all candidates, better match open jobs with the right candidate and more successfully integrate new hires, UBS standardized its approach to sourcing, selecting and “on-boarding” new hires globally in 2008. Additionally, Global Wealth Management & Business Banking launched an internal marketplace aimed at filling vacancies with internal candidates.
In regard to graduate recruitment, UBS developed a firm-wide campus recruiting strategy in 2008, creating a cross-division governance body and aligning marketing with the needs of “Generation Y” (20- to 30-year-olds) to enhance the UBS brand within this recruitment segment. A more interactive website and focused print materials support a globally consistent candidate experience. UBS also focused on enhancing relationships with target schools in 2008 through a new university relations strategy, while global sourcing efforts targeted bilingual graduates overseas for UBS’s businesses in the Asia Pacific region. For the fourth straight year, global consultant Universum ranked UBS the number one employer for business students in Switzerland.
In 2008, UBS hired more than 1,100 university graduates for its undergraduate and MBA training programs. The UBS apprenticeship program in Switzerland hired 304 apprentices in 2008, up 9% from 2007. In Global Wealth Management & Business Banking interns and graduate trainees represent approximately 1% of the workforce. In response to external market conditions, the Investment Bank instituted a graduate deferral program for 2008, in which 43 graduates postponed their start dates at UBS for up to one year to engage in community service or pursue educational opportunities.


Gender distribution by employee category1

                                                 
 
On 31.12.08   Officers     Non-officers     Total
    Number     %     Number     %              
 
Male
    30,788       75.0       18,337       48.1       49,125       62.1  
 
Female
    10,283       25.0       19,758       51.9       30,041       37.9  
 
Total
    41,071       100.0       38,095       100.0       79,166       100.0  
 
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this table only. This accounts for the total UBS year-end 2008 employee number of 79,166 in this table. Normally, UBS expresses employee numbers in terms of full-time equivalents (FTEs), which is measured as a percentage of the standard hours normally worked by permanent full-time staff. When calculated according to FTEs, the year-end 2008 total is 77,783.

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UBS employees

Developing and sustaining a diverse workforce

A workforce of people from different backgrounds, cultures and experiences is indispensable in today’s global business environment, in part because it can help enhance understanding of regional markets and sensitivity to cultural norms and labor market issues. In 2008, the UBS workforce included citizens of 153 countries. The scope of UBS’s diversity initiatives is global, with 10 regional diversity boards translating this global commitment into regional action, working with local business and HR leaders. In addition, more than 20 employee networks globally help to build cross-business relationships and strengthen UBS’s inclusive culture.
Over the past six years, UBS has promoted diversity in three stages: raising basic awareness; integrating diversity into management processes such as recruiting and performance management; and ensuring that diversity ultimately becomes a selfsustaining part of the workplace culture. In 2008, efforts continued to focus on making diversity self-sustaining by linking diversity to revenue generation. Among other initiatives, UBS invited women clients and prospects in China, Italy, Switzerland, the UK and the US to targeted events designed to help UBS build market share among this important client segment.
UBS also continued its program to help professionals return to work after a career break. In 2008, four such programs were held in London, Philadelphia / New York, Singapore and Sydney. These programs have helped more than 300 professionals, primarily women, prepare to return to work over the past two years. In addition, UBS was recognized by Working Mother magazine as being among the 100 best companies for working mothers in the US for the sixth consecutive year.

Performance management

UBS believes that the foundation of good performance management is an ongoing employee-manager dialogue, with demonstrable performance as the basis for meritocracy. All employees therefore participate in a year-round performance management process that assesses individual achievements against specific objectives. This process supports staff development, links behavior to corporate values and helps ensure that employees have the skills required to meet their clients’ needs and implement their division’s strategic goals. The performance management process the senior executives is broadly the same as for other employees. Achieving specific financial targets plays a significant role, with business leadership, client leadership, people leadership and personal leadership also explicitly reviewed.

Compensation and incentives

On 12 August 2008, UBS announced the separation of its business groups into business divisions, with incentives for management and staff in each business division aligned directly with its financial results. This is being achieved through a centrally managed change program that includes the development of revised incentive systems to reward divisional management and staff for shareholder value creation in their own division. As part of this, beginning in 2009, UBS will adopt a new compensation model for the BoD and the GEB that has a long-term focus and is more closely aligned with the creation of value for the firm. (Refer to the “Compensation principles 2009 and beyond for UBS senior executives” section of this report for more information.)
UBS’s compensation programs are results-oriented and market-focused. Total compensation is linked to UBS’s business objectives, and pay and incentive programs are designed to pay for performance. UBS’s total compensation and benefits philosophy has five guiding principles which require UBS to:
  use carefully selected performance measures, rigorous performance management and a strict pay-for-performance relationship to support UBS’s business strategy;
  support reward opportunities by consistently communicating UBS’s business strategy and promoting a meritocratic culture;
  provide competitive total compensation opportunities to enable UBS to attract and retain talent;
  balance compensation components to meet short-term needs while focusing on mid- to long-term objectives; and
  encourage employee share ownership to strengthen the alignment between employee and shareholder interests.

Employee share ownership

UBS is committed to the principle of employee share ownership, believing accountability for decisions and actions is encouraged through equity-based awards that vest and / or become unrestricted over time. Positions with a large scope of responsibility and a significant potential impact on the firm have higher equity exposure. UBS also has stringent share ownership requirements for senior executives.
A voluntary equity-based program enables employees to purchase UBS shares at fair market value and generally receive two free UBS options for each share purchased. Staff with annual incentive awards above a certain threshold are awarded a component in UBS shares or notional shares instead of cash. Select high-performing employees are granted stock options with a strike price not less than the fair market value of the shares on the date the option is granted.


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On 31 December 2008, current UBS employees held an estimated 6% of UBS shares outstanding (including approximately 3% in unvested / blocked shares), based on all known share holdings from employee participation plans, personal holdings and individual retirement plans. At the end of 2008, an estimated 56% of all employees held UBS shares while 51% of all employees held UBS stock options.

Leadership development

UBS takes a structured approach to both talent management and leadership development, understanding that both capabilities are important factors in ensuring high-quality client service and long-term business success.

In 2008, a Group-wide talent management architecture was established to align the firm’s identification and selection processes for “key talent”. All levels of employees with the potential to take on substantially more senior roles in the organization than they currently have may be considered key talent. In 2008, about 4% of employees were placed in a key talent pool where they can benefit from focused investment in their career and professional development.
UBS’s leadership development activities are separated into Group-wide and divisional initiatives. A new framework created in 2008 centralizes development initiatives for managing directors and above within a Group-level learning organization. An organizational development and culture change initiative for the GEB, GMB and managing director populations, called “Leading our Future”, is being developed to engage and align the firm’s leadership with its vision, core values, strategy and leadership principles. A new leadership and management development core curriculum will be designed to strengthen the capabilities of senior leaders in their current
roles, while a key talent core curriculum will build leadership capabilities among potential future senior leaders. Initiatives for all other employees are managed within the divisions but coordinated with the Group-wide initiatives to ensure consistency and promote the sharing of best practices.

Commitment

While meeting the needs of clients is UBS’s ultimate purpose, it is the firm’s corporate values that lay the foundation for its long-term sustainable growth. These values are integrated into decision making processes, management techniques and the ways in which employees interact with each other in the daily course of business. UBS’s values are clustered into four categories:
  Focus on the client: The ultimate purpose of all UBS activities is to increase client satisfaction;
  Lead yourself: Each individual takes responsibility for his or her own motivation, development and success;
  Lead others: Everyone can lead others by being a role model, appreciating others’ successes and supporting one another’s endeavors. Leading others is about creating a collaborative environment and developing people on the basis of meritocracy and diversity;
  Act with integrity: UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards.

Measuring employee perceptions

Employee engagement supports workforce retention and performance. An annual employee survey assesses UBS’s corporate culture and levels of employee engagement. A


 
The client leadership experience

Launched in February 2008, this Group-wide initiative brings together senior client-facing employees from different divisions for a one-and-a-half-day workshop designed to improve UBS’s ability to meet the diverse needs of its clients and to increase UBS’s share of business

with them. Participants learn about relevant products and services in the other divisions, build cross-division partnerships and learn how to work more effectively across boundaries. Seventeen regional workshops, each focusing on a specific client segment such as family offices, hedge funds

and financial institutions, or on a specific region such as Western Europe, brought nearly 500 senior client-facing participants together. Almost 400 cross-divisional client service opportunities were shared, ultimately bringing in more than USD 300 million in net new money to UBS.



 

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UBS employees

core set of questions across all divisions provides a comprehensive view of employee opinions.

48,205 employees, or 60% of UBS’s employee population, participated in the survey conducted in June / July 2008. Most measures declined compared with earlier years. For example, 67% of respondents were very satisfied with UBS as a place to work (compared with 80% in 2007) and 77% reported high motivation to contribute beyond what is expected of them (versus 83% in 2007). These overall satisfaction ratings covering the period between June 2007 and June 2008 show the continued dedication of UBS employees despite the challenges. However, the survey results also clearly revealed a perceived lack of communication from senior management.
UBS and its business divisions take these results seriously. The GEB committed to increasing employee communication through employee events, intranet and e-mail. Additionally, dialogue with managing directors across UBS increased to ensure they had accurate, updated information about UBS to share with their teams.

Employee assistance

UBS is committed to being a conscientious employer. Examples of this commitment can be found in the firm’s Employee Assistance Programs (EAPs) and the COACH and SOVIA programs in Switzerland.
EAPs are available in a number of locations globally. In the US, the program provides information, referrals and ongoing

support for child care, academic services and issues surrounding elder care, work performance and personal conflicts. In the UK, the program is part of a health and wellbeing program including onsite medical specialists, emergency childcare, counseling and referral services. In Switzerland, UBS offers professional assistance for current and retired employees, as well as family members, through its HR Social Counseling and HR Retiree Service.

The COACH transfer and severance process was launched in Switzerland in 2003 to help employees displaced by a restructuring. COACH advisors provide support and assistance in finding new jobs, working closely with UBS’s internal recruitment center and outside employment services. During the COACH process employees retain full salary and benefits, and financial assistance is available for job-related training, if needed.
Staff below the level of director are eligible for the new Social Partnership Agreement for employees in Switzerland (SOVIA) that became effective on 1 August 2008. SOVIA lays out the terms and conditions for implementing redundancies among employees whose jobs are subject to the Agreement on Conditions of Employment for Bank Staff. SOVIA now governs the requirements and procedures for internal hiring, job transfers, and, when needed, severance. The aim is to implement necessary job cuts and operational changes in a responsible manner, making full use of the UBS internal labor market, and to offer targeted, relevant support and career advice to these employees.


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Employee representation

The UBS Employee Forum facilitates the exchange of information between employees and management on pan-European issues that have the potential to impact the performance and prospects of UBS and, in particular, its operations in Europe. This forum fulfills EU Directive 94 / 45 on the establishment of a European Works Council. Local forums also exist in a number of locations across Europe to address local issues such as health and safety, changes to workplace conditions, pension arrangements and collective redundancies. The UK Employee Forum, for example, is made up of internal elected representatives for each business area and division that has employees in the UK.
In Switzerland, Employee Representation Committee (ERC) representatives partner with UBS management in the annual salary negotiations and are involved in employee matters, including health and safety issues, social security and pension issues. ERC employee representatives are elected to represent the interests of employees whose work contracts are governed by Swiss law and the Agreement on Conditions of Employment for Bank Staff. The ERC also fosters an open dialogue between management and employees. During late 2008 and early 2009, for example, the ERC and management jointly hosted a program called “Trust is Key”. In total, around 1,100 employees gathered in seven UBS locations across Switzerland for open forum events in which employees developed and proposed measures to rebuild trust and confidence in UBS. These measures can be implemented in employees’ working environments or by management.

Select 2008 awards

 

“100 Best Companies for Working Mothers in the US”
(Working Mother magazine 2003–2008)

 

“No. 1 employer of choice for business graduates in Switzerland”
(Universum Switzerland 2008)

 

“Top 100 Employers for Lesbian, Gay and Bisexual People in Britain”
(Stonewall Workplace Equality Index 2008)

 

“Best Graduate Recruitment and Development Program”
(UBS EXPLORE Graduate Program)
(Graduate Solutions 2008)

 

“UBS’s learning programs: awards in three categories”
(Corporate University Xchange 2008)

 



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Corporate responsibility

Corporate responsibility

Corporate responsibility contributes to UBS’s goal of sustainable value creation.

As a leading global financial services firm, UBS is confronted with the concerns and expectations of a wide and diverse range of stakeholders. Along with clients, investors and employees, for example, various government regulators and suppliers can also be said to have a stake in the company to varying degrees. In a broader sense, the communities in which UBS has a presence are stakeholders too.

UBS takes the term “corporate responsibility” to mean the process of understanding, assessing, weighing and addressing the concerns and expectations of these groups. This process supports UBS in its efforts to safeguard and advance the firm’s reputation for responsible corporate conduct. In very direct ways, responsible corporate conduct helps create sustainable value for the company.
The crisis faced by the financial services industry made it difficult for the firm to do as much as it would have liked to fulfill its stakeholder expectations. Still, as can be seen from the examples given below – from anti-money laundering to community development and human rights to protecting the environment – UBS continued with a wide range of important and effective corporate responsibility-related activities during 2008. Even in difficult times, UBS remains convinced that corporate responsibility makes good business sense.

Adherence to the United Nations Global Compact initiative

In 2000, UBS became one of the first companies to sign the United Nations (UN) Global Compact. This global corporate responsibility initiative unites governments, business, labor

organizations and civil society, fostering adherence to 10 principles covering the areas of human rights, labor standards, the environment and anti-corruption. UBS considers the initiative, which had over 5,200 corporate participants at the end of 2008, to be an important yardstick providing guidance for its key corporate responsibility initiatives and activities. In addition, by participating in the Swiss UN Global Compact network, UBS contributes actively to important corporate responsibility discussions across industrial sectors among Swiss-based companies.

Labor standards and human rights

UBS has well established human resources policies and practices that address issues such as employment, diversity, equal opportunity and discrimination. Such policies also tackle human rights issues, as do policies relating to health and safety practices. UBS’s human resources policies and practices are regularly reviewed to ensure that labor standards are respected.
In line with the firm’s endorsement of the UN Global Compact and its underlying principles, UBS adopted a statement supporting basic human rights in 2006. The “UBS Statement on Human Rights” outlines important human rights issues and sets out the firm’s position on the topic. In 2008, UBS reaffirmed its commitment to human rights by supporting the UN Global Compact’s Chief Executive Officer statement, which marked the 60th anniversary of the UN’s Universal Declaration of Human Rights. In 2008, UBS continued with the implementation of its human rights statement with the introduction of a responsible supply chain guide-


Operational corporate responsibility at UBS

 
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line. It also continued the development of industry sector guidelines to support the consistent identification and assessment of environmental and social risks in the firm’s banking activities.
  è   Refer to the “UBS employees” section of this report for more information on labor standards and diversity programs
  è   Refer to the discussion on supply chain management and environmental risk management below for more information on the responsible supply chain guidelines and on industry sector guidelines

Environment

In 1992, UBS was one of the first signatories of the UN Environment Program’s Bank Declaration (UNEP). This act committed the firm to integrating appropriate environmental measures within its activities. It has resulted in a well developed global environmental management system, certified to the ISO 14001 standard, which covers both banking activities and in-house operations. UBS acknowledges that climate change represents one of the most significant environmental challenges of current times. By offering relevant products and services across businesses, UBS seeks to help clients address risks and take advantage of opportunities presented by climate change and the expected transition to a lower carbon economy. With this in mind, UBS continued in 2008 to expand its offering of climate change-related products and services and to publish dedicated research reports. In addition, UBS seeks to lead by example by acting to reduce its own environmental impact. To this end, in 2006 the Group Executive Board (GEB) set a target to reduce the firm’s carbon emissions through 2012 by 40% from 2004 levels. UBS continued in 2008 to make good progress towards achieving this target.
  è   Refer to www.ubs.com/environment for more information on UBS’s environmental policies

Fighting corruption

UBS has long been committed to assisting the fight against money laundering, corruption and terrorist financing.
The firm employs a vigorous risk-based approach to its internal anti-money laundering (AML) process. (A “risk-based approach” means that the processes are continually tested to prove their effectiveness against the risks they are intended to address.) In early 2008 it also issued a revised Group Policy Against Corruption, setting out its zero-tolerance stance towards corruption and strictly prohibiting all forms of bribery by UBS and its employees, including so-called facilitation payments. At the same time, it issued more detailed guidance papers to address the following topics: guidance for employees who have connections to public officials; the hiring of political advisers; guidance on engaging intermediaries; and anti-corruption guidance in connection with corrupt activity by clients. Implementation of the policy

against corruption by the business divisions is well under way, and training materials developed by the Group Money Laundering Prevention Unit (GMLPU) have formed the basis for business division training modules that raise awareness of new and revised topics. In some instances web-based training programs have also been developed.

Although internal policies are an important support for UBS’s high ethical standards, in practice the major risk for the firm in relation to bribery is not so much employee behavior as the potential misuse of UBS systems by clients to perpetrate bribery. Many firms, including UBS, continue to face the legal, regulatory and reputational risk of being used to collect, store or transfer corrupt funds. UBS’s efforts to reduce the risk of misuse of its systems to perpetrate bribery will continue in 2009 and beyond.
  è   Refer to the discussion on preventing money laundering below for more information on UBS’s AML activities

External recognition

The firm’s corporate responsibility work has been widely recognized, and UBS has been included in many indexes that track such efforts. It has, for example, been a component of the Dow Jones Sustainability Indexes since their inception in 1999. These indexes track the financial performance of the leading sustainability-driven companies worldwide. UBS is also included in the FTSE4Good Index, which measures the performance of global companies in the areas of environmental sustainability, stakeholder relations and support for human rights.

Corporate responsibility governance

The corporate responsibility committee was established in 2001 and, as a Board of Directors (BoD) committee, it supports the BoD’s efforts to safeguard and advance UBS’s reputation for responsible conduct. As part of the governance changes introduced by UBS in 2008, the committee’s charter was revised and updated. Under the revised charter, the committee is mandated to review and assess how UBS should meet the evolving corporate responsibility expectations of its stakeholders. It also has responsibility for monitoring the firm’s corporate responsibility policies and regulations, as well as the implementation of its corporate responsibility activities and commitments. Headed by the Chairman of the BoD, the committee includes three other BoD members. A new advisory panel to the committee has also been established consisting of members of the GEB and other senior managers. The panel participates in committee meetings and implements its recommendations. Meetings are held at least twice a year, with the agenda and documentation prepared by the committee chair and the corporate responsibility management function of UBS’s chief communication officer area.



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     The GEB is responsible for UBS’s environmental policy and nominates a Group environmental representative, a function currently held by the firm’s Chief Risk Officer. A committee, comprising both Group and divisional environmental representatives, is tasked with overseeing the implementation of UBS’s environmental policy and providing guidance to the different business divisions in their implementation of the “UBS Statement on Human Rights”.

The GMLPU leads the Group’s overall efforts in all aspects of money laundering prevention, including terrorism financing, sanctions and anti-bribery. It supports the Group General Counsel and the head of compliance in their functional responsibilities by providing, in conjunction with the compliance functions in the business divisions, reasonable assurance that UBS meets relevant regulatory and professional standards in its business conduct. It also defines, where appropriate, uniformly applicable minimum standards for AML as a whole. The GMLPU coordinates its work via various committees and specialist networks with the core committee being the global AML committee.
Regional diversity boards consider and decide on key regional issues, such as the regional diversity strategy and diversity goals and measures. The boards are chaired by senior managers and are also responsible for assessing the progress made on relevant issues. UBS’s global community affairs activities are governed in a decentralized fashion. Every region has a dedicated community affairs function that coordinates charitable commitments by UBS, its senior management and employees within their region.

Corporate responsibility: training and
raising awareness

UBS strives to increase employee awareness of its corporate responsibility processes, activities and commitments. General information is published on the firm’s intranet and in em-

ployee magazines. In 2008, 2,800 employees participated in training and awareness-raising activities dealing with corporate responsibility. Specific training is also given to staff working in the areas of AML and environmental management. It is mandatory for AML and compliance staff to complete a training program every two years, and new joiners in all UBS business divisions receive training in the issue of anti-corruption as part of their induction process. Furthermore, in 2008, 5,232 employees participated in training on environmental issues, with 3,905 receiving general education on UBS’s environmental policy and programs, mostly in induction training, and 1,327 employees receiving specialist training targeted at their area of expertise and impact.

Preventing money laundering, corruption and
terrorist financing

UBS takes its responsibility to preserve the integrity of the financial system, and its own operations, very seriously. The firm has developed extensive policies intended to prevent, detect and report money laundering, corruption and terrorist financing. These policies seek to protect the firm, and its reputation, from those who may intend to legitimize their ill-gotten gains through UBS.

The GMLPU leads UBS’s efforts to fight money laundering, corruption and the financing of terrorism. It does so by continuously assessing the threats and risks that UBS faces with respect to AML in all its businesses. It takes a risk-based approach, ensuring the firm’s policies and procedures are commensurate with those risks, and that relationships that are classified as higher risk are dealt with appropriately. The firm constantly engages with its business divisions to ensure that these policies and procedures are adapted to their businesses and specific AML exposures, while also seeking to streamline and increase consistency between business divisions by using consistent methodologies and tools (for ex-


UBS’s corporate responsibility governance process

 
(FLOW CHART)

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ample, the creation of a uniform country risk framework). UBS also seeks to ensure its employees adhere to the firm’s strict know-your-customer regulations, while at the same time not treating clients a priori as criminals or undermining their right to privacy. Employees regularly undergo training in AML-related issues and new trends, be it through online training, awareness campaigns or seminars. UBS also utilizes advanced technology to assist in the identification of transaction patterns or unusual dealings.

Over the last few years, and as a core part of its risk-based approach, UBS has been particularly vigilant about enhancing controls with regard to regimes and countries with heightened risks. The need for increased vigilance has been underscored by the acknowledgement by the Financial Action Task Force (FATF) of the importance of country risk considerations in the risk-based approach, increasing international focus on corruption, and the need for the firm to manage its global security risk activity. As a result of these considerations, UBS has implemented a global sanctions policy, ceasing all business activities with a limited number of countries.
In 2008, UBS continued its engagement with the public sector and its peers to promote the development and implementation of AML standards for the financial industry as a whole, thereby contributing to wider efforts against money laundering. A notable achievement in this regard was made by the Wolfsberg Group, where UBS actively contributed to the FATF’s development of its Guidance Paper on Weapons of Mass Destruction Proliferation Finance, as well as completing and on 14 January 2009 publishing its own trade finance principles paper. Wolfsberg Group’s work is ongoing in the area of credit cards and stored value cards, the implementation of a new SWIFT message format to protect against the abuse of cover payments and a review of the Group’s 2003 paper on monitoring, screening and searching.

Supply chain management

In 2008, UBS spent over CHF 6.9 billion purchasing a wide range of products and services from suppliers and contractors around the world. UBS has established processes to manage environmental and human rights issues in relevant areas of its supply chain such as client gifts, IT equipment and energy sourcing. In order to further incorporate these issues into procurement processes, UBS has developed a supply chain guideline, which provides Group-wide guidance on identifying, assessing and monitoring supplier practices in the areas of human and labor rights, the environment and corruption. Examples of human rights issues that have been included are avoidance of child and forced labor, non-discrimination, remuneration, hours of work, freedom of association, humane treatment, and health and safety. In 2008, the guideline was gradually applied to new contracts and contract renewals with suppliers. By the end of the year

around 100 suppliers had been screened according to the guideline’s social and environmental criteria, and responsible supply chain requirements were included in the contractual arrangement with those suppliers who were awarded contracts. Also, some 170 procurement and sourcing officers were trained on the relevance and application of the new guidelines.

Community investment

UBS, together with its employees, seeks to have a positive influence on the social and environmental well-being of the local communities in which it operates. The firm does this through its community affairs program.

This program encompasses activities such as direct cash donations to selected organizations, employee volunteering, matched-giving schemes, in-kind donations, disaster relief efforts and / or partnerships with community groups, educational institutions and cultural organizations. UBS has dedicated teams around the world which work closely with staff at all levels to build partnerships with organizations in the communities, focusing on the key themes of “empowerment through education” and “building a stronger community”.
Overall, in 2008, UBS and its affiliated foundations donated nearly CHF 46 million to support charitable causes. UBS employees, through their donations and volunteer efforts, also made significant contributions to the communities they live in. Last year, almost 9,300 employees spent 84,700 hours volunteering. UBS supports their commitment by matching their donations and offering up to two working days a year for volunteering efforts.
UBS has also established a number of foundations and associations that donate money to worthy causes in Switzerland. The association A Helping Hand from UBS Employees helps disabled and disadvantaged people lead active, independent lives. UBS encouraged this employee involvement by matching the funds raised in 2008. The UBS Cultural Foundation fosters creativity, appreciation of different forms of art, and contact between artists and society. The foundation provides financial support for fine arts, film, literature, music, preservation of historic buildings, archaeological projects and research in history and philosophy in Switzerland. In similar fashion, the purpose of the UBS Foundation for Social Issues and Education is to support deprived communities in Switzerland in various forms. Non-profit, charitable organizations, projects and initiatives aiming at improving social welfare receive monetary assistance from these funds.

Client foundation

Besides the engagement of the firm and its employees, UBS also provides its clients with the opportunity to contribute to charitable causes. The UBS Optimus Foundation invests donations from UBS clients into a number of programs and


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Examples of UBS’s global community affairs in 2008

Americas: In partnership with Northwestern University, UBS launched a program to identify and develop future leaders in the non-profit sector. According to the Donors Forum of Chicago, the non-profit sector will see a large turnover in its local and national executive leadership in the next five years, with nearly 60% of executive directors set to retire. This program produced its first graduates in 2008 and four UBS fellows took classes at Northwestern and were mentored by a UBS senior executive.

Asia Pacific: UBS launched the first Community Leadership Experience program at the India Service Centre in Hyderabad. This initiative aims to build the capacity of leaders from the non-profit sector using the expertise and human resources of UBS and to provide them with a platform for

dialogue, discussion, sharing and learning. Modeled on UBS leadership programs, it gave 20 promising young leaders from the non-profit sector a chance to learn from UBS and external speakers about topics related to leadership, governance, strategic planning, communication and mentorship.

Switzerland: Twenty employees volunteered for Procap Sport, an organization that promotes enthusiasm for sport among people with physical or mental disabilities. Volunteers supported participants in a broad range of sports activities. In another volunteering project, 200 UBS employees
successfully participated at the eighth Finance Forum charity run to aid Kispex – a service providing home care for very sick, disabled and terminally ill children. UBS employees came in first in terms of numbers of

participants and donations collected.

UK: UBS continues to support an independent secondary school in Hackney, newly established in 2007, through the UK government’s Academies program. A local school for students of all abilities, The Bridge Academy opened in September 2007 by welcoming 187 students, and by 2013 will cater to 1,150 students including 250 sixth formers. The school’s ambition is to create an outstanding learning environment for students, staff and the local community. The Bridge Academy exemplifies UBS’s commitment to improving the provision of education and to supporting regeneration efforts in the London Borough of Hackney.
  è   Refer to www.ubs.com/ corporateresponsibility for more information on UBS’s community affairs program


 

organizations, focusing on the key themes of children and of medical and biological research. The projects involve close collaboration with respected partner organizations and are selected by a team of specialists within the foundation, who also closely monitor their implementation. The costs of managing and administering the UBS Optimus Foundation are borne by UBS, so that the full contribution of each client reaches the projects. In 2008, the UBS Optimus Foundation spent over CHF 17 million supporting 71 projects in Africa, Asia Pacific, Europe and North and South America.

UBS and the environment

Through its commitment to the environment, embodied in its environmental policy, UBS aims to create long-term value for the firm and its clients and the communities they live in. The policy is based on five principles, under which the firm is continuously:
  seeking to consider environmental risks in all UBS businesses, especially in lending, investment banking, advisory and research, and UBS’s own investments;
  seeking to pursue opportunities in the financial markets for environmentally friendly products and services, such as socially responsible investments;

  seeking ways to reduce UBS’s direct environmental impact on air, soil and water from in-house operations, with a primary focus on reducing greenhouse gas emissions. UBS also assesses the environmental impact of its suppliers’ products and services;
  ensuring efficient implementation of UBS’s policy through a global environmental management system certified according to ISO 14001 – the international environmental management standard;
  integrating environmental considerations into internal communications and training.

Environmental management system

UBS’s environmental management system covers both its banking activities and in-house operations and has been certified under the ISO 14001 standard since 1999. ISO 14001 requires that the system be audited annually and recertified every three years. UBS successfully passed the extensive ISO 14001 recertification audit in 2008. Conducted by Société Générale de Surveillance (SGS), 24 days of audits involving 163 employees were undertaken. SGS confirmed that a well-performing environmental management system, integrated in the organization and suitable for manag-



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The five principles of UBS’s environmental policy

 
 
(CHART)

ing environmental risks and improving environmental performance on a continual basis, is in place.

Environmental products and services

During the last ten years UBS has developed a range of products and services that meet or anticipate clients’ needs in environmental and socially responsible investments (SRI). This offering currently stretches across UBS’s businesses in wealth management, investment banking, asset management, and retail and commercial banking. It includes SRI funds, research and advisory services provided to private and institutional clients, access to the world’s capital markets for renewable energy firms and, in Switzerland, “green” mortgages.

Investment products and advisory

In 2008, UBS continued to expand its SRI offering in response to growing demand from a number of markets, including

the launch of two new SRI products, the UBS (Lux) Equity Sicav – Emerging Markets Innovators and the UBS Strategy Certificate Energy Efficiency. UBS’s SRI offering is diverse and includes products managed according to “best-in-class” practices and theme-based approaches. “Best-in-class” is an active equity management approach that is based on stock selection of companies that generate above-average environmental, social and economic performance. The “best-in-class” offering includes a global fund and a European fund. The theme-based approach focuses investment on segmented climate change, water and demographics strategies.

Additionally, UBS offers customized client portfolios in the form of segregated mandates / institutional accounts based on “negative” screening, which excludes certain controversial stocks or sectors from the portfolio based on their negative social or environmental impact as perceived by the client. UBS’s global platform and investment research enable the firm to offer such tailor-made solutions. In the UK, the asset management business seeks to influence the corporate responsibility and corporate governance practices of the companies it invests in. In addition to fund management services, UBS provides stock-broking and account management services to alternative energy and SRI fund managers.
Finally, UBS also offers SRI portfolio management solutions to selected private client segments. This offering pools internal and external SRI expertise and includes SRI-focused portfolios in Switzerland and SRI-managed accounts in the US. UBS’s open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from third-party providers.
In the past years UBS experienced increased client demand for SRI and expanded its SRI product offering, resulting in a significant increase in UBS SRI invested assets. In 2008 these SRI invested assets decreased significantly year on year, primarily due to severe corrections in the global equity markets (equities is the preferred asset class of UBS’s SRI products), but also due to asset outflows.


Socially responsible investments invested assets1

 
                                    % change  
          For the year ended     from  
CHF billion, except where indicated
  GRI2       31.12.08       31.12.07       31.12.06       31.12.07  
 
UBS
            2,174       3,189       2,989       (32 )
 
UBS SRI3 products and mandates
                                       
 
positive criteria
    FS11       2.12       5.20       1.84       (59 )
 
exclusion criteria
    FS11       14.05       33.33       16.17       (58 )
 
Third-party
    FS11       1.85       1.08       N/A       72  
 
Total SRI invested assets
    FS11       18.03       39.61       18.01       (54 )
 
Proportion of total invested assets (%)4
            0.83 %     1.24 %     0.60 %        
 
1 All figures are based on the level of knowledge as of January 2009.  2 Global reporting initiative (GRI) (see also www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement.  3 Socially responsible investments (SRI).  4 Total SRI / UBS’s invested assets.

Positive criteria: apply to the active selection of companies, focusing on how a company’s strategies, processes and products impact its financial success, the environment and society. This includes best-in-class or thematic investments.

Exclusion criteria: companies or sectors are excluded based on environmental, social or ethical criteria, for example, companies involved in weapons, tobacco, gambling, or companies with high negative environmental impacts. This also includes faith-based investing consistent with principles and values of a particular religion.

Third-party: UBS’s open product platform gives clients access to socially responsible investment products from third-party providers. This includes both positive and exclusion criteria, and microfinance investments.



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Research

UBS’s SRI research teams analyze emerging socio-economic and environmental trends and assess their potential impact on investment markets and companies’ share prices. Identifying material SRI issues is challenging. Essentially, three things help determine which environmental and social issues are critical: society’s perception of what is important; the nature of the competitive pressures facing firms in an industry; and how costs and benefits are (or will be) distributed between stakeholders.
The UBS SRI research teams were established in each of the firm’s divisions to serve their respective clients. In the Investment Bank, the equity research team writes recommendations and reports for institutional investment clients on renewable energy, the carbon markets and the impact of climate change on companies in a wide range of sectors. SRI and sustainability research is provided by a dedicated team. In the asset management business, an internal SRI research team manages portfolios around themes such as climate change / energy efficiency, water and demographics. The SRI research team in UBS’s wealth management business conducts SRI research and provides advice to private clients on SRI investment solutions.
Client interest in some aspects of SRI – for instance climate change, demographics and water – has grown, and so has research coverage. The SRI teams regularly collaborate with analysts in other teams to write about emerging SRI themes, and relevant research content is regularly published by a growing number of specialists within the mainstream research effort. In 2008, for example, UBS published the report “Mind over Matter”, which broadly examines the issue of resources efficiency, and makes the case that higher prices for basic necessities, urbanization, and more stringent climate change policies will eventually yield benefits to those who invest in efficiency upgrades.

Financing and advisory services

UBS’s renewable energy investment banking business arranges financing and provides strategic and financial advisory services for companies in the solar, wind, wave and other renewable energy sectors. Since 2006, UBS has led over 30 financing transactions in these sectors, raising over USD 7 billion for renewable energy companies worldwide. In 2008, to name just one example of such a transaction, UBS acted as the joint global coordinator and joint bookrunner for the EUR 1.8 billion initial public rights offering of the wind generation company EDP Renováveis, one of the largest wind generation companies in the world and a subsidiary company of Portuguese utility Energias de Portugal (EDP).

Carbon trading

In cap and trade emissions markets, such as the EU Emissions Trading Scheme (EU ETS), companies have annual caps on

the amount of emissions their facilities are allowed to produce. Companies who are able to reduce their emissions below their cap have the ability to sell their unused quota to other companies, thereby creating an emissions market. Through the use of financial instruments, UBS is able to help clients manage their exposure to the emissions markets. UBS ETD (Exchange Traded Derivatives) is an active member of and offers execution and full service clearing on the major emission exchanges in Europe and North America for contracts on EU ETS allowances (EUA), UN Certified Emissions Reductions (CER), Regional Greenhouse Gas Initiative allowances, CCX Carbon Financial Instruments (CFI) and Nitrogen Oxide and Sulfur Dioxide.

Environmental risk management

UBS seeks to identify, manage and control environmental risks in its business transactions. Examples of environmental risk include the impairment of a client’s cash flow or assets by environmental factors (such as inefficient processes or property that is polluted or contaminated) or through liability risk, such as when a bank takes environmentally unsound collateral onto its own books. As environmental risks can manifest themselves across the wide variety of risks inherent in UBS’s business activities, including credit risks, liability risks and reputational risks, UBS has designed environmental procedures and tools for their identification, management and control. These environmental procedures and tools are integrated into existing processes, such as due diligence on transactions or investments and ongoing risk management.

UBS continues to develop and test internal industry sector guidelines to support the consistent identification and assessment of environmental and social risks in all its banking activities. The sector guidelines cover industry sectors that have a high potential for environmental and social risk and summarize industry standards for dealing with potential issues in the various life cycles of the sector.
Not all products and services provided by UBS have the same risk potential: UBS therefore takes a risk-based approach to environmental risk management and regularly analyzes its portfolio of products and services to assess their respective potential environmental risk potential. With its current business profile and operating environment, UBS’s potential for material risk is greater within the context of its lending and capital markets businesses, as well as its direct real estate and infrastructure investments. As a result, Global Wealth Management & Business Banking has introduced a standardized environmental risk check to identify material environmental risk in its lending to all relevant clients, including its roughly 140,000 corporate clients in Switzerland. In the Investment Bank, the environmental risk framework covers all banking activities including debt and equity under-


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writing, financial advisory services and lending. For its part, Global Asset Management has put environmental due diligence processes in place for its real estate and infrastructure funds. If significant potential environmental risks are identified in a transaction, the risks are assessed. Wherever possible, UBS seeks to engage with the client to discuss possible mitigating measures. Where this is not possible or successful, the firm may decline the transaction altogether.

Global Wealth Management & Business Banking

The business division assesses its environmental risks in a three-stage process. Client advisors complete the first screenings, looking at financial risks linked to environmental aspects such as compliance with environmental legislation, workplace safety, contaminated sites and natural hazards. In 2008, close to 100,000 lending transactions in Switzerland were subject to such a screening. If the risks cannot be fully ruled out during the first screening, a credit officer initiates a second screening and decides whether the risks identified are transparent enough for the credit decision to be taken. Transactions entailing significant environmental risk undergo a detailed environmental assessment as a third step, a service provided by the business division’s environmental risk competence center. In 2008, 32 such detailed assessments took place and 134 client advisors and credit officers were trained.

Investment Bank

The Global Environmental Risk Guidelines apply to all transactions, services and activities within the Investment Bank. The guidelines are supported by an environmental risk framework that is integrated into the business division’s due diligence and approval processes. Investment Bank staff identify potential environmental risks in the initial due diligence phase and alert the Investment Bank’s environmental advisory group (EAG) in case of significant potential risks. Assessments by lawyers and / or external consultants are routinely sought for certain sectors and products. The EAG works with the relevant business and control functions (80 transactions in 2008) to assess the risks, determine any mitigating measures and direct further due diligence, as required. In this way the relevant senior business committee may fully consider the potential environmental risk in the course of its review of the transaction and / or client. The implementation of the environmental risk framework is supported by training and awareness-raising activities. In 2008, sector-specific training was provided to 443 bankers and support functions and high-level training to a further 107 employees.

Global Asset Management

The business division introduced a formal environmental risk matrix in 2004 in order to assess the reputational and envi-

ronmental risks that investments made by UBS on behalf of its clients might imply. The matrix is reviewed annually for applicability and comprehensiveness and forms part of the environmental management system employed within the business division. In 2008, all properties acquired or developed by Global Real Estate for its direct investment vehicles were subject to a thorough environmental due diligence process, in accordance with local regulations and internal best practice guidance. Similar processes are in operation in Infrastructure Asset Management.

Environmental and CO2 footprints

UBS directly impacts the environment in a number of ways: its businesses consume electricity; employees travel for business purposes and use paper and generate waste in the course of their work; and offices require heating and cooling systems. Improving the use of these resources can reduce costs and enhance environmental performance, and UBS therefore has a series of measures to efficiently manage its environmental impact.

CO2 strategy and emission reduction

The GEB decided in February 2006 to set a Group-wide CO2 emission reduction target of 40% below 2004 levels by 2012. UBS seeks to achieve this target by:
  adopting in-house energy efficiency measures that reduce energy consumption in buildings it operates;
  increasing the proportion of renewable energy used to avoid emissions at source;
  offsetting and neutralizing emissions that cannot be reduced by other means.

UBS’s CO2 footprint

(BAR CHART)


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Corporate responsibility

     These measures allowed UBS to further increase the share of renewable energy it purchases, and to reduce its 2008 CO2 emissions by 27% compared with 2004, another step toward achieving the 40% reduction target by 2012.

Energy consumption and energy efficiency

Energy consumption represents an important environmental impact area for UBS and is the biggest contributor to its overall greenhouse gas emissions. UBS has a long track record of managing its energy consumption, with the firm establishing its first energy management function in the 1970s. Today, energy efficiency measures are an important component of UBS’s program for achievement of the Group-wide CO2 emission reduction target. Measures include investments in energy-efficient technology and encouraging good housekeeping measures. For example, a major IT server consolidation project has been under way since 2007 which has reduced the total number of distributed servers at UBS by 2,200. The project focused on consolidating applications sitting on multiple old servers to fewer, newer machines and the decommissioning of old applications. The resulting energy savings of 17 GWh contributed significantly to the total of 25 GWh of savings from IT activities since 2007 (representing around 3% of UBS’s global power consumption).

Renewable energy

In addition to its energy efficiency programs, UBS seeks to improve the energy mix it purchases by including a higher proportion of renewable energy. The percentage of renewable energy and district heating purchases rose from 24% in 2004 to 48% in 2008.
Since 2007, roughly 210 GWh or 90% of the electricity supply for UBS’s buildings in Switzerland has come from renewable sources, such as water and solar power stations. Similarly, in the UK, UBS purchases electricity backed by 100% renewable sources for all its major buildings, representing 85% of the total volume. In addition, UBS purchases renewable energy credits (RECs) in the US electricity markets, which accounted for 16% of its electricity consumption in the US in 2008.

Business travel and offsetting

Business travel is a significant contributor to UBS’s greenhouse gas emissions. While the firm encourages its employees to use environmentally friendly alternatives to air and road travel, for example video conferences, travel is essential for a global financial services firm that strongly believes in personalized client relationships. Therefore, since 2006, UBS has offset emissions from business-related air travel, representing roughly 100,000 tons of CO2 per year, or about a quarter of its total annual CO2 emissions. Offsetting emissions means that UBS indirectly neutralizes its business air travel emissions by investing in third-party projects that reduce an equivalent amount of greenhouse gas emissions. UBS selected offsetting projects in Brazil, Russia, India, China, Turkey and Germany, on the basis of their adherence to international quality standards such as the Voluntary Carbon Standard and the Gold Standard, and of their additional environmental and social benefits.

Paper and waste

UBS continues to work towards achieving its firm-wide targets for paper use and waste reduction. This includes the goal of reducing paper consumption per employee by 5% for 2009 when compared with 2006 levels. UBS also aims to have 20% of the paper it uses come from recycled sources. UBS has made steady progress towards achieving these paper targets, for example by switching across Europe to a 100% recycled paper for all internal printing, and through continuing improvements in electronic distribution of client statements. At the same time, the firm seeks to improve its environmental footprint by reducing waste per employee (for example, plastic bottles or packaging) by 10% and by sending 70% of waste to recycling sites. These latter targets are proving to be challenging in certain regions as they heavily rely on behavioral changes rather than technical measures or processes. UBS will continue to educate its employees on environmental matters, helping them make the right choices and promoting sustainable behavior both at work and at home.
  è   Refer to www.ubs.com/environment for more information on UBS’s environmental management system


Environmental indicators per full-time employee

                                         
 
    Unit     2008     Trend     2007     2006  
 
Total direct and intermediate energy
  kWh / FTE       11,792       è       11,942       12,736  
 
Total business travel
  Pkm / FTE       10,281       ê       12,685       12,544  
 
Total paper consumption
  kg / FTE       167       ê       190       188  
 
Total waste
  kg / FTE       298       è       299       303  
 
Total water consumption
  m3 / FTE       28.1       ì       26.7       26.0  
 
CO2 footprint
  t / FTE       3.07r       ê       3.43       3.93  
 
Legend: FTE = full-time employee; kWh = kilo watt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

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Environmental indicators1

                                                 
 
                    20082             20072     20062  
           
            Absolute     Data             Absolute     Absolute  
    GRI3     normalized4     quality5     Trend6     normalized4     normalized4  
 
Total direct and intermediate energy consumption7
          1,016 GWh       ***       è     981 GWh     951 GWh  
 
Total direct energy consumption8
  EN3     127 GWh       **       è     130 GWh     154 GWh  
 
natural gas
            83.3%       **       è       83.3%       85.5%  
 
heating oil
            12.2%       ***       è       12.1%       11.8%  
 
fuels (petrol, diesel, gas)
            4.5%       ***       è       4.6%       2.7%  
 
renewable energy (solar power, etc.)
            0.03%       ***       î       0.03%       0.03%  
 
Total intermediate energy purchased9
  EN4     890 GWh       ***       è     851 GWh     797 GWh  
 
electricity from gas-fired power stations
            11.7%       **       è       12.3%       13.2%  
 
electricity from oil-fired power stations
            3.7%       ***       ê       4.2%       4.5%  
 
electricity from coal-fired power stations
            18.4%       **       è       18.6%       21.7%  
 
electricity from nuclear power stations
            11.1%       **       î       13.6%       20.5%  
 
electricity from hydroelectric power stations
            25.8%       ***       è       25.5%       21.4%  
 
electricity from other renewable resources
            23.1%       ***       è       22.0%       12.7%  
 
district heating
            6.2%       ***       é       3.8%       6.0%  
 
Share of renewable energy and district heating
            48%       ***       ì       45%       34%  
 
Total business travel
  EN29     886 m Pkm       ***       ê     1,042 m Pkm     936 m Pkm  
 
rail travel10
            3.5%       **       è       3.3%       4.1%  
 
road travel10
            0.6%       **       é       0.5%       0.6%  
 
air travel
            96.0%       ***       è       96.2%       95.3%  
 
Number of flights (segments)
            398,369       ***       ê       446,274       402,629  
 
Total paper consumption
  EN1       14,403 t       ***       î       15,593 t       14,013 t  
 
post-consumer recycled
    EN2       16.2%       ***       é       10.5%       6.2%  
 
new fibers FSC11
            16.6%       ***       é       10.7%       0.0%  
 
new fibers ECF + TCF11
            66.8%       ***       ê       78.6%       93.8%  
 
new fibers chlorine bleached
            0.4%       **       é       0.2%       0.0%  
 
Total waste
  EN22       25,644 t       ***       è       24,589 t       22,631 t  
 
valuable materials separated and recycled
            54.6%       ***       è       56.3%       58.2%  
 
incinerated
            14.3%       ***       î       15.8%       12.7%  
 
landfilled
            31.1%       **       ì       27.9%       29.1%  
 
Total water consumption
  EN8       2.42 m m 3     **       ì       2.19 m m 3     1.94 m m 3
 
Total CO2 footprint12
            264,197 t       ***       î       281,705 t       293,169 t  
 
total direct CO2 emissions (GHG scope 1)13
    EN16       26,490 t       ***       è       26,701 t       31,519 t  
 
total indirect CO2 emissions (GHG scope 2)13
    EN16       204,344 t       **       è       218,681 t       230,015 t  
 
total other indirect CO2 emissions (GHG scope 3)13
    EN17       129,364 t       ***       ê       149,323 t       132,635 t  
 
total CO2e offsets (business air travel)14
            96,000 t       ***       ê       113,000 t       101,000 t  
 
Legend: GWh = giga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million
1 All figures are based on the level of knowledge as of January 2009.  2 Reporting period: 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007), 2006 (1 July 2005–30 June 2006).  
3 Global reporting initiative (see also www.globalreporting.org). “EN” stands for the environmental performance indicators as defined in the GRI.  4 Non-significant discrepancies from 100% are possible due to roundings.  5 Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5% – ***, up to 15% – **, up to 30% – *. “Uncertainty” is the likely difference between a reported value and a real value.  6 Trend: at a *** / ** / * data quality, the respective trend is stable (è) if the variance equals 5 / 10 / 15%, low decreasing / increasing (î,ì) if it equals 10 / 20 / 30% and decreasing / increasing if the variance is bigger than 10 / 20 / 30% (ê,é).  7 Refers to energy consumed within the operational boundaries of UBS.  8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).  9 Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).  10 Rail and road travel: Switzerland only.  11 Paper produced from new fibers. “FSC” stands for Forest Stewardship Council, “ECF” for elementary chlorine free and “TCF” for totally chlorine free.  12 CO2 footprint equals total CO2 emissions (GHG scope 1, 2 and 3) minus CO2e offsets.  13 Refers to ISO 14064 and the “GHG (greenhouse gas) protocol initiative” (www.ghgprotocol.org), the international standards for CO2 reporting: Scope 1 accounts for direct CO2 emissions by UBS; Scope 2 accounts for indirect CO2 emissions associated with the generation of imported / purchased electricity, heat or steam; Scope 3 accounts for indirect CO2 emissions associated with business travel, paper consumption and waste disposal.  14 Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize CO2 emissions from business air travel.

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Strategy, performance and responsibility
Corporate responsibility

(ASSURANCE STATEMENT)

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UBS business divisions and
Corporate Center

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


Table of Contents

UBS business divisions and Corporate Center
 
 
As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas.
 
  The Investment Bank underwent a detailed strategic review in 2008. The result was a repositioning of the business division, personnel and cost reductions and a refocusing of the business division’s activities and businesses.



Global Wealth Management & Business Banking

Wealth Management International & Switzerland recorded a pre-tax profit of CHF 3,601 million in 2008, a decrease from the record profit of CHF 6,310 million in 2007. This is partially due to a provision of CHF 917 million in connection with the US cross-border case. During this period:

Net new money outflows were CHF 101.0 billion compared with inflows of CHF 125.1 billion. Invested assets declined to CHF 870 billion from CHF 1,294 billion. The gross margin on invested assets fell six basis points to 97 basis points. The cost/income ratio increased to 63.1% from 51.1%.

Wealth Management US recorded a pre-tax loss of CHF 698 million in 2008, compared with a pre-tax profit of CHF 674 million in 2007. 2008 included auction rate securities-related charges of CHF 1,524 million. During this period:

Net new money outflows were CHF 10.6 billion compared with inflows of CHF 26.6 billion. Invested assets declined to CHF 600 billion from CHF 840 billion. The gross margin on invested assets increased seven basis points to 84 basis points. The cost/income ratio increased to 111.3% from 89.9%. Recurring income declined 8% to CHF 3,835 million. Revenues per advisor decreased to CHF 735,000 from CHF 828,000.

Business Banking Switzerland recorded a pre-tax profit of CHF 2,449 million, up CHF 182 million from 2007. During this period:

Net new money outflows were CHF 11.4 billion compared with inflows of CHF 4.6 billion. Invested assets declined to CHF 129 billion compared with CHF 164 billion. The cost/income ratio decreased to 51.2% from 57.7%. The loan portfolio declined 2% to CHF 143 billion. The ratio of the impaired gross lending portfolio to the total gross lending portfolio improved to 1.0% from 1.2%.







                                 
  UBS reporting structure in 2008  
 
 
 
                             
 
Global Wealth Management
& Business Banking
    Global Asset Management     Investment Bank       Corporate Center  
                     
                                 
 
Wealth Management
                             
 
International & Switzerland
                             
                                 
                                 
 
Wealth Management US
                             
                                 
                                 
 
Business Banking Switzerland
                             
                                 
 
 
 
 

 


Table of Contents

                                 
Performance from continuing operations before tax  
    For the year ended     % change from  
CHF million   31.12.08     31.12.07     31.12.06     31.12.07  
 
Wealth Management International & Switzerland
    3,601     6,310       5,197       (43 )
 
Wealth Management US
    (698)     674       542          
 
Business Banking Switzerland
    2,449     2,267       2,281       8  
 
Global Wealth Management & Business Banking
    5,352     9,251       8,020       (42 )
 
Global Asset Management
    1,333     1,454       1,320       (8 )
 
Investment Bank
    (34,092)     (16,669 )     5,568       (105 )
 
Corporate Center
    54     2,222       (789 )     (98 )
 

Global Asset Management

Pre-tax profit decreased 8% to CHF 1,333 million in 2008 from CHF 1,454 million in 2007. During this period:

Net new money outflows were CHF 103.0 billion compared with CHF 15.7 billion. Institutional invested assets declined to CHF 335 billion compared with CHF 522 billion. Wholesale intermediary invested assets fell to CHF 240 billion compared with CHF 369 billion. The gross margin on institutional invested assets declined six basis points to 38 basis points. The gross margin on wholesale intermediary invested assets fell six basis points to 41 basis points. The cost/income ratio was 54.1% compared with 64.5%.

Investment Bank

Pre-tax loss of CHF 34,092 million in 2008, compared with a pre-tax loss of CHF 16,669 million in 2007. During this period:

The cost/income ratio and compensation ratio remained not meaningful due to negative overall results in both years. Average regulatory Value at Risk (VaR) (10-day, 99% confidence, five years of historical data) was CHF 374 million compared with CHF 514 million. The ratio of the impaired gross lending portfolio to the total gross lending portfolio was 3.6%, up from 0.4%.

Corporate Center

The Corporate Center produced a slightly positive result of CHF 54 million in 2008 from continuing operations, compared with a gain of CHF 2,222 million in 2007. During this period, total operating income decreased to CHF 1,083 million from CHF 3,562 million and total operating expenses declined to CHF 1,029 million from CHF 1,340 million.



 


Table of Contents

UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Global Wealth Management & Business Banking

Global Wealth Management & Business Banking is a leading global provider of financial services for wealthy clients and the leading bank for individual and corporate clients in Switzerland.

                                 
Business division reporting  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
Income
    21,802       24,841       21,775       (12 )
 
Credit loss (expense)/recovery
    (421)       28       109          
 
Total operating income
    21,381       24,869       21,884       (14 )
 
Cash components
    9,191       10,564       9,074       (13 )
 
Share-based components1
    187       444       377       (58 )
 
Total personnel expenses
    9,378       11,008       9,451       (15 )
 
General and administrative expenses
    5,367       3,178       3,078       69  
 
Services (to)/from other business units
    926       1,106       1,040       (16 )
 
Depreciation of property and equipment
    261       241       232       8  
 
Amortization of intangible assets
    98       85       63       15  
 
Total operating expenses
    16,030       15,618       13,864       3  
 
Business division performance before tax
    5,352       9,251       8,020       (42 )
 
 
                               
Key performance indicators
                               
 
Cost/income ratio (%)2
    73.5       62.9       63.7          
 
 
                               
Attributed equity and risk-weighted assets
                               
 
Average attributed equity (CHF billion)3
    17.3                          
 
Return on attributed equity (RoaE) (%)4
    31.0                          
 
BIS risk-weighted assets (CHF billion)5
    89.2       169.7       155.2          
 
Return on BIS risk-weighted assets (%)6
    5.9       5.6       5.3          
 
Goodwill and intangible assets (CHF billion)7
    6.2       5.8       6.0          
 
 
                               
Additional information
                               
 
Invested assets (CHF billion)
    1,599       2,298       2,123       (30 )
 
Net new money (CHF billion)8
    (123.0)       156.3       114.5          
 
Client assets (CHF billion)
    2,393       3,554       3,337       (33 )
 
Personnel (full-time equivalents)
    49,541       51,243       48,200       (3 )
 
1 Includes social security contributions and expenses related to alternative investment awards.    2 Operating expenses / income.    3 Refer to the “Capital management” section of this report for more information about the equity attribution framework, which was implemented in 2008.    4 Business division performance before tax / average attributed equity.    5 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.    6 Business division performance before tax / average BIS RWA.    7 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.    8 Excludes interest and dividend income.

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Global Wealth Management & Business Banking business portfolio

()

Business

A global branch network delivers comprehensive financial services to wealthy private individuals around the world and to private and corporate clients in Switzerland. All clients are provided with the advice, financial products and tools that fit their individual needs.

Strategy

The cornerstones of this business division’s strategy are:
  to strengthen its global leadership in wealth management by actively investing in fast-growing markets and developing a strong focus on high and ultra-high net worth clients;
  to position UBS as the universal bank of choice in Switzerland by strengthening its position across all client segments, as well as developing clients across segments and therefore each client relationship to its full potential; and
  to maximize risk-adjusted profits by a balanced focus on top-line growth, risk and efficiency.

UBS places great emphasis on differentiating strategies for individual markets according to their profitability and growth potential. In the international markets where UBS is well established with a high market share and in Switzerland, the focus is on maximizing productivity and profitability as the growth prospects are less high. For domestic businesses within the five biggest European economies, UBS aims to increase profitability. For the key domestic US presence, UBS concentrates on continuing earnings growth and achieving profitability comparable with the best of its peer group. In those international markets which have been expanding strongly (for example, Asia, Eastern Europe, Latin

America and the Middle East), UBS will continue to invest actively in order to tap their long-term growth potential. In addition, within the next seven to 10 years UBS plans to establish a significant domestic presence in select markets where its business is not yet mature.

Organizational structure

Formed on 1 July 2005, this business division encompassed UBS’s global wealth management businesses and the Swiss corporate and retail banking unit. Throughout 2008, until the recent reorganization, it comprised the following business units: Wealth Management International & Switzerland, serving wealthy and affluent clients around the world, except domestic clients in the US; Wealth Management US, serving wealthy and affluent domestic US clients; and Business Banking Switzerland, serving retail and corporate clients in Switzerland. Each of these business units is provided with infrastructure, products and services by the business division’s support functions, which also provide services to other UBS business divisions under a transfer pricing mechanism.

On 10 February 2009, UBS announced a reorganization of its global wealth management and Swiss business banking businesses. Global Wealth Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank, which comprises all wealth management business booked outside the Americas plus the Swiss private and corporate client business; and Wealth Management Americas, including Wealth Management US, the domestic Canadian and Brazilian businesses, as well as the international business booked in the United States.
This new management structure will be the basis for the business division’s segment reporting starting with UBS’s


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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Current reporting structure (on 31 December 2008)

()
New reporting structure (from first quarter 2009 onwards)
 
()
1Includes “Swiss Bank” and “Corporate and Institutional Banking”.  2 Includes “Wealth Management International” and “Wealth Management Global”.

financial report for first quarter 2009. UBS will provide separate segment reporting for Wealth Management & Swiss Bank and Wealth Management Americas. UBS has chosen to subdivide Wealth Management & Swiss Bank into Swiss and international business areas for reporting purposes (income data and key performance indicators):
  “Swiss clients” will cover services provided to Swiss retail, wealth management and small businesses, as well as corporate and institutional clients.
  “International clients” will encompass the international wealth management business conducted out of Switzerland and all wealth management businesses of UBS’s other booking centers in Asia and Europe.

è   Prior to publication of first quarter 2009 results, UBS will publish restated business division results on www.ubs.com/investors showing quarterly and annual results for 2007 and 2008 under the new organizational structure announced on 10 February 2009.


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UBS business divisions and Corporate Center

Wealth Management International & Switzerland
Business description

Business

Wealth management solutions are delivered via this business unit’s global branch network and through financial intermediaries. In addition to the specific wealth management products and services outlined below, clients benefit from UBS’s entire range of resources, from asset management to estate planning and corporate finance advice. An open product platform gives clients access to a wide array of pre-screened, top-quality products from third-party providers that complement UBS’s own product lines. On 31 December 2008, invested assets were CHF 870 billion.

Organizational structure

Throughout 2008, until the recent reorganization, this business unit comprised the following areas: Asia Pacific; Latin America, the Mediterranean, the Middle East and Africa; North, East and Central Europe; and Switzerland. The extensive wealth management branch network consisted of 5,755 client advisors, around 110 offices in Switzerland and more than 100 offices worldwide.

Competitors

Major competitors of this business unit include globally active wealth managers, such as the wealth management operations of Credit Suisse, HSBC and Citigroup. The business unit also competes with private banks that operate mainly within their respective domestic markets, such as

Coutts in the UK, Deutsche Bank AG and Sal. Oppenheim in Germany, Unicredit in Italy, and Swiss banks focused on international clients (such as Julius Baer and Pictet).

Clients and markets

The following client segments are offered sophisticated products and services specifically designed to address their needs: international core affluent clients with investable assets of CHF 250,000 to CHF 2 million; high net worth clients with investable assets of up to CHF 5 million; private wealth management clients with investable assets of CHF 5 million to CHF 50 million; and ultra-high net worth clients with investable assets of more than CHF 50 million. The business unit also provides financial intermediaries, both inside and outside Switzerland, with UBS’s wealth management solutions, products and services.

Products and services

The business unit offers expert financial advice to support clients throughout the different stages of their lives. Wealth planning advice is also given on topics such as the funding of education, gift giving, inheritance and succession. Corporate finance advice is offered to support clients in the process of disposing of corporate assets. Clients can also trade a full range of financial instruments, from single securities, such as equities and bonds, to structured products and alternative investments. The business unit also fulfills the basic banking needs of private clients with a wide variety of products, rang-



Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by currency

(INVESTED ASSETS BY CURRENCY)


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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Loan penetration

(LOAN PENETRATION)

ing from cash accounts and savings accounts to credit cards, mortgages and securities-backed lending.

By aggregating private investment flows into institutional-size flows, the business unit is in a position to offer its private clients access to investments that would otherwise only be available to institutional clients. Expertise is sourced either from within UBS or from the external market.
Both discretionary and non-discretionary mandates are offered. Clients who opt for a discretionary mandate delegate the management of their assets, including investment decisions, to a team of professional portfolio managers who work according to an agreed investment strategy. Clients who prefer to be actively involved in the management of their assets can choose a non-discretionary mandate, where investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions.

Invested assets by client domicile

(INVESTED ASSETS BY CLIENT DOMICILE)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)



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UBS business divisions and Corporate Center

 
Settlement regarding the US cross-border case

As announced on 18 February 2009, UBS settled the US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) by entering into a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the SEC. As part of these settlement agreements:
  UBS will pay a total of USD 780 million (CHF 917 million) to the United States, USD 380 million representing disgorgement of profits from maintaining the US cross-border business and USD 400 million representing US federal backup withholding tax required to be withheld by UBS, together with interest and penalties, and restitution for unpaid taxes associated with certain account relationships involving fraudulent sham and nominee offshore structures and otherwise as covered by the DPA.
  UBS will complete the exit of the US cross-border business out of non-SEC registered entities, as announced in July 2008, which these settlements now allow UBS to do in a lawful, orderly and expeditious manner.
  UBS will implement and maintain an effective program of internal controls with respect to compliance with its obligations under its Qualified Intermediary Agreement (QIA) with the Internal Revenue Service (IRS) as well as a revised

    legal and compliance governance structure in order to strengthen independent legal and compliance controls.
  Pursuant to an order issued by the Swiss Financial Market Supervisory Authority (FINMA), information has been transferred to the DOJ regarding accounts of certain US clients as set forth in the DPA, who, based on evidence available to UBS, appear to have committed tax fraud or the like within the meaning of the Swiss-US Double Taxation Treaty.
Under the DPA, the DOJ has agreed that any prosecution of UBS be deferred for a period of at least 18 months, which is subject to extension under certain circumstances, such as UBS needing more time to complete the implementation of the exit of its US cross-border business. If UBS satisfies all of its obligations under the DPA, the DOJ will refrain from pursuing charges against UBS relating to the investigation of its US cross-border business.
Additionally, as published by FINMA on 18 February 2009, FINMA has concluded that UBS violated the requirements for proper business conduct, and it barred UBS from providing services to US resident private clients out of non-SEC registered entities. Further, FINMA ordered UBS to enhance its control framework around its cross-border
businesses and announced that the effectiveness of such a framework will be audited. The order by FINMA in support of the resolution achieved with the DOJ was instrumental in averting the imminent risk of further negative implications and uncertainties for the bank.
The cost for the settlement has been fully charged to the year 2008, as reflected in this report.
The settlement agreements do not resolve issues concerning the pending “John Doe” summons which the IRS served on UBS in July 2008. The summons seeks information regarding a substantial number of undisclosed accounts maintained by US persons at UBS in Switzerland, whose information is protected from disclosure by Swiss financial privacy laws. As announced on 19 February 2009, the IRS has commenced a civil action, seeking enforcement of the summons, which UBS intends to challenge. UBS believes it has substantial defenses to the enforcement of the summons and intends to vigorously contest its enforcement in the civil proceeding, as is permitted under the terms of the DPA. Objections to the enforcement of the summons are based upon US law, the terms of UBS’s QIA with the IRS, Swiss financial privacy and other laws, and the principles of international comity that require US courts to take into account foreign laws.


 

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Global Wealth Management & Business Banking

Business performance

                                 
Business unit reporting  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
Income
    10,819       12,893       10,827       (16 )
 
Credit loss (expense) / recovery
    (390 )     (1 )     1          
 
Total operating income
    10,429       12,892       10,828       (19 )
 
Cash components
    3,037       3,704       2,999       (18 )
 
Share-based components1
    75       169       174       (56 )
 
Total personnel expenses
    3,112       3,873       3,173       (20 )
 
General and administrative expenses
    2,001       1,064       885       88  
 
of which: impact from US cross-border settlement
    917                          
 
Services (to) / from other business units
    1,581       1,531       1,479       3  
 
Depreciation of property and equipment
    97       95       84       2  
 
Amortization of intangible assets
    38       19       10       100  
 
Total operating expenses
    6,828       6,582       5,631       4  
 
Business unit performance before tax
    3,601       6,310       5,197       (43 )
 
of which: impact from US cross-border settlement
    (917 )                        
 
of which: business unit performance before tax excluding US cross-border settlement
    4,518       6,310       5,197       (28 )
 
 
                               
Key performance indicators
                               
 
Invested assets (CHF billion)
    870       1,294       1,138       (33 )
 
Net new money (CHF billion)2
    (101.0 )     125.1       97.6          
 
Gross margin on invested assets (bps)3
    97       103       103       (6 )
 
Cost/income ratio (%)4
    63.1       51.1       52.0          
 
Client advisors (full-time equivalents)
    5,755       5,774       4,742       0  
 
Client advisor productivity
                               
 
Revenues per advisor (CHF thousand)5
    1,824       2,424       2,441       (25 )
 
Net new money per advisor (CHF thousand)6
    (17,029 )     23,516       22,008          
 
Invested assets per advisor (CHF thousand)7
    187,159       234,504       236,879       (20 )
 
 
                               
International clients
                               
 
Income
    8,185       9,739       7,907       (16 )
 
Invested assets (CHF billion)
    682       1,013       862       (33 )
 
Net new money (CHF billion)2
    (71.3 )     115.6       90.8          
 
Gross margin on invested assets (bps)3
    94       101       101       (7 )
 
 
                               
Swiss clients
                               
 
Income
    2,634       3,154       2,920       (16 )
 
Invested assets (CHF billion)
    189       281       276       (33 )
 
Net new money (CHF billion)2
    (29.7 )     9.5       6.8          
 
Gross margin on invested assets (bps)3
    110       111       110       (1 )
 
1 Includes social security contributions and expenses related to alternative investment awards.    2 Excludes interest and dividend income.    3 Income/average invested assets.  4  Operating expenses/income.    5 Income/average number of client advisors.    6 Net new money/average number of client advisors.    7 Average invested assets/average number of client advisors.

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Business unit reporting (continued)  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
 
                               
Attributed equity and risk-weighted assets
                               
 
Average attributed equity (CHF billion)1
    6.1                          
 
Return on attributed equity (RoaE) (%)2
    59.0                          
 
BIS risk-weighted assets (CHF billion)3
    25.2       63.1       51.5          
 
Return on BIS risk-weighted assets (%)4
    12.3       10.5       10.8          
 
Goodwill and intangible assets (CHF billion)5
    1.9       1.8       1.7          
 
 
                               
Additional information
                               
 
Recurring income6
    8,194       9,617       8,143       (15 )
 
Client assets (CHF billion)
    1,048       1,651       1,436       (37 )
 
Personnel (full-time equivalents)
    15,271       15,811       13,564       (3 )
 
1 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.  2 Business unit performance before tax/average attributed equity.  3 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  4 Business unit performance before tax/average BIS RWA.  5 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.  6 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.

2008

Key performance indicators

In 2008, net new money outflows amounted to CHF 101.0 billion, compared with inflows of CHF 125.1 billion in 2007. This occurred in the context of continuing credit market turbulence and its impact on the firm’s operating performance and reputation. Outflows of net new money were most pronounced in September and the first half of October.

Invested assets, at CHF 870 billion on 31 December 2008, were down 33% from CHF 1,294 billion a year earlier, mainly reflecting sharply lower equity markets and the strong decline of major currencies against the Swiss franc, as well as net new money outflows.
The gross margin on invested assets was 97 basis points in 2008, down six basis points from a year earlier, as clients increased their allocation of lower-margin cash products. A further contributing factor was substantially lower levels of client transaction activity. Overall, recurring income made up 74 basis points of the margin in 2008, down from 77 basis points in 2007. Non-recurring income comprised 23 basis points of the margin in 2008, down 3 basis points from 2007.
The cost/income ratio increased to 63.1% in 2008 from 51.1% a year earlier. This increase is primarily due to general and administrative expenses from the recognition of a provision of CHF 917 million (USD 780 million) in connection with the US cross-border case (refer to the “Settlement regarding the US cross-border case” sidebar in this section for more information). Excluding the impact of these costs, the cost / income ratio would have increased to 54.6% in 2008 from the previous year.

Results

In 2008, pre-tax profit fell 43% to CHF 3,601 million, compared with the record CHF 6,310 million in 2007. This is partially due to a provision of CHF 917 million in connection with the US cross-border case. Excluding the impact of these costs, the pre-tax result would have fallen 28%, mainly reflecting the lower asset base and client transaction activity.

Operating income

Total operating income in 2008 was CHF 10,429 million, down 19% from CHF 12,892 million a year earlier. Recurring income decreased 15% on lower asset-based fees. Non-recurring income fell by 20% due to lower brokerage fees, reflecting decreased client transaction activity levels.

Operating expenses

At CHF 6,828 million, operating expenses in 2008 were up 4% from CHF 6,582 million a year earlier. This is primarily due to a provision of CHF 917 million in connection with the US cross-border case. Excluding the impact of these costs, the operating expenses would have decreased 10%, mainly due to lower performance-related compensation. This resulted in lower personnel expenses, which fell 20% to CHF 3,112 million in 2008 compared with CHF 3,873 million a year earlier. General and administrative expenses, at CHF 2,001 million, were up by 88% from CHF 1,064 million a year earlier due to the abovementioned provisions related to the US cross-border case. Expenses for services from other business units, at CHF 1,581 million in 2008, were up 3% from CHF 1,531 million the previous year, mainly reflecting increased consumption of services. Depreciation was CHF 97 million in 2008, almost unchanged from CHF 95 million a year earlier. Amortization of intangible assets was CHF 38 million, up CHF 19 million from 2007 mainly reflecting an impairment charge.


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Global Wealth Management & Business Banking

2007

Key performance indicators

In 2007, net new money was a record CHF 125.1 billion, compared with CHF 97.6 billion in 2006, representing an annual growth rate of 11% of the underlying invested asset base at year-end 2006. This outstanding result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Americas, both a result of the growth strategy.

Invested assets, at CHF 1,294 billion on 31 December 2007, were up 14% from CHF 1,138 billion a year earlier, mainly reflecting the strong inflow of net new money and rising financial markets. This increase was partially offset by negative currency effects. The 7% fall of the US dollar against the Swiss franc contributed to this decrease – approximately 36% of invested assets were denominated in US dollars at the end of 2007.
The gross margin on invested assets was 103 basis points in 2007, unchanged from a year earlier, as the increase in non-recurring margin following a sustained level of client activity was offset by a lower recurring margin. Overall, recurring income made up 77 basis points of the margin in 2007, down from 78 basis points in 2006. Non-recurring income comprised 26 basis points of the margin in 2007, up one basis point from 2006.
The cost/income ratio improved to 51.1% in 2007 from 52.0% a year earlier. The cost / income ratio improved for the fifth consecutive year despite the rise in costs in pursuit of the global expansion strategy. This improvement reflected the strong rise in income due to a higher asset base and higher volumes in lombard lending, which more than offset the increase in personnel expenses (mainly headcount increase and performance-related compensation) and general and administrative expenses.

Results

In 2007, pre-tax profit, at a record CHF 6,310 million, rose 21% compared with 2006. Total operating income was up 19% in 2007, reflecting a higher asset base and increased collateralized lending volumes and more client activity. Operating expenses, up 17% in 2007 from 2006, also rose as the business expanded.

Operating income

Total operating income in 2007 was CHF 12,892 million, up 19% from CHF 10,828 million a year earlier. This was the highest level ever, reflecting a rise in recurring as well as nonrecurring revenues. Recurring income increased 18% on rising asset-based fees, benefiting from strong net new money inflows. This was accentuated by higher interest income due to the expansion of lombard lending activities. Nonrecurring income rose 22% due to higher brokerage fees, reflecting high client activity levels.

Operating expenses

At CHF 6,582 million, operating expenses in 2007 were up 17% from CHF 5,631 million a year earlier, reflecting higher personnel expenses and general and administrative expenses as a result of ongoing business growth. Personnel expenses rose 22% to CHF 3,873 million in 2007 compared with CHF 3,173 million a year earlier, reflecting the increase in salaries due to business expansion and higher performance-related compensation. General and administrative expenses, at CHF 1,064 million, were up 20% in 2007 from CHF 885 million a year earlier due to increased expenses for travel and entertainment, premises and professional fees – all a consequence of continuous business expansion. Expenses for services from other business units, at CHF 1,531 million in 2007, were up 4% from CHF 1,479 million the previous year, mainly reflecting increased consumption. Depreciation was CHF 95 million in 2007, up 13% from CHF 84 million a year earlier because of continued business growth. Amortization of intangible assets was CHF 19 million, up CHF 9 million from 2006.


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Wealth Management US
Business description

Business

Wealth Management US provides wealth management services to US private clients. On 31 December 2008, the business unit had CHF 600 billion in invested assets.

Organizational structure

Wealth Management US is headquartered in Weehawken, New Jersey, where most corporate and operational functions are located. The client-facing organization consists of the branch network in the US and Puerto Rico, with more than 8,100 financial advisors. The branch network is staffed by regional managers, market area managers, branch office managers, financial advisors and administrative support staff.

Established as part of Global Wealth Management & Business Banking in 2005, the business unit continues to evolve to meet the specific needs of its client base. Key acquisitions and transactions over the last three years included:
  August 2006 acquisition of the private client services branch network of Piper Jaffray.
  February 2007 acquisition of the McDonald Investments’ private client branch network.
  October 2008 saw the Investment Bank’s municipal securities operations serving private clients transfer to Wealth Management US (following UBS’s decision in June 2008 that its Investment Bank would exit the institutional municipal securities business).

Legal structure

In the US, the business unit operates through direct and indirect subsidiaries of UBS. Securities and operations activities are conducted primarily through three registered broker-dealers: UBS Financial Services Inc., UBS Financial Services Inc. of Puerto Rico and UBS Services USA LLC. Wealth Management US’s banking services include Federal Deposit Insurance Corporation (FDIC)-insured deposit accounts and enhanced collateralized lending services, which are conducted through UBS Bank USA, a federally regulated Utah bank.


Geographical presence in key markets

 

(GEOGRAPHICAL PRESENCE IN KEY MARKETS)

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Competitors

Wealth Management US competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment advisors, commercial banks, trust companies and other financial services firms offering wealth management services to US private clients. In 2008, the financial crisis triggered consolidation within the industry that directly impacted the business unit’s major competitors: Citi Global Wealth Management, Merrill Lynch Global Wealth Management, Morgan Stanley Global Wealth Management Group and Wachovia Securities. Specifically, Merrill Lynch was acquired by Bank of America, effective 1 January 2009 and Wachovia Corporation was acquired by Wells Fargo, effective 31 December 2008. In January 2009, Morgan Stanley and Citi announced an agreement to combine Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney unit into a joint venture called Morgan Stanley Smith Barney.

Clients and strategy

Wealth Management US is focused on the delivery of services tailored to meet the needs of four distinct client segments: ultra-high net worth (more than USD 10 million in investable assets), high net worth (USD 1 million to USD 10

million in investable assets), core affluent (USD 250,000 to USD 1 million in investable assets) and the emerging affluent (up to USD 250,000 in investable assets).

The business unit is committed to a number of strategic priorities, including gaining market share, achieving improved profitability, enhancing the client experience and attracting and retaining key talent.
One long-term strategy is to ensure the delivery of a high-quality and consistent client experience as defined by the four steps of the “UBS Client Experience”: understanding client needs, proposing appropriate solutions, agreeing on and implementing them, and reviewing progress toward client goals. To do so, the organization is focused on implementing a number of organic growth initiatives, infrastructure enhancements and staff development programs, all aimed at fundamentally improving the way financial advisors serve clients. In 2008, Wealth Management US expanded its services and capabilities by increasing its range of client-segment specific offerings. Two additional private wealth management offices were opened to service ultra-high net worth clients in Houston, Texas, and Boston, Massachusetts. With these openings, UBS has nine dedicated private wealth management offices across the US, with additional offices to be opened in select markets through 2010. In June 2008, the first group of UBS wealth advisors received accreditation from a new and comprehensive development program


 

Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)


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designed by UBS for advisors focused on the high net worth segment. In the first and third quarters of 2008, investment centers in New Jersey and North Carolina were opened to serve emerging affluent clients.

Products and services

Wealth Management US offers clients a full array of wealth management services that focus on the individual investment needs of each client. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, tax management strategies, estate strategies, insurance, retirement, and trusts and foundations. Advisors work closely with consultants who are subject-matter experts in areas such as wealth planning, asset allocation, retirement and annuities, alternative investments, structured products, and banking and lending. They also have access to Wealth Management Research content to support investment decisions.

Products and services are designed to meet a wide variety of investment objectives including capital appreciation, income generation, diversifying portfolio concentration and tax optimization. To address the full range of clients’ investment needs, Wealth Management US offers competitive lending and cash management services, including the Resource Management Account (RMA) product, credit
cards, FDIC-insured deposits, securities-backed lending and mortgages. Additionally, through Corporate Employee Financial Services, it provides stock option and other related services to many of the largest US corporations and their executives.
The business unit’s clients have the option of transaction-based or asset-based pricing for their relationships. Clients who choose asset-based pricing have access to both discretionary and non-discretionary investment advisory programs. While non-discretionary advisory programs enable the client to maintain control over all transactions in the account, clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give investment discretion to a qualified financial advisor, a team of UBS investment professionals or a third-party investment manager. Separately, mutual fund advisory programs are also offered, where a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework.
Transaction-based pricing offers access to a broad range of transaction products, including individual securities such as equities and fixed income instruments. To complement portfolio strategies, qualified clients may take advantage of the offerings in structured products and alternative investments.


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Business performance

 
                                 
Business unit reporting  
    As of or for the year ended     % change from  
CHF million, except where indicated   31.12.08     31.12.07     31.12.06     31.12.07  
 
Income
    5,959       6,662       5,863       (11 )
 
of which: ARS settlement impact
    (60 )                        
 
Credit loss (expense) / recovery
    (25 )             (2 )     (1 )
 
Total operating income
    5,933       6,660       5,862       (11 )
 
Cash components
    3,806       4,352       3,686       (13 )
 
Share-based components1
    85       199       153       (57 )
 
Total personnel expenses
    3,891       4,551       3,839       (15 )
 
General and administrative expenses
    2,348       976       1,073       141  
 
of which: ARS settlement impact
    1,464                          
 
Services (to) / from other business units
    238       314       281       (24 )
 
Depreciation of property and equipment
    94       79       74       19  
 
Amortization of intangible assets
    60       66       53       (9 )
 
Total operating expenses
    6,631       5,986       5,320       11  
 
Business unit performance before tax
    (698 )     674       542          
 
of which: ARS settlement impact
    (1,524 )                        
 
of which: business unit performance before tax excluding ARS settlement impact
    826       674       542       23  
 
 
Key performance indicators
                               
 
Invested assets (CHF billion)
    600       840       824       (29 )
 
Net new money (CHF billion)2
    (10.6 )     26.6       15.7          
 
Net new money including interest and dividend income (CHF billion)3
    11.7       51.5       37.9       (77 )
 
Gross margin on invested assets (bps)4
    84       77       76       9  
 
Cost / income ratio (%)5
    111.3       89.9       90.7          
 
Recurring income6
    3,835       4,173       3,488       (8 )
 
Financial advisor productivity
                               
 
Revenues per advisor (CHF thousand)7
    735       828       776       (11 )
 
Net new money per advisor (CHF thousand)8
    (1,307 )     3,305       2,077          
 
Invested assets per advisor (CHF thousand)9
    87,876       107,719       101,922       (18 )
 
 
Attributed equity and risk-weighted assets
                               
 
Average attributed equity (CHF billion) 10
    7.3                          
 
Return on attributed equity (RoaE) (%) 11
    (9.5 )                        
 
BIS risk-weighted assets (CHF billion) 12
    25.9       18.7       18.3          
 
Return on BIS risk-weighted assets (%) 13
    (3.3 )     3.6       3.0          
 
Goodwill and intangible assets (CHF billion) 14
    4.3       4.0       4.3          
 
 
Additional information
                               
 
Client assets (CHF billion)
    636       917       909       (31 )
 
Personnel (full-time equivalents)
    18,929       19,347       18,557       (2 )
 
Financial advisors (full-time equivalents)
    8,182       8,248       7,880       (1 )
 
1 Includes social security contributions and expenses related to alternative investment awards.  2 Excludes interest and dividend income.  3 For purposes of comparison with US peers.  4 Income / average invested assets.  5 Operating expenses / income.  6 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.  7 Income / average number of financial advisors.  8 Net new money / average number of financial advisors.  9 Average invested assets / average number of financial advisors.  10 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.  11 Business unit performance before tax / average attributed equity.  12 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  13 Business unit performance before tax / average BIS RWA.  14 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.
 

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2008

Key performance indicators

In 2008, net new money outflows amounted to CHF 10.6 billion compared with inflows of CHF 26.6 billion in 2007, with net new money outflows concentrated in the second and third quarters. This reflects the credit market turbulence and its impact on the firm’s operating performance and reputation, which led to an increase in financial advisor attrition and clients diversifying assets away from the firm. Net new money improved to positive levels in the fourth quarter, with its strongest inflows occurring in December after financial advisor recruiting and retention. Including interest and dividends, net new money in 2008 was CHF 11.7 billion, down from CHF 51.5 billion in 2007.

Wealth Management US had CHF 600 billion in invested assets on 31 December 2008, down 29% from CHF 840 billion on 31 December 2007. This was a result of declining markets over the year, net new money outflows and the negative impact of currency translation. In US dollar terms, invested assets decreased 24% compared with a year earlier.
The gross margin on invested assets was 84 basis points in 2008, up from 77 basis points in 2007. The increase is mainly a result of a six basis point increase in the recurring income margin to 54 basis points, while the non-recurring margin increased one basis point to 30 basis points.
The cost/income ratio increased to 111.3% in 2008 from 89.9% in 2007. Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were included in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, Wealth Management US agreed to purchase ARS from clients at their par value. Up to fourth quarter 2008, the ARS settlement liability represented a provision. The liability was re-classified from provisions to negative replacement values in fourth quarter 2008, when ARS settlement rights, which are treated as derivative instruments, were issued and accepted by clients. Losses incurred post-reclassification represented trading losses. Excluding ARS-related charges, the cost / income ratio improved to 85.8% due to lower expenses, including reduced performance-based compensation accruals. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentration” section of this report for more information.
In 2008, recurring income was CHF 3,835 million, down 8% from CHF 4,173 million a year earlier. Excluding the impact of currency fluctuations, recurring income increased 6% in 2008, driven by growth in net interest income from increased deposit balances, while recurring fee income
declined slightly due to lower asset levels. Recurring income represented 65% of total operating income in 2008, compared with 63% in 2007.
Revenues per advisor decreased in 2008 to CHF 735,000 from CHF 828,000 in 2007. In US dollar terms, revenue per advisor increased 2% as higher recurring income was partly offset by lower transactional revenue. The number of financial advisors at 31 December 2008 was 8,182, down 66 or 1% from a year earlier. Turnover among financial advisors was concentrated among lower producing advisors, including trainees.

Results

For full-year 2008, Wealth Management US recorded a pre-tax loss of CHF 698 million compared with a pre-tax profit of CHF 674 million in 2007. Driving the decline were total ARS-related charges of CHF 1,524 million taken during 2008. Excluding these charges, the pre-tax result would have increased 23%. In US dollar terms and excluding ARS-related charges, the pretax performance would have increased 41% driven by resilient operating income growth during a challenging environment, coupled with a decline in expenses, including lower performance-based compensation accruals.

Operating income
In 2008, total operating income was CHF 5,933 million, down 11% from CHF 6,660 million in 2007. Excluding currency effects and ARS related trading losses, operating income increased 4% from 2007. The increase in operating income reflects stronger net interest income related to an increase in deposit balances, and a positive impact of the new equity attribution framework introduced in first quarter 2008, partly offset by lower transactional revenue and an increase in credit losses.

Operating expenses
Total operating expenses rose 11% to CHF 6,631 million in 2008 from CHF 5,986 million in 2007. Excluding ARS-related expenses, operating expenses declined 14%. In US dollar terms and excluding ARS-related expenses, operating expenses declined 1%. On this basis, personnel expenses decreased 2% driven by lower performance-based compensation accruals, partly offset by higher severance costs related to staff reductions. Excluding ARS-related expenses, non-personnel costs (including general and administrative expenses, depreciation and amortization expenses, and services provided to and received from other business units), rose 2% in US dollar terms due to an increase in depreciation costs, while total general and administrative expenses were essentially flat from the prior year.



 

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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

 

2007

 

Key performance indicators

The inflow of net new money in 2007 was CHF 26.6 billion, up from CHF 15.7 billion a year earlier, reflecting reduced outflows from existing clients and the recruitment of experienced advisors. Including interest and dividends, net new money in 2007 was CHF 51.5 billion, up from CHF 37.9 billion in 2006.

Wealth Management US had CHF 840 billion in invested assets on 31 December 2007, up 2% from CHF 824 billion on 31 December 2006. This was a result of rising markets over the year, net new money inflows and the first-time inclusion of former McDonald Investments’ assets. These increases were partly offset by the negative impact of currency translation. In US dollar terms, invested assets increased 10% compared with a year earlier.
The gross margin on invested assets was 77 basis points in 2007, up from 76 basis points in 2006. The increase is mainly a result of a higher recurring income margin, while the non-recurring margin decreased.
The cost/income ratio was 89.9% for 2007, compared with 90.7% in 2006. The improvement in the cost/income ratio reflects higher operating income due to strong growth in recurring income, partially offset by a rise in expenses mainly reflecting higher personnel expenses in support of growth initiatives and the integration of the McDonald Investments’ private client branch network.
In 2007, recurring income was a record CHF 4,173 million, up 20% from CHF 3,488 million a year earlier. Excluding the impact of currency fluctuations, recurring income was up 23% in 2007 from 2006. This increase mainly reflects higher levels of managed account fees on a year-end record level of invested assets, higher investment advisory fees and higher net interest income. Recurring income represented 63% of operating income in 2007, compared with 60% in 2006.
Revenues per advisor increased in 2007 to CHF 828,000 from CHF 776,000 in 2006 as a higher average number of financial advisors was able to produce significantly higher
recurring income than a year earlier. The number of financial advisors rose 5% compared with 2006, increasing by 368 advisors to 8,248 at the end of 2007, while recurring income increased 20%.

Results

In 2007, Wealth Management US reported a pre-tax profit of CHF 674 million, compared with CHF 542 million in 2006. In US dollar terms, performance in 2007 was up 27% from 2006. Performance in 2007 benefited from record levels of recurring income and lower general and administrative expenses. This was partly offset by higher personnel expenses.

Operating income
In 2007, total operating income was CHF 6,660 million, up 14% from CHF 5,862 million in 2006. Excluding currency effects, operating income increased 16% from 2006. The increase in operating income reflected the record recurring income (driven by increased asset levels in managed account products) and increased transactional revenue.

Operating expenses
Total operating expenses rose 13% to CHF 5,986 million in 2007 from CHF 5,320 million in 2006. Excluding currency effects, operating expenses were 15% higher.

Personnel expenses increased CHF 712 million or 19%, with higher salaries as well as share-based compensation. This reflects rising headcount due to organic growth and the McDonald Investments’ private client branch network inclusion. General and administrative expenses decreased 9% to CHF 976 million in 2007 from CHF 1,073 million in 2006. In US dollar terms, they fell 7%, primarily reflecting lower provisions compared with 2006. Services from other business units increased 12% from CHF 281 million in 2006 to CHF 314 million in 2007. Depreciation was higher due to leasehold improvements. The amortization of intangibles was CHF 66 million in 2007, up 25% from CHF 53 million, mainly due to the acquisition of the McDonald Investments’ private client branch network and the full-year impact of the acquisition of the Piper Jaffray’s private client services branch network.


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UBS business divisions and Corporate Center

Business Banking Switzerland
Business description

Business

Business Banking Switzerland is UBS’s retail and commercial banking unit and the leading bank in Switzerland. At the end of 2008, business banking Switzerland had CHF 129 billion in invested assets. UBS also leads the Swiss lending and retail mortgage markets, with a total loan book of CHF 143 billion on 31 December 2008.

Organizational structure

Business Banking Switzerland is home to the firm’s Swiss branch network for corporate and individual clients. It is organized in eight geographical regions. The customer services network includes e-banking services, customer service centers, 1,260 automated teller machines (ATMs) and 303 branches across Switzerland.

To meet the needs of private clients, which are changing in line with technological advances, Business Banking Switzerland pursues an integrated, multi-channel strategy. It uses technology to complement, rather than replace, the traditional physical branch network. Standard transactions can be executed using one of the electronic channels, enabling client advisors to focus on providing advice and developing financial solutions. For basic products and services, technology is used to ensure around-the-clock availability. Customer service centers exist in five locations and provide basic information and support 24 hours a day via telephone. Additionally, in 65 of the UBS branches in Switzerland, a two-zone concept has been implemented:
standard transactions are executed via ATMs, while client advisors, sitting in an open plan desk area next to the ATMs, focus on giving clients value-added advice. Clients make extensive use of e-banking channels. On 31 December 2008, more than 600,000 clients had active e-banking contracts and more than 80% of all payment orders were made in 2008 through electronic channels.

Competitors

UBS’s major competitors are the banks that are active in the retail and corporate banking market in Switzerland. This group includes Credit Suisse, the country’s cantonal banks, Raiffeisen Bank, other regional or local Swiss banks and foreign bank branches in Switzerland.

Clients and products

The business unit serves both retail and commercial clients, including financial institutions.

Approximately 2.5 million individual Switzerland-based clients are served through over 3 million accounts, mortgages and other financial relationships. Through the client service networks described above, individual clients can access services such as a comprehensive selection of cash accounts, savings products, advisory services, residential mortgages, pensions and life insurance.
Of the approximately 135,000 corporate clients, about 200 are major companies with operations spanning a broad range of markets and geographical regions and therefore
 

Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)


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Global Wealth Management & Business Banking

 

require advanced financing and risk management skills as well as comprehensive access to the capital markets for funding needs; about 8,200 are large companies requiring expertise in handling complex financial transactions, including the selection and design of investment products, assistance in complex mergers and acquisitions or provision of structured financing; and some 126,000 are small- and medium-sized enterprises requiring local market expertise and access to a full range of products and services. In addition, substantial business process support is available (ranging from transactional payments and securities services to the facilitation of cross-border transactions with trade finance products).
Global custody services offer institutional investors the opportunity to consolidate multiple-agent bank relationships into a single, cost-efficient global custodial relationship. This simplifies their processing and administration arrangements and allows them to take advantage of other services, such as flexible consolidated performance reporting and powerful portfolio management tools.
Payments, securities and custodial services are offered to more than 3,000 financial institutions worldwide. Other banks which lack UBS’s scale can also outsource their payment, security or custodial services in order to benefit from UBS’s scale efficiencies.

Total lending portfolio, gross

On 31 December 2008, the total lending portfolio was CHF 143 billion, gross. Of this amount, mortgages comprised CHF 116 billion, with 84% being residential mortgages. Continued discipline in implementing risk-adjusted pricing has resulted in a strengthened focus of origination efforts on higher-quality exposures with an attractive risk/return relationship. The introduction of this model has resulted in a clear improvement in the risk profile of the business unit’s lending portfolio.
  è   Refer to the “Credit risk” section of this report for more information on UBS’s credit portfolio.

Recovery portfolio

A dedicated team of recovery specialists assists clients that are unable to meet their financial obligations. Economic recovery can be achieved through restructuring or through liquidation of available collateral in order to limit the financial loss on the loan. The recovery portfolio amounted to CHF 2.3 billion on 31 December 2008. Since the end of 1998, successful recovery efforts have reduced the portfolio by more than 91% and non-performing loans have decreased from CHF 14.0 billion to CHF 1.5 billion, resulting in a ratio of non-performing loans to total lending portfolio of 0.9%.



 

Total lending portfolio by category, gross

(TOTAL LENDING PORTFOLIO BY CATEGORY, GROSS)

Development of UBS’s recovery portfolio, 2000-2008

(DEVELOPMENT OF UBS'S RECOVERY PORTFOIO, 2000-2008)


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Business performance