ab
Combinations
produce synergies
and open new
perspectives.
Financial Report
1998.
UBS Group
Financial Highlights
CHF million (except where indicated)
1998
1997
Income statement key figures
Operating income
Operating expenses before restructuring
Operating profit before restructuring and taxes
Net profit / (loss)
Per share data (CHF)
Basic earnings per share 1
Diluted earnings per share 1
Dividends proposed
At year end
Total assets
Shareholders’ equity
Market capitalization
Ratios (%)
Return on shareholders’ equity 2
Return on risk-weighted assets 3
Cost / income ratio 4
BIS Capital ratios 5
Tier 1 capital (%)
Total capital (Tier 1 and Tier 2) (%)
Risk-weighted assets
22,328
18,258
4,070
3,030
14.31
14.23
10.00
944,116
32,395
90,720
10.3
1.0
78.4
9.8
14.0
288,296
24,880
18,636
6,244
( 667 )
23.05
23.02
n/a
1,086,414
30,927
n/a
14.5
1.3
71.2
8.3
12.6
345,904
Assets under management (CHF billion)
Total assets under management
1,572
1,512
Headcount
Total headcount
of which: Switzerland
of which: Rest of world
Long-term ratings
Moody’s, New York
Fitch / IBCA, London
Standard & Poor’s, New York
BankWatch, New York
55,176
36,638
18,538
48,011
32,706
15,305
Aa1
AAA
AA+
AA
1 For EPS calculation, see Note 10 to the Financial Statements. For this disclosure 1997 is adjusted for impact of restructuring including taxes
thereon. 2 Net profit / (loss) / average shareholders’ equity excluding dividends from parent bank. 1997 loss and shareholders’ equity
adjusted for impact of restructuring including taxes thereon. 3 Net profit / (loss) / average BIS risk-weighted assets. 1997 loss adjusted for
impact of restructuring including taxes thereon. 4 Operating expenses before restructuring / operating income before credit loss expenses
of CHF 951 m in 1998 and CHF 1,278 m in 1997. 5 For BIS ratio calculations, see Note 34e to the Financial Statements.
Contents
Letter to Shareholders
Review of Businesses
UBS Segment Reporting
Private Banking
Warburg Dillon Read
Private and Corporate Clients
UBS Brinson
UBS Capital
Corporate Center
Review of Risk Management and Control
The UBS Risk Framework
Credit Risk
Market Risk
Operational Risks
Review of Asset and Liability Management
Funding and Liquidity Management
Interest Rate Management
Currency Management
Capital Management
UBS Group Financial Statements
Group Financial Review
Financial Statements
Notes to the Financial Statements
Report of the Group Auditors
UBS AG (Parent Bank)
UBS Corporate Governance
UBS Group Human Resources
Glossary
UBS Share Information
2
7
8
10
14
20
24
28
30
31
32
35
40
42
45
46
46
47
48
49
52
56
60
106
107
117
123
125
129
1
Letter to Shareholders
Dear Shareholders,
– The gain of CHF 1 billion arising from the divest-
ment of BSI-Banca della Svizzera Italiana. This
resulted from a condition laid down by the
Swiss Competition Commission in the context
of the merger.
– The provision of CHF 0.8 billion for the settle-
ment reached regarding dormant accounts and
World War II-related claims.
– Losses on pre-merger positions resulting from
third-quarter market volatility totaling approx-
imately CHF 1.9 billion by the end of 1998.
These related to the loss from UBS’s engage-
ment in Long Term Capital Management and
significant value adjustments on pre-merger
equity derivative positions.
Analysis of 1998 results
A review of the UBS Group 1998 results leads
to an ambivalent conclusion. On the one hand,
net profit after tax and minorities of CHF 3.0
billion falls short of expectations and is there-
fore disappointing. On the other hand, despite a
highly unusual combination of very difficult
events which compounded the challenge of the
merger, the UBS Group made significant progress.
This is clear on closer analysis:
– If adjusted for the non-recurring items set out
above, 1998 net profit would have been CHF
4.4 billion compared to CHF 4.8 billion for
1997 (excluding the restructuring reserve). This
is clearly in line with management’s expecta-
tions of a 10% decline in net profit as stated in
December 1997.
– Furthermore, if revenues are adjusted for total
non-recurring third-quarter losses and divest-
ments, then the decline in 1998 was again well
within the 10% decline which had been forecast
at the time of the merger.
– Finally, if total 1998 operating expenses are
adjusted for the provision against the settle-
ment regarding dormant accounts and the
divestment of BSI, operating expenses declined
by 6%, or about CHF 1.1 billion, year-on-year.
This is better than expectations set out at the
announcement of the merger, especially con-
sidering that the merger only became legally
effective in the second half of the year.
Private Banking most significant
contributor to earnings
On a divisional basis, Private Banking, with
a pre-tax result of CHF 4.3 billion, was the
With the execution of the largest European
bank merger, 1998 was a year in which UBS firm-
ly shaped its own destiny. 1998 was also a difficult
year for the banking industry and one in which
UBS, in particular, was buffeted by an unusual
combination of exceptional events. The settlement
regarding the role of Swiss banks during and after
World War II, combined with the consequences of
third-quarter 1998 financial market turbulence,
had a severe impact on UBS’s otherwise healthy
financial performance. This mixture of events had
a clear impact on the UBS share price, which post-
ed a high of CHF 657 in July 1998 and a low of
CHF 270 only two months later. In view of the
underlying strength of the bank, the Board of
Directors of UBS recommends to shareholders a
dividend of CHF 10 per registered share for 1998.
The difficult conditions of 1998 are reflected in
the Group’s results. For 1998, UBS reports a pre-
tax profit of CHF 4.1 billion, compared to the
pre-tax profit of CHF 6.2 billion in 1997 (exclud-
ing the CHF 7.0 billion restructuring provision,
established in the context of the merger). Earn-
ings per share (on a post-tax basis) were down by
around 38% from CHF 23.05 in 1997 (again
excluding the restructuring provision) to CHF
14.31 in 1998. At the same time, taking into con-
sideration the difficult conditions in the latter
half of the year, UBS still was able to achieve a
respectable return on equity of 10.3%.
The pre-tax impact of the major non-recurring
factors influencing UBS’s 1998 result is set out
below:
2
Letter to Shareholders
most important contributor to the UBS Group’s
result. Its profit was influenced most significant-
ly by the CHF 1 billion divestment proceeds from
the sale of BSI. Operating financial performance
was primarily driven by asset growth due to per-
formance. However, we were able to offset
client attrition arising from the merger to a sig-
nificant extent by successful marketing, which
resulted in a net inflow of new assets under man-
agement. Outside Switzerland, Private Banking
has completed the merger integration; domesti-
cally, the full integration of the information tech-
nology platforms is still underway and is expect-
ed to be concluded in 1999. Importantly, the
division successfully launched a major initia-
tive to grow domestic private banking outside
Switzerland in core markets, such as Germany,
Italy, France, Spain, Australia and Japan. We are
highly satisfied with initial indications of prof-
itability.
Total commitment to investment banking
Warburg Dillon Read, the investment banking
arm of UBS, was naturally most sensitive to the
market turbulence of the third quarter 1998 and
consequently achieved a disappointing pre-tax
loss of CHF 1 billion. Two factors stand out: part
of the Global Equity Derivatives Portfolio, which
is difficult to hedge and has a potential for signi-
ficant variance, and the losses resulting from our
involvement with Long-Term Capital Manage-
ment. Excluding these positions, the pre-tax result
would have been a significant reduction from the
1997 result, but in line with industry trends. Here
the demands of the merger should also be borne
in mind.
Warburg Dillon Read successfully implement-
ed the merger with a reduction in headcount
of approximately 5,000 and also undertook a
strategic review towards the end of the year to
refocus the business and reduce the risk profile.
This review confirmed the total commitment of
UBS to its investment banking division. This
commitment is based on the structural attractive-
ness of the market and the distinctive positioning
of Warburg Dillon Read as the leading European
investment bank, as well as the substantial exist-
ing and potential synergies with the other divi-
sions, most notably Private Banking. The review
called for an alignment of core business activities
with similar client requirements, risk character-
istics and logistics needs. Capital-intensive activ-
ities deemed not to be attractive on a risk / return
basis – such as global trade finance, internation-
al lending to clients in excess of revised limits and
certain segments of the fixed-income business –
will be reduced. Finally, the review reconfirmed
the course set at the time of the merger to reduce
risk appetite with regard to both market and
counterparty risk.
Substantial increase in Private and Corporate
Clients profitability in Switzerland
Private and Corporate Clients contributed
CHF 0.9 billion pre-tax to the Group’s result, up
by 20% against restated 1997 results. For this
division, the year was marked by intense and
successful merger integration efforts. Significant
progress was achieved by aligning both predeces-
sor banks’ client services, activities, products and
organizations. Plans to migrate the technical plat-
forms are on track and will be completed in
1999, thereby facilitating significant operational
synergies and cost savings. At the same time, risk-
adjusted pricing in the credit area has been imple-
mented and technology-based banking business-
es have expanded significantly, with approxi-
mately 160,000 Telebanking (Internet / Videotex)
clients and with 230,000 brokerage transactions
and 14.5 million payment transactions executed
via Telebanking in 1998.
UBS Brinson posts steady growth
UBS Brinson’s pre-tax earnings were up 11%
from CHF 403 million to CHF 448 million
despite the impact of market volatility in 1998.
Positive results from the UBS Brinson business
area were to some extent offset by a decline in
revenue due to short-term performance issues
and a very competitive UK marketplace for the
Phillips & Drew business area.
Strong results for UBS Capital
UBS Capital posted pre-tax earnings of CHF
428 million versus CHF 381 million in 1997,
thus continuing its excellent track record. This
business enjoys significant synergies with both
Private Banking and Warburg Dillon Read and is
well-placed to benefit from increasing levels of
corporate restructuring in Europe.
Logistical challenges
1998 was a year of logistical challenges, the
biggest of which for UBS was, of course, the
3
Letter to Shareholders
4
merger. Here we are pleased to confirm that UBS
is absolutely on course: implementation has been
completed outside Switzerland and further sub-
stantial progress will be made domestically in
1999. In addition to the merger, the whole bank-
ing industry has been preoccupied with the Euro
and the Year 2000. In the case of the former, UBS
conducted an intensive preparation in the form of
a number of dress rehearsals in November and
December 1998 resulting in an extremely smooth
introduction of the Euro in all divisions. With
regard to preparations for Year 2000, we also
made substantial progress in remediating and
testing our hardware and software in 1998. We
expect the work on the remaining systems to be
substantially completed by mid-1999. Total
expenditure on the introduction of the Euro and
the Year 2000 amounted to CHF 662 million in
1998.
In addition to managing merger integration,
UBS spent considerable effort in fine-tuning its
strategy, as outlined at the merger announce-
ment.
Strategic overview
Our strategy is based on the following
assumptions: significant financial markets growth
world-wide, especially in Europe where we see
heightened potential for asset gathering and for
European investment banking business. Ongoing
industry consolidation and restructuring will
favor industry leaders, and quality earnings are
increasingly at a premium given heightened
market cyclicality. Finally, technology is becoming
a major driver of business.
UBS is well-positioned to succeed in such an
environment and has clear leadership aspirations.
We aim to achieve sustainable profitable growth
within defined parameters for risk, leading to
ongoing value creation. We see UBS as managing
its own destiny rather than being shaped by exter-
nal forces and, thus, as being recognized as a role
model for success and quality. We aim to foster a
co-operative, meritocratic and professional cor-
porate culture, which goes far beyond financial
conglomerate management.
On this basis, UBS corporate strategy has
developed as follows:
– Firstly, UBS seeks to position itself as a global
financial institution with the goal of becoming
a leading European asset gathering house. This
will be achieved with all business divisions con-
tributing as part of an integrated business model
leveraging cross-divisional synergies. The main
emphasis is on organic growth, facilitated by
sustained technology investments and comple-
mented by selected acquisitions. At present, we
have two major initiatives underway: we are
building up domestic private banking in key
European markets and are encouraged by the
good degree of success achieved already.
Secondly, we have mandated the Private and
Corporate Clients Division to build a techno-
logy-driven asset gathering business, using
platforms already developed in this business to
expand into major European markets.
– UBS is committed to best practice in its com-
munication with shareholders. In this context
we have gone further than many of our com-
petitors in providing indicative medium-term
earnings forecasts. During the year, we have
revised our preliminary forecast for the year
2002 set out at the time of the merger from
earnings per share of approximately CHF 50 to
earnings per share of approximately CHF 45,
representing a net income range of CHF 9 – 10
billion. The main adjustments reflect the lower
risk appetite in and capital allocation to War-
burg Dillon Read. Here a marked reduction in
risk appetite and international counterparty
risk has already taken place and further reduc-
tions will follow. Importantly, we maintain our
return on equity target of 15%– 20% and our
cost/income target of approximately 60 %.
– UBS is already one of the best capitalized finan-
cial institutions world-wide with a Tier 1 ratio
of 9.8 % at end-1998. This exceeds our target
range of 8.5% – 9%. UBS has already made
progress in divesting non-core, capital-intensive
businesses. Given our high level of capitaliza-
tion and focused allocation of resources, we
expect UBS to continue to generate excess cap-
ital. UBS is committed to efficient equity man-
agement, and we see investment in own stock as
an acceptable alternative in the absence of
value-enhancing acquisitions.
In terms of material events to date in 1999,
jointly
UBS and Swiss Life / Rentenanstalt
announced the intended termination of their co-
operation agreement on 19 February 1999. This
was a result of growing competition between the
strategies of the two companies in the area of
European asset gathering. In this context, UBS’s
25% stake in Swiss Life / Rentenanstalt will be
Letter to Shareholders
acquired by a number of Swiss and international
investors. Swiss Life / Rentenanstalt will also
acquire UBS’s 50 % stake in the UBS Swiss Life
joint venture. UBS expects a post-tax gain of CHF
1.2 –1.4 billion from these divestments. The cross
directorships between the two companies will be
relinquished during the course of 1999. UBS
does, however, continue to consider the life assur-
ance business as an important component of its
European asset gathering strategy.
In conclusion, UBS is embarking upon 1999
tested and strengthened by the events of the pre-
vious year. We are confident that we are on
course with our strategy, and we expect a signifi-
cant profit increase which will bring us close to
our return on equity target.
In drawing to a close, we would like to take
this opportunity to thank our clients, staff and
you, our shareholders, for your support during a
difficult year.
UBS AG
Alex Krauer
Chairman of the Board of Directors
Marcel Ospel
President and Group CEO
5
UBS Presence world-wide
6
Review
of Businesses
Review of Businesses
UBS Segment Reporting
UBS Segment Reporting
To enable a more mean-
Segment Reporting by Business 1
ingful analysis of UBS’s
results, Group results are
CHF million
Operating income
Less: Credit loss expenses 2
presented on a man-
Total
agement reporting basis.
Consequently, internal
charges and transfer
pricing adjustments have
been reflected in the
Personnel, general and administrative expenses
Depreciation and amortization
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Net profit / (loss)
Regulatory equity used (avg)
Assets under management (bn) 3, 4
performance of each busi-
Cost / income (%) 3
Private Banking
12.97
12.98
Warburg Dillon Read
12.97
12.98
7,223
26
7,197
2,605
256
2,861
4,336
737
3,599
0
3,599
1,500
607
46
6,215
59
6,156
2,773
218
2,991
3,165
561
2,604
0
2,604
2,100
610
48
6,987
500
6,487
6,984
524
7,508
( 1,021)
( 306)
( 715)
( 9)
( 706)
10,888
300
10,588
8,714
595
9,309
1,279
213
1,066
0
1,066
13,300
13,600
0
107
0
85
ness. The basis of
the reporting reflects the
management of the
business within the UBS
Group.
8
Purpose
Based on UBS’s Management Accounting, seg-
ment reporting provides accurate performance
measurements of the UBS divisions to increase
substantially transparency and accountability.
Segment reports follow the organizational struc-
ture of UBS. Therefore, the results reported are
performance indicators for the UBS divisions.
Accounting Standards
Although segment
reports are based on
Management Accounting, they comply with
International Accounting Standards (IAS), and
they are also examined by the UBS’s auditors,
ATAG Ernst & Young AG. Where a different
approach has been applied in order to increase
transparency, the figures are fully reconciled to
Financial Accounting.
Segment reports disclose additional informa-
tion not required by IAS in order to measure the
performance of the business divisions in a more
accurate way. Examples in this context are: assets
under management, headcount, and regulatory
equity used.
Basic assumptions
The divisions are treated for this purpose as if
they were autonomous business units. Hence, the
amount of equity capital that would be required
for the divisions operating as separate entities is
attributed to them, and this resource is not free of
funding. (Please see the Review of Asset and Lia-
bility Management Section.)
Inter-segmental revenues and costs are allo-
cated to the divisions based on market prices
or on service level agreements. Basically, all
Corporate Center costs are allocated to the
divisions based upon the concepts of benefit
and controllability, which are explained below.
At the end of the process, the Corporate Center
comprises all revenues and costs that actually
belong to the Corporate Center (e.g. income
from treasury activities or from risk management
and control), or that cannot reasonably be
attributed to the divisions (e.g. provisions for
settlement reached in the US). Taxes are also
debited (or, in the case of a loss, credited) to the
divisions.
Management Accounting Principles
– Interest revenues are apportioned across the
divisions based on the opportunity costs of fun-
ding. Accordingly, all assets and liabilities are re-
financed with the fixed-income business within
Warburg Dillon Read based on market rates.
Revenues relating to balance-sheet products are
calculated on a fully-funded basis. Therefore,
there is no free capital. As a result, in the seg-
ment reports, the divisions are credited with the
risk-free return on the equity used. Commis-
sions are credited to the business division with
the corresponding customer relationship.
– In addition to the direct costs of the divi-
sions, inter-divisional costs are allocated based
on service level agreements and treated as a cost
reduction in the division providing the service.
Private & Corporate Clients
12.97
12.98
7,025
1,170
5,855
3,999
948
4,947
908
154
754
0
754
7,005
1,092
5,913
4,305
852
5,157
756
135
621
0
621
8,250
8,600
434
70
398
74
12.98
1,163
0
1,163
608
107
715
448
128
320
0
320
100
531
61
UBS Brinson
12.97
UBS Capital
12.97
12.98
Corporate Center
12.97
12.98
1,040
0
1,040
593
44
637
403
127
276
0
276
50
504
61
585
0
585
152
5
157
428
15
413
0
413
250
0
27
492
0
492
108
3
111
381
2
379
0
379
200
0
23
296
( 745)
1,041
2,085
( 15)
2,070
( 1,029)
317
( 1,346)
4
( 1,350)
6,350
0
n/a
Group Total
12.97
26,158
1,278
12.98
23,279
951
22,328
24,880
16,433
1,825
16,874
1,762
18,258
18,636
4,070
1,045
3,025
( 5)
3,030
6,244
1,395
4,849
16
4,833
518
( 173 )
691
381
50
431
260
357
( 97 )
16
( 113 )
4,150
29,750
28,700
0
n.a.
1,572
1,512
78
71
assets under management are included in both
business segments. Custody-only assets are
excluded.
– Headcounts of the divisions include trainees
and staff of special management development
programmes. Contractors are not part of the
figures.
– The allocation of Corporate Center costs to the
business segments is based upon concepts of
benefit and controllability. Basically the divi-
sion which controls the process or is responsi-
ble for the logistic bears the costs.
– In order to report the relevant divisional per-
formance over time, adjusted expected loss
figures are reported for all business divisions
rather than the net credit loss expenses as in the
financial income statement. The statistically-
derived adjusted expected losses reflect the
inherent counterparty and country risks in the
respective portfolios. The difference between
these figures and the financially-booked credit
loss expense at Group level is in Corporate
Center. (Please see page 36 of the Review of
Risk Management and Control.)
– Taxes reflect an average effective tax rate for
each division, based on the different geograph-
ical regions in which they operate.
– Equity is allocated to the divisions based on the
average regulatory capital requirement during
the period. Utilized equity only is taken into
account, and a mark-up of 10 % as a security
margin is added. The remaining equity, mainly
for real estate investments, as well as excess
capital remains in Corporate Center. (Please see
page 48 in the Review of Asset and Liability
Management.)
– Assets under management include client-related
on- and off-balance sheet assets. Where two
divisions share responsibility for management
of the funds (such as investment funds), the
Review of Businesses
UBS Segment Reporting
1 The 1997 results do not
take into account the
merger provision and the
merger impact on taxes.
The net loss of the whole
Group including these items
would be CHF 667 million.
Private Banking and Private
and Corporate Clients
1997 figures were restated
in order to properly reflect
the new client segmentation
(transfer of investment
clients from Private Banking
to Private and Corporate
Clients).
2 In order to show the rele-
vant divisional performance
over time, adjusted expected
loss figures rather than the
net credit loss expense
are reported for all business
divisions. The statistically
derived adjusted expected
losses reflect the inherent
counterparty and country
risks in the respective port-
folios. The difference
between the statistically
derived adjusted expected
loss figures to the financially
booked net credit loss
expenses at Group level is
reported in the Corporate
Center. For 1997, basically
the same methodology as for
full-year 1998 Segment Re-
porting is applied. Due to the
unavailability of some pre-
merger data, management
estimates were used.
The divisional breakdown
of the net credit loss expense
of CHF 951 million as of
December 1998 is as follows:
Private Banking CHF 48
million,Warburg Dillon Read
CHF 506 million, Private
and Corporate Clients CHF
397 million.
3 Banca della Svizzera Italiana
not included as at 31
December 1998 (assets
under management CHF 37
billion).
4 UBS Brinson 1998: institu-
tional assets CHF 360 billion,
funds CHF 171 billion.
9
Review of Businesses
Private Banking
Private Banking
The Private Banking
Business Profile / Mission Statement
Division focuses on
comprehensive wealth
management solutions
for high-net-worth
individuals and holds the
leading position in this
highly-fragmented global
market. Size enables
specialization and thus
truly individualized,
high-quality services. By
leveraging the strengths
and the expertise of
the whole UBS Group,
the Private Banking
Division can offer an
extraordinary range
of services and financial
products, the breadth
and depth of which hardly
can be found anywhere
With CHF 607 billion in assets under man-
agement (AuM), UBS holds the leading position
in the global private banking industry. The Pri-
vate Banking Division focuses on comprehensive
wealth management solutions for high-net-worth
individuals. Its mission is to deliver outstanding
advice and execution in financial matters world-
wide to wealthy private individuals and to the
intermediaries serving them.
Size enables the Private Banking Division to
offer truly individual services: through size, the
division can cater to the specific needs of client
segments and markets. The client advisor is cen-
tral to the delivery of services to our clients. He
or she manages the relationship and is the main
advisor for clients. The focus on the long-term
client relationship is in line with the division’s
emphasis on the lifetime value of our client rela-
tions rather than short-term revenue.
The four core services, or “product lines”, of
the Private Banking Division – Portfolio Manage-
ment, Active Advisory Team, Investment Funds
and Financial Planning and Wealth Management
– provide the building blocks of the Private Bank-
ing services. Further strengths are derived from
our position as an integral part of the UBS Group:
The division leverages the financial strength and
capital of the UBS Group, the wide and sophisti-
cated product range of Warburg Dillon Read, the
asset management expertise of UBS Brinson and
the technological and physical infrastructure of
Private and Corporate Clients in Switzerland.
Employing 7,634 people, the Private Banking
Division is represented through 78 branches and
subsidiaries in Switzerland and around the world
(excluding Representative Offices).
else in the world.
Review of Divisional Results
During a challenging year which included
merger integration and extraordinarily volatile
market conditions in the third quarter, the Private
Banking Division demonstrated consistent and
stable earnings power. Private Banking was able
to minimize the potentially significant risks of
client defections identified at the time of the
merger, and was much less negatively affected by
events in the third quarter than the market in gen-
eral. Market turmoil had no lasting impact on
performance of the division and the managed
portfolios.
Pre-tax profit for 1998 was CHF 4.3 billion,
up 37% from 1997. (1998 and 1997 results were
restated to take into consideration the effect of
interdivisional client business transfers.) 1998
pre-tax profit was impacted by divestments.
Eliminating the impact of divestments, net profit
before tax went up by 4%, year-on-year. Assets
under management (also adjusted for divestments)
grew 6% to CHF 607 billion over end-1997.
Operating income
Net operating income (after credit loss expens-
es) increased by 17% to CHF 7.2 billion from
CHF 6.2 billion in 1997. This included CHF 1.4
billion (sales proceeds and operating revenues) in
divestments, including BSI-Banca della Svizzera
Italiana and Adler & Co. Ltd.
Personnel, general and
administrative expenses
Operating expenses before depreciation and
amortization decreased by 6% to CHF 2.6 billion
from CHF 2.8 billion in 1997. As with operating
income, expenses were affected by divestments.
Eliminating the personnel, general and adminis-
trative expenses associated with the normal oper-
ations of divestments, expenses decreased 1% to
CHF 2.5 billion in 1998.
The major shift in Private Banking headcount
in 1998 took place in Switzerland. The sale of BSI
led to a reduction of 802. Headcount figures for
Switzerland per end of 1998 amounted to 5,092
(including Private Banks). Outside Switzerland
staff for the Private Banking Division are in the
following geographic areas – Rest of Europe
1,278, the Americas 629 and Asia / Pacific 635.
Depreciation and amortization / taxes
Depreciation and amortization increased by
17% to CHF 256 million in 1998, whereas taxes
increased from CHF 561 million in 1997 to CHF
737 million in 1998, in line with the pre-tax results.
Assets under management
Despite the merger and volatile markets, the
Private Banking Division achieved a net AuM
inflow. The inflow of new money from new and
existing clients exceeded client defections and
withdrawals by CHF 8 billion. While market
developments in the third quarter interrupted the
10
Review of Businesses
Private Banking
1997
Change (%)
6,215
59
6,156
2,773
218
2,991
3,165
561
2,604
0
2,604
2,100
48
610
7,862
5,859
2,003
16
)
(56 )
17
)
(6 )
17
)
(4 )
37
31
38
–
38
(29 )
0
(3 )
(13 )
27
1998
2,088
5,135
7,223
26
7,197
2,605
256
2,861
4,336
737
3,599
0
3,599
1,500
46
607
7,634
5,092
2,542
CHF million
Private banks 1
Other business areas
Total operating income
Less: Credit loss expenses
Assets under Management
Development
CHF billion
0
1
6
0
4
–
s
t
n
e
m
t
s
e
v
i
D
8
+
y
e
n
o
m
w
e
n
l
a
t
o
T
5
3
6 +
–
7
0
6
Total
e
c
n
a
m
r
o
f
r
e
P
s
t
c
e
f
f
e
y
c
n
e
r
r
u
C
Personnel, general and administrative expenses
Depreciation and amortization
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Total 31.12.97
Total 31.12.98
Net profit / (loss)
Regulatory equity used (avg)
Cost / income in % 2
Assets under management (bn)
Headcount
of which: Switzerland
of which: Rest of world
Assets under Management
Advisory vs. Discretionary
100%
80%
60%
40%
20%
0%
25%
23%
75%
77%
31.12.98
31.12.97
1997 Total: CHF 610 billion1
1998 Total: CHF 607 billion
Discretionary
Advisory
1 Before 1998 divestments of
CHF 40 billion
Assets under Management
by Currency
100%
80%
60%
40%
20%
0%
26%
22%
6%
29%
17%
30%
21%
5%
27%
17%
31.12.98
31.12.97
1997 Total: CHF 610 billion1
1998 Total: CHF 607 billion
CHF
DEM
GBP
USD
Others
1 Before 1998 divestments of
CHF 40 billion
1 Includes sales profit and operating income from divested companies. 2 Before credit loss expense.
positive development in AuM performance over
the first half of the year, positive fourth-quarter
performance helped to yield a full-year increase
in AuM attributable to performance and curren-
cies of CHF 29 billion.
AuM at Private Banking were also affected by
divestments, which accounted for a reduction of
CHF 40 billion in AuM. Eliminating these items,
assets under management grew by CHF 37 billion
and stood at CHF 607 billion at year-end 1998.
As can be seen from the accompanying graph,
25% of Private Banking’s AuM portfolio is in dis-
cretionary AuM, a proportion which has been
increasing over time and which generates higher
levels of fee and commission income. The distri-
bution of asset classes between accounts, bonds,
mutual funds, and equities is well spread. Alloca-
tion of AuM among the major currencies as of
31 December 1998 was weighted more strongly
towards the USD, DEM and GBP, while the CHF
portion declined below the USD.
Looking to the development of AuM, we
expect the following trends as clients continue to
seek higher returns, and in line with our strategy
to strengthen our business in the domestic private
banking markets outside of Switzerland:
– an increasing proportion of discretionary AuM
– a movement out of deposit accounts into higher-
yielding products
– market growth that is higher in the domestic
private banking markets than in the traditional
international private banking markets.
Merger and Other Initiatives in 1998
Merger on track and successful
In Switzerland, the merger is moving ahead as
planned. The new management structure was
announced in early 1998. Unified services and a
new price structure were introduced at the offi-
cial merger date on 29 June 1998.
The client segmentation process is on track
and the transfer of client business between the
Private Banking and Private and Corporate
Clients is well underway. UBS is very careful to
extend every effort in meeting our clients needs
during this transfer process, which we expect to
be completed by the end of 1999. Client segmen-
tation will enable Private Banking to become
more focused on the clients’ needs and to dedicate
additional resources to selected segments of high-
net-worth individuals.
The migration process, i.e. the transfer of
data to one new IT platform, was successfully
completed in the main international centers
(New York, Singapore, Hong Kong, London).
In Switzerland, the size and complexity of the
11
Review of Businesses
Private Banking
Assets under Management
by Asset Class
100%
80%
60%
40%
20%
0%
9%
26%
32%
16%
17%
8%
24%
34%
19%
15%
31.12.98
31.12.97
1997 Total: CHF 610 billion1
1998 Total: CHF 607 billion
Accounts
Equities
Bonds
UBS mutual
funds
Others
1 Before 1998 divestments of
CHF 40 billion
Definition: Equities and Bonds
exclude UBS mutual funds. UBS
mutual funds include UBS investment
funds, UBS fund account and UBS
Brinson and Warburg Dillon Read
Funds. Others include Money Market,
UBS Medium-term Notes, Derivatives,
other mutual funds not managed by
UBS, and Metals.
UBS Investment Funds
Development
Swiss-authorized funds only
CHF billion
3
5
1
8
3 +
–
5
7
1
y
c
n
e
r
r
u
C
e
c
n
a
m
r
o
f
r
e
P
7
1
+
w
o
l
f
n
i
y
e
n
o
m
t
e
N
31.12.97
31.12.98
business required a much higher degree of prep-
aration. After several test runs were success-
fully concluded, the full migration is planned
to take place in five steps in the first half of
1999.
Private Banking recognized clearly from the
outset of the merger that some client defections
would occur. This risk was taken very seriously,
and therefore careful monitoring and focused
management processes were put in place. Client
defections could obviously not be completely pre-
vented, but the risk was successfully mitigated. As
a result, the inflow of new AuM substantially
exceeded AuM losses from client defections, and
the same applies to the number of clients.
The new business model
The Private Banking Division has used the
merger as an opportunity to develop a new busi-
ness model to better serve an increasingly
demanding client base in a more efficient manner:
– The merger provided the unique opportunity to
create a large and very targeted client segment of
high-net-worth individuals. The client advisors
are principally organized by respective markets,
which allows them a higher level of client focus.
Flexible new “client servicing teams” can now
be assembled to bring together the highest level
of customized expertise to meet our clients’
increasingly sophisticated needs.
– Tightened focus on the operations surrounding
our core products and services will increase our
efficiency in engineering and executing sophis-
ticated individual wealth management solu-
tions. It is this “vertical integration” of the busi-
ness that will allow us to achieve economies of
scale and scope.
– The new business area encompassing six Private
Banks in Switzerland operating under their own
names continues to offer an alternative to those
clients that are attracted by the individual
atmosphere and service of a small Private Bank,
while they will benefit from the backing and
support of one of the world’s largest and best-
capitalized banks.
– Following a “no-redundancy principle”, Pri-
vate Banking is becoming more efficient by
leveraging off the specific divisional competen-
cies highlighted through an integrated UBS
Group concept. This gives UBS a significant
advantage against the competition.
– Private Banking’s performance incentive systems
are increasingly designed to reward entrepre-
neurial talent and initiative within the division.
Investment funds business
As a result of the merger, UBS has become the
number one fund provider both in Europe and in
Switzerland. At the end of 1998, assets under
management of UBS Investment Funds amounted
to CHF 175.2 billion, an increase of 14.7% for
the year. Product owners of mutual funds in the
UBS Group are Private Banking, UBS Brinson
and Warburg Dillon Read. Private and Corporate
Clients offers Private Banking Division’s mutual
fund product range to its clients. “UBS Invest-
ment Funds” is the label for the Private Banking
Division’s core range of public open-end mutual
funds.
During the course of the year, we simplified
our administration structure in Switzerland and
in Luxembourg by reducing operations to one
company in each location. Further fund activities
– administration and / or local and regional dis-
tribution of our funds within the bank and with
third parties – are dealt with by our fund units in
Germany, Italy, Jersey, the USA, the Cayman
Islands, Japan, Taiwan and Hong Kong.
In addition, we have re-calibrated and
renamed a number of funds, and we made inten-
sive preparations for the merging of the funds of
the two former banks. These mergings will come
into effect in 1999, when we adapt our fund
range to the introduction of the Euro. It is our
aim to implement these changes in a customer-
friendly manner and as swiftly as possible.
Major Awards Won by UBS Investment Funds in 1998
Award
Best Overall Management Group over 5 years
Best Bond Management Group over 5 years
48 different awards for individual funds
in their respective fund categories or markets
Source
Standard & Poor’s, Micropal
Standard & Poor’s, Micropal
Standard & Poor’s, Micropal, Lipper, BOPP ISB
12
UBS Investment Funds
by Fund Category
Swiss-authorized funds only
100%
80%
60%
40%
20%
0%
20%
26%
24%
20%
7%
3%
16%
33%
26%
17%
5%
3%
The risk-controlled management style of our
portfolio managers has led to consistently good
performance results which is demonstrated by
a high number of awards given to our funds.
The transparent fee structure (all-in-fee) and the
clear positioning of our fund range has enhanced
its attractiveness to the investing community at
large.
Strategic Initiatives
31.12.98
31.12.97
A holistic, client-oriented model
1997 Total: CHF 153 billion
1998 Total: CHF 175 billion
Asset allocation funds
Money market funds
Bond funds
Equity funds
Capital preservation funds
Real estate funds1
1 UBS has a 50% interest in the SIP Real
1 estate funds
The private banking industry is undergoing fun-
damental changes. Traditional private banking
client preferences of security and stability are giving
way to demands for more sophisticated and per-
formance-oriented solutions which are far-reaching
in nature. Thus, comprehensive wealth manage-
ment solutions in the client’s own market are mov-
ing towards the forefront of client preferences.
Two initiatives have developed from these
trends. First, we are looking at a wider and deep-
er penetration of our services and products into
our existing client base. We aim to extend our
services and products to better cover our clients’
total net wealth through comprehensive wealth
management solutions. By the same token, we are
seeking to meet our clients’ customized, sophisti-
cated needs by developing individualized servic-
es, and additionally by utilizing Warburg Dillon
Read as an essential supplier of an expanded
range of advanced products.
Second, the Private Banking Division is com-
mitted to a strategy of developing the domestic
private banking market outside of Switzerland.
This strategy will allow us not only to tap money
previously inaccessible to us, but also to tap
money flowing back to, or no longer flowing out
of, those markets. Therefore, value creation is
entirely accretive to the current core franchise of
Review of Businesses
Private Banking
Swiss private banking, which is intact and which
we will aggressively preserve with major invest-
ments in people and in technology.
Balancing organic growth in various com-
petitively-fragmented markets against a number
of select acquisitions around the world, Private
Banking is on course to increase significantly
AuM and revenues from the domestic private
banking business outside of Switzerland. Prof-
itable domestic businesses already exist in
the UK, US and Canada. Our start-ups in Italy
and Japan are progressing better than planned
and so is the conversion in Germany (Schröder
Münchmeyer Hengst AG) and in Australia
(Potter Warburg Securities Ltd.). Our offices in
Spain opened just after year-end 1998, and the
ones in France are ready to come on-line as soon
as regulatory approval is achieved. Private Bank-
ing
to commit substantial
resources in terms of management’s time and
investment capital to achieve significant growth
of the domestic businesses, as we view these
strategies as essential to achieving sustained
profitability in the private banking industry in
the medium term. In addition Private Banking
will continue to analyze a range of select acquisi-
tion opportunities. The Group’s potential acqui-
sition budget is mainly focused on Private
Banking.
is determined
Outlook
We expect organic growth of AuM in our new
domestic units outside of Switzerland, as well as
from selected acquisitions in targeted markets.
Due to start-up costs, however, their net contri-
bution will remain limited. Thus, the Private
Banking Division expects to grow 1999 net prof-
it by expansion of its business, improved servic-
es and the synergy effects of the merger.
13
Review of Businesses
Warburg Dillon Read
Warburg Dillon Read
Warburg Dillon Read
Business Profile / Mission
has established itself as
the leading European
investment bank and the
most truly international
of the global top tier.
Following the merger and
the market turbulence
of the third quarter, the
division reassessed all
its business activities and
designated those on
which it would focus
going forward. Manage-
ment believes that
these businesses have
sustainable competitive
advantages and can
be operated to serve the
global client base in a
manner which enhances
the considerable franchise
of Warburg Dillon Read.
14
Warburg Dillon Read is the investment bank-
ing division of the UBS Group. Delivering debt
and equity financing, advisory services, global
research, securities and foreign exchange execu-
tion, and risk management services to major cor-
porations,
institutions, and public entities
around the world, Warburg Dillon Read has
established itself as the leading European invest-
ment bank among the top tier of investment
banks globally.
Warburg Dillon Read is a “narrowly defined”
investment bank compared to its major global
competitors. This is because some of the elements
generally found in a broader investment bank –
private clients, institutional asset management,
and private equity – reside within the other divi-
sions of UBS. In addition to its role as franchise
manager within the Group for institutions, cor-
porations and sovereigns, a significant function
of Warburg Dillon Read is providing products,
execution and transaction processing to the other
asset gathering activities of UBS. Warburg Dillon
Read clearly focuses on both its external clients
and its very substantial internal clients, providing
each category with the same professional prod-
ucts and services. The cost savings for the Group
are significant.
Our “home markets”, meaning those in which
we are in the very top few firms in advisory, pri-
mary issuance, research, and secondary sales and
trading, are the UK, Switzerland and Australia. In
the United States and Japan, cross-border trans-
actional flows are our mainstay. At the same
time, with a listed equity market share of over 2%
in the United States, we also have significant
domestic presence in secondary sales and trading
of securities in the largest of the world’s market-
places and a very credible presence in domestic
advisory and debt and equity underwriting.
Achieving a position among the global top tier
of investment banks with this business mix
demonstrates that Warburg Dillon Read is the
most truly international of the leading investment
banks. While some competitors list the pursuit of
international opportunities as part of their strat-
egy, we consider every undertaking, wherever the
location, to be part of our single global business.
It is difficult to define the international element of
our business given that no one nationality
accounts for more than 25% of our employees.
Review of Results
Business priorities
Warburg Dillon Read generated a post-tax
loss of CHF 706 million in 1998, following a
profit of CHF 1.1 billion in 1997.
After an excellent first half in 1998, we expe-
rienced a very difficult third quarter, as did many
competitors. As reported in the Review of Risk
Management and Control Section on pages
33–35, principal contributors to this were the
exposure to the hedge fund Long Term Capital
Management (LTCM) and the positions in the
Global Equity Derivatives portfolio which pre-
dated the merger. Warburg Dillon Read’s pre-tax
losses on these were CHF 793 million and CHF
762 million, respectively, in 1998. The Review of
Risk Management and Control Section summa-
rizes the remaining exposure to these positions.
Other contributors to the poor third-quarter
performance were more within our control. These
included losses on structural positions such as short
Swiss equity volatility in the longer maturities.
Although a good job had been done in decreasing
this position between the merger and the time of the
market turmoil, it still was a large exposure which
proved costly. This particular exposure, an adjunct
to the large role that we fulfill in the Swiss market,
can be expected to suffer during market disloca-
tions. However, we expect our role to be reward-
ing over the cycle, and much of the third-quarter
loss was recouped during the fourth quarter.
We also experienced losses on credit exposures
in tradable assets and the loan portfolio in Russia
and other emerging markets. These losses, cou-
pled with the view that the changed market envi-
ronment would have more long-lasting repercus-
sions, caused Warburg Dillon Read’s senior man-
agement to conduct a fundamental review of the
division’s business activities and priorities, with
particular emphasis on the Fixed Income Area.
Each of the major business activities was
assessed as to whether it was supportive of the
franchise of Warburg Dillon Read or the UBS
Group and whether it could be justified on an
expected risk / return basis. Activities meeting
both requirements were designated as core busi-
nesses of Warburg Dillon Read. Those activities
failing one or both tests were identified for exit or
designated as non-core. Non-core businesses,
while remaining within Warburg Dillon Read for
financial reporting, are being run down or dis-
Revenues by Region (1998)
14%
20%
CHF million
Corporate finance
Equities
Fixed income
Treasury products
Total operating income
Less: Credit loss expenses
Total
Personnel, general and administrative expenses
Depreciation and amortization
66%
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Europe
Americas
Asia/Pacific
Revenues by Client Type (1998)
6%
Net profit / (loss)
Regulatory equity used (avg)
Return on equity
Cost / income in % 1
Headcount
of which: Switzerland
of which: Rest of world
1 Before credit loss expense.
1998
1,665
2,572
399
2,351
6,987
500
6,487
6,984
524
7,508
(1,021)
(306)
(715)
(9)
(706)
13,300
(5)
107
13,794
2,502
11,292
Review of Businesses
Warburg Dillon Read
1997
Change (%)
10,888
300
10,588
8,714
595
9,309
1,279
213
1,066
0
1,066
13,600
8
85
18,620
3,304
15,316
(36 )
67
(39 )
(20 )
(12 )
(19 )
(180 )
(244 )
(167 )
(166 )
(2 )
(168 )
(26 )
(24 )
(26 )
39%
55%
posed of as appropriate and prudent. The core
businesses of Warburg Dillon Read are deemed to
have sustainable competitive advantages, and we
expect to operate them profitably so as to pro-
duce shareholder-value-enhancing returns.
Activities identified for rapid position run-
down and exit include:
– Commodities Trading (Energy, Base Metals,
Institutional
Corporates
Government/Supranational organizations
Revenue by
Type of Activity (1998)
Electricity)
– Project Finance
– Non-structured Asset-backed Finance
– Conduit Finance
– Lease Finance
– Distressed Debt Trading
1%
24%
75%
Customer
Market making
Proprietary
Also, two activities have been designated non-
core and will be operated separately from our
main businesses. These are:
– Those loans and commitments which are not
part of the tradable asset portfolio (loan trad-
ing), not issued in conjunction with the Lever-
aged Finance business or which are in excess of
the limits for credit exposure to our clients. The
non-core loan portfolio will be separated from
the core activities of Warburg Dillon Read. It
will be managed to zero in an economically sen-
sible fashion.
– Global Trade Finance which, while operating
successfully, is a business that with the excep-
tion of the Swiss corporate business is not core
to any division of UBS. Various strategic and
operational alternatives for this business are
being investigated which will ensure that client
service is maintained.
Additionally, those risks of the Global Equity
Derivatives book which we do not consider part
of the core activities of Equities will be managed
by Warburg Dillon Read under an agreement
with Corporate Center. Note that this does not
mean that we are ceasing all Global Equities Deriv-
atives dealing. In fact, we have enhanced our abil-
ity to meet the risk management needs of clients
by establishing a team that delivers solutions
across both equity and interest rate products. We
believe that this activity can be operated pru-
dently to yield attractive risk-adjusted returns.
Results
Warburg Dillon Read generated a post-tax
loss of CHF 706 million in 1998.
Excluding the losses of CHF 793 million from
LTCM and CHF 762 million on the Global
Equity Derivatives Portfolio reported under the
business areas Fixed Income and Equities respec-
tively, Warburg Dillon Read would have pub-
lished a pre-tax profit which was disappointing
but in line with industry trends. In this context
the demands of the merger should also be borne
in mind.
15
Review of Businesses
Warburg Dillon Read
Headcount by Region (1998)
19%
27%
54%
Total: 13,794 employees
Europe
Americas
Asia/Pacific
Equity Analysts by Region (1998)
30%
49%
21%
Total: 546 analysts
Europe
Americas
Asia/Pacific
16
Corporate Finance exceeded expectations, as
a result of high levels of M&A activity and a
record amount of business in equity and equity-
linked issues.
Equities, after a strong first half, experienced
a difficult trading background in the second half,
when extreme levels of volatility were encoun-
tered. High levels of commission and income on
new issues were achieved.
Fixed Income revenues were depressed prima-
rily by losses in Russia and other emerging mar-
kets. Very healthy primary bond activity driven
by Warburg Dillon Read’s strong placing capa-
bilities was offset by other activities performing
marginally below expectation.
Treasury Products performed well in 1998. An
exceptional Short Term Interest Rates result, large-
ly due to an efficient implementation of centralized
netting, was partially offset by proprietary foreign
exchange losses and low Precious Metals revenues.
Proprietary trading, owing both to poor
results in 1998 and our strategic de-emphasis
over the last few years, made a negligible contri-
bution to total revenues in 1998.
Personnel, general and administrative expens-
es have benefited from a faster reduction in head-
count than anticipated and a consequent reduc-
tion in personnel and related costs.
Depreciation and amortization costs include
the write-down of goodwill in investments in
emerging markets ventures following the strate-
gic review of Warburg Dillon Read’s businesses
and markets.
Non-core
The Non-Core Loan portfolio and the Global
Trade Finance business together generated rev-
enues of CHF 388 million and profit before tax
of CHF 54 million, and utilized regulatory equi-
ty of approximately CHF 3 billion.
Significant Events in 1998
Merger impact
The merger of Swiss Bank Corporation and
Union Bank of Switzerland had a significant
impact on the investment banking business, owing
to an extensive product / service overlap in the two
organizations. This resulted in a rationalization of
enormous magnitude.Although not without some
extremely difficult interim patches, these rational-
izations all were identified and the investment
banking merger accomplished in 1998.
Headcount, which totaled 18,620 in the two in-
vestment banking activities at the time of the merg-
er announcement, stood at13,794 at year-end 1998.
As a result of the merger, Warburg Dillon Read
can point to an enhanced position in a number of
areas compared to that enjoyed by either prede-
cessor firm. In the Americas, combining the
respective operations improved the platform
substantially; inter alia our research coverage
increased to over 70% of the S&P 500 compa-
nies. In Europe the merger reinforced the leading
position in Equities which Warburg Dillon Read
previously enjoyed. Globally, our distribution and
origination power was markedly enhanced.
The review of business priorities discussed pre-
viously also led to a realignment of core activities
among the newly-defined business areas of Trea-
sury Products and Equities & Fixed Income. The
former includes all our foreign exchange busi-
nesses, both spot and derivatives, as well as our
short-term interest rate and repo activities. Equi-
ties & Fixed Income includes both our Equity and
Fixed Income businesses, including derivatives.
The alignment of our product areas into these
main groupings was driven primarily by com-
monality of clients, logistics requirements, and
risk characteristics. For example, Treasury Prod-
ucts encompasses markets which are generally
the most commoditized, which present the great-
est opportunity for creating automated delivery
paths to link individual market makers with
clients and which most depend on processing and
pricing efficiency to be competitive.
LTCB joint venture
In the first half of 1998, Warburg Dillon Read
launched a joint investment banking venture in
Japan with the Long-Term Credit Bank of Japan,
Ltd. (LTCB), as envisaged under the alliance
between Swiss Bank Corporation and LTCB
announced in 1997. Unfortunately, against the
backdrop of a deepening banking crisis in Japan,
LTCB subsequently became the first bank to be
nationalized under new government legislation.
Under these extraordinary circumstances, it
proved necessary for Warburg Dillon Read to ter-
minate the alliance and to negotiate the buy-out
of LTCB’s interests in the joint venture. Warburg
Dillon Read then re-launched successfully our
wholly-owned investment banking businesses in
Review of Businesses
Warburg Dillon Read
Japan under the Warburg Dillon Read brand, a
business which secured and continues to enjoy
significant economic benefits from the alliance in
terms of goodwill and business flows.
Logistics, Euro and Year 2000
The logistical requirements created by the
merger were enormous for Warburg Dillon Read.
As noted elsewhere in this Financial Report, an
early decision was made to adopt within Switzer-
land the systems platform of Union Bank of
Switzerland and elsewhere in the world the plat-
form of SBC Warburg Dillon Read. This decision
permitted a rapid focusing on the necessary migra-
tions and enabled financial reporting and risk con-
trol to operate effectively as early as the first day
following the effective legal merger. As noted, inte-
gration of the infrastructure in Switzerland is
ongoing and is planned to be completed in 1999.
In the face of the many “run the business” logis-
tical requirements spawned by the merger, we are
pleased to be able to report that these requirements
were managed without a loss of focus on the Euro
and Year 2000 programs. The Euro preparation
concluded successfully when all Warburg Dillon
Read activities were able to function as expected
after the critical year-end conversion weekend. Our
top priority remains to complete the Year 2000
program equally successfully in 1999.
Strategic Initiatives
Although Warburg Dillon Read’s 1998 results
were unsatisfactory in purely financial terms, as
the above review shows, the impact of the
extraordinary items should not obscure some
significant accomplishments that provide confi-
dence going forward.
Proven strengths
Augmented by the merger, our Equities busi-
ness ranks among the top firms globally and con-
tinued to win accolades for both research and exe-
cution. It will continue to provide full service to
the major investing institutions of the world
across all equity markets with any significance for
asset allocation. The strength of this global base
will enable our business to grow in the US at least
as fast as US competitors are growing in Europe.
In equity-linked primary issuance (convert-
ibles) Warburg Dillon Read was the global leader
in 1998 by a wide margin. The division was num-
ber two across both equity and equity-linked
issuance, including US domestic activity.
The accomplishments of our Equity Capital
Markets Group reflect both the global reach and
sector strengths of our partnered Corporate
Finance and Equities businesses. We intend to
expand these capabilities by investing selectively
in global sectors, with emphasis on the US, when-
ever skilled analysts and bankers can be found to
complement existing strengths.
Our sector strengths also are apparent in the
continuing successes of our advisory franchises.
Our Corporate Analysis and Structuring Team
augments this by providing a market-driven
approach to the analysis of debt / equity structur-
ing that is unique in the industry.
We have maintained our long standing leader-
ship in Eurobonds by topping the league tables
for the eighth consecutive year. The main area of
expansion will now be the Euro-zone markets.
We already lead our home markets, and we are
the top European securities house in primary
issues.
A priority of our Fixed Income business is to
use capital more efficiently, thus supporting the
division’s aim of reducing its capital requirement.
To this end, the Fixed Income business will seek to
act primarily as an intermediary rather than as a
principal, by exploiting its portfolio management
capabilities in both loan and security products
and by leveraging its growing credit distribution
capabilities, which include credit derivatives.
Corporate Finance and Fixed Income are
active in two “joint ventures”. The first is Lever-
aged finance, a business area that, although large-
ly US-based today, holds much promise in Europe
with its nascent high-yield markets. This initiative
is supported by investment in high-yield research.
The second joint venture, the Debt Capital Mar-
kets Group, covers the marketing, origination and
structuring of all products in this category. Both
joint ventures are well positioned to capitalize on
the opportunities afforded by the developing
Euro-based, pan-European capital markets.
In their more commoditized marketplace, our
Treasury Products businesses continue to take
the role of market maker and lead liquidity
provider. Efficiencies from electronic price distri-
bution and deal capture are increasingly impor-
tant. We will continue to build upon established
platforms.
17
Review of Businesses
Warburg Dillon Read
18
Challenges
With the division’s resources and focus on
core businesses, we believe that we can compete
successfully with the industry leaders in most
markets for most products around the globe.
The key challenges lie in certain areas of the
US marketplace and the Euro-zone, notably in
Germany.
We further believe that our aims are achiev-
able without a corporate-level acquisition and
that at most we will enhance our capabilities
selectively by adding a few small teams. We will
focus on serving our corporate and sovereign
client bases and on achieving top-three supplier
status with an expanded number of major insti-
tutional investors.
These plans can be accomplished while assum-
ing less risk than either of our predecessor firms.
We have already reached our reduced market risk
target, having operated in recent months far
below our VaR limit, which was down to CHF
600 million at the 1998 year-end. Counterparty
risk fell significantly during 1998 and will con-
tinue to decline at the same pace or faster in 1999.
In Warburg Dillon Read, as in other invest-
ment banks, the logistics functions are increas-
ingly important to productivity and competitive-
ness. These functions account for a growing pro-
portion of total production and distribution
costs. The trend is most pronounced for stan-
dardized products with their heavy reliance on
efficient operations and technology, but the same
tendency is apparent in all product and distribu-
tion activities. We are looking for improved com-
petitiveness from enhanced processes implement-
ed through more efficient partnerships between
the business and the logistics functions.
Increasingly we think successful exploitation
of the Internet will be a prerequisite for success
in investment banking. Within Warburg Dillon
Read, Internet efforts are focused on clients and
distribution, trading and risk management, pro-
1998 Warburg Dillon Read Selected Awards
Corporate Finance Magazine
Top Banks of the Year
– Investment Bank of the Year
– Equity-Linked House of the Year
Corporate Finance Magazine
Deals of the Year
– Equity-Linked Offering of the Year – Swiss Life GEMMS
– Equity-Linked Offering of the Year – Bell Atlantic
(runner-up)
– Equity Offering (Privatization) of the Year – Swisscom
– Syndicated Loan Deal of the Year – GEC
– Buyout of the Year – Investcorp / Watmoughs & BPC
Euromoney
Poll of Polls
Overall winner of the Poll of Polls
– No.1 Underwriting
– No.1 Trading
– No.1 Advisory
Euromoney
Awards for Excellence
– Best Eurobond Trading House
(4th consecutive year)
– Best Securities Firm in Western Europe
(5th consecutive year)
– Best Securities Firm in the UK
(2nd consecutive year)
– Best Securities Firm in Switzerland
(4th consecutive year)
– Best Foreign Securities House in the US
(2nd consecutive year)
Euromoney
Deals of the Year
– Best International Euro Issue – Republic of Italy
– Best Equity-Linked Issue – Bell Atlantic (CWC)
– Best High-Grade Corporate Issue – KPN
– Best IPO – Swisscom
– Best Financial Institution Issue – Associates Corporation
of North America
– Best International Syndicated Loan – GEC
Euromoney / Global Investor
European Broker Survey
– Best Overall European Sectoral Research
– Best Pan-European Equity Research
– Best Pan-European Equity Execution
Global Investor
FX Survey
– No.1 Best Advice on Spot Trading
– No.1 Best Sales Coverage
International Financing Review
Review of the Year
– European Equity House of the Year
– Equity-Linked House of the Year
– European Equity-Linked House of the Year
– European Equity-Linked Issue of the Year – Swiss Life
GEMMS
– Privatization Issue of the Year – Swisscom
– Deutschmark Bond of the Year – KPN
International Financing Review Asia
Review of the Year
– Australian Equity House of the Year (2nd consecutive year)
– Australian Domestic Bond House of the Year
Review of Businesses
Warburg Dillon Read
duction and logistics. In each of these three
areas, initiatives are co-ordinated with those of
other UBS divisions with a view to leveraging the
entire Group’s asset gathering and servicing capa-
bilities.
Outlook
Global consolidation and the continued with-
drawal of former aspirants to global status are by
no means spent forces in the investment banking
sector. This said, we believe that attractive oppor-
tunities exist for investment banks worldwide,
opportunities that will outlast any continuing
disruptions in the short term. Among the factors
driving such opportunities are market deregula-
tion, economic globalization, increasing empha-
sis on shareholder value, industrial consolida-
tion, the rising volume of investable funds, and
accelerating technological change.
Buoyed by these trends, the growth of the finan-
cial services industry has outpaced that of its host
economies throughout the 1990s. While we expect
the global investment banking revenue pool to
continue growing, overall compound annual
growth rates cannot be relied upon to match those
of recent years. Further, short-term fluctuations
and regional variations will inevitably affect the
performance of all investment banks.
We expect the revenue pool to grow more
strongly in Europe than in other regions over the
next few years, thanks in part to Euro-driven cor-
porate restructuring, a shift towards equity
investment, and the nascent high-yield market.
Warburg Dillon Read is uniquely positioned to
take advantage of this growth.
In the US, the combination of high valuations,
low inflation, and continued economic growth
leaves equity prices sensitive to unexpected news.
Volatility is therefore expected to remain high in
the US and elsewhere.
Asia excluding Japan is unlikely to stage a
rapid recovery from the current weak conditions
in the banking and commercial sectors. We
therefore have reduced our front office head-
count significantly in the region in line with the
size of expected opportunities. In the short term,
such opportunities should come mainly from
corporate restructuring and a shift from bank
finance to the international capital markets. We
have also scaled back our activities in other
emerging markets including Latin America and
Eastern Europe.
19
Review of Businesses
Private and Corporate Clients
Private and Corporate Clients
Our objective is to
Business Profile / Mission Statement
become the most profi-
table bank for private,
business and corporate
clients in Switzerland
by maintaining our
leading market position.
Furthermore, we are
seeking to increase our
return on equity to a
level of 18%.
20
The Private and Corporate Clients Division,
measured in terms of assets under management as
well as in terms of the loan portfolio, is the leading
bank in Switzerland. Our year-end 1998 assets
under management amounted to CHF 434 billion,
of which 53% was from our Private and Business
Clients business area, 41% from the Corporates
business area and the remaining 6% from the
Operations (Banks) business area. The volume of
our loan portfolio amounted to CHF 165 billion
of which mortgages accounted for around 75%.
Our position in the Swiss market and our ready
access to other divisions enables us to offer a
comprehensive range of state-of-the-art products
and services to our diversified client base. As of
year-end 1998, our client base consisted of more
than 4.4 million private and investment clients,
some 180,000 small- and medium-sized business-
es plus more than 10,000 large corporates. In
addition, we provide payment and custodial serv-
ices to some 1,800 banking institutions located
throughout the industrialized world.
A strategic review identified the potential to
expand our business beyond Switzerland’s bor-
ders in order to take advantage of the growing
opportunities associated with Euroland. To this
end, we have finished the initial analysis and are
pursuing the realization of our objectives.
Review of Results
Summary
1998 was a year of major change for the Pri-
vate and Corporate Clients Division. The merger
brought about new challenges which required an
outstanding effort from our managers and
employees. Through their tremendous contribu-
tion, we were able to achieve both our integration
and business-related objectives, resulting in a
very successful year despite the highly competi-
tive environment. Our integration process con-
tinues on track and will be completed during the
remainder of 1999. Full-year 1997 and 1998
results have been restated to provide an accurate
comparison of our results in light of the client
business transfer which took place between Pri-
vate and Corporate Clients and Private Banking.
Net profit after tax increased by 21% to CHF
754 million compared to the prior year level of
CHF 621 million. The improvement was mainly
due to significant cost cuts of 4%. This resulted in
an enhanced cost / income ratio of 70%, which
compares favorably with the 1997 ratio of 74%.
Furthermore, the improved financial result and
reduction in equity utilization contributed to a
higher RoE of 9.1% versus 7.2% in 1997.
Operating income
Operating income increased slightly by CHF
20 million from CHF 7,005 million in 1997 to
CHF 7,025 million in 1998. Margin improve-
ments from risk-adjusted pricing were offset by
divestments of Prokredit and Aufina.
Operating expenses
Operating expenses decreased 4%, or CHF
210 million, to CHF 4,947 million over the peri-
od due to management’s rigorous attention to
efficiency enhancement and the rapid realization
of merger-related synergies.
Headcount for the period decreased 6%, or
1,598, to 24,043 year-on-year. Of the overall
headcount reduction, some 980 were mainly
attributable to the sale of Bosslab and Prokredit.
We closed around 34 duplicate branch locations
during the latter half of the year.
Our ability to reduce costs further was
impaired by the need to maintain a high level of
outside contractors associated with the introduc-
tion of the Euro and the upcoming Year 2000 con-
version. Efforts in this regard ensured that we had
a trouble-free Euro conversion on 1 January 1999.
Loan portfolio
After some interdivisional client shifts, the loan
portfolio amounted to CHF 165 billion at year-end
1998. Accounting for about 75% of the division’s
portfolio, mortgages are a core element of our
business. The remaining 25% of the Swiss portfo-
lio consists primarily of commercial loans. The
mortgage portfolio is broken down into about
two-thirds fixed-rate mortgages, which represent a
low interest rate risk. Furthermore, some 50% of
all mortgages relate to low-risk single-family
homes. More detail can be found in the Review of
Risk Management and Control on pages 37–38.
The recovery portfolio was reduced by a net
CHF 3 billion to CHF 26 billion by the end of
1998. This consisted of around CHF 10 billion of
settled cases partially offset by some CHF 7 bil-
lion new workout positions.
Assets under Management
by Business Area (1998)
6%
CHF million
Private and business clients
Corporate clients
Operations (banks)
Others (e.g. Systor)
Total operating income
Less: Credit loss expenses
Total
41%
Personnel, general and administrative expenses
Depreciation and amortization
53%
Total
Total: CHF 434 billion
Private and business clients
Corporate clients
Operations (banks)
AuM for private and business clients
and for corporate clients include
accounts and custody. AuM in opera-
tions (banks) include accounts only.
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Net profit / (loss)
Regulatory equity used (avg)
Cost / income in % 1
Assets under management (bn)
Headcount
of which: Switzerland
of which: Rest of world
1 Before credit loss expense.
1998
4,785
1,728
448
64
7,025
1,170
5,855
3,999
948
4,947
908
154
754
0
754
8,250
70
434
24,043
23,989
54
Review of Businesses
Private and Corporate Clients
1997
Change (%)
7,005
1,092
5,913
4,305
852
5,157
756
135
621
0
621
8,600
74
398
25,641
25,581
60
0
7
(1 )
(7 )
11
(4 )
20
14
21
–
21
(4 )
9
(6 )
(6 )
(10 )
Assets under management
Assets under management rose by CHF 36
billion to CHF 434 billion. This increase was due
to, in roughly equal amounts, the net inflow of
assets and positive equity markets over full-year
1998.
Significant Events in 1998
Merger on track and successful
Our ambitious integration plan remains on
track with all major tasks expected to be com-
pleted before year-end. The following tasks were
completed during the year:
– Rebranding / Client Communication: We have
completed our rebranding both internally and
externally. Furthermore, we harmonized our pri-
cing and product ranges and were able to offer
these to our clients by August 1998. This major
effort was accompanied by the need to adapt the
related information technology (IT) systems.
– Technical and Operational Migration: A deci-
sion to utilize a common IT Platform (ABA-
CUS) was taken in January 1998 which permit-
ted an early start to the major technical and
operational migration. The rapid conversion
allowed us to successfully migrate the first
100,000 clients in November of last year and
establish the basis for migrating the remaining
clients to ABACUS in 1999.
– Redesign of Distribution Network: We closed
34 duplicate branch locations throughout
Switzerland during the year and have identified
additional branches to be closed in 1999. Fur-
thermore, we are broadening our offer of alter-
native distribution channels such as telephone
and Internet banking.
– Client and Employee Retention: Client defec-
tions resulting from the merger have remained
within the anticipated 5% range. Employee
turnover, on the other hand, reached an average
rate of approximately 14% for the year com-
pared to the prior year’s 12% rate. This trend
has now been reversed and employee turnover
is on the decrease.
The merger going forward
A number of significant integration steps remain
to be completed. Based on progress so far, and the
comprehensive preparatory work, we are confident
that we will complete our projects within the estab-
lished deadlines. Efforts to minimize further client
and employee defections will continue.
21
Review of Businesses
Private and Corporate Clients
35%
Assets under Management
by Asset Class (1998)
6%
17%
20%
22%
Total: CHF 434 billion
Customer accounts
Bonds
Equities
Mutual funds
Other custody accounts
22
Strategic Initiatives
European asset gathering
Initiative for small- and medium-sized
enterprises (SMEs)
At the time of the merger, UBS announced the
“SME Initiative Switzerland”. This initiative is a
targeted response to the main challenges facing
SMEs, namely the lack of adequate equity capital.
At the outset, UBS made some CHF 150 mil-
lion available to qualified SMEs. During the sec-
ond half of 1998, this amount was further
increased to a total of CHF 335 million funded
by EIBA and the venture capital initiative of for-
mer Swiss Bank Corporation. Three vehicles are
being utilized for distribution, namely Aventic
AG, UBS Startcapital and a seed fund for sup-
porting high-technology development.
– Aventic AG is a wholly-owned UBS Group sub-
sidiary with equity capital of CHF 30 million
and access to some CHF 245 million of credit
lines. It was formed in August 1998 and invests
in innovative SMEs through equity stakes or by
providing venture capital. Its Board is com-
posed mainly of people from outside the bank
in order to ensure the necessary flexibility and
independence in its decision making.
– To assist in the start-up phase of new compa-
nies, UBS has launched a new range of products
for up-and-coming entrepreneurs. The aim is to
provide equity capital combined with start-up
loans as well as necessary additional services to
support management activities. These clients
are served out of newly-created competence
centers within our Private and Business Clients
Business Area.
– A seed fund has been established to facilitate
the transfer and realization of promising tech-
nology from Switzerland’s universities. This
autonomous vehicle was created to assist in
promoting the development of new high-tech
firms in Switzerland and is actively involved
with universities and other institutions.
The rapid growth in demand for investment
and retirement products within Europe repre-
sents a significant opportunity. Growing wealth
levels, the consolidation of Europe and uncer-
tainty over the stability of state pension schemes,
are some of the reasons why a cross-border prod-
uct offering
is attractive. Furthermore, an
increasing number of investors are turning to
channels such as the Internet and telephone to
conveniently provide them with information and
the ability to buy and sell securities and other
financial products.
UBS, with core competencies in asset manage-
ment, investment and long-term savings prod-
ucts, as well as proven client servicing capabilities
and the appropriate technology, is well-placed to
capitalize on these developments and offers these
services outside of its traditional home market.
As a global bank with in-house access to com-
prehensive and high-quality research, representa-
tions on all major stock exchanges, a well-recog-
nized brand and exceptional technology, UBS has
a significant opportunity to embark upon a tech-
nology-based expansion.
Outlook
For 1999, we expect to continue our improve-
ment in net profit. This will be achieved by real-
izing our strategic projects which consist of clear-
ly-defined initiatives and further enhancing the
efficiency of our businesses.
We are highly confident about reaching our
long-term objectives despite the continuing inte-
gration process, the highly competitive environ-
ment and the anticipation of only a moderate
upswing in the Swiss economy.
Review of Businesses
23
Review of Businesses
UBS Brinson
UBS Brinson
UBS Brinson posted a
Business Profile / Mission Statement
strong performance in
1998 against a volatile
market backdrop. Global
revenue growth was
generally healthy and was
achieved with moderate
growth in costs. Given
the depth and breadth of
our new resources, the
merger and other client-
driven strategic initiatives
completed during the
year should position us
well for further growth.
Our 1999 outlook is posi-
tive, although competition
and market conditions
are likely to remain chal-
lenging.
24
UBS Brinson is responsible for the institution-
al asset management businesses of the UBS
Group. We invest globally for a world-wide client
base consisting of institutional investors such as
pension funds, public funds and central banks.
On behalf of Private Banking, we also manage the
UBS Investment Funds of the UBS Group.
UBS Brinson is one of the largest institutional
asset managers in the world. We employ a total
of almost 1,500 people at our headquarters in
Chicago and our offices in Bahrain, Basel, Frank-
furt, Geneva, Hong Kong, London, Melbourne,
New York, Paris, Rio de Janeiro, Singapore, Syd-
ney, Tokyo and Zurich. In the United States, the
United Kingdom and Switzerland, we are among
the industry leaders. We have over CHF 360 bil-
lion in institutional assets under management,
with an additional CHF 171 billion in mutual
funds managed for Private Banking.
Institutional asset management mandates are
typically awarded on the basis of investment style,
performance track records and client service. UBS
Brinson’s goal is therefore to deliver sustained
value-added investment performance relative to
client-mandated benchmarks. Our asset allocation
strategies are based on comprehensive proprietary
research in the major equity, fixed income and cur-
rency markets around the world. Our method is to
identify periodic discrepancies between market
price and investment value and turn them to our
clients’ advantage. Our global presence means that
we are thoroughly familiar with local client needs
and regulatory environments. While applying local
knowledge to meet our clients’ specific needs,
we leverage our research capability globally. The
resulting superior service quality is the basis for
building strategic partnerships with our clients.
The institutional asset management business,
though subject to intense competition, has the
potential to deliver attractive returns. Capital
requirements are minimal, thus favouring a high
return on equity. Revenues take the form of fees,
which are closely correlated to the size of the assets
under management. Earnings streams are conse-
quently less volatile and more predictable. The
growth potential for the business is impressive:
institutional assets currently run to some CHF 17
trillion worldwide – by 2002 they are expected to
reach CHF 25 trillion. Rising security market lev-
els are a factor, but so are demographics. In many
regions, notably Japan, Europe and also North
America, the average age of the population is ris-
ing and so is the need to make provisions for grow-
ing future pension requirements. With our strate-
gy built on a global platform with a local delivery
focus, we are well-placed to continue to build our
franchise in the markets of our choice.
Review of Results
Summary
The division’s performance rose 11% pre-tax
year-on-year. Excluding non-cash items, the divi-
sion posted a very strong increase of 24% in oper-
ating profits before tax. The favorable perform-
ance stemmed primarily from good revenue
growth overall with lower costs as the division
rationalized its post-merger infrastructure and
partially held in check its longer-term investments.
Against a volatile market backdrop, the division’s
accomplishments during the year were impressive:
– The successful integration of the Union Bank of
Switzerland and Swiss Bank Corporation busi-
nesses to create a diversified, global divisional
platform unique in the industry.
– Expanded co-operation with Private Banking
helping to further realize the extensive business
synergies between the two businesses.
– The purchase of the Long-Term Credit Bank of
Japan’s (LTCB) asset management business sig-
nificantly bolstering our institutional asset
presence in Japan.
All of these events represent significant mile-
stones in fulfilling our long-term strategy.
Revenues
Growth in new assets under management, our
acquisition in Japan and positive market per-
formance contributed to a 12% increase in oper-
ating income over the prior year. Institutional
revenue growth was generally positive across the
globe. An added boost to revenue came from an
increased asset flow from Private Banking. These
positive developments were partially offset by a
decline in Phillips & Drew revenue due to short-
term performance issues and a very competitive
UK marketplace.
Total costs
Total costs for the division increased by 12%
due to goodwill charges on LTCB in Japan and the
Employees by Region (1998)
6%
7%
CHF million
Phillips & Drew business area
UBS Brinson business area
Total operating income
Less: Credit loss expenses
Total
30%
57%
Total
Personnel, general and administrative expenses
Depreciation and amortization
Total: 1,497 employees
Europe, Middle East and Africa
The Americas
Japan
Asia, excluding Japan
Total Institutional
Assets under Management
by Business Area
100%
80%
60%
40%
20%
0%
34%
66%
39%
61%
31.12.98
31.12.97
1997 Total: CHF 373 billion
1998 Total: CHF 360 billion
Phillips & Drew business area
UBS Brinson business area
Total Institutional
Assets under Management
by Client Location (1998)
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Net profit / (loss)
Regulatory equity used (avg)
Cost / income in %
Assets under management (bn)
Brinson BA institutional AuM
Phillips & Drew BA institutional AuM
UBS investment funds AuM
Headcount
of which: Switzerland
of which: Rest of world
payment of the remaining obligation to Brinson
Partners in the US. Merger synergies enabled the
Swiss headcount to be scaled back 11% while,
outside of Switzerland, expansion in Europe and
the acquisition in Japan resulted in a 15% overall
increase in headcount during the year.
The division continues to focus on control-
ling cost efficiency while making selective
investments in IT and infrastructure. IT devel-
opment efforts are currently underway in the
investment management, operations and busi-
ness development areas aimed at increasing the
efficiency and control of our global resources. In
the next year, we will also be developing our
Internet facilities further for our clients.
3%
7%
Net profit
34%
56%
Total: CHF 360 billion
Europe, Middle East and Africa
The Americas
Japan
Asia, excluding Japan
Combined with an increase in divisional pre-
tax performance of 11%, the slight decrease in the
effective tax rate for the division from 32% to 29%
resulted in an after-tax increase in profits of 16%.
Assets under management
Divisional assets under management increased
by 11% overall before considering the apprecia-
tion of the Swiss franc during the year. After the
currency impact, growth in assets was a more
moderate 5% year-on-year in Swiss franc terms.
Similarly, growth in the Brinson area assets under
Review of Businesses
UBS Brinson
1997
Change (%)
1,040
0
1,040
593
44
637
403
127
276
0
276
50
61
504
228
145
131
1,364
298
1,066
12
–
12
3
143
12
11
1
16
–
16
100
5
4
(16 )
31
10
(11 )
15
1998
326
837
1,163
0
1,163
608
107
715
448
128
320
0
320
100
61
531
238
122
171
1,497
266
1,231
management was up 10% before taking into
account exchange rate movements (or 4% after
the currency impact). Partially offsetting Brinson
business area growth, Phillips & Drew showed a
net decline in assets under management.
Brinson business area
Brinson growth in assets under management
resulted about equally from new business, acqui-
sitions and performance.The US, Switzerland and
Japan accounted for the major share of business
gained as new and existing clients showed con-
tinued confidence in the post-merger Brinson in
UBS Brinson
Portfolios and their Corresponding Indices
Performance characteristics since inception (1981)
in USD
Annual Return (%)
20
18
16
14
12
10
U.S. Equity Portfolio
U.S. Equity Index
Global (Ex-U.S.)
Equity Portfolio
Global Securities Portfolio
Global Securities Market Index
Global (Ex-U.S.) Bond Portfolio
Global (Ex-U.S.)
Equity Index
U.S. Bond Portfolio
U.S. Bond Index
Global (Ex-U.S.) Bond Index
4
6
8
10
12
Volatility (%) 1
14
16
18
20
1 Annualized standard deviation of monthly logarithmic returns
Note: Performance figures are gross of fees
25
Review of Businesses
UBS Brinson
UBS Brinson Business Area
Institutional AuM
by Client Mandate (1998)
6%
UBS Brinson Investment Performance
Global Securities
Global Securities Markets Index
Global equities
MSCI World Equities Index
29%
40%
US Equities
Wilshire 5000
Global bonds
Salomon World Government Bond Index
US fixed income
Salomon Brothers BIG Index
3-year
12.46
14.42
18.85
18.06
23.77
25.24
8.79
6.20
7.46
7.29
5-year
12.17
13.63
16.11
16.06
22.24
21.78
8.51
7.85
7.54
7.30
10-year
12.82
12.45
14.70
11.11
20.03
18.11
10.22
8.97
9.73
9.31
25%
Total: CHF 238 billion
Equity
Asset allocation
Fixed income
Private markets
Phillips & Drew Business Area
Institutional AuM
by Client Mandate
100%
80%
60%
40%
20%
0%
72%
11%
17%
73%
11%
16%
31.12.98
31.12.97
1997 Total: CHF 145 billion
1998 Total: CHF 122 billion
Asset allocation
Bonds
Equities
26
managing their institutional monies. In addition,
the buyout of our joint venture partner LTCB in
Japan bolstered our presence significantly, mak-
ing us the third-largest foreign institutional asset
manager in that market with a strong platform
for future growth.
Characterized by our global geographic pres-
ence and strong mandate diversification, our
business stands apart from our competitors in the
resources and the skill set we can leverage on our
clients’ behalf. The relative mix of our mandates
has remained consistent during the year, although
we continue to explore alternative asset invest-
ment opportunities that we believe may comple-
ment our existing businesses and add value for
our clients.
The long-term performance of our portfolios
clearly demonstrates our value-added investment
philosophy. Relative to the benchmarks, we have
periodically under-performed against certain
benchmarks on a short-term basis. During 1998,
our long-term value-oriented philosophy some-
times appeared at odds with a market focused
narrowly on short-term events. The overvaluation
of world equity markets persisted in 1998, but we
are confident that these markets will revert to
their natural fundamental underpinnings and
that our basic investment framework remains
sound. The timing of this reversion remains, of
course, the uncertain factor.
Phillips and Drew Business Area
Phillips & Drew is the third-largest asset man-
ager in the UK marketplace with a business prin-
cipally specialized in equity and balanced portfo-
lios. A competitive, mature marketplace, com-
bined with market sentiment favouring passive
managers as robust equity markets continue to
ignore long-term fundamentals, has made for a
challenging environment for the business to grow
in. These factors combined with relative under-
performance of its balanced portfolios have
resulted in a decline of assets under management
on a year-on-year basis. Focusing on the funda-
mentals of investment process and client service,
and evolving its structure and services in response
to the marketplace, management continues to
maintain a favourable outlook for the future.
Merger and Other Initiatives in 1998
1998 was a significant year for UBS Brinson.
From a divisional perspective, the prior resources
of Union Bank of Switzerland and Swiss Bank
Corporation were fully rationalized and inte-
grated without major disruption to client service.
Enabling us to establish a global platform in
significantly less time than we could build it our-
selves, the merger has given us the opportunity
to obtain a distinct competitive advantage for
growing our business further.
Apart from the merger, two other significant
milestones occurred in 1998: the buyout of the
LTCB joint venture in Japan and the establish-
ment of Private Banking Investment Services.
The buyout of LTCB was critical as it gives us
a significant platform from which to build our
institutional business in Japan further while still
allowing us to be regarded as a foreign manager
– a factor which in the current economic climate
in Japan is beneficial to us.
Private Banking Investment Services was also
established during 1998. Private Banking Invest-
Review of Businesses
UBS Brinson
ment Services works closely with Private Banking
to enable their clients to receive institutional-
quality investment products and advice which
are delivered through the traditional Private
Banking channel – an arrangement that benefits
clients and shareholders alike.
Strategic Initiatives
Our longer-term strategy revolves around
being responsive to three key changes in market
dynamics: slower aggregate future growth in
home markets, structural changes in global pen-
sion schemes and continuing globalization and
consolidation of the asset management business:
– Slower future growth in our home markets (US,
UK and Switzerland) requires that we leverage
existing relationships with consulting firms,
enter into strategic partnering efforts with
multinational corporations and tap into the
reservoir of existing clients of other UBS divi-
sions.
– Structural changes in global pension schemes
require that we tailor our response in Anglo-
Saxon defined-contribution markets, consoli-
date our position in Japan, and accelerate pres-
ence and establish strategic positions in devel-
oping European and Latin American markets.
– Continuing global consolidation will give rise
to opportunities for alliances, acquisitions and
expansion of investment capabilities that will
be explored as a means to enhance shareholder
and client value. The merger in 1998 was clear-
ly a very significant step in this direction.
Outlook
With the merger year behind us, our key chal-
lenge at UBS Brinson will be to continue to focus
on the equation of philosophy, process and peo-
ple which has made us so successful. We must
provide to our clients continuous value-added
investment performance over the long term and
superior client service. Superior client service, as
measured by external consultants, means the fol-
lowing things to us: timely and accurate informa-
tion to clients, excellent co-ordination with client
custodian banks, and positioning ourselves as an
advisor, not just a manager, to our clients’ aggre-
gate portfolios.
While markets are likely to remain volatile in
1999, we expect good overall growth in cash
flow earnings. Regionally, we anticipate relatively
strong growth in Europe and Japan with com-
petitive yet reasonable growth in the Americas.
Over the medium term, we expect further com-
petitive intensification as newer and ever larger
entrants wish to exploit the modest capital
amounts required and lower volatility of earn-
ings implied by this business. Our strong client
base and geographic diversity as well as the
inherent synergies we have with Private Banking
and the rest of the Group give us a competitive
edge few can match.
27
Review of Businesses
UBS Capital
UBS Capital
UBS Capital is one of
Business Profile / Mission
few private equity
operations with a truly
global presence.
It continued to be a
significant income
generator for the UBS
Group in 1998, confirm-
ing its growing impor-
tance within the bank.
UBS Capital is well-
positioned for continued
success given the
quality of its teams and
the potential to
unlock Group synergies.
1998 Portfolio (book value)
by Sector (direct investments)
3%
3%
4%
5%
8%
9%
47%
10%
11%
Manufacturing
Retail
Post and telecommunication
Software, consultancy and supply
Transport, storage and communication
Automobile rentals
Radio/TV activities
Real estate, rental and other services
Others
28
The private equity business continued to be a
significant income generator for the UBS Group
in 1998. UBS Capital delivered excellent results
confirming its growing importance within the
bank. Favorable economic conditions coupled
with high levels of stock market liquidity
throughout most of the year in Western markets
facilitated disposals from the portfolio. New
investments continued at an increased rate. With
the strong flows of capital into the private equity
industry, competition for attractive opportunities
remained fierce. However, UBS Capital is well-
positioned for continued success given the quali-
ty of teams now in place and the potential to
unlock Group synergies.
Actively adding value
UBS Capital is one of few private equity oper-
ations with a truly global presence. Its network of
13 teams of local professionals covers over 30
countries in Western Europe, the Americas and
Asia Pacific. The business benefits strongly from
its integrated position in the UBS Group, which
offers particular synergies with Private Banking
and Warburg Dillon Read.
UBS Capital aims to make majority equity
investments in established unlisted companies. The
main focus of its investments is later-stage financ-
ing, such as management buy-outs, expansion or
replacement capital. The business’ seasoned pro-
fessionals actively participate with management in
developing the potential of a company over the
medium term, thereby maximizing shareholder
value. By using the local knowledge and industry
expertise of its teams combined with a risk-con-
scious approach to investing, UBS Capital has built
a globally-diversified portfolio with superior
returns and annual average loss rates among the
lowest in the industry.
An area of increased focus in Europe is family
businesses facing succession issues where UBS
Capital is able to bring a flexible approach to
structuring a transaction coupled with a reputa-
tion for professionalism in its business.
Review of Results
The result for 1998 was excellent as the gener-
ally favorable conditions in Western markets
allowed for many disposals from the portfolio. Net
revenues after write-downs for 1998 increased
19%, or CHF 93 million, to CHF 585 million
from CHF 492 million in 1997. This increase was
generated largely by disposals of investments by
the Swiss, US, Benelux and Nordic teams.
Although the operating costs as a percentage of
revenues increased slightly in 1998, they remained
low at 27%.
Continuing from its strong first-half results,
UBS Capital increased pre-tax profits by 12%, or
CHF 47 million, to CHF 428 million in 1998.
These results also reflect the lower divestment
activity of the fourth quarter compared to other
quarters, when, as expected, the portfolio cycle
did not offer as many exit opportunities. Net
profit after tax increased 9%, or CHF 34 million,
to CHF 413 million over the year.
The financial crises in emerging markets
around the world during the year had little imme-
diate impact on the value of UBS Capital’s
investments, with the portfolio predominantly
focused on the US and Western Europe and only
weighted 7% in Latin America and 2% in Asia.
The portfolio continues to expand in line with
expectations and had a book value at year-end
of approximately CHF 1.8 billion. The year-end
semi-annual portfolio review and valuation
resulted in a market value of around CHF 2.7 bil-
lion providing unrealized gains at year-end 1998
estimated at about CHF 0.9 billion, or 50% of the
total portfolio book value. New investments in
1998 amounted to around CHF 0.8 billion.
Headcount increased as the business has devel-
oped particularly in Europe and Latin America.
Staff losses due to the merger were minimal and
have had no noticeable impact on operations.
Discussion of operations
Merger
The merger process was smoothly completed
in 1998. UBS Capital successfully integrated the
Swiss-based SBC Equity Partners into its Euro-
pean operations and the team contributed signif-
icantly to the 1998 result. The establishment of
new linkages with the other businesses of the
Group is also bearing fruit.
As a consequence of the merger, UBS Capital lost
its grandfathered status in the US, which allowed
direct equity investments in the US with voting
Review of Businesses
UBS Capital
1998
1997
Change (%)
585
0
585
152
5
157
428
15
413
0
413
250
27
122
36
86
492
0
492
108
3
111
381
2
379
0
379
200
23
90
35
55
19
–
19
41
67
41
12
> 100
9
–
9
25
36
3
56
1998 Portfolio (book value)
by Investment Stage
2%
2%
18%
CHF million
Total operating income
Less: Credit loss expenses
Total
Personnel, general and administrative expenses
Depreciation and amortization
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Net profit / (loss)
Regulatory equity used (avg)
Cost / income in %
Headcount
of which: Switzerland
of which: Rest of world
17%
61%
Management buy-out
Replacement capital
Expansion capital – late stage
Expansion capital – early stage
Others
1998 Portfolio (book value)
by Geography
7%
2%
40%
51%
North America
Europe
Latin America
Asia/Pacific
1998 Portfolio Unrealized Gain
CHF billion
3
2
1
0
1
n
b
9
.
0
n
b
7
.
2
n
b
8
.
1
n
b
3
.
1
i
n
a
g
d
e
z
i
l
a
e
r
n
U
7
9
.
2
1
.
1
3
e
u
a
v
l
k
o
o
B
8
9
.
2
1
.
1
3
e
u
a
v
l
k
o
o
B
8
9
.
2
1
.
1
3
e
u
a
v
l
t
e
k
r
a
M
1 0.8 bn private equity
*0.1 bn equity-related instruments
rights of up to 25% in larger transactions. UBS
Capital continues to evaluate its options with regard
to this important market and will implement a new
structure in 1999. This is not expected to signifi-
cantly impact earnings in the time frame up to 2002.
Strategic initiatives
The increasing awareness of private equity as
an attractive asset class for fund managers, cou-
pled with the growing efforts by industry in
Europe to restructure and embrace the share-
holder value principle, has further improved the
opportunities for investment and hence the funds
being made available to invest in this sector.
Competition for potential investments remains
fierce. Despite the increased competition, UBS
Capital is well-positioned to leverage its unique
strategic advantages.
UBS Capital intends to maximize the propri-
etary deal flow that exists within the UBS Group
through further developing its internal linkages.
Using primarily the Group’s own funds for
investing allows UBS Capital to pursue a value
strategy that differs from that of its competitors.
The business is not forced to meet target spend
rates but pursues transactions only if they offer
fair value over an investment cycle.
With its successful and highly-qualified net-
work of teams, UBS Capital is well-positioned to
be a key player in this rapidly expanding business
world-wide. It will focus on continuing growth in
Western Europe and North America as well as
seizing select value opportunities in Latin Ameri-
ca and Asia / Pacific.
UBS Capital is committed to utilizing its glob-
al network of teams to combine local expertise
and resources as required. In doing so, it aims to
provide tailor-made solutions for cross-regional
and cross-border transactions, which are gaining
in importance world-wide.
Based on these competitive strengths, UBS
Capital plans to gradually increase the annual
investment rate, targeting a portfolio book value
of approximately CHF 4 billion by the end of
2002, while achieving further diversification in
the timing and geography of earnings streams.
Outlook 1999
In 1999, UBS Capital plans to strengthen the
existing business and to maintain a global market
presence and a well-diversified portfolio of
investments. While the current portfolio’s aging
profile is anticipated to offer fewer divestment
opportunities over the coming year than it did
over the past two years, the business is targeting
to add CHF 800 million of new investments to
the portfolio in 1999 and remain a strong con-
tributor to UBS Group results going forward.
29
Review of Businesses
Corporate Center
Corporate Center
The Corporate Center encompasses Group
level functions which cannot be devolved to the
divisions. Additionally, the Corporate Center
plays an active role with regard to funding, capi-
tal and balance sheet management, and with
regard to risk management. (See Review of Risk
Management and Control and Review of Asset
and Liability Management.)
For 1998 the Corporate Center posted a pre-
tax loss of CHF 1,029 million versus a pre-tax
profit of CHF 260 million in 1997.
The two major items which negatively impact-
ed on the Corporate Center result were CHF 842
million for the settlement relating to the role of
Swiss banks during and after World War II and
CHF 367 million relating to the write-off on Long
Term Capital Management, explained in the
Review of Risk Management and Control. See
Management Accounting policies on pages 8–9
and Review of Risk Management and Control for
explanations of the link between the credit expense
line and the Group Financial Statements.
Serving the UBS Group,
the Corporate Center
reports directly to the
CEO and provides
centralized services such
as Legal Support, Com-
munications and Human
Resources. In addition,
the Corporate Center
CHF million
Operating income
Less: Credit loss expenses
embraces the functions
Total
reporting to the Chief
Personnel, general and administrative expenses
Depreciation and amortization
Financial, Chief Risk and
Chief Credit Officers.
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interests
Net profit / (loss)
Regulatory equity used (avg)
Headcount
of which: Switzerland
of which: Rest of world
30
1998
296
(745)
1,041
2,085
(15)
2,070
(1,029)
317
(1,346)
4
(1,350)
6,350
921
821
100
1997
518
(173 )
691
381
50
431
260
357
(97 )
16
(113 )
4,150
1,599
1,561
38
Review of
Risk Management
and Control
Review of Risk Management and Control
Risk exposure is integral
Introduction
to UBS’s business and
extends beyond just
market and credit risks.
The highest standards
of risk identification, risk
management and risk
control are indispensable
to the success, repu-
tation, and continuing
strength of UBS.
Thus, UBS is committed
to developing and apply-
ing best market practice
to all risk activities.
32
Following the investigation and thorough
analysis of the circumstances surrounding the
third-quarter trading losses, and in particular the
losses associated with the Long Term Capital
Management (LTCM) transaction, UBS’s Board
of Directors (BoD) commissioned a review of
UBS’s overall risk profile together with its risk
management and control processes and pro-
cedures. A parallel review was also initiated
in Warburg Dillon Read at the same time to con-
sider the extent to which the changed market
circumstances required a reassessment of the
business priorities. The results of that review are
reported separately in the Warburg Dillon Read
section of this report.
The overall result of the risk review was
encouraging, since it did not identify any signifi-
cant new risk concentration or previously un-
identified risk management issues. The principal
conclusion of the risk review was that UBS should
continue to implement a fully-integrated approach
to risk management and control covering all
material risks and all aspects of UBS’s business.
In late 1998, the BoD and the Group Execu-
tive Board (GEB) endorsed the findings of the risk
review and agreed upon the following areas as the
principal priorities for attention:
– to further incorporate operational risks into the
risk management and control process
– to reinforce existing efforts to ensure the com-
pleteness and accuracy of data which support
the risk management decision-making process
– to ensure that assessments of the risk/return
potential of particular business activities fully
take into account all relevant risk considerations
– to ensure that there is a structured process in
place throughout the Group to assess the risks
in new business activities
– to reorient UBS’s approach to measuring and
limiting risk exposures towards potential loss
in extreme conditions as well as more normal
conditions.
The UBS Risk Framework
As an integral part of the risk review, UBS has
also reviewed and updated its risk policy frame-
work which sets the overall guidelines for risk
management and control at UBS. The policy
framework, which covers all material risks,
emphasizes the importance of distinguishing
between the following functions within the risk
management process:
– risk management, which is defined as managing
UBS’s exposure to risk within the overall guide-
lines and limits approved by the BoD. Ensuring
the adherence to these guidelines and limits is
the responsibility of the management of the
business divisions and individual business lines;
– logistics, which are the separately constituted
operational functions, including financial con-
trol, operations and IT, that exercise an essen-
tial control function when processing the trans-
actions entered into by the divisions;
– risk control, which are the independent risk
control functions reporting to the Chief Risk
Officer (CRO) and the Chief Credit Officer
(CCO) and which verify the business areas’
compliance with corporate risk policies.
UBS approaches risk-taking first and foremost
by recognizing that an effective process for man-
aging and controlling risk is indispensable to
UBS’s continued success. Effectively managing
and controlling risk depends on a sound process
for identifying the risks which UBS faces, as well
as establishing a comprehensive set of limits and
procedures to control these risks. UBS puts these
limits and procedures in place to ensure that its
exposure to risk is consistent with its risk appetite
and risk bearing capacity and with its assessment
of management’s capabilities to manage and
control the risks in an effective manner. In this
context, internal capabilities, such as the availa-
bility of suitable IT processing systems and staff
knowledge and experience, and the external envi-
ronment are taken into consideration. UBS places
particular emphasis on its procedures for analyz-
ing the risks in new business activities and for
undertaking large or complex transactions.
The BoD sets UBS’s risk limits by assessing the
Group’s risk appetite and risk-bearing capacity.
UBS’s risk appetite is a measure of the risk which
the BoD believes the Group requires in order to
deliver satisfactory long-term growth and return
on equity. This potential risk is represented by
absolute statistical loss levels (value at risk) that
are consistent with the budgeted annual earnings
of the relevant business units.
In addition, the BoD sets limits on the poten-
tial stress loss which UBS could face in extreme,
but unlikely situations based on its risk-bearing
Review of Risk Management and Control
capacity. The determination of potential stress
loss takes into account UBS’s overall earnings
capacity, and is set to protect the Group from
unacceptable damage to annual earnings, divi-
dend-paying ability, business viability and its rep-
utation. The BoD reviews the risk appetite and
the risk-bearing capacity on a regular basis con-
sidering changes in market conditions. The GEB
actively monitors potential losses for a series of
pre-determined stress scenarios and actively
alters the limit for each scenario in circumstances
that indicate higher-than-normal risk to a given
stress event.
A further important element of the risk
process at UBS is the management structure
through which the risk management and control
process operates. The overall responsibility for
implementing the risk framework lies with the
GEB, which allocates risk limits to the divisions
and which regularly monitors the development of
UBS’s risk profile at the Group level. Within the
GEB, the Chief Risk Officer and the Chief Credit
Officer are responsible for ensuring that consistent
policies and procedures are established across the
Group for measuring, managing and reporting
the risks, which are approved by the GEB and the
BoD, and communicated throughout the organi-
zation. The Market and Credit Risk Control
functions, which report directly to the CRO and
CCO respectively, are independent from the busi-
ness and are staffed by senior and experienced
employees located in the respective business divi-
sions as well as at the Corporate Center. In addi-
tion, close co-operation on a day-to-day basis
UBS Risk Management and Control Framework
between the credit risk and market risk control
functions ensures appropriate checks and bal-
ances in the daily business.
Each division also has Risk Management
Committees which involve senior business man-
agers together with representatives of the risk
control functions. These committees are chaired
by the CEO of each division and are an integral
part of the business management process. The
Risk Management Committees ensure that there
is an ongoing review of the risk profile of the
division in respect of all the material risks it faces,
evaluate the risk in new business initiatives and in
large or complex transactions and propose to the
GEB changes in risk policies and limits affecting
the divisions.
Further Group Internal Audit, which reports
directly to the Chairman of the BoD, reviews and
evaluates the effectiveness of the Risk Policy
Framework and the related internal control sys-
tem to verify that all policies and procedures are
complied with and that risk profile data in all
reports is accurate. Group Internal Audit also
reviews and evaluates the independence of the
Corporate Risk Control functions.
Long Term Capital Management and the
Global Equity Derivatives Portfolio
On 24 September 1998, UBS announced that
as a result of the market turmoil in the wake of
the Russian crisis it was expecting to report a loss
during the third quarter. The reported loss for the
Board of Directors
Group Internal Audit
y
c
i
l
o
P
k
s
i
R
Group Executive Board
Corporate
Center
CRO & CCO
Corporate Risk Control
Warburg Dillon Read
Warburg Dillon Read
Credit
Risk Control
Market
Risk Control
Private & Corporate Clients
UBS Private Banking
Private Banking
Private & Corporate Clients
UBS Brinson
UBS Brinson
UBS Capital
UBS Brinson
– Divisional Risk Management
Committees
– Divisional Logistics Functions
t
i
d
u
A
l
a
n
r
e
t
n
I
t
n
e
m
e
g
a
n
a
M
k
s
i
R
I
n
d
e
p
e
n
d
e
n
t
R
i
s
k
C
o
n
t
r
o
l
I
n
t
e
r
n
a
l
A
u
d
i
t
33
Review of Risk Management and Control
quarter announced in October was CHF 911
million. The principal reasons for this were UBS’s
exposures to the hedge fund, Long Term Capital
Management, which resulted in a post-tax loss
of CHF 987 million and to the Global Equities
Derivatives Portfolio, which resulted in a post-tax
loss of CHF 659 million at year-end.
Long Term Capital Management (LTCM)
In the case of LTCM, the loss arose from a
structured transaction which was entered into by
Union Bank of Switzerland in 1997. Under this
transaction, UBS sold an option which gave the
right to purchase shares in the LTCM fund at a
predetermined price over a seven-year period. In
order to hedge the risk of this option, UBS held
shares to the value of USD 800 million in the
LTCM fund to create an incrementally risk neu-
tral position. Separate from the structured trans-
action, a further direct equity investment of USD
266 million was made in the fund, based on the
enormous demand for such investments by insti-
tutional and private clients, and the consensus
expectation of high returns from this fund in par-
ticular. In normal market conditions, the struc-
tured transaction would behave in a controlled
manner. However, in the event of extreme market
movements leading to a discontinuous decline in
the fund’s value, the structured transaction could
not be effectively hedged and, in fact, resulted in
a large loss on the transaction.
The problems at LTCM have been extensively
documented. In summary, at the time of the
Russian crisis in September 1998, LTCM had
invested in a number of “convergence strategies”,
which would have been profitable for the fund if
the prevailing differentials between the prices of
different securities had diminished. However, the
spreads widened suddenly and significantly, leav-
ing LTCM with mark-to-market losses which
largely wiped out the fund’s equity capital. This
resulted in the loss which was announced by UBS
in October. In addition, as with most other large
investment banks, UBS had provided significant
fully collateralized financing to LTCM against its
substantial securities holdings. Because of the risk
of further losses in the event of a forced liquida-
tion of the LTCM assets, UBS agreed to par-
ticipate in a co-ordinated exercise to recapitalize
LTCM to ensure an orderly release of the financ-
ing exposures, and as an additional benefit,
allowing UBS to maximize the value of the
remaining equity investments which would have
otherwise been wiped out in a liquidation scenario.
Under this arrangement UBS injected a further
USD 300 million of equity into LTCM and
assumed a position on a newly-established Man-
agement Board of LTCM which is overseeing the
orderly management of LTCM’s activities. This
investment was made only after analysis of the
LTCM portfolio. It revealed that in large part, the
positions held by LTCM possessed significant
potential for future profits, but their ultimate
level of leverage combined with extreme market
volatility had eroded the capital base needed to
support the portfolio. UBS management is confi-
dent that the fund now has sufficient capital to
withstand future market turmoil and therefore
return the capital injection in approximately 24
months.
Following these events, UBS has a residual
exposure to LTCM arising from its new equity
investment as well as its original equity holdings.
The relative stabilization of trading conditions
since the end of the third quarter has allowed
LTCM to recover some of its earlier losses. More-
over, the wind-down of LTCM’s positions is
being managed in a way that is designed to
minimize the risk to LTCM’s shareholders. As a
result, UBS regards the downside risk in this posi-
tion as limited.
Global Equity Derivatives Portfolio (GED)
The other major contributory factor to the
third-quarter losses related to the GED business.
This portfolio consists of a number of structured
equity derivative transactions which were entered
into as part of an earlier strategic initiative to
develop a leading position in this market. This
portfolio was analyzed at the time of the merger
when it was recognized that it contained a num-
ber of positions which, though appropriately
hedged over the longer term, possessed the poten-
tial for significant short-term variance. Conse-
quently, when equity market volatilities increased
significantly as a result of the market turmoil in
the third quarter, an unrealized loss on the value
of the portfolio became necessary.
UBS will continue to actively manage the expo-
sure associated with this portfolio in order to min-
imize the risk of further adverse effects on earn-
ings. However, given that the average maturity of
the transactions in the portfolio is about three
years, it will take some time to wind down this
34
Review of Risk Management and Control
exposure, and during this time the portfolio will
continue to be exposed to adverse moves in equity
markets. Nevertheless, UBS believes that the mark-
to-market losses which were incurred in the third
quarter represent extreme circumstances and the
potential range of losses for this portfolio in such
circumstances is within UBS’s overall stress loss
limits (see Market Risk section on pages 40–41).
Analysis by Risk Categories
In its risk policy framework, UBS has identi-
fied a number of risk factors as being of particu-
lar significance to its business. The following dis-
cussion together with the Review on Asset and
Liability Management outlines the major trends
and developments during the year with respect to
the key risks which UBS faces.
1 Credit Risk
Credit risk is the risk of loss resulting from the
default of an obligor or counterparty (banks,
corporations, non-bank financial institutions,
public entities/governments and private individu-
als). At UBS, credit risk includes counterparty
and country transfer risk, as well as settlement
risk. Credit risk is inherent in traditional banking
products, such as loans and conditional contracts
to lend money in the future (commitments) or
contracts to support clients’ obligations to third
parties (e. g. letters of credit), as well as in deri-
vative contracts and other traded products, such
as bonds. In view of the significance of credit risk
to UBS, the approval of new transactions giving
rise to credit risk plays a central part in UBS’s risk
control process. Only a limited number of highly-
experienced senior credit professionals indepen-
dent from the business are entrusted with author-
ity to approve transactions. Such authorities are
differentiated by amount, counterparty rating,
tenor and other parameters.
UBS measures its exposure to credit risk based
on a statistical analysis of the probability of de-
fault relating to each of its client categories. For
this purpose, UBS categorizes all its counter-
parties as well as the countries where it under-
takes business on the basis of a fourteen-point
rating scale with a specified default probability
attached to each rating class.
Loans are classified as “Non-Performing” as
soon as a payment of interest and / or commission
and / or installment is overdue for 90 days. The
adequacy of allowances and provisions for both
counterparty credit risk and for country transfer
risk is regularly assessed and booked in accor-
dance with the guidelines of International
Accounting Standards. Specific allowances are
created as and when a particular counterparty’s
and /or country’s creditworthiness is impaired.
UBS Group Loan Portfolio Summary by Division (1998)
CHF million
Private &
Corporate
Clients
31.12.98
Private
Banking
31.12.98
Warburg
Dillon
Read
31.12.98
Corporate
Center
31.12.98
Total
31.12.98
Total
31.12.97
Total loans and advances
(performing and non-performing loans)
Principal amount of loans
outstanding (gross amount)
164,840
24,133
141,686
Allowance and provisions for credit losses
11,844
66
3,063 2
Loans, net of allowances
for credit losses
152,996
24,067
139,058
Non-performing loans (NPL)
14,003
68
1,645
Ratios
Allowance and provisions for credit losses
in % of non-performing loans
Non-performing loans
in % of gross loans outstanding
Allowance and provisions for credit losses
in % of gross loans outstanding
84.6
97.1
186.2
8.5
7.2
0.3
0.3
1.2
2.2
305
5
300
0
n/a
0.0
1.6
330,964
353,240
14,978 1
16,2131
316,421
337,499
15,717
16,664
95.3
97.3
4.7
4.5
4.7
4.6
1 Of which CHF 435 million relating to contingent liabilities (1997: CHF 472 million). 2 Of which CHF1,450 million relating to country risk provisions.
35
Review of Risk Management and Control
Total Credit Risk Exposure and Expected Loss by Division (1998)
Total Credit Risk Exposure CHF 614 billion
Total Expected Loss CHF 1,696 million
27%
5%
68%
29%
2%
Private and Corporate Clients
Private Banking
Warburg Dillon Read
69%
Exposure is defined as Gross Loans to Banks and Customers, Contingent Liabilities, Unutilized Irrevocable Commitments,
OTC Derivatives (positive Replacement Value), without Security Lending, without Tradable Assets.
A particular focus for UBS credit analysis in
1998 was the prospective effect of the Year 2000 IT
challenge on the credit standing of UBS’s clients.
As a result, the Chief Credit Officer initiated an
extensive assessment of the Year 2000 readiness of
the most important international clients as well as
of some 10,000 corporate clients in Switzerland.
The results of this review are covered in more
detail in the discussion of the Year 2000 problem
(pages 43–44) at the end of this section.
Since the merger, UBS has been engaged in a
rigorous process of reassessing its international
credit activities to ensure that the risk / reward
profile of its lending business is consistent with
UBS’s long-term strategic objectives. This review
which is discussed further in the Warburg Dillon
Read section (pages 14–19) resulted in a reduc-
tion in the overall size of the international credit
portfolio from CHF 268 billion to CHF 175 bil-
lion in 1998. A further reduction is planned going
forward, bringing the overall size of the inter-
national portfolio closer to our medium-term
target level of CHF 60 to CHF 100 billion.
From a Group perspective, the asset quality re-
mains satisfactory. Total non-performing loans of
CHF 15.7 billion represented 4.7% of total loans,
of which 95.3% were covered by allowances and
provisions for credit losses of CHF 15 billion.
Moreover, within the Private and Corporate Clients
Division the reported coverage ratio of 84.6%
remains conservative since the bulk of the non-
performing loans were in the form of mortgage
lending and the underlying property has residual
value. The table on page 35 summarizes the current
status of the loan portfolio by division.
When assessing the results of the individual
business divisions in the Management Accounts,
each division is charged for the credit risk it
assumes based on a statistical estimate of
the expected loss in its portfolio. Differences
between the expected loss and the credit loss
expenses actually incurred in the reporting
period are balanced through the Corporate Cen-
ter account.
The graph above shows the annual expected
loss per division in relation to the total portfolio
of the Group. The expected loss in the Warburg
Dillon Read portfolio is significantly lower than
that in the Private and Corporate Clients Divi-
sion, reflecting the fact that the Warburg Dillon
Read portfolio consists primarily of internation-
al wholesale business of high credit quality,
whereas the Private and Corporate Clients port-
folio is concentrated in the Swiss middle and
retail market.
Portfolio composition
UBS actively manages the composition of its
credit risk portfolio, and seeks to avoid excessive
concentration to any one obligor, industry, rating
class, product or geographical location. In view
of the distinctly different segments, the following
discussion of the portfolio is segregated into the
major divisions:
Warburg Dillon Read
As depicted in the graph on the top of page 37,
over 92% of the Warburg Dillon Read credit risk
exposure is to counterparties which are of invest-
ment grade quality (C5 and better rated).
36
Review of Risk Management and Control
Distribution of Warburg Dillon Read Credit Risk Exposure by Counterparty Rating Class (1998)
in % of total portfolio
40%
35%
30%
25%
20%
15%
10%
5%
0%
AAA
“Investment Grade” Categories
AA
A
BBB
BBB–
BB+
C1
C2
C3
C4
C5
C6
BB
C7
BB–
C8
B+
C9
B
D0
B–
CCC-C
D
“Speculative Grade” Categories
D
D1
D2
D3
D4
UBS OTC Derivatives Exposure
by Product Type and Maturity
(1998)
in % of total portfolio
40%
35%
30%
25%
20%
15%
10%
5%
0%
0–1
year
1–5
years
>5
years
Interest rates
Foreign exchange
Precious metals
Equity/Index
Commodities
Exposure is defined as OTC Deriva-
tives (positive gross replacement
values), secured and unsecured.
Exposure is defined as Gross Loans to Banks and Customers, Contingent Liabilities, Unutilized Irrevocable Commitments,
Unsecured OTC Derivatives (gross replacement value + add-on), Tradable Assets (net long) without Security Lending.
In line with its investment banking strategy,
two-thirds of the Warburg Dillon Read exposure
is to the financial intermediation industry. The
remainder is well-diversified, with the public
sector accounting for some 6%. The lending
portfolio is of high credit quality, with the non-
investment grade exposure restricted to high-yield
and leveraged finance transactions.
In view of the particular risks involved in over-
the-counter (OTC) derivative contracts, UBS
maintains careful control over all OTC exposures
entered into and limits this business to top-qual-
ity counterparties. The largest part (37.6%) of
such contracts have a residual maturity of less
than one year and in most cases the maximum
tenor is below seven years. (Refer to Note 28 on
page 85 for a detailed breakout of instruments
and tenors.) Longer-dated contracts constitute
exceptions to policy and are available to sover-
eign counterparties or counterparties of the high-
est credit quality only. Certain long-dated trans-
actions were also assumed as part of the Global
Equity Derivatives (GED) business. Under the
current post-merger business policy, UBS contin-
ues to deal with certain hedge funds provided its
exposure is fully collateralized either by cash or
by government bonds of particular OECD coun-
tries.
Private and Corporate Clients Division
This segment represents the UBS domestic
home market for small- and medium-sized cor-
porate and retail clients. With the introduction of
risk-adjusted pricing following the merger, the
rating process and the quality of counterparty
ratings gained increased importance. While the
Distribution of Private and Corporate Clients Credit Risk Exposure by Counterparty Rating Class (1998)
in % of total portfolio
40%
35%
30%
25%
20%
15%
10%
5%
0%
AAA
“Investment Grade” Categories
AA
A
BBB
BBB–
BB+
C1
(S&P rating mapped to corresponding UBS master scale)
C4
C3
C2
C5
C6
BB
C7
BB–
C8
B+
C9
B
D0
CCC-C
D
B–
“Speculative Grade” Categories
D
D1
D2
D3
D4
Exposure is defined as Gross Loans to Banks and Customers, Contingent Liabilities, Unutilized Irrevocable Commitments,
Unsecured OTC Derivatives (gross replacement value + add-on), without Tradable Assets and Security Lending.
37
Review of Risk Management and Control
Private and Corporate Clients
Mortgage Portfolio by
Type of Property (1998)
23%
28%
49%
Residential (single-family homes)
Residential (multi-family homes)
Commercial
Mortgage loan utilizations are broken
down by collateral type.
Private and Corporate Clients
Credit Risk Exposure
by Industries (1998)
3%
3%
5%
5%
10%
10%
44%
20%
Private households
Construction and real estate
Manufacturing
Others*
Financial intermediation
Wholesale and retail
Hotels and restaurants
Public administration
* includes health and social work,
* community, social and personal
* services, transport, storage and
* communications.
Exposure is defined as Gross Loans to
Banks and Customers, Contingent
Liabilities, Unutilized Irrevocable Com-
mitments, Unsecured OTC Derivatives
(gross replacement value + add-on),
without Tradable Assets and Security
Lending.
38
quality of the entire loan portfolio continues to
show the impact of the recessionary environment
in Switzerland of the past seven years at the tail
end of the rating scale, about 58% of the per-
forming part of the loan portfolio is judged to be
of investment grade quality (C5 and better-rated).
The concentration of exposures in the rating class
C5 reflects to a large extent our exposure to the
residential mortgage market in Switzerland.
In terms of industry distribution the Private and
Corporate Clients portfolio continues to be domi-
nated by loans extended to private households, of
which about 91% are in the form of mortgages.
The improving macroeconomic environment
during 1998 is evident in a further decline of the
Swiss bankruptcy rate. Coupled with a continu-
ing low interest rate scenario and a stable outlook
we expect an improvement of the overall Swiss
loan portfolio in 1999.
Private Banking
Private Banking credit risk exposure of CHF
30.2 billion consists of collateralized lending and
trading products of CHF 25.7 billion and mort-
gages on single-family homes of CHF 4.5 billion.
Eligible collateral for any Private Banking
exposure is limited to cash, money market claims
and precious metals as well as marketable and
negotiable securities, all of which are to be duly
pledged and assigned to UBS. Specific haircuts
(margins) apply to different categories of col-
lateral in different countries. Due to the sub-
stantial stock market decline in August and
September 1998, margin calls were initiated and
– in cases where those were not honored –
adequate allowances created. The overall quality
of this portfolio is very high.
Swiss Bankruptcy Rates (1977–1998)
in % of total registered companies
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
7
7
9
1
0
8
9
1
5
8
9
1
0
9
9
1
5
9
9
1
8
9
9
1
Source: Creditreform, SHAB
Number of bankruptcies from registered firms divided by
total number of registered companies.
Country risk
As a result of the global character of its
business, Warburg Dillon Read incurs transfer
risk exposure to a wide range of economies.
UBS’s definition of country exposure includes all
cross-border positions of
loans, derivative
products and traded products as well as UBS
Group internal cross-border positions. 96% of
such cross-border exposure relates to major
OECD countries rated S0–S2 (corresponding
to public ratings of AAA–A+), where the risk
of default is deemed negligible. The remaining
4% risk exposure to emerging markets is closely
monitored on an ongoing basis and within
stringent risk limits (country ceilings) approved
by the BoD. In addition, all new transactions
with counterparties located in these countries
require sign-off by the respective country risk
managers in addition to the standard counter-
party credit approval.
UBS Selected Emerging Markets Exposures (1998)
CHF million
Indonesia
Russia
Argentina, Brazil, Colombia,
Ecuador, Peru, Venezuela
Mexico
Malaysia, Philippines,
South Korea, Thailand
Total
exposure
Tradable
assets 1
Trade
finance 2
Allowan-
Financial ces & pro-
visions
risk 3
Coverage Reduction
of total
of finan-
exposure
cial risk
in % since 1997
824
339
5,542
2,634
2,939
22
128
90
317
183
43
116
2,923
498
759
95
2,529
1,819
161
2,595
500
91
485
94
358
66
96
19
5
14
( 969 )
( 1,097 )
( 1,782 )
( 266 )
( 1,791 )
1 Equity and fixed income products in the trading book, marked-to-market daily. 2 Letters of credit, export credits, short-term advances in
financing of exports and imports. 3 Includes all balance sheet lending (including money market lending) as well as derivatives and repos.
Review of Risk Management and Control
UBS Transfer Risk Exposure by
Country Rating Classes (1998)
100% = CHF 882 billion
100% = CHF 32 billion
loss severity is significantly lower than in the case
of longer-dated exposures. UBS is confident that
the current provisioning level for the most affect-
ed economies is suitably conservative.
1%
35%
20%
Settlement risk
4%
96%
Industrial (S0–S2)
Emerging (S3–S14)
44%
Latin America
Asia Pacific
Europe, Middle East, Africa
Others
Transfer Risk includes Loans, Contingent Liabilities, Deriva-
tives Products (gross replacment value + add-on) and Tradable
Assets, to both third parties and intergroup companies.
Following the Asian crisis in the second half
of 1997, UBS had already taken active steps to limit
new business in all emerging markets and to reduce
its existing emerging market exposures prior to the
crisis spreading to Russia and Latin America in the
second half of 1998. Total emerging markets expo-
sure was thus reduced by CHF 5 billion or about
14% from the end of 1997 onwards. During the
same period, country ceilings previously available
for business with emerging countries were reduced
by 30%. UBS’s approach to country risk manage-
ment follows the guidelines of the Swiss Bankers’
Association which allow banks to evaluate provi-
sion levels for transfer risk based on their own port-
folio scenarios. UBS has established specific scenar-
ios for each country which assess the current and
future probability of a default due to country risk
incidents or country-specific systemic risks on a
regular basis. The appropriate provisioning level is
then determined by taking into account the type of
product involved as well as the loss severity in-
herent in each product.
Events in a number of emerging markets in the
second half of the year including in particular the
declaration by Russia in August 1998 of a mora-
torium on all government debt repayments
caused UBS to increase its country risk provisions
substantially.
The table on page 38 provides an overview of
the status of emerging market exposures and pro-
visioning levels as at year-end 1998 together
with a quantification of the exposure reductions
achieved since the beginning of the year.
UBS’s exposure to emerging markets includes a
large share of short-term trade finance, where the
Settlement risk is defined as the risk that a
counterparty fails to deliver cash or securities or
to honor third-party payments upon conclusion
of a transaction.
UBS measures, manages and controls settle-
ment risk by way of counterparty-specific settle-
ment risk limits in accordance with standards
set by the Bank for International Settlements for
all Foreign exchange, Precious metal and Cross-
currency rates swap trades.
The settlement risk analysis graph shows the
average daily settlement volumes together with
the total annualized expected loss assigned for
settlement risk. Exposure reductions are achieved
through the use of bilateral netting agreements
and other mitigating techniques. The significant
reduction of net expected loss in the fourth quar-
ter was the result of a successful re-negotiation of
netting and other arrangements with target
clients immediately following the legal merger.
Settlement Risk Analysis (1998)
M
P
&
X
F
)
d
e
z
i
l
a
u
n
n
A
(
s
e
s
s
o
L
d
e
t
c
e
p
x
E
n
o
i
l
l
i
m
F
H
C
n
i
120
100
80
60
40
20
0
120
100
80
60
40
20
0
M
P
&
X
F
l
s
e
m
u
o
V
y
l
i
a
D
e
g
a
r
e
v
A
n
o
i
l
l
i
b
F
H
C
n
i
8
9
l
u
J
8
9
g
u
A
8
9
t
p
e
S
8
9
t
c
O
8
9
v
o
N
8
9
c
e
D
Settlement risk residual expected losses
Settlement risk reduction achieved
Average daily settlement volume
Classified credit portfolio
The Classified credit portfolio consists of posi-
tions where there is a high probability of partial or
full loss to UBS. The portfolio includes positions
rated D2 (“substandard”), D3 (“doubtful”) and
D4 (“loss”), reflecting an increasing degree of loss
severity. Typically, substandard exposures carry
allowances for credit risk of up to 20%, doubtful
exposure of up to 80% and loss exposure of
100% of the unsecured portion. 89% of the Clas-
39
Review of Risk Management and Control
Summary of Classified Credit Risk Exposure (1998)
CHF million
Private and Corporate Clients
Warburg Dillon Read
Private Banking
Corporate Center
Total
sified credit portfolio is attributed to the Private
and Corporate Clients Division, 10% to Warburg
Dillon Read. The remaining 1% relates to sundry
positions managed directly by the Corporate
Center.
UBS maintained the conservative approach of
both predecessor banks in assessing and managing
its credit risk portfolio. As part of the harmoniza-
tion of the credit loss methodology of the two
predecessor banks, the previously established
ACRA reserve of CHF 2.1 billion of Swiss Bank
Corporation was earmarked for specific provi-
sioning needs of the Private and Corporate Clients
and the Warburg Dillon Read portfolios. As the
recovery units started their assessment work at an
accelerated pace after the legal merger was con-
summated, all but CHF 300 million of these Spe-
cial Reserve pools, including the Special Reserve
pool created by the former Union Bank of Switzer-
land, were allocated to specific positions of the
previously defined workout portfolios as well as to
country risk provisions.
In the international portfolio, the rapid deteri-
oration of emerging market economies caused a
substantial increase in individual counterparty
allowances and write-offs and / or country provi-
sions, primarily in Asian markets, in Russia and
to a smaller extent in Latin America. Overall
credit risk costs amounted to CHF 4.3 billion, of
which CHF 3.3 billion was funded from existing
allowances, resulting in a net credit loss expense
of CHF 951 million.
Substandard (D2) Doubtful (D3)
Loss (D4)
Total
4,688
958
0
117
5,763
6,602
954
14
26
7,582
13,553
896
1
12
24,843
2,808
15
155
14,461
27,806
2 Market Risk
Market risk is the risk which UBS faces as a
result of adverse movements in the value of its
foreign exchange, marketable securities and
derivatives positions. UBS incurs market risk
mainly through its trading activities, which are
centered in the Warburg Dillon Read Division.
UBS measures its exposure to market risk
using the framework of expected loss, statistical
loss and stress scenario loss as indicated in the
chart on page 41. In the context of market risk,
expected losses are the value adjustments made to
the portfolio to adjust for price uncertainties
resulting from a lack of market liquidity or the
absence of a reliable market price for a particular
instrument. Statistical loss is measured based on
a value at risk (VaR) methodology, which is also
used to calculate the regulatory capital require-
ment for UBS’s market exposure. Stress scenario
loss is defined as the risk of an extreme market
move affecting particular predefined market vari-
ables. In order to keep UBS exposure to market
risk within acceptable boundaries, the BoD has
set limits on the Group’s exposure to particular
stress scenarios.
UBS calculates the value at risk associated with
its exposure to market risk and consequently also
its regulatory capital requirement using the his-
torical simulation technique. Value at risk is cal-
culated both on a 1-day 99% confidence interval
and a 10-day 99% confidence interval, and the
latter is used both for internal limits setting and
Credit Risk Costs by Division (1998)
CHF million
Counterparties
Countries
Total risk costs
Funded through:
Risk Pool UBS 96
Risk Pool SBC 96 (ACRA)
Net credit loss expense
Private &
Corporate Clients
Warburg
Dillon Read
Private
Banking
2,980
–
2,980
1,331
1,252
397
812
422
1,234
–
728
506
48
–
48
–
–
48
Total
3,840
422
4,262
1,331
1,980
951
40
Review of Risk Management and Control
Expected, Statistical and Stress Scenario Loss
Warburg Dillon Read Revenue and VaR (1998)
Risk-
adjusted
outcome
Expected
outcome
Outcome with
predefined statistical
probability
e
m
o
c
t
u
o
f
o
y
c
n
e
u
q
e
r
F
Description of
exposure type
Measurement
methodology
Risk control
action
Expected loss
Statistical loss
«Outcome»
Stress scenario loss
Income
Loss
Expected cost
of exposure to
risk
Average
expected
loss
Acceptable exposure
to possibility of loss
Exposure to
extreme events
Value at risk
methodology
Stress loss scenario
analysis
Charged to
P/L
Controlled by use of
VaR limits
Protection
provided by
stress loss limits
for calculating regulatory capital. The calculation
incorporates both the risk from general market
moves such as moves in foreign exchange rates,
equity indices and market interest rates as well as
the risk from price movements that are specific to
an individual issuer. A simplified process was put in
place from mid-February to estimate the value at
risk for the combined exposures of Union Bank of
Switzerland and Swiss Bank Corporation. A com-
plete value at risk estimation process was however
operational as from the date of the merger.
UBS’s daily trading profit and loss and market
risk exposure following the merger reflects the sig-
nificant volatility which occurred in financial mar-
kets between August and October. This was pri-
marily associated with the Russian crisis in Sep-
tember as a result of which emerging market debt
traded at extremely low levels which in turn led to
Warburg Dillon Read Daily Revenue Distribution (1998)
Frequency in number of days
CHF million
200
0
–200
–400
–600
–800
–1000
–1200
–1400
Six months ended 31 December 1998
10-day VaR
1-day VaR
1-day Revenue
Capital
unprecedented spikes in equity volatilities. The
subsequent record one-day move in the USD / JPY
exchange rate contributed further to market
volatilities. During this period of adverse trading
conditions there were three days when the daily
loss exceeded the one-day value-at-risk measure. In
response to these market conditions, UBS reduced
its risk appetite and risk exposure. As a result,
despite the widespread increase in the volatility of
market prices, UBS’s overall VaR utilization fell
from CHF 260 million at the end of June to CHF
214 million at year end.
While UBS uses a value-at-risk measure as the
principal measure of its exposure to day-to-day
movements in market prices, the experience during
the third quarter underlines the fact that these
measures are not designed to give an indication of
the scale of loss that could occur in the unusual
case of extreme market moves. For this reason,
UBS supplements its value-at-risk numbers with a
system of stress loss simulations in order to moni-
tor its potential exposure to this type of market
40
35
30
25
20
15
10
5
0
<–150
–150
to
–120
–120
to
–90
–90
to
–60
–60
to
–30
–30
to
0
0
to
30
30
to
60
60
to
90
90
to
120
120
to
150
>150
Revenue in CHF million
Six months ended 31 December 1998
41
Review of Risk Management and Control
Illustrative UBS Stress Scenario Market Moves
Country
Foreign exchange
Europe
North America
Japan
Emerging markets
Price
+/– 10%
+/– 5%
+/– 15%
+/– 40%
Interest rates
Libor/Govt.
+ – 100 bps
+/– 120 bps
+/– 100 bps
+ 500 / – 300 bps
Equity
Price
+/– 15%
+/– 15%
+/– 25%
+/– 40%
(+) = Market appreciation. (–) = Market depreciation.
shock. These measures seek to assess the scale of
loss which UBS might face in the event of large
movements in a range of market prices such as
equity indices, foreign exchange rates and interest
rates. In the light of the events of the third quarter,
UBS has revised the range of price changes which
it uses to calculate the exposure to stress loss and
has revised the relevant limit structures.
UBS has a consistent set of predefined large
price movements (shocks) which apply to all the
major risk factors to which UBS is exposed. A
sample list of the type of price changes which are
used as the basis for calculating stress losses is
shown in the above table.
UBS also analyses the loss which it might face
in the event of certain predefined combinations of
adverse market moves. These scenarios, which
are kept under constant review, include previous
significant adverse market movements such as the
European Monetary Union (EMU) crisis of 1993
and the more recent Asian and Russian crises as
well as other possible combinations of events
which might arise in the future. The purpose of
this analysis is to ensure that the possible losses
which UBS would face as a result of sharp adverse
market moves remain within the overall stress
loss limits which UBS has set for its exposure to
market risk.
3 Operational Risks
In addition to the risks discussed above, UBS
recognizes the existence of a number of other
risks which affect its business and which are often
referred to as “operational risks”. At UBS we seek
to identify the main factors which might adverse-
ly affect the volatility of the Group’s earnings and
to manage each of these factors through the es-
tablishment of common Group-wide risk policies
and measurement methodologies. The particular
elements of operational risk which we have iden-
tified and which are covered by this process are
operations risk (sometimes referred to as transac-
tion processing risk), legal risk, compliance risk,
liability risk, information technology risk, key
personnel risk and physical and crime risk.
Following the announcement of the merger at
the end of 1997, it was clear that UBS faced three
challenges that would significantly increase its ex-
posure to operations risk within a very short time
horizon: the integration of the two banks’ organi-
zations and infrastructures, the Euro implementa-
tion and Year 2000 remediation.In order to address
these challenges, a decision was reached at an early
stage about the system architecture which would
be employed following the merger. UBS has chosen
to use the former Union Bank of Switzerland oper-
ating platform within Switzerland and the SBC
Monitoring Operations Risk in Warburg Dillon Read – Illustrative Statistics (1998)
Number of fails / Nostro breaks
Number of trades
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Fails
Nostro breaks
Trade volume
42
Review of Risk Management and Control
Warburg Dillon Read platform outside Switzer-
land. Following these decisions, a project manage-
ment structure was established in each division to
oversee the management of the three initiatives.
Integration
UBS recognized at the outset that there were
significant risks associated with the merger
process particularly in Private and Corporate
Clients and Warburg Dillon Read. The approach
adopted in managing these risks in Private and
Corporate Clients is discussed on page 21.
In Warburg Dillon Read the
integration
process placed significant demands on the IT
infrastructure and overall transaction processes.
The principal risk drivers were seen as being the
significant increase in transaction volumes and the
effect of staff instability on the control environ-
ment surrounding the business processes. The
recognition of this increase in potential risk meant
that senior logistics and business management
carried out a preemptive risk assessment and
implemented a series of risk mitigation initiatives.
Throughout this period the existence of a
robust reporting framework within Warburg Dil-
lon Read provided full transparency both pre-
and post-integration, enabling operational risks
to be identified and dealt with promptly. In addi-
tion, before the integration date an assessment
was made of the financial impact of the increased
risk. This led to heightened management aware-
ness of the potential cost of the integration
process. These costs were realized in the course of
1998 or provided for in most locations and this
process will be extended to all locations in 1999.
The chart on page 44 shows an example of the
types of key risk indicators which form part of the
operations risk reporting framework.
Euro and Year 2000
In addition to the need to manage the risks aris-
ing from the merger, UBS also recognized the
strategic importance of actively managing the
inherent risks associated with the introduction of
the Euro and the Year 2000 problem. Conse-
quently, we accorded a very high priority to the
work which was necessary to prepare for both of
these events. Throughout 1998, projects were
under way in each of the four divisions on both
the Euro and the Year 2000. In addition, the risk
issues associated with these projects were reviewed
on a monthly basis by a Group-wide committee
chaired by the Chief Risk Officer. Overall expen-
diture on these two projects in 1998 amounted to
CHF 169 million for the Euro and CHF 493 mil-
lion for Year 2000 (projected cost for 1999: CHF
38 million and CHF 362 million, respectively).
In preparation for the Euro conversion, a
number of detailed dress rehearsals were con-
ducted in the course of November and December
1998. As a result, the introduction of the Euro at
the start of 1999 progressed extremely smoothly
in all divisions. The work to amend the operating
systems was undertaken according to plan. There
were no material operational problems once deal-
ing in the Euro started on 4 January 1999, put-
ting UBS in a strong position to handle Euro busi-
ness and to focus on other strategic initiatives.
In the context of the Year 2000, UBS also made
substantial progress in the course of 1998 in reme-
diating and testing its own software and hardware.
As the table on the page 44 shows, by the end of
1998, over 60% of the work on UBS’s critical sys-
tems worldwide had been completed. UBS expects
that work on the remaining critical systems will be
substantially completed by mid-1999.
However, UBS is also aware that the successful
transition to the Year 2000 is dependent on UBS’s
own suppliers and customers also having made
appropriate preparations. In this context, UBS has
taken an active role in encouraging its key suppli-
ers to address the Year 2000 issue as actively as
possible. As indicated on page 36, UBS has also
undertaken an extensive review of its credit expo-
sure both within Switzerland and internationally
in order to assess the extent to which UBS might
be exposed to loss in the event that its customers
were themselves adversely affected by Year 2000-
related issues. In the case of international cus-
tomers where UBS has concerns about the cus-
tomer’s preparedness, if after further investigation
these have not been satisfactorily resolved, UBS
will take appropriate measures to mitigate its risk.
A similar review process is being undertaken to
ensure that banks and depositories which UBS
uses to conduct its international securities and
payments activities are suitably prepared.
Within Switzerland where UBS has a significant
exposure to small and medium-sized enterprises
Private and Corporate Clients Division is engaged
in a program of customer awareness to encourage
these customers to take the necessary steps to
address the Year 2000 problem. In addition UBS
will be undertaking a broad customer information
43
Review of Risk Management and Control
Year 2000 Quantitative Progress Assessment for UBS 1
as at 31 December 1998; in %
Phase
Organization plans
Current status
Forecast
6.98 9.98 12.98
3.99 6.99
6.98 9.98 12.98
12.98
3.99 6.99 9.99 12.99
Developing a stra-
tegic approach
Creating organiza-
tional awareness
Assessing actions
and developing
detailed plans
Renovating sys-
tems, applications
and equipment
Validating
renovation
through testing
Implementing
tested,
compliant systems
1 Mission critical systems.
100
100
100
100
94
98
99
100
89
95
98
99
100
58
76
95
99
100
52
68
87
89
98
100
24
64
88
96
100
21
41
68
74
93
100
20
54
79
92
100
17
38
61
69
89
97
99
100
program to provide the necessary information
to reassure customers and counterparties about
UBS’s own preparedness. This includes a website
(http://www.ubs.com/y2k.html) which provides
updated information on the UBS program in
accordance with the standard for self disclosure
established by the Global 2000 Co-ordinating
Group.
Despite the efforts that UBS is taking on its own
account to limit its risk to Year 2000 related prob-
lems, as an internationally active bank with activ-
ities in a large number of countries, UBS is depend-
ent on the preparations which are under way in
these countries to ensure that the critical elements
of the country’s infrastructure on which the finan-
cial sector depends such as electricity, water and
telecommunications supply are able to handle the
Year 2000 date change satisfactorily. Our analysis
shows that the state of awareness and preparation
varies significantly from country to country. For
this reason, UBS has taken a leading role in estab-
lishing the Global 2000 Co-ordinating Group
which is encouraging governments and key suppli-
ers to address these issues as actively as possible.
At the same time, since it is not possible for any
firm to state that complete Year 2000 compliance
has been achieved, and thus to guarantee the effec-
tiveness of its remediation efforts, UBS recognizes
the importance of preparing for the probability that
some problems will arise in the transition to Year
2000. Accordingly, in the course of 1999, UBS will
be devoting significant efforts to ensure that its con-
tingency arrangements are as robust as possible.
Measuring operational risks
As an integral part of the Risk Management
Framework UBS is in the process of introducing a
generic operational risk modelling framework
(which is illustrated in the simplified chart below).
The framework, which consists of a number of
sophisticated techniques, will provide a means to
more accurately assess the level of risks faced and
ensure that it is in line with UBS’s risk appetite and
risk-bearing capacity. In addition, it can provide
the foundation for evaluating the risk transfer
mechanisms available to UBS. In particular, this
approach enables UBS to evaluate whether the
insurance market offers an appropriate option
for transferring part of its operational risks.
Generic Operational Risk Management Framework
Risk modelling
approach
groups risks into
Risk categories
and identifies
Exposure
determining
factors
Risk measures
Stress scenario
loss
Statistical loss
Expected loss
Risk management
activities
Monitor exposure
Monitor limits
Optimize risk
profile
Improve
processes
Obtain insurance
44
Review of Asset
and Liability
Management
Review of Asset
and Liability Management
With its centralized
approach to asset and lia-
bility management, UBS
ensures cost-efficient
funding on a global scale
for all UBS entities and
adequate liquidity to ful-
fill payment obligations
even in periods of finan-
cial stress. Other benefits
include optimal allocation
of capital to comply with
Funding, capital and balance sheet manage-
ment activities are centrally managed to optimize
UBS’s financial resources. Centralizing Group-
wide internal and external treasury functions
provide the following advantages:
– Overall Group funding costs are as low as possible.
– Liquidity management within the Group is opti-
mized.
– Interest rate management is based on standard-
ized risk processes and transfer pricing to allow
cost-efficient risk management.
– Currency management is optimized by capturing
the netting potential of the Group’s foreign
currency positions.
– Regulatory capital requirements can be efficient-
ly managed at all levels.
The overarching goals shaping the basic funding,
liquidity, interest rate, capital and foreign exchange
management policies are:
– Continued stability in financing.
– Fostering the long-term, forward-looking man-
agement of risk positions in the CFO area.
regulatory requirements,
– Compliance with legal and regulatory require-
as well as efficient man-
ments.
agement of interest-sen-
Funding and Liquidity Management
sitive assets and liabilities,
and exchange risk.
46
The aim of liquidity management is to ensure
sufficient liquidity to repay debt in a timely man-
ner, while preserving the option of exploiting
potential strategic market opportunities. In order
to comply at all times with its payment obliga-
tions, UBS prudently manages its liquidity posi-
tion for different scenarios, taking stress factors
into due consideration.
UBS analyzes the evolution of the liquidity
profile over a time-frame of three months, with
the heaviest emphasis on the first two weeks. The
analysis gives assurance that the current liquidity
position should be more than adequate to cover
short-term liabilities even in difficult conditions.
A significant stock of highly liquid and redis-
countable securities is maintained that can be
converted into cash at short notice at no signifi-
cant market loss to the bank.
Liability management ensures a cost-efficient
and continuous financing of the balance sheet. The
funding strategy is based on a broad array of
sources, diversified by geographical, product, cur-
rency, maturity, and other factors. This results in a
well-balanced portfolio of liabilities that generates
stable financing and helps the bank ride out mar-
ket disruptions. To reduce reliance on unsecured
short-term borrowing, short-term funding relies
increasingly on collateralized borrowing, that is,
repurchase and securities lending transactions.
During 1998, UBS issued senior medium- and
long-term debt totalling CHF 8.4 billion, compared
to CHF 8.3 billion in 1997. Market turmoil during
the months August, September and October made
it difficult to raise more funding at the target costs.
During 1998 medium- and long-term debt totalling
CHF 4.7 billion matured. There was no issuance
of lower Tier 2 debt this year, compared to CHF
2.9 billion in 1997. The bank did launch two asset-
backed transactions, “Eisberg” and “TELL”, by
which a loan portfolio of USD 2.5 billion and a
mortgage portfolio of CHF 250 million were secu-
ritized, releasing regulatory capital.
Interest Rate Management
including differences
Interest rate risk is inherent to most UBS busi-
nesses. Interest rate risks arise from a variety of
in the timing
factors,
between the contractual maturity or repricing of
assets, liabilities and derivative instruments. Net
interest income is affected by changes in market
interest rates, given that the repricing character-
istics of loans and other interest-earning assets do
not necessarily match those of deposits, other
borrowings and capital. In the case of floating-
rate assets and liabilities, UBS is also exposed to
basis risk, which is the difference in repricing
characteristics of two floating rate indices, such
as the savings rate and six-month LIBOR. In
addition, certain UBS products have embedded
options that affect their pricing and principal.
The CFO Area manages the Group’s non-trad-
ing interest rate risk. With regard to interest rate
risk, the Board of Directors reviews and approves
risk management policies, risk limits and the con-
trol framework. We have established a compre-
hensive interest rate risk management process
that identifies and monitors non-trading interest
rate risk. A key element of this process is that it
allows only a limited number of authorized busi-
ness units to actively manage interest risk.
The UBS approach is to capture all interest rate
risks at business origination and allocate them
either to Warburg Dillon Read’s trading book or to
the Corporate Center’s bank book. This process is
Review of Asset
and Liability Management
formalized by a Group-wide funds transfer pricing
system, based on the following principles:
– Synergies between the divisions are utilized
whenever possible.
– The interest rate risks of front units in all divi-
sions are transfer-priced to central books by a
uniform funds transfer pricing system at inter-
nal bid/ask rates.
– Interest rate risks are transferred whenever pos-
sible directly into Warburg Dillon Read’s trad-
ing book.
– Interest rate risks associated with client busi-
ness with undefined maturities are hedged by
pooled transactions via the Corporate Center.
– All interest rate risks which are neither product-
nor trading-related are consolidated in the
Corporate Center (such as the funding of bank
premises).
The above principles are implemented by
segregating all transactions into three categories:
(1) client business with fixed maturities (such as
fixed-term mortgages), (2) client business with
undefined maturities (such as saving accounts),
and (3) non-interest-bearing or non-business bal-
ance sheet items (such as bank premises, share-
holders’ equity).
Client business with fixed maturities: UBS
policies require all transactions with determined
roll-over or maturity dates to be matched back-
to-back with Warburg Dillon Read’s trading
book. IT systems ensure the on-line link between
the client and the internal hedge transaction. This
allows UBS to increase efficiency by capturing the
netting potential between balance sheet and trad-
ing products. In this way, fixed-rate balance sheet
products become part of the trading book.
Because the trading book positions are regulated
by the Market Risk Management department of
the Chief Risk Officer Area and Warburg Dillon
Read, they are no longer subject to balance sheet
management in the CFO Area.
Client business with undefined maturities:
These products have no contractual maturity
date, their interest rates are not directly market-
linked, and they may have various embedded
options. Therefore, back-to-back hedges fail due
to the lack of adequate hedging products and
indices. To solve this problem, UBS has created
replicating portfolios to approximate the cash
flow behavior of these positions. Their function
is to mirror the risk profile of complex, non-
maturing client accounts and to translate them
into portfolios of revolving fixed-rate trans-
actions. Any core deposit behavior then becomes
transferable and manageable. All replicating
portfolios are pooled in the Corporate Center.
The replicating portfolios are updated month-
ly by adding new aggregated tranches to the
maturing ones. Counterparties to the Corporate
Center are either the divisions (such as Private
Banking and Private and Corporate Clients for
saving deposits) or service entities such as Corpo-
rate Real Estate. Corporate Center itself hedges
the bank book by means of internal transactions
with the Warburg Dillon Read trading book.
Owing to the large size of these transactions,
these risks cannot be hedged instantly. Therefore,
the CFO Area is also subject to risk limits in the
process of bridging any mismatches between the
replicating (benchmark) portfolios and the effec-
tive hedge portfolios at Warburg Dillon Read.
Resulting gains or losses are reported on an ac-
crual basis in the financial statements.
Non-interest-bearing or non-business balance
sheet items: In contrast to the above-mentioned
client businesses, non-interest-bearing or non-
business balance sheet items, such as real estate
and investments, bear no explicit interest rate
risk. This is due to the fact that these items have
neither a contractual maturity nor any link to
market rates. Therefore, the effective maturities
of these items are determined by the Group Exec-
utive Board, which takes a strategic view on their
assumed term to divestment. On the basis of this
decision, all these items are also replicated by
benchmark portfolios so as to initiate the respec-
tive funding activity at the Corporate Center. The
Group Executive Board also decides how to
invest the bank’s equity, and the period of that
investment. As at 31 December 1998 the bank’s
equity has been invested in a portfolio of fixed-
rate deposits with an average duration of 1.9
years. The net interest income of the bank is
therefore affected by the actual average interest
rate generated by these replicating portfolios.
Currency Management
As UBS operates in a CHF accounting envi-
ronment, pays CHF dividends, and reports on a
CHF basis, the CFO Area manages UBS on a
CHF operational basis. Based on this, the corpo-
rate currency management is designed as follows:
47
Review of Asset
and Liability Management
48
Key Capital Figures and Ratios
31.12.1997
30.6.1998
31.12.1998
BIS Tier 1 capital (CHF million)
BIS Total capital (CHF million)
BIS Risk-weighted assets (CHF million)
BIS Tier 1 ratio (in %)
BIS Total capital ratio (in %)
28,749
43,089
345,904
8.3
12.6
30,549
44,085
345,680
8.8
12.8
28,299
40,385
288,296
9.8
14.0
Translation (balance sheet) currency risk: For-
eign assets (business unit or non-financial assets)
must be capable of being divested at any time
without negative currency impacts. To eliminate
foreign exchange impacts on investments/divesti-
tures of such assets, UBS match-funds foreign
currency assets in the respective currency.
The match-funding principle is also applied to
foreign investments (or foreign investments in
third companies). This strategy, together with
consistent foreign dividend / capital repatriation,
ensures that UBS equity is invested in CHF.
Transaction (revenues / costs) currency risk: As
a management principle, internal budgets (expres-
sed in CHF) must be comparable to current
results (expressed in CHF) which means that a
stabilized currency environment must be provid-
ed for the management of the bank. The budget-
ed annual foreign currency net profits in local
(reporting) currency are managed centrally
against the CHF within the given directives of the
Group Executive Board. As UBS is managed on a
global functional basis, the corresponding budget
rates (implied from the budgeted annual foreign
currency net profits in CHF) are used for the per-
formance measurement of the divisions/business
units during the financial year. This ensures that
for internal comparability the reference currency
is CHF for all divisions. During the year, actual
results are continuously monitored and major
budget deviations must be communicated to the
CFO Area for adjustments to the opening posi-
tions to enable the CFO Area to take the neces-
sary pro-active steps to cover any open currency
positions.
Capital Management
UBS manages its capital to maintain a Bank
for International Settlements (BIS) Tier 1 ratio of
8.5% – 9.0%. UBS is in a healthy position with
regard to its capital goals. Should additional cap-
ital be required, it can be raised easily, thanks to
the bank’s capital structure.
UBS is regulated by the Swiss Federal Banking
Commission (FBC) which has stricter capital
requirements than the BIS. As a consequence, UBS’s
risk-weighted assets according to the FBC rules are
significantly higher than the internationally accept-
ed BIS standards demand. Therefore, additional
Tier 2 capital has been raised on occasion to satis-
fy FBC requirements, although UBS satisfies the BIS
requirement with its Tier 1 capital base alone.
As can be inferred from the above table, UBS’s
BIS Tier 1 ratio increased by 1.5 percentage points
to 9.8% as of 31 December 1998 year-on-year.
The significant reduction in the second half was
mainly due to a reduction of the risk-weighted
asset base following a down-sizing of the in-
ternational loan book. (For more detailed infor-
mation see also page 94, Note 34e Capital
Adequacy.)
Divisional capital allocation
With regard to steering the divisions, UBS has
a sophisticated value-at-risk system for trading
risk in place at the divisional level. In addition,
looking beyond capital allocation on a regula-
tory level, we are continuously evolving models
for economic capital allocation to provide a
more consistent approach and a more meaning-
ful basis for capital allocation than regulatory
capital.
Treasury stock
Positions in treasury stock are held mainly to
cover employee share plans and future acquisi-
tions. Additionally, within the capital manage-
ment process, treasury stock is one of the drivers
used to fine-tune the capital requirement to BIS
Tier 1 ratio targets. UBS will consider investments
in its own shares for equity amounts exceeding its
target BIS Tier 1 ratio range (8.5% – 9%).
UBS Group
Financial Statements
UBS Group Financial Statements
Table of Contents
Financial Statements
Table of Contents
Group Financial Review
Financial Statements
Income statement
Balance sheet
Statement of changes in equity
Statement of cash flows
Notes to the Financial Statements
52
56
56
57
58
59
60
1
2
3
4
Summary of the significant accounting
60
policies and principles
64
Harmonization of accounting policies
Segment reporting by business division
65
Segment reporting by geographical location 66
Income statement
5
6
7
8
Net interest income
Net fee and commission income
Net trading income
Other income, including income
from associates
Operating expenses
Earnings per share
9
10
Balance sheet: assets
11 Money market paper
12a Due from banks and loans to customers
12b Allowance for credit losses
12c Non-performing loans
13
Cash collateral on securities
borrowed and lent
Repurchase and reverse repurchase
agreements
Trading portfolio
Financial investments
Investments in associates
Property and equipment
Intangible assets and goodwill
Other assets
14
15
16
17
18
19
20
50
67
67
67
68
68
69
69
70
70
70
71
72
73
73
73
74
74
75
75
75
UBS Group Financial Statements
Table of Contents
Balance sheet: liabilities
21
22
23
24
25
Due to banks and customers
Long term debt
Other liabilities
Provisions, including restructuring provision
Income taxes
75
75
76
79
79
80
Balance sheet: equity
26 Minority interests
27
Shareholders’ equity
Off balance sheet and other information
28
29
30
31
32
33
34
Derivative instruments
Pledged assets
Fiduciary transactions
Commitments and contingent liabilities
Operating lease commitments
Litigation, including Holocaust
Financial instruments risk position
Interest rate risk
(a)
Credit risk
(b)
Currency risk
(c)
Liquidity risk
(d)
(e)
Capital adequacy (BIS)
Fair value of financial instruments
Retirement benefit plans and
other employee benefits
Equity participation plans
Related parties
Post balance sheet date events
Significant subsidiaries and associates
Significant currency translation rates
Swiss banking law requirements
The Year 2000 challenge
35
36
37
38
39
40
41
42
43
Report of the Group Auditors
81
81
81
83
83
86
86
87
88
88
89
89
90
92
93
94
95
97
99
100
100
101
103
104
105
106
51
UBS Group Financial Statements
Group Financial Review
Group Financial Review
Overview
– UBS Group realized a profit after taxes and
minorities of CHF 3.0 billion in 1998. This
compares to CHF 4.8 billion for the prior year,
excluding the after-tax impact of the 1997
restructuring provision.
– UBS’s return on equity for 1998 is 10.3%, com-
pared to 14.5% in 1997 (adjusted for after-tax
impact of the restructuring provision).
– Total net operating income fell 10%, or CHF
2.6 billion, to CHF 22.3 billion in 1998. Excep-
tional revenue losses incurred from Long Term
Capital Management (LTCM) and other excep-
tional items in trading income offset positive
developments in net fee and commission income
and the exceptional gain on the sale of BSI.
– Total operating expenses before restructuring
provision decreased 2%, or CHF 378 million,
to CHF 18.3 billion year-on-year. This includes
a CHF 842 million provision for the US settle-
ment regarding the role of Swiss banks during
and after World War II, as well as a total of
CHF 662 million in costs associated with the
Year 2000 and Euro projects. Merger-related
cost reductions are estimated to have exceeded
CHF 1 billion.
– The cost-income ratio increased to 78.4% in
1998 from 71.2% in 1997 (adjusted for after-
tax impact of restructuring provision).
– Group-wide assets under management
in-
creased by a remarkable 4%, or CHF 60 bil-
lion, to CHF 1.6 trillion, despite third-quarter
market turbulence and some negative impact
from the merger.
Income Statement
Net interest income
Overall, net interest income showed a decline
of approximately 4%, or CHF 274 million, to
CHF 6.7 billion, year-on-year. The two major
contributory factors are the divestitures of
Prokredit and Aufina in Switzerland and a lower
rate of return on invested equity.
Credit loss expense
The credit loss expense decreased by 26% to
CHF 951 million in 1998 from CHF 1,278 mil-
lion in 1997. The credit loss expense improved
because of positive developments in the overall
Swiss economic situation and tightened credit
procedures at both predecessor banks in the past.
This was offset in part by the rapid deterioration
in emerging market economies which caused a
substantial increase in individual counterparty
allowances and/or country provisions. Total risk
costs increased to CHF 4,262 million in 1998
from CHF 3,720 million in 1997. Total risk costs
were funded by previously established allowan-
ces of CHF 3,311 million in 1998 versus CHF
2,456 million in 1997. All but CHF 300 million
of both predecessor banks’ 1996 Special Review
Pools have been allocated to specific positions of
the previously-defined workout portfolios.
For more detailed information please see the
discussion and table in the Review of Risk Man-
agement and Control on pages 39–40.
Net fee and commission income
Net fee and commission income increased 3%,
or CHF 392 million, to CHF 12.6 billion over
1997. Generally stable asset-related fees – includ-
ing investment fund unit fees, portfolio and other
management and advisory fees, custodian fees
and fiduciary fees – increased around 23% as a
result of strong marketing efforts, assets-under-
management growth, and certain first-time con-
solidations.
Brokerage fees fell 12%, or CHF 475 million, to
CHF 3.7 billion partly due to disappointing condi-
tions in the second half and partly due to contin-
ued conscious efforts to transfer revenue sources
toward asset-related rather than transaction-relat-
ed business through pricing and other measures.
Underwriting and corporate finance fees
remained mostly stable at CHF 1.6 billion.
Income from credit-related fees and commis-
sions decreased by 30%, or CHF 234 million, to
CHF 559 million as emerging market exposures
were reduced.
Net trading income
Net trading income fell by 68% to CHF 1,750
million compared to the prior year. Principal con-
tributors to this were the exposure to the hedge
fund Long Term Capital Management (LTCM)
and the positions in the Global Equities Deriva-
tives (GED) book. Please see the Review of Risk
Management and Control for more detailed
information.
The reduction in net trading income was driv-
en by the loss in fixed income due to the full-year
52
UBS Group Financial Statements
Group Financial Review
LTCM write-down of CHF 793 million and other
losses in emerging markets. Equities fell 35% to
CHF 0.7 billion as a result of the negative impact
of the CHF 762 million in full-year 1998 losses
from the GED portfolio. Foreign exchange and
banknotes declined 23% to CHF 1.8 billion. Pre-
cious metals and commodities also showed a
decline of 89% to CHF 28 million due mainly to
the wind-down of the latter business in Warburg
Dillon Read (see pages 14–19).
Other income, including income
from associates
Other income increased 50%, or CHF 744 mil-
lion, to CHF 2.2 billion. Net income from invest-
ments in financial assets increased strongly. The
most significant contributory factor were gains on
the divestment of several subsidiaries, including
CHF 1.0 billion from BSI-Banca della Svizzera
Italiana. Investment income from property, gains
on the sale of private equity investments (UBS
Capital), and net income from associated compa-
nies also all showed significant increases.
Eliminating the gain from the sale of BSI, other
income would have fallen 18%, or CHF 270 mil-
lion. This is mostly because of the remaining CHF
367 million write-down on LTCM and the write-
down of CHF 75 million on the cross-sharehold-
ing position with Long-Term Credit Bank of
Japan.
Personnel expenses
Personnel expenses showed a substantial
decrease of 15%, or 1.7 billion, to CHF 9.8 bil-
lion in 1998. Decreases in personnel expenses
were due to a significant headcount reduction
resulting from the merger, several divestments
and also to lower levels of incentive compensa-
tion charged to the Income Statement on account
of disappointing results.
General and administrative expenses
General and administrative expenses
in-
creased 24%, or CHF 1.3 billion, year-on-year.
The reasons for this are, firstly, the CHF 842 mil-
lion provision for the US settlement regarding the
role of Swiss banks during and after World War
II and, secondly, total costs associated with the
Year 2000 and Euro projects (around 60% of a
total CHF 662 million is booked under general
and administrative expenses). Merger benefits
have yet to be fully realized as the physical con-
solidation of premises within Switzerland only
started in the second half of 1998.
Depreciation and amortization
Depreciation and amortization increased 4%,
or CHF 63 million, to CHF 1.8 billion over 1998.
The reduction in property and equipment depre-
ciation was more than offset by regular and some
accelerated amortization of goodwill on several
acquisitions including Brinson Partners, Bruns-
wick in Russia and Omega in Brazil.
Tax expense
UBS Group incurred a tax expense of CHF
1,045 million. The effective tax rate is higher
than in 1997 due to tax losses in locations where
no tax benefit could be booked, as well as signif-
icant deferred tax expenses arising from amorti-
zation of deferred tax assets associated with the
restructuring provision, allowances for credit
losses and other provisions.
Restructuring provision
At the time of the merger, a restructuring pro-
vision of CHF 7 billion was established to cover
expenses resulting from reductions in personnel,
elimination of duplicate IT infrastructures, merg-
ing of bank premises and various other restruc-
turing costs.
Restructuring Provision Usage During 1998
CHF million
Personnel
Private and Corporate Clients
Warburg Dillon Read
Private Banking
UBS Brinson
UBS Capital
Corporate Center
Group total
82
1,750
104
14
2
72
2,024
IT
468
293
32
4
797
Premises
Other
Total usage
31.12.1998
11
4
252
267
156
339
7
437
939
717
2,382
147
18
2
761
4,027
53
During 1998, CHF 4 billion of the provision
was utilized. CHF 2 billion were for personnel-
related measures, including severance payments
for redundancies made during the year, and spe-
cial payments and lock-in agreements to maintain
stability in the workforce during the vital inte-
gration period. In addition, our budgets assumed
a merger-related shortfall of investment banking
net income in 1998. This shortfall did materialize
in the third quarter and, in accordance with plan,
the restructuring provision was utilized to fund a
certain amount of performance-related compen-
sation. CHF 797 million was applied toward inte-
gration projects and write-offs of equipment no
longer used, mostly at Warburg Dillon Read and
Private and Corporate Clients. CHF 267 million
was applied to the write-down in value of prem-
ises no longer used, and CHF 939 million was for
additional costs associated with exiting certain
businesses, as well as merger administration
costs. A full divisional breakout is shown above.
UBS sees the CHF 7 billion as sufficient to
cover merger-related expenses and expects to
fully utilize this amount over the next two years.
Balance Sheet
Assets
During 1998, total assets decreased by 13%,
or CHF 142 billion to CHF 944.1 billion for
three major reasons. First, UBS Group conscious-
ly reduced its credit risk exposure mainly to
international counterparties, which is reflected in
a decrease of the total loan portfolio by 6%, or
CHF 21 billion. The trading portfolio has been
decreased by 23%, or CHF 48 billion in the sec-
ond half of 1998 as a result of adjusting UBS mar-
ket risk appetite. Market conditions also affected
a change in our customers’ risk appetite. Further-
more, financial investments decreased 46%, or
CHF 5.8 billion, as a result of the sale of non-core
businesses and the realization of certain private
equity investments.
Liabilities
Due to customers decreased 9%, or CHF 28
billion, to CHF 275 billion. This is mainly caused
by clients reallocating funds to other investment
products due to low interest rates and the impact
of the lower USD against the Swiss franc; a minor
part of the decrease is due to client defections.
Shareholders’ equity
Shareholders’ equity increased by 5%, or CHF
1.5 billion, to CHF 32.4 billion in 1998 before
dividend payments. Treasury shares amounted to
CHF 1.5 billion in 1998, a decrease of 25% or
CHF 500 million, year-on-year. Please refer to the
capital management section of the Review of
Assets and Liability Management Section on page
48.
UBS Group Financial Statements
Group Financial Review
54
UBS Group Financial Statements
55
UBS Group Financial Statements
Financial Statements
Financial Statements
UBS Group Income Statement
CHF million
Operating income
Interest income
Less: Interest expense
Net interest income
Less: Credit loss expense
Total
Net fee and commission income
Net trading income
Other income, including income from associates
Total
Operating expenses
Personnel
General and administrative
Depreciation and amortization
Total
Operating profit before restructuring costs and tax
Restructuring costs
Operating profit / (loss) before tax
Tax expense / (benefit)
Group profit / (loss)
Less: Minority interests
Net profit / (loss)
Basic earnings per share (CHF)
Diluted earnings per share (CHF)
Note
1998
1997
Change
%
5
6
7
8
9
9
9
25
26
22,835
16,173
6,662
951
5,711
12,626
1,750
2,241
22,328
9,816
6,617
1,825
18,258
4,070
4,070
1,045
3,025
( 5)
3,030
14.31
14.23
23,669
16,733
6,936
1,278
5,658
12,234
5,491
1,497
24,880
11,559
5,315
1,762
18,636
6,244
7,000
( 756 )
( 105 )
( 651 )
16
( 667 )
( 3.18 )
( 3.18 )
( 834 )
( 560 )
( 274 )
( 327 )
53
392
( 3,741 )
744
( 2,552 )
( 1,743 )
1,302
63
( 378 )
( 2,174 )
( 4 )
( 3 )
( 4)
( 26 )
1
3
( 68 )
50
( 10 )
( 15 )
24
4
( 2 )
( 35 )
( 7,000 )
( 100 )
4,826
1,150
3,676
( 21 )
3,697
17.49
17.41
–
–
–
–
–
–
–
56
UBS Group Financial Statements
Financial Statements
UBS Group Balance Sheet
CHF million
Note
1998
1997
Change
%
Assets
Cash and balances with central banks
Money market paper
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio
Positive replacement values
Loans, net of allowance for credit losses
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Intangible assets and goodwill
Other assets
Total assets
Total subordinated assets
Liabilities
Money market paper issued
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Accrued expenses and deferred income
Long term debt
Other liabilities
Total liabilities
Minority interests
Shareholders’ equity
Share capital
Share premium account
Less: Treasury shares
Foreign currency translation differences
Retained earnings
Total shareholders’ equity
Total liabilities, minority interests
and shareholders’ equity
Total subordinated liabilities
11
12
13
14
15
28
12
16
17
18
19
20
21
13
14
28
21
22
23, 24, 25
26
27
3,267
18,390
68,495
91,695
141,285
162,588
169,936
247,926
6,914
6,627
2,805
9,886
2,210
12,092
4,638
36,353
66,582
82,656
216,355
210,738
149,538
270,917
12,693
7,712
2,724
10,964
1,430
13,114
(1,371 )
(17,963 )
1,913
9,039
(75,070 )
(48,150 )
20,398
(22,991 )
(5,779 )
(1,085 )
81
(1,078 )
780
(1,022 )
944,116
1,086,414
(142,298 )
496
2,357
(1,861 )
51,527
85,716
19,171
137,617
47,033
205,080
274,850
11,232
50,783
27,722
55,600
159,634
14,140
191,793
68,215
170,162
302,516
9,956
54,284
28,154
(4,073 )
(73,918 )
5,031
(54,176 )
(21,182 )
34,918
(27,666 )
1,276
(3,501 )
(432 )
910,731
1,054,454
(143,723 )
990
1,033
(43 )
4,300
13,740
1,482
(456)
16,293
32,395
4,296
13,260
1,982
(111 )
15,464
30,927
4
480
(500 )
(345 )
829
1,468
944,116
1,086,414
(142,298 )
13,652
14,375
(723 )
(30 )
(49 )
3
11
(35 )
(23 )
14
(8 )
(46 )
(14 )
3
(10 )
55
(8 )
(13 )
(79 )
(7 )
(46 )
36
(28 )
(31 )
21
(9 )
13
(6 )
(2 )
(14 )
(4 )
0
4
(25 )
311
5
5
(13 )
(5 )
57
UBS Group Statement of Changes in Equity
CHF million
1998
1997
Shareholders’ equity at beginning of the
year as previously reported by the combining banks:
Former Union Bank of Switzerland
Former Swiss Bank Corporation
Total
Changes at beginning of the year due
to the harmonization of accounting policies
Shareholders’ equity at beginning of the year
restated for harmonization of accounting policies
Currency translation differences
Net profit / (loss)
Dividends paid
Capital increase / (repayment)
Acquisition of Treasury Shares, cost
Disposal of Treasury Shares, cost
Premium on disposal of Treasury Shares
Options and shares issued
Premium from options and convertible bonds
Reclassification of minority interests
Other
Total movements in shareholders’ equity during the year
–
–
–
–
22,707
11,742
34,449
(293 )
30,927
34,156
(345)
3,030
(2,201)
4
(2,796)
3,296
369
0
111
0
0
(1,217)
(44 )
(667 )
(800 )
(795 )
(3,172 )
1,892
129
50
358
(175 )
(5 )
(2,518 )
Shareholders’ equity at the end of the year
32,395
30,927
UBS Group Financial Statements
Financial Statements
58
UBS Group Statement of Cash Flows
CHF million
Cash flow from operating activities
Net profit / (loss)
Adjustments to reconcile to cash used in operating activities
Non cash items included in net profit / (loss):
Depreciation and amortization
Provision for credit losses
Income from associates
Net gains included in cash flows from investing activities
Increase / (decrease) in operating assets:
Net due from (or to) banks
Reverse repurchase agreements
Trading portfolio
Loans due to (or from) customers
Accrued income, prepaid expenses and other assets
Net increase / (decrease) in operating liabilities:
Money market paper issued
Repurchase agreements
Accrued expenses, deferred income and other liabilities
Net cash used in operating activities
Cash flow from investing activities
Purchase of investments in subsidiaries and associates
Purchase of property and equipment
Disposal of subsidiaries and associates
Disposal of property and equipment
Net (increase) / decrease in financial investments
Net cash flow from (used in) investing activities
Cash flow from financing activities
Net movements in Treasury Shares
Capital increase
Capital repayment
Dividends paid
Premium on capital increase
Issue of long-term debt
Repayment of long-term debt
Net cash flow from (used in) financing activities
Effects of exchange rate differences
Net increase / (decrease) in cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents comprise:
Cash and balances with central banks
Money market paper
Bank deposits maturing in less than 3 months
Income taxes paid
UBS Group Financial Statements
Financial Statements
1998
3,030
1,825
951
(301)
(1,803)
(65,172)
66,031
41,488
(5,626)
2,107
(4,073)
(49,145)
1,444
(9,244)
(1,202)
(1,818)
1,422
1,138
6,134
5,674
869
4
0
(2,201)
111
5,566
(9,068)
(4,719)
(386)
(8,675)
92,354
83,679
3,267
18,390
62,022
733
1997
(667 )
1,762
1,278
(432 )
(438 )
22,503
(52,440 )
(38,388
)
2,865
(1,385 )
23,303
24,594
6,852
(10,593 )
(1,349 )
(1,785 )
765
1,101
(731 )
(1,999 )
(1,151 )
50
(795 )
(800 )
358
17,155
(9,105 )
5,712
(571 )
(7,451 )
99,805
92,354
4,638
36,353
51,363
1,185
59
UBS Group Financial Statements
Notes to the Financial Statements
60
Notes to the
Financial Statements
Note 1 Summary of the Significant Accounting Policies and Principles
a) Basis of accounting
The consolidated financial statements are stat-
ed in Swiss francs, the currency of the country in
which UBS is incorporated. The consolidated
financial statements have been prepared in accor-
dance with and comply with International
Accounting Standards.
UBS AG was formed on 29 June 1998 when
Swiss Bank Corporation and Union Bank of
Switzerland merged. The UBS consolidated
financial statements were prepared using the
pooling of interests method of accounting. Due to
the merger, the Group harmonized its accounting
policies which have then been retrospectively
applied for the restatement of comparative infor-
mation and opening retained earnings at 1 Janu-
ary 1997.
b) Consolidation method
The Group consolidated financial statements
comprise those of the parent company and its
subsidiaries presented as a single economic enti-
ty. Subsidiaries are companies which are directly
or indirectly controlled by the Group. Sub-
sidiaries acquired during the year are consolidat-
ed from the date control passes. Companies
which are acquired and held with a view to their
subsequent disposal are recorded at the lower of
cost or market value as financial investments.
The effects of intra-group transactions are
eliminated in preparing the Group financial
statements. Equity and net income attributable to
minority interests are shown separately in the
balance sheet and income statement respectively.
c) Offsetting
Financial assets and financial liabilities are
presented separately. Assets and liabilities are
offset only when the Group has a legal right to
offset amounts with the same counterparty, and
transactions are expected to be settled on a net
basis.
d) Trade date/settlement date accounting
When the Group becomes party to a contract
in its trading activities it recognizes from that
date (“trade date”) any unrealized profits and
losses arising from revaluing that contract to fair
value. These unrealized profits and losses are rec-
ognized in the income statement.
In addition to the trade date, spot and forward
trading transactions involve a subsequent date
(“settlement date”), which can vary between a
number of days to many months. On the settle-
ment date, the terms of the contract are fulfilled
and a resulting financial asset or liability is rec-
ognized on the balance sheet at the fair value of
the consideration given or received.
e) Foreign currency translation
Foreign currency transactions are recorded at
the rate of exchange on the date of the transac-
tion. At the balance sheet date, monetary assets
and liabilities denominated in foreign currencies
are reported using the closing exchange rate.
Exchange differences arising on the settlement of
transactions at rates different from those at the
date of the transaction, and unrealized foreign
exchange differences on unsettled foreign curren-
cy monetary assets and liabilities, are recognized
in the income statement.
Assets and liabilities of foreign entities are
translated at the exchange rates at the balance
sheet date, while income statement items and
cash flows are translated at average rates over the
year. Differences resulting from the use of these dif-
ferent exchange rates are recognized directly in
Currency translation differences within Sharehold-
ers’ Equity.
f) Business and geographical segments
Business segments: for management purposes
the Group is organized on a world-wide basis into
five major operating businesses. The divisions are
the basis upon which the Group reports its pri-
mary segment information. Financial informa-
tion on business segments is presented in Note 3.
Intersegment transfers: Segment revenue, seg-
ment expenses and segment performance include
transfers between business segments and between
geographical segments. Such
transfers are
accounted for at competitive market prices
charged to unaffiliated customers for similar
services. Those transfers are eliminated on con-
solidation.
The business and geographical segments are
presented in accordance with IAS 14, Segment
reporting, as revised 1997.
UBS Group Financial Statements
Notes to the Financial Statements
g) Securities borrowing and lending
Securities borrowed and lent that are collater-
alized by cash are included in the balance sheet at
amounts equal to the collateral advanced or
received.
Income arising from the securities lending and
borrowing business is recognized in the income
statement on an accrual basis.
h) Repurchase and reverse
repurchase transactions
The Group enters into short-term purchases of
securities under agreements to resell and sales of
securities under agreements to repurchase sub-
stantially identical securities. Securities, which
have been sold subject to a repurchase agreement,
continue to be recognized in the balance sheet
and are measured in accordance with the
accounting policy for trading balances or finan-
cial assets as appropriate. The proceeds from the
sale of these securities are treated as liabilities and
included in Repurchase Agreements.
Securities purchased subject to commitments
to resell at a future date are treated as loans
against that security and are included in Reverse
Repurchase Agreements.
Interest earned on reverse repurchase agree-
ments and interest incurred on repurchase agree-
ments is recognized as interest income and inter-
est expense respectively over the life of each
agreement.
i) Trading portfolio
The trading portfolio consists of debt and
equity securities as well as of precious metals held
to meet the financial needs of our customers and
to take advantage of market opportunities. The
trading portfolio is carried at fair value. Short
positions in securities are reported as Trading
portfolio liabilities. Realized and unrealized gains
and losses, net of related transaction expenses,
are recognized as Net trading income. Net trad-
ing income also includes interest and dividend
income as well as the funding costs for holding
these positions.
j) Loans and the allowance for credit losses
Loans are initially recorded at cost. For loans
originated by the bank, the cost is the amount
lent to the borrower. For loans acquired from a
third party the cost is the fair value at the time of
acquisition.
Interest income on an unimpaired loan is rec-
ognized on an accrual basis. Interest includes the
amount of amortization of any discount or pre-
mium between the cost of a loan and its amount
at maturity and the amortization of any loan fees
and costs.
An impairment in a loan is recognized when it
becomes probable that the bank will not be able
to collect all amounts due according to the con-
tractual terms of the loan agreement. The carry-
ing amount of the loan is reduced to its estimat-
ed realizable value through a specific allowance.
The impairment is recognized as an expense for
the period. Loans are stated at their principal
amount net of any allowance for credit losses.
A loan is classified as non-performing when
the contractual payments of principal and/or
interest are in arrears for 90 days or more. After
the 90 day period the recognition of interest
income ceases and a charge is recognized for the
unpaid and accrued interest receivable.
A write-off is made when all or part of a loan
is deemed uncollectible or in the case of debt for-
giveness. Write-offs are charged against previ-
ously established allowances and reduce the prin-
cipal amount of a loan. Recoveries of loans writ-
ten off in an earlier period are included in income.
k) Financial investments
Financial investments are debt and equity
securities held for the accretion of wealth through
distribution such as interest and dividends and
for capital appreciation. Financial investments
also include real estate held for sale.
Debt securities held to maturity are carried at
amortized cost. If necessary, the carrying amount
is reduced to its estimated realizable value. Inter-
est income on debt securities, including amorti-
zation of premiums and discounts, is recognized
on an accrual basis and reported as Net interest
income.
Financial investments held for sale are carried
at the lower of cost or market value. Reductions
to market value and reversals of such reductions
up to cost as well as gains and losses on disposal
are included in Other income. Interest earned and
dividends received are included in Net interest
income.
Private Equity investments are carried at cost
less write-downs for a non-temporary impair-
ment in value. Reductions of the carrying amount
and reversals of such reductions as well as gains
61
UBS Group Financial Statements
Notes to the Financial Statements
and losses on disposal are included in Other
income.
l) Investments in associates
Investments in associates in which the Group
has a significant influence are accounted for by
the equity method. Investments in which the
Group has a significant influence, but which are
acquired and held with a view to their subsequent
disposal are included in financial investments and
recorded at the lower of cost or market value.
Investments in companies where the parent
company does not hold a significant influence are
recorded at cost less value adjustments for per-
manent declines in value.
Interests in jointly controlled entities are
reported using the equity method and recorded
under investments in associates.
m) Property and equipment
Property and equipment includes properties,
computer and telecommunications equipment as
well as other equipment, fixtures and fittings.
Property and equipment is carried at cost less
accumulated depreciation.
Property and equipment is depreciated on a
straight-line basis over their estimated useful lives
as follows:
Buildings
Not exceeding 50 years
Furnishings and fixtures
Not exceeding 10 years
Leasehold and
building improvements
Equipment
Not exceeding 10 years
Not exceeding 5 years
Major renewals and improvements are capi-
talized, while maintenance and repairs are recog-
nized as expenses as incurred. Building improve-
ments are recorded under buildings, whereas
leasehold improvements are recorded under
equipment and furniture.
n) Goodwill
Goodwill represents the excess of the cost of
an acquisition over the fair value of the Group’s
share of the net assets of the acquired subsidiary
or associate at the date of acquisition. Good-
will
is recognized as an asset and is amor-
tized using the straight-line basis over its esti-
mated useful economic life, normally 5 years
and not more than 20 years. Goodwill and fair
value adjustments arising on the acquisition of
foreign subsidiaries are treated as local currency
balances and are retranslated into Swiss francs
at the closing rate at subsequent balance sheet
dates.
Negative goodwill is deferred and recognized
in the income statement on a systematic basis
over its estimated period of benefit, normally five
years and not more than 20 years.
o) Income taxes
Income tax payable on profits, based on the
applicable tax laws in each jurisdiction, is recog-
nized as an expense in the period in which profits
arise. The tax effects on income tax losses avail-
able for carry-forward are recognized as an asset
when it is probable that future taxable profit will
be available against which those losses can be uti-
lized.
Deferred tax liabilities are recognized for tem-
porary differences between the carrying amounts
of assets and liabilities in the Group balance sheet
and their amounts as measured for tax purposes,
which will result in taxable amounts in future
periods. Deferred tax assets are recognized for
in
temporary differences which will result
deductible amounts in future periods, but only to
the extent it is probable that sufficient taxable
profits will be available against which these dif-
ferences can be utilized.
Deferred tax assets and liabilities are meas-
ured at the tax rates that are expected to apply to
the period in which the asset will be realized or
the liability will be settled.
Current and deferred tax assets and liabilities
are offset when they arise from the same tax
reporting group and relate to the same tax
authority and when the legal right to offset exists.
Current and deferred taxes are recognized as
tax income or expense except for deferred taxes
recognized or disposed of on the acquisition or
disposal of a subsidiary.
p) Own shares and options on own shares
In the normal course of its equity trading and
market making activities, the Group buys and
sells UBS shares and options on those shares.
These shares are held in Trading Assets similar to
other trading securities, and are carried at fair
value. Changes in fair value and dividends
received on UBS shares in the trading portfolio
are recognized as Net trading income.
62
UBS Group Financial Statements
Notes to the Financial Statements
In addition the Group holds its own shares for
non-trading purposes, for instance employee
compensation schemes and other strategic pur-
poses. These shares are recorded within Treasury
Stock and are deducted from Shareholders’ Equi-
ty. Gains and losses on sales of Treasury Stock are
recognized in Share Premium. Dividends relating
to Treasury Stock shares are not recognized.
Options on own shares for strategic purposes
are recorded at market value under positive and
negative replacement values. Gains and losses
thereon are recognized in the share premium
account.
q) Retirement benefits
The Group operates a number of funded re-
tirement benefit plans which include characteris-
tics of both defined benefit and defined contribu-
tion plans. The Group’s minimum contributions
to such plans are determined under the terms of
the plan but the Group may be required to pro-
vide additional funding, if necessary, to meet the
level of benefits set out in the plan rules. Inde-
pendent actuarial valuations are used to estimate
the present value of the promised retirement ben-
efits and of the plans assets.
The Group also operates a number of defined
contribution plans. Contributions to such plans
are recognized as expenses in the period to which
they relate.
r) Derivative instruments
Derivative instruments are carried at fair value
on the balance sheet. The Group enters into
derivative transactions including swaps, futures
and option contracts in interest rate, foreign
exchange, equity, precious metal and commodity
markets. Fair values are obtained from quoted
market prices, discounted cash flow models and
option pricing models as appropriate. The fair
values of derivative instruments are shown in the
balance sheet as positive and negative replace-
ment values. Gains and losses, realized and unre-
alized, are recognized in net trading income as
they arise. Valuation adjustments to cover credit
and market liquidity risks as well as future
administration costs have been made.
Transactions in derivative instruments entered
into for hedging of non trading positions are rec-
ognized in the income statement on the same
basis as to the underlying item being hedged.
63
Note 2 Harmonization of Accounting Policies
The business combination of Union Bank of
Switzerland and Swiss Bank Corporation was
accounted for under the pooling of interest
method of accounting. Under the pooling of
interest method of accounting, a single uniform
set of accounting policies was adopted and
applied to all periods presented. As a result of
harmonizing these policies, adjustments were
required for the accounting for treasury shares,
netting of balance sheet items, repurchase agree-
ments, depreciation and employee share schemes.
The impact on the financial statements is
shown in the table below. Details of the shares
issued to effect the pooling of interests are shown
in Note 27.
CHF million
Shareholders’ equity as at 1 January 1997
Former Union Bank of Switzerland
Former Swiss Bank Corporation
Total Shareholders’ equity as previously reported
Impact of accounting policy harmonization
Shareholders’ equity restated as at 1 January 1997
Net loss for the 12 month period ended 31 December 1997
Former Union Bank of Switzerland
Former Swiss Bank Corporation
Total as previously reported
Impact of accounting policy harmonization
Net loss restated for the 12 month period ended 31 December 1997
Total assets as at 31 December 1997
Former Union Bank of Switzerland
Former Swiss Bank Corporation
Total assets as previously reported
Impact of accounting policy harmonization
Total assets restated as at 31 December 1997
1997
22,707
11,742
34,449
( 293)
34,156
( 129)
( 248)
( 377)
( 290)
( 667)
577,576
438,948
1,016,524
69,890
1,086,414
UBS Group Financial Statements
Notes to the Financial Statements
64
UBS Group Financial Statements
Notes to the Financial Statements
Note 3 Segment Reporting by Business Division
For the year ended 31 December 1998
Private
Banking
Warburg
Private &
Dillon Corporate
Clients
Read
UBS
Brinson
UBS Corporate
Center
Capital
CHF million
Operating income
Less: Credit loss expense 1
Total
Personnel, general and
administrative expenses
Depreciation and amortization
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interest
Net profit / (loss)
7,223
26
7,197
2,605
256
2,861
4,336
737
3,599
0
3,599
6,987
500
6,487
6,984
524
7,508
(1,021)
(306 )
(715)
(9 )
(706)
7,025
1,170
5,855
3,999
948
4,947
908
154
754
0
754
Group
Total
23,279
951
296
(745 )
1,041
22,328
2,085
(15 )
16,433
1,825
2,070
18,258
(1,029)
317
(1,346)
4
4,070
1,045
3,025
(5 )
(1,350)
3,030
585
0
585
152
5
157
428
15
413
0
413
1,163
0
1,163
608
107
715
448
128
320
0
320
800
724
Other information as at 31 December 1998
107,772
Total assets 2
Total liabilities 2
106,197
685,921
675,041
173,028
164,865
1,800
1,513
(25,205 )
(36,619 )
944,116
911,721
1 In order to show the relevant divisional performance over time, adjusted expected loss figures rather than the net credit loss expense are
reported for all business divisions. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the
respective portfolios. The difference between the statistically derived adjusted expected loss figures to the financially booked net credit loss
expenses at Group level is reported in the Corporate Center. The divisional breakdown of the net credit loss expense of CHF 951 million as
of December 1998 is as follows: Private Banking CHF 48 million, Warburg Dillon Read CHF 506 million, Private and Corporate Clients
CHF 397 million. 2 The funding surplus / requirement is reflected in each division and adjusted in Corporate Center.
To enable a more meaningful analysis of UBS’s results, the above business group results have been pre-
sented on a management reporting basis. Consequently, internal charges and transfer pricing adjust-
ments have been reflected in the performance of each business group. The basis of the reporting
reflects the management of the business within UBS Group.
For the year ended 31 December 1997
Private
Banking
Warburg
Private &
Dillon Corporate
Clients
Read
UBS
Brinson
UBS Corporate
Center
Capital
CHF million
Operating income
Less: Credit loss expense 1
Total
Personnel, general and
administrative expenses
Depreciation and amortization
Total
Segment performance before tax
Tax expense / (benefit)
Segment performance after tax
Less: Minority interest
Net profit / (loss)
6,215
59
6,156
2,773
218
2,991
3,165
561
2,604
0
2,604
10,888
300
10,588
8,714
595
9,309
1,279
213
1,066
0
1,066
7,005
1,092
5,913
4,305
852
5,157
756
135
621
0
621
1,040
0
1,040
593
44
637
403
127
276
0
276
492
0
492
108
3
111
381
2
379
0
379
Group
Total
26,158
1,278
518
(173 )
691
24,880
381
50
431
260
357
(97)
16
(113)
16,874
1,762
18,636
6,244
1,395
4,849
16
4,833
1 Basically the same methodology as for the year 1998 Segment Reporting is applied. Due to the unavailability of some pre-merger data,
management estimates had to be used.
The results do not take into account the merger provision and the merger impact to taxes. The net
loss of the whole Group including these items would be CHF (667) million. Private Banking and Pri-
vate and Corporate Clients figures for 1997 were restated in order to properly reflect the new client
segmentation (transfer of investment clients from Private Banking to Private and Corporate Clients).
65
UBS Group Financial Statements
Notes to the Financial Statements
Note 4 Segment Reporting by Geographical Location
The geographical analysis of operating
income, total assets and capital investment given
below is based on the location of the office in
which the transactions and assets are recorded.
Because of the global nature of financial markets,
the Group’s business is managed on an integrat-
ed basis world-wide, with a view to profitability
by product line. The geographical analysis of
operating income, total assets and capital invest-
ment is provided in order to comply with Inter-
national Accounting Standards, and does not
fairly reflect the way the Group is managed.
Management believes that analysis by business
division, as shown in Note 3 to these financial
statements, is a more meaningful representation.
For the year ended 31 December 1998
Total operating income
Share %
CHF m
CHF m
221,945
409,780
216,989
95,402
75
8
11
6
Total assets
Share %
Capital investment
Share %
CHF m
24
43
23
10
234
767
513
304
13
42
28
17
100
100
944,116
100
1,818
Switzerland
Europe / Africa / Middle East
Americas
Asia / Pacific
Total
16,838
1,691
2,548
1,251
22,328
66
UBS Group Financial Statements
Notes to the Financial Statements
Income Statement
Note 5 Net Interest Income
CHF million
1998
1997
Interest income
Interest earned on loans and advances to banks
Interest earned on loans and advances to customers
Interest from finance leasing
Interest income from financial investments
Dividend income from financial investments
Other
Total
Interest expense
Interest on amounts due to banks
Interest on amounts due to customers
Interest on medium and long-term debt
Less: Refinancing costs for trading positions
Total
Total
7,361
14,111
60
293
79
931
22,835
7,879
9,890
5,045
6,641
16,173
6,662
4,031
17,565
90
460
38
1,485
23,669
7,247
10,074
4,468
5,056
16,733
6,936
Note 6 Net Fee and Commission Income
CHF million
1998
1997
Credit-related fees and commissions
Guarantee and letter of credit commissions
Other
Total
Security trading and investment activities fees
Underwriting and corporate finance fees
Brokerage fees
Fiduciary fees
Custodian fees
Portfolio and other management and advisory fees
Investment funds
Other
282
277
559
1,694
3,670
349
1,386
3,335
1,778
110
343
450
793
1,645
4,145
375
1,188
2,549
1,457
233
Total
12,322
11,592
Commission income from other services
Total
Commission expense
Brokerage fees paid
Other
Total
Total
776
704
327
1,031
12,626
784
694
241
935
12,234
67
Note 7 Net Trading Income
CHF million
Foreign exchange and bank notes
Fixed income
Equities
Precious metals / commodities
Total
1998
1,765
( 762)
719
28
1,750
1997
2,306
1,843
1,098
244
5,491
Interest and dividends derived from the trading portfolio are included within Net trading income. The
funding costs for holding these trading positions are charged to Net trading income and credited to
Interest expense.
Note 8 Other Income, including Income from Associates
CHF million
1998
1997
Investments in financial assets (debt and equity)
Net income from disposal of private equity investments
Net income from disposal of other financial assets
Gains / (losses) from revaluation of financial assets
Subtotal
Net income from disposal of consolidated subsidiaries
Total
Investments in property
Net income from disposal of properties held for resale
Gains / (losses) from revaluation of properties held for resale
Subtotal
Net income from properties, excluding properties held for resale
Total
Investments in associates
Net income from investments in associates
Gains / (losses) from the disposal of investments in associates
Total
Other
Total
587
398
( 556)
429
1,149
1,578
33
( 106)
( 73)
328
255
377
( 30)
347
61
2,241
418
338
( 16 )
740
154
894
20
( 90 )
( 70 )
99
29
231
44
275
299
1,497
UBS Group Financial Statements
Notes to the Financial Statements
68
UBS Group Financial Statements
Notes to the Financial Statements
1998
7,203
535
421
614
201
842
9,816
822
390
820
759
262
537
1,792
1,235
6,617
1,483
342
1,825
18,258
1998
3,030
1997
8,932
365
536
580
143
1,003
11,559
830
460
819
794
306
528
1,464
114
5,315
1,623
139
1,762
18,636
1997
( 667 )
214,855,064
3,057,586
213,497,120
3,862,118
211,797,478
209,635,002
14.31
( 3.18 )
3,030
211,797,478
( 667 )
209,635,002
296,272
847,140
288,145
0
212,940,890
209,923,147
14.23
( 3.18 )
Note 9 Operating Expenses
CHF million
Personnel expenses
Salaries and bonuses
Contractors
Insurance and social contributions
Contributions to retirement benefit plans
Employee share plans
Other personnel expenses
Total
General and administrative expenses
Occupancy
Rent and maintenance of machines and equipment
Telecommunications and transportation
Administrative expense
Marketing and public relations
Travel and entertainment
Professional fees, including IT outsourcing
Other
Total
Depreciation and amortization
Property and equipment
Intangible assets and goodwill
Total
Total operating expenses before restructuring
Note 10 Earnings per Share
Basic earnings per share calculation
Net profit for the year (CHF million)
Weighted average shares outstanding:
Registered ordinary shares (nominal CHF 20)
Less: Treasury Shares
Weighted average shares for
basic earnings per share (nominal CHF 20)
Basic earnings per share (CHF)
Diluted earnings per share calculation
Net profit for the year (CHF million)
Weighted average shares for basic earnings per share (nominal CHF 20)
Add:
Potential ordinary shares resulting from the issuance of outstanding options
Potential ordinary shares relating to employee plans
Weighted average shares for
diluted earnings per share (nominal CHF 20)
Diluted earnings per share (CHF)
The weighted average number of shares is calculated based upon the average outstanding shares at
the end of each month. All share amounts, including comparatives, are restated in terms of new UBS
shares.
69
UBS Group Financial Statements
Notes to the Financial Statements
70
Balance Sheet: Assets
Note 11 Money Market Paper
CHF million
Swiss government treasury notes and bills
Money market placements
Other bills and cheques
Total
thereof eligible for discount at central banks
1998
9,568
8,262
560
18,390
16,512
1997
11,142
21,977
3,234
36,353
15,143
Note 12a Due from Banks and Loans to Customers
The composition of the loan portfolio and the allowance for credit losses by type of exposure as at
31 December was as follows:
CHF million
Banks
Less: Allowance for credit losses
Total
Non-banks
Mortgages
Other loans
Subtotal
Less: Allowance for credit losses
Total
Total net of allowance for credit losses
thereof subordinated
1998
69,543
1,048
68,495
140,785
120,636
261,421
13,495
247,926
316,421
133
1997
67,310
728
66,582
146,802
139,128
285,930
15,013
270,917
337,499
146
The composition of the loan portfolio by geographical region based on the location of the borrower
as at 31 December was as follows:
CHF million
Switzerland
Europe / Africa / Middle East
Americas
Asia / Pacific
Subtotal
Less: Allowance for credit losses
Total net of allowance for credit losses
1998
187,223
56,043
44,556
43,142
330,964
14,543
316,421
1997
353,240
15,741
337,499
UBS Group Financial Statements
Notes to the Financial Statements
Note 12a Due from Banks and Loans to Customers (continued)
The composition of the loan portfolio by type of collateral was as follows:
CHF million
Secured by mortgages
Collateralized by securities
Guarantees and other collateral
Unsecured
Subtotal
Less: Allowance for credit losses
Total net of allowance for credit losses
1998
145,247
13,185
27,953
144,579
330,964
14,543
316,421
1997
153,235
11,278
33,482
155,245
353,240
15,741
337,499
Note 12b Allowance for Credit Losses
The allowance for credit losses developed as follows:
CHF million
Balance at beginning of year
Write-offs
Recoveries
Increase in for credit loss allowances
Net foreign exchange and other adjustments 1
Balance at end of year
1 Includes allowance for doubtful interest of CHF 423 million.
Specific Country risk
provision
allowances
14,566
2,312
59
710
70
13,093
1,175
9
1
422
(139)
1,450
Total
1998
1997
15,741
2,321
60
1,132
(69)
17,531
4,120
442
1,432
456
14,543
15,741
As at 31 December the aggregate allowances and provisions were apportioned and displayed as
follows:
CHF million
As a reduction of due from banks
As a reduction of loans to customers
Subtotal
Included in other business risk provision related to commitments and
contingent liabilities and other
Total aggregated allowances and provisions for credit losses
1998
1,048
13,495
14,543
435
14,978
1997
728
15,013
15,741
472
16,213
71
Note 12c Non-Performing Loans
An analysis of changes in non-performing loans is presented in the following table:
CHF million
Non-performing loans at beginning of year
Net additions
Write-offs
Non-performing loans at end of year
1 Estimate based on harmonization of non-performing loan methodology.
1998
16,664
1,861
2,808
15,717
The non-performing loans by type of exposure as at 31 December were as follows:
CHF million
Banks
Non-banks
Mortgages
Other
Subtotal
Total non-performing loans
1 Estimate based on harmonization of non-performing loan methodology.
1998
204
9,280
6,233
15,513
15,717
19971
16,664
19971
16,664
The non-performing loans by geographical region based on the location of the borrower were as
follows:
CHF million
Switzerland
Europe / Africa / Middle East
Americas
Asia / Pacific
Total non-performing loans
1 Estimate based on harmonization of non-performing loan methodology.
1998
14,023
352
1,066
276
15,717
1997
15,238 1
510
821
95
16,664
When principal and interest are overdue by 90
days, loans are classified as non-performing, the
recognition of interest income ceases and a
for
recognized against
charge
income
is
the unpaid interest receivable. Non-performing
loans are written down to their estimated recov-
erable amount. Unrecognized interest related to
such loans totalled CHF 423 million.
UBS Group Financial Statements
Notes to the Financial Statements
72
UBS Group Financial Statements
Notes to the Financial Statements
Note 13 Cash Collateral on Securities Borrowed and Lent
CHF million
Cash collateral by counterparties
Banks
Customers
Total
1998
Securities
borrowed
1998
Securities
lent
1997
1997
Securities Securities
lent
borrowed
68,186
23,509
91,695
5,337
13,834
19,171
79,289
3,367
8,472
5,668
82,656
14,140
Note 14 Repurchase and Reverse Repurchase Agreements
CHF million
Agreements split by counterparties
Banks
Customers
Total
1998
Reverse repos
1998
1997
Repos Reverse repos
1997
Repos
107,565
33,720
77,942
59,675
149,170
67,185
102,964
88,829
141,285
137,617
216,355
191,793
Note 15 Trading Portfolio
Trading assets are carried at fair value. The following table presents the carrying value of trading
account assets as at 31 December.
CHF million
Debt instruments
Listed instruments (excluding own notes)
Own medium-term notes
Other unlisted instruments
Total
Equity instruments
Listed instruments (excluding own shares)
Own shares 1
Unlisted instruments
Total
Precious metals
Total
thereof eligible for discount at central banks
1 Number of registered shares 8,078,419 (1997: 598,495 [UBS], 3,034,660 [SBC]).
1998
1997
86,548
608
15,519
102,675
49,848
3,409
841
54,098
5,815
162,588
82,265
115,517
130
11,735
127,382
75,851
2,345
1,912
80,108
3,248
210,738
106,530
The Group trades debt, equity, precious met-
als, foreign currency and derivatives to meet the
financial needs of its customers and to generate
revenue through its trading activities. Note 28
provides a description of the various classes of
derivatives together with the related volumes
used in the Group’s trading activities, whereas
Notes 13 and 14 give further details about Re-
pos and Reverse Repos and Securities Lent and
Borrowed.
73
UBS Group Financial Statements
Notes to the Financial Statements
74
Note 16 Financial Investments
CHF million
Debt instruments
Listed
Unlisted
Total
Equity instruments
Listed
Unlisted
Total
Private equity investments
Properties held for resale
Total
thereof eligible for discount at central banks
1998
1,880
547
2,427
400
1,048
1,448
1,759
1,280
6,914
544
1997
5,386
3,227
8,613
699
866
1,565
1,286
1,229
12,693
4,213
The following table gives additional disclosure in respect of the valuation methods used.
CHF million
Valued in accordance with the accrual method
Debt instruments
Valued at the lower of cost or market value
Debt instruments
Equity instruments
Properties held for resale
Total
Valued at cost less value adjustments for
other than temporary impairments
Private equity investments
Total
1998
Book value Market value
1997
Book value Market value
1,530
1,551
8,613
8,687
897
1,448
1,280
3,625
1,759
6,914
907
1,552
1,369
3,828
2,574
7,953
–
1,565
1,229
2,794
–
1,574
1,229
2,803
1,286
12,693
1,903
13,393
Note 17 Investments in Associates
CHF million
Investments in associates
(equity method)
Other investments (carried at cost)
Total
Carrying
amount at
end of 1997
Equity
share of
profits Write-offs
Additions
Carrying
amount at
Disposals end of 1998
2,542
182
2,724
225
225
5
5
59
138
197
205
131
336
2,621
184
2,805
UBS Group Financial Statements
Notes to the Financial Statements
Note 18 Property and Equipment
CHF million
Bank premises 1
Other properties
Equipment and furniture 2
Total 3
Accumulated
depreciation
at end of
1997
3,943
573
5,446
9,962
Historical
cost
11,377
1,797
7,752
20,926
Carrying
amount
at end of
1997
7,434
1,224
2,306
10,964
Additions
Disposals
Depreciation,
write-offs
109
152
1,552
1,813
617
133
56
806
354
97
1,634
2,085
Carrying Accumulated
amount depreciation
at end of
1998
at end of
1998
6,572
1,146
2,168
9,886
4,096
656
3,867
8,619
1 Depreciation of current year before release of CHF 121 million against restructuring provision. 2 Depreciation of current year before release of CHF 481 million against restructuring provi-
sion. 3 Fire insurance value of property and equipment is CHF 14,941 million (1997: CHF 16,160 million).
Note 19 Intangible Assets and Goodwill
CHF million
Intangible assets
Goodwill
Total
Accumulated
amortization
at end of
1997
257
1,025
1,282
Historical
cost
513
2,199
2,712
Carrying
amount
at end of
1997
256
1,174
1,430
Additions
Disposals
Amortization,
write-offs
Carrying Accumulated
amount amortization
at end of
1998
at end of
1998
59
1,307
1,366
19
225
244
44
298
342
252
1,958
2,210
301
1,323
1,624
During the year we purchased the remaining partnership interests in Brinson as well as UBS Brinson Asset Management Co. Ltd in Tokyo,
Bank Omega (now Banco Warburg Dillon Read SA) in Brasil and a participation in Phildrew Ventures in London. The most significant
disposal is the sale of UBS Asset Management (France) SA.
Note 20 Other Assets
CHF million
Deferred tax assets 1
Settlement and clearing accounts
Other
Total
1 Additional tax information is provided in Note 25.
Balance Sheet: Liabilities
Note 21 Due to Banks and Customers
CHF million
Due to banks
Amounts due to customers in the form of savings or deposits
Other amounts due to customers
Total due to customers
Total
1998
1,205
5,542
5,345
12,092
1997
2,074
4,562
6,478
13,114
1998
85,716
79,723
195,127
274,850
360,566
1997
159,634
87,343
215,173
302,516
462,150
75
UBS Group Financial Statements
Notes to the Financial Statements
Note 22 Long Term Debt
Publicly placed bond issues of UBS AG (parent company) outstanding at the end of 1998
Year
of issue
Interest
rate in %
Remarks
Maturity
Premature
redemption
possible
Currency
Amount
in millions
1980
1986
1986
1989
1990
1990
1990
1990
1990
1990
1991
1991
1991
1991
1991
1991
1991
1991
1992
1992
1992
1992
1993
1993
1993
1993
1993
1993
1993
1994
1994
1994
1994
1994
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1995
1996
1996
3.750
5.000
3.000
6.375
7.000
7.250
0.000
7.500
0.000
6.750
7.500
7.000
5.000
7.000
7.000
4.250
6.750
6.750
7.250
7.000
7.500
7.000
4.750
4.875
4.000
3.500
5.125
3.000
2.750
6.250
2.000
4.500
5.000
5.375
7.000
8.000
5.250
8.750
5.750
4.500
8.750
5.500
6.750
7.375
7.500
4.500
7.000
2.500
4.000
5.625
5.000
5.250
5.000
4.375
3.500
2.000
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
25.9.2000
10.2.2011
17.9.2001
21.12.1999
15.2.2000
15.3.2000
31.3.2020
7.6.2002
31.12.2019
31.7.2000
15.2.2003
4.9.2001
15.4.2001
20.2.2001
16.5.2003
25.6.2004
28.6.2001
20.9.2001
10.1.2004
6.2.2002
10.7.2002
16.10.2002
8.1.2005
3.3.2003
31.3.2003
31.3.2003
15.7.2001
26.11.2003
1.12.2000
6.1.2004
4.1.1999
5.5.1999
20.6.2000
7.9.2001
5.1.2000
17.2.1999
20.6.2003
20.6.2005
8.12.1999
21.12.2000
18.12.2025
15.2.2005
15.07.2005
15.7.2015
15.7.2025
21.11.2005
15.10.2015
18.10.2004
7.2.2005
13.4.2005
7.11.2006
18.7.2005
24.8.2005
7.11.2002
18.1.2000
23.8.2002
–
10.2.2001
17.9.1999
–
–
–
–
–
–
–
15.2.2001
–
–
20.2.1999
16.5.2001
–
28.6.1999
20.9.1999
10.1.2002
–
–
–
8.1.2003
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
USD
CHF
CHF
CHF
CHF
DEM
USD
CHF
GBP
DEM
CHF
GBP
CHF
USD
USD
USD
CHF
USD
JPY
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
100
250
200
60
300
300
59.2
300
351
300
300
250
60
300
200
300
50
20
150
200
200
200
200
200
200
200
30
200
200
300
250
225
300
200
400
200
200
250
500
300
150
150
200
150
350
300
300
5,000
150
150
250
200
250
250
200
300.5
1, 17
2, 17
17
3, 17
17
17
3, 4, 17
17
3, 5, 17
18
17
17
17
18
18
18
18, 20
18, 21
17
18
18
18
18
18
18
18
18, 21
18
18
6, 17
18
18
18
18
6, 17
6, 17
6, 17
6, 17
6, 17
6, 17
6, 17
17
7, 17
7, 17
7, 17
17
7, 17
3, 6, 17
18
18
18
18
18
18
6, 17
6, 9, 17
For footnotes see next page.
76
UBS Group Financial Statements
Notes to the Financial Statements
Note 22 Long Term Debt (continued)
Publicly placed bond issues of UBS AG (parent company) outstanding at the end of 1998
Year
of issue
Interest
rate in %
Remarks
Maturity
Premature
redemption
possible
Currency
Amount
in millions
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1996
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1997
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
1998
3.000
6.000
4.750
6.500
6.250
4.000
4.000
7.250
7.750
1.500
5.750
5.750
3.250
4.250
3.625
3.125
2.500
7.250
7.375
6.000
10.625
6.500
15.000
6.750
1.000
1.250
1.000
1.750
1.000
1.750
1.500
8.000
5.750
7.375
5.875
9.150
9.700
10.250
9.000
11.500
10.000
7.500
1.625
7.000
7.500
8.000
8.000
5.750
1.000
1.000
3.500
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
7.2.2001
29.3.1999
31.12.1999
16.7.1999
18.10.2002
14.2.2006
18.4.2002
3.9.2006
3.9.2026
20.11.2003
9.12.1999
9.12.2006
20.12.2002
6.2.2006
10.4.2001
22.12.1999
20.12.2000
15.7.2006
15.6.2017
24.7.2000
28.1.1999
4.7.2002
10.3.1999
25.2.2000
17.9.2002
5.11.2002
7.8.2002
30.4.2001
15.3.2001
25.7.2001
14.1.2003
8.1.2007
12.3.2007
26.11.2004
18.8.2009
27.3.2000
27.4.2000
8.9.2000
14.9.2000
9.10.2000
21.12.2000
11.5.2001
14.5.2003
18.5.2001
10.7.2001
3.8.2001
17.8.2001
18.3.2002
17.2.2003
12.3.2003
27.8.2008
Footnotes
1 Floating rate
2 At 1021/2%
3 Private placement
4 Issue price 17.45%
5 Issue price 19.27%
6 Issued by UBS Jersey Branch
7 Issued by UBS New York Branch
8 Convertible into SMI Index
9 With options on Nikkei 225 Index
10 Convertible into UBS Industrial Basket
11 Convertible into European Bank Basket
12 Convertible into European Insurance
shares Basket
13 Convertible into Life Sciences Basket
14 Convertible into Eurotrack 100 Index
15 Convertible into Nikkei 225 Index
16 Indexed to UBS Currency Portfolio
17 Issued by former SBC
18 Issued by former UBS
19 Issued by UBS London Branch
20 Formerly Commercial Bank of Soleure
21 Formerly Regiobank beider Basel
22 Convertible into shares of ENI
23 Convertible into shares of Pirelli
24 GOAL on Daimler shares
25 GOAL on Rück shares
26 GOAL on CSG shares
27 GOAL on Pepsico shares
28 Convertible into UBS Oil Basket
29 GOAL on Novartis shares
30 GOAL on Roche GS
31 GOAL on UBS shares
32 GOAL on Zürich shares
33 Convertible into FTSE Index
34 Convertible into UBS Dutch Corporate
Basket
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
USD
USD
DEM
USD
USD
CHF
CHF
USD
USD
CHF
USD
DEM
CHF
CHF
CHF
CHF
CHF
USD
USD
USD
CZK
USD
ZAR
GBP
DEM
DEM
DEM
USD
DEM
USD
DEM
GBP
DEM
GBP
FRF
ITL
ITL
DEM
CHF
CHF
USD
CHF
USD
CHF
CHF
CHF
CHF
USD
XEU
NLG
CHF
6, 17
6, 17
6, 17
6, 17
6, 17
17
17
7, 17
7, 17
6, 8, 17
6, 17
6, 17
17
18
18
18
18
7, 18
7, 17
6, 17
6, 17
6, 17
6, 17
6, 17
6, 10, 17
6, 11, 17
6, 12, 17
6, 13, 17
6, 14, 17
6, 15, 17
6, 16, 17
18, 19
18, 19
18, 19
18, 19
6, 22
6, 23
6, 24
6, 25
6, 26
6, 27
6, 25
6, 28
6, 29
6, 30
6, 31
6, 32
6
6, 33
6, 34
250
200
400
300
250
200
200
150
300
45
400
500
350
250
400
400
300
500
300
200
1,500
300
250
100
150
260
225
225
125
100
100
450
350
250
2,000
200,000
150,000
300
155
215
50
722
275
488
412.005
725
340
250
110
275
300
77
UBS Group Financial Statements
Notes to the Financial Statements
Note 22 Long Term Debt (continued)
Publicly placed bond issues of UBS subsidiaries outstanding at the end of 1998
Year
of issue
Interest
rate in %
Remarks
Maturity
Premature
redemption
possible
Currency
Amount
in millions
0.000
7.250
6.500
5.000
UBS Finance (Cayman Islands) Ltd., Grand Cayman
1991 1
1993 1
1994 1
1994 1
1997
1997
1997
1997
PIP on Biotech Basket
GROI on Russian Basket
PIP on Global Basket
PIP on S & P
UBS Australia Limited, Sydney 1
1997
3.250
28.2.2001
8.4.1999
7.7.1999
1.7.2000
14.5.1999
8.6.2000
20.7.1999
27.9.2000
2.10.2001
UBS Finance (Curaçao) N.V. Netherlands Antilles 1
1990
1992
1993
1995
1996
1996
1996
1997
1997
1997
1997
1998
9.125
FRN 5
9.250
6.500
2.500
6.000
2.500
2.500
0.000
2.750
5.875
0.000
8.2.2002
8.11.2002
23.8.2000
2.5.2000
30.10.2001
30.12.1999
1.3.2001
30.10.2001
29.1.2027
16.6.2002
30.12.1999
3.3.2028
UBS Bank (Canada), Toronto
1989
7.650
Solothurner Bank
1990
1991
7.25
6.5
S.G.W. Finance plc. 4
1991
13.25
S.G. Warburg Group plc
1994
1986
9.000
7.625
28.4.1999
30.5.1999
10.7.2001
21.3.2001
perpetual
preference
shares GBP 1.–
CHF million
Total bond issues
Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central
Bond Institutions
Medium-term notes
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
GBP
CAD
NLG
CHF
USD
USD
USD
USD
200 2
250
350
150
25.033
24.34
113.79
10
USD
100
USD
USD
ITL
DEM
DEM
USD
USD
DEM
ITL
USD
USD
DEM
225
250
250,000
250
250
300
5 6
100
2,500,000
325 7
200
1,000 8
JPY
2,600 3
–
10.7.1999
–
–
CHF
CHF
AUD
GBP
GBP
45
80
60
125
10.934
42,124
2,571
6,088
50,783
Footnotes
1 Guaranteed by UBS
2 Zero coupon, issue price 36.55 %
3 Subordinated
4 Guaranteed by S.G. Warburg Group plc.
5 6 months Libor – 0.25% (minimum 5 %,
maximum 8.25%)
6 Convertible into shares of Gillette
Company
7 Convertible into shares of UBS
8 Zero coupon, issue price 15.68285%
Protected Index Participation
PIP
GROI Guaranteed Return on Investment
PEP
GRIP Guaranteed Return on Investment
Protected Equity Participation
Participation
78
UBS Group Financial Statements
Notes to the Financial Statements
Note 23 Other Liabilities
CHF million
Provisions including restructuring provision 1
Tax liabilities 2
Settlement and clearing accounts
Other liabilities
Total
1998
7,529
2,028
9,502
8,663
27,722
1 Additional restructuring provision information is provided in Note 24. 2 Additional tax information is provided in Note 25.
Note 24 Provisions, including Restructuring Provision
Restructuring provision
CHF million
Balance brought forward at 1 January
New provisions charged to income
Provisions applied 1
Personnel
IT
Premises
Other
Total utilized during the year
Balance at 31 December
1998
7,000
2,024
797
267
939
4,027
2,973
1 The expense categories refer to the nature of the expense rather than the income statement expense line.
Other business risk provision
CHF million
Balance brought forward at 1 January
New provisions charged to income
Provisions applied
Recoveries of previous write-offs 1
Balance at 31 December
Total
1 Includes foreign currency translation differences and other adjustments.
1998
1,614
2,952
487
477
4,556
7,529
1997
8,614
2,690
8,601
8,249
28,154
1997
–
7,000
0
7,000
1997
1,521
177
222
138
1,614
8,614
Provision for restructuring costs
At the time of the merger, it was announced
that the merged bank’s operations in various
locations would be combined, resulting in vacant
properties, reductions in personnel, elimination
of redundancies in the information technology
platforms, exit costs and other costs. As a result,
the individual banks estimated that the cost of
the post-merger restructuring would be approxi-
mately CHF 7 billion, to be expended over a
period of four years.
During 1998, the bank utilized CHF 4 billion
of the provision. At year end 31 December 1998,
the bank estimates that the remaining provision
of CHF 3 billion
is reasonable to cover
the remaining costs associated with the merger
restructuring.
79
Note 25 Income Taxes
Tax liabilities
CHF million
Current tax liabilities
Deferred tax liabilities
Total
1998
1,016
1,012
2,028
1997
1,195
1,495
2,690
The table below presents the significant components of deferred tax assets and liabilities:
Deferred tax assets
CHF million
Temporary differences on:
Compensation and benefits
Restructuring provision
Allowance for credit losses
Tax losses recognized as assets
Others
Deferred tax assets
Deferred tax liabilities
CHF million
Temporary differences on:
Property, equipment
Investments in associates
Unremitted earnings
Other provisions
Gains on debt and equity investment securities
Others
Deferred tax liabilities
1 Includes decrease due to disposal of subsidiaries.
Income Translation/
31.12.97
statement
other adj. 31.12.98
58
1,100
479
234
203
2,074
18
( 382)
( 253)
( 176)
( 94)
( 887)
( 10)
–
5
4
19
66
718
231
62
128
18
1,205
Income Translation/
31.12.97
statement
other adj. 31.12.98
602
277
10
501
69
36
1,495
( 120)
12
–
( 274)
4
( 18)
( 396)
2
–
–
( 118)
30
( 1)
1
484
289
10
109
103
17
( 87)
1,012
Undistributed earnings of subsidiaries for which taxes have not been provided, amounted to CHF
2,731 million and CHF 3,451 million at 31 December 1998 and 1997 respectively. No significant
additional tax liability is expected to arise on any distribution of these earnings.
UBS Group Financial Statements
Notes to the Financial Statements
80
UBS Group Financial Statements
Notes to the Financial Statements
Note 25 Income Taxes (continued)
Tax expense
CHF million
Current taxes
Swiss
Foreign
Total current taxes
Deferred taxes
Income tax expense / (benefit)
1998
354
200
554
491
1,045
1997
511
419
930
( 1,035 )
( 105 )
A reconciliation of the expected income tax expense / (benefit) computed at the applicable rate in each
jurisdiction to the effective income tax expense / (benefit) is shown in the following table:
CHF million
Operating profit / (loss) before income taxes
Expected income tax expense at the applicable rates 1
Increase or (decrease) resulting from:
Tax losses not recognized
Tax losses of previous periods now recognized
Non-taxable income
Non-deductible expenses
Adjustments related to prior years
Capital taxes
Deferred tax assets not recognized
Income tax expense / (benefit)
1998
4,070
1,104
1,436
( 142)
( 1,849)
172
7
93
224
1,045
1997
( 756 )
( 192 )
310
( 201 )
( 333 )
171
( 27 )
96
71
( 105 )
1 The expected income tax expense for the Group is an aggregate of individual amounts representing the mix of profits and losses and the
applicable tax rates in each jurisdiction.
The amounts and expiry dates of unused tax losses carried forward which have not been recognized
as assets, are as follows:
CHF million
Following year
Next three years
After four years
Total
Balance Sheet: Equity
Note 26 Minority Interests
CHF million
Minority interests in profit / (loss)
Preferred stock 1
Minority interests in equity
Total minority interests
1998
0
118
6,664
6,782
1998
(5)
689
306
990
1997
122
46
1,917
2,085
1997
16
870
147
1,033
1 Represents Auction Market Preferred Stock, issued by UBS Inc., New York, a subsidiary whose ordinary share capital is completely owned
by UBS.
81
UBS Group Financial Statements
Notes to the Financial Statements
82
Note 27 Shareholders’ Equity
CHF million
Issued and paid up share capital
214,976,306 ordinary registered shares of CHF 20 each, fully paid
Less: Treasury shares, cost
Balance as at beginning of the year
Acquisitions
Disposals
Balance at the end of the year
Total outstanding share capital
Share premium account
Balance at the beginning of the year restated
for the harmonization of accounting policies
Premium on shares issued, warrants exercised
Premium on disposal of Treasury Shares
Balance at the end of the year
Foreign currency translation differences
Balance at the beginning of the year
Movements during the year
Balance at the end of the year
Retained earnings
Balance at the beginning of the year restated
for the harmonization of accounting policies
Net profit / (loss) for the year
Dividends paid
Balance at the end of the year
Total shareholders’ equity
1998
4,300
1,982
2,796
(3,296)
1,482
2,818
13,260
111
369
13,740
(111)
(345)
(456)
15,464
3,030
(2,201)
16,293
32,395
1997
4,296
702
3,172
(1,892 )
1,982
2,314
13,001
130
129
13,260
(155 )
(44 )
(111 )
16,931
(667 )
(800 )
15,464
30,927
its
On 1 October 1997, the share capital was
increased from
initial capitalization of
CHF 50,000 by CHF 4,287,469,820 being
214,373,491 registered shares at CHF 20 each to
CHF 4,287,519,820. The new shares were issued
exclusively for the exchange of the existing shares
of Swiss Bank Corporation and Union Bank of
Switzerland. Pursuant to the merger the share-
holders of both combining banks exchanged
their shares for shares in the new bank. Union
Bank of Switzerland shareholders received 5 reg-
istered shares for each bearer share held and 1
registered share for each registered share held.
Swiss Bank Corporation shareholders received
11/13 registered shares of the new bank for each
Swiss Bank Corporation registered share held.
UBS AG absorbed all the assets and liabilities
of the combining banks. The combined share
capital amounted to CHF 5,754,937,280. As a
result of
shares CHF
1,467,417,460 were transferred from share cap-
ital to the share premium account.
the exchange of
There are no preferential rights and restric-
tions with respect to the distribution of dividends
and to the repayment of capital except that
retained earnings in the amount of CHF 13,816
million (1997: CHF 12,515 million) must be held
in the form of a legal reserve. In addition to the
issued and paid up share capital 999,229 shares
are unissued and are reserved for the employee
share ownership plan and optional dividend war-
rants (1997: 1,339,312 unpaid SBC ordinary reg-
istered shares). A further 526,541 shares are at the
disposal of the Board of Directors (1997: 70,718
UBS unissued ordinary bearer shares and 172,951
UBS unissued ordinary registered shares). These
shares represent the maximum amount of shares
that may be issued in the future without fur-
ther approval from the shareholders. Comparative
figures for the number of shares issued as at 31
December 1997 are not provided as no shares were
issued by UBS AG at this date. The Swiss franc
figure has been restated for comparative purposes
only. Movements in the issued share capital are
due to the issuance of shares to fulfill existing
commitments.
UBS Group Financial Statements
Notes to the Financial Statements
Off Balance Sheet and Other Information
Note 28 Derivative Instruments
Derivatives held or issued
for trading purposes
Most of the Group’s derivative transactions
relate to sales and trading activities. Sales activi-
ties include the structuring and marketing of
derivative products to customers at competitive
prices to enable them to transfer, modify or re-
duce current or expected risks. Trading involves
market making, positioning and arbitrage activi-
ties. Market making involves quoting bid and
offer prices to other market participants with the
intention of generating revenues based on spread
and volume. Positioning involves managing mar-
ket risk positions with the expectation of profit-
ing from favourable movements in prices, rates or
indices. Arbitrage activities involve identifying
and profiting from price differentials between
markets and products.
Derivatives held or issued
for non-trading purposes
The Group also uses derivatives as a part of its
asset/liability management activities.
The majority of derivative positions used in
UBS’s asset and liability management activities
are established via intercompany transactions
with independently managed UBS dealer units
within the Group.
When the Group purchases assets and issues
liabilities at fixed interest rates it subjects itself to
fair value fluctuations as market interest rates
change. These fluctuations in fair value are man-
aged by entering into interest rate contracts,
mainly interest rate swaps which change the fixed
rate instrument into a variable rate instrument.
When the Group purchases foreign currency
issues foreign currency
denominated assets,
denominated debt or has foreign net investments,
it subjects itself to changes in value as exchange
rates move. These fluctuations are managed by
entering into currency swaps and forwards.
Type of derivatives
The Group uses the following derivative finan-
cial instruments for both trading and non-trading
purposes:
Swaps
Swaps are transactions in which two
parties exchange cash flows on a specified notio-
nal amount for a predetermined period.
Interest rate swap contracts generally repre-
sent the contractual exchange of fixed and float-
ing rate payments of a single currency, based on
a notional amount and an interest reference rate.
Cross currency interest rate swaps generally
involve the exchange of payments which are
based on the interest reference rates available at
the inception of the contract on two different cur-
rency principal balances that are exchanged. The
principal balances are re-exchanged at an agreed
upon rate at a specified future date.
Forwards and futures Forwards and futures
are contractual obligations to buy or sell a finan-
cial instrument on a future date at a specified
price. Forward contracts are effectively tailor-
made agreements that are transacted between
counterparties in the over-the-counter market,
whereas futures are standardized contracts that
are transacted on regulated exchanges.
Options Options are contractual agree-
ments under which the seller (writer) grants the
purchaser the right, but not the obligation, either
to buy (call option) or sell (put option) by or at a
set date, a specified amount of a financial instru-
ment at a predetermined price. The seller receives
a premium from the purchaser for this right.
83
UBS Group Financial Statements
Notes to the Financial Statements
Note 28 Derivative Instruments (continued)
Notional amounts and replacement values
The following table provides the notional
amounts and the positive and negative replace-
ment values of the Group’s derivative transac-
tions.
The notional amount is the amount of a de-
rivative’s underlying asset, reference rate or
index and is the basis upon which changes in
the value of derivatives are measured. It provides
an indication of the volume of business trans-
acted by the Group but does not provide any
measure of risk.
Some derivatives are standardized in terms of
their nominal amounts and settlement dates, and
these are designed to be bought and sold in active
markets (exchange traded). Others are packaged
specifically for individual customers and are not
exchange traded although they may be bought
and sold between counterparties at negotiated
prices (over-the-counter or OTC instruments).
Positive replacement value represents the cost
to the Group of replacing all transactions with a
receivable amount if all the Group’s counterpar-
ties were to default. This measure is the industry
standard for the calculation of current credit
exposure. Negative replacement value is the cost
to the Group’s counterparties of replacing all the
Group’s transactions with a commitment if the
Group were to default. The total positive and
negative replacement values are included in the
balance sheet separately.
84
UBS Group Financial Statements
Notes to the Financial Statements
Note 28 Derivative Instruments (continued)
Term to maturity
CHF million
Interest rate contracts
Over-the-counter (OTC) contracts
Forward contracts including FRAs
Swaps
Options purchased
Options written
Exchange-traded contracts 3
Futures
Options
Total
Foreign exchange contracts
Over-the-counter (OTC) contracts
Within 3 months
NRV 2
PRV 1
3–12 months
NRV
PRV
1–5 years
NRV
PRV
over 5 years
NRV
PRV
Total
PRV
Total
NRV
Total
notional
amount
CHF bn
783
3,488
233
932
4,502
327
309
6,657
465
271
6,024
615
45
36,464
2,947
29
35,799
4,476
42
38,056
3,207
23
34,758
4,427
1,179
84,665
6,852
0
1,255
81,084
0
9,845
217.7
8,544.0
1,264.8
1,254.4
12
0
7
0
0
0
1
0
2
0
0
0
0
0
0
0
14
0
7
0
732.3
77.8
4,517
5,768
7,430
6,911
39,458
40,304
41,305
39,208
92,710
92,191 12,091.0
Forward contracts
Combined interest and currency swaps
Options purchased
Options written
3,439
2,456
4,718
498
3,009
17,168
6,493
1,718
10,123
9,455
2,683
218
278
4,626
1,945
261
5,202
619
164
4,974
604
237
5,097
604
10,375
13,775
17,390
0
10,451
15,991
0
18,610
888.4
235.4
466.8
455.1
Exchange-traded contracts 3
Futures
Options
Total
Precious metals contracts
Over-the-counter (OTC) contracts
Forward contracts
Options purchased
Options written
Exchange-traded contracts 3
Futures
Options
Total
Equity / Index contracts
Over-the-counter (OTC) contracts
Forward contracts
Options purchased
Options written
Exchange-traded contracts 3
Futures
Options
Total
Commodity contracts
Over-the-counter (OTC) contracts
Forward contracts
Options purchased
Options written
Exchange-traded contracts 3
Futures
Options
Total
Total 1998
Total 1997
0
156
0
120
0
193
0
0
0
0
0
5
0
0
0
0
0
348
0
124
2.5
5.2
10,770
20,794
18,528
12,356
6,849
6,087
5,742
5,938
41,889
45,175
2,053.4
4,539
2,840
4,633
2,915
0
4
0
0
7,383
7,548
216
24
0
15
254
295
6
0
0
75
41
0
2
60
0
0
0
301
119
60
10
0
0
0
10
0
0
0
0
0
4,840
2,905
0
4,988
0
2,921
0
21
0
0
47.7
25.3
30.9
1.2
5.0
7,766
7,909
110.2
279
8,220
383
15,347
325
4,619
608
8,480
791
8,700
2,421
25,726
159
1,687
446
4,598
1,554
23,227
0
3,858
0
54,151
57.3
706.0
233.6
3
320
15
242
0
703
0
392
0
754
0
305
0
75
0
9
3
1,851
15
948
17.7
62.0
8,822
15,988
5,647
9,480
10,245
28,452
1,921
5,053
26,635
58,972
1,076.6
114
8
0
0
52
0
0
0
122
52
244
62
85
0
391
214
70
65
7
325
24
0
2
359
0
0
0
355
352
359
65
5
0
0
70
66
0
0
0
66
749
99
0
85
2
936
691
0
70
65
7
8.9
1.5
1.5
2.2
0.9
832
14.9
31,614
50,150
32,251
29,404
57,023
75,261
49,048
50,265 169,936 205,080
–
–
–
–
–
–
–
– 149,538 170,162
–
–
85
1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include proprietary trades only.
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Pledged Assets
Assets pledged or assigned as security for liabilities and assets subject to reservation of title
CHF million
Money market paper
Mortgage loans
Securities 1
Property and equipment
Other
Total
1998
Carrying
amount
1998
Related
liability
1997
Carrying
amount
1997
Related
liability
6,981
2,955
13,902
147
0
23,985
5
2,047
5,636
71
0
7,759
3,188
1,951
13,175
183
7
1,106
1,220
9,719
112
0
18,505
12,157
1 Excluding securities pledged in respect of securities borrowing and repurchase agreements.
Assets are pledged as collateral for collateralized credit lines with central banks, loans from central
mortgage institutions, deposit guarantees for savings banks, security deposits relating to stock
exchange membership and mortgages on the Group’s property.
Note 30 Fiduciary Transactions
CHF million
Placements with third party banks
Fiduciary credits and other fiduciary financial transactions
Total
1998
60,612
652
61,264
1997
72,852
1,392
74,244
86
UBS Group Financial Statements
Notes to the Financial Statements
Note 31 Commitments and Contingent Liabilities
CHF million
Contingent liabilities
Credit guarantees and similar instruments 1
Less: Sub-participations
Total
Performance guarantees and similar instruments 2
Less: Sub-participations
Total
Irrevocable commitments under documentary credits
Less: Sub-participations
Total
Total contingent liabilities
Less: Sub-participations
Total
Irrevocable commitments
Undrawn irrevocable credit facilities
Less: Sub-participations
Total
Liabilities for calls on shares and other equities
Total irrevocable commitments
Less: Sub-participations
Total
Commitment credits 3
Total commitments and contingent liabilities
Less: Sub-participations
Total
1998
1997
22,697
5,217
17,480
12,092
216
11,876
2,942
39
2,903
37,731
5,472
32,259
82,337
26
82,311
109
82,446
26
82,420
1,807
121,984
5,498
116,486
37,306
8,274
29,032
15,371
1,002
14,369
5,824
11
5,813
58,501
9,287
49,214
76,997
554
76,443
102
77,099
554
76,545
821
136,421
9,841
126,580
1 Credit guarantees in the form of bill of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit,
endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities. 2 Bid bonds, performance bonds,
builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities.
3 Obligations under deferred payments, acceptance obligations. Amounts already included in the balance sheet.
CHF million
Overview of collateral
Contingent liabilities
Irrevocable commitments
Liabilities for calls on shares and other equities
Commitment credits
Total 1998
Total 1997
Mortgage
collateral
Other
collateral
Unsecured
Total
339
50
–
–
389
635
14,163
19,200
–
–
33,363
22,638
23,229
63,087
109
1,807
37,731
82,337
109
1,807
88,232
121,984
113,148
136,421
Commitments and Contingencies represent
potential future liabilities of the Group resulting
from credit facilities available to clients, but not
yet drawn upon by them. They are subject to
expiration at fixed dates. The Group engages in
providing open credit facilities to allow clients
quick access to funds required to meet their short-
term obligations as well as their long-term financ-
ing needs. The credit facilities can take the form
of guarantees, whereby the Group might guaran-
tee repayment of a loan taken out by a client with
a third party; standby letters of credit, which are
credit enhancement facilities enabling the client
to engage in trade finance at lower cost; docu-
mentary letters of credit, which are trade finance-
related payments made on behalf of a client; com-
mitments to enter into repurchase agreements,
which are described under short-term financing;
note issuance facilities and revolving underwrit-
ing facilities, which allow clients to issue money
87
UBS Group Financial Statements
Notes to the Financial Statements
88
Note 31 Commitments and Contingent Liabilities (continued)
market paper or medium-term notes when need-
ed without engaging in the normal underwriting
process each time.
The figures disclosed in the accompanying
tables represent the amounts at risk should clients
draw fully on all facilities and then default, and
there is no collateral. Determination of the cred-
itworthiness of the clients is part of the normal
credit risk management process, and the fees
charged for maintenance of the facilities reflect
the various credit risks.
Note 32 Operating Lease Commitments
Our minimum commitments for non-cancellable leases of premises and equipment are presented as
follows:
CHF million
Operating leases due:
Not later than one year
Later than one year and not later than five years
Later than five years
Total commitments for minimum payments under operating leases
1998
709
555
1,541
2,805
Operating expenses include CHF 797 million and CHF 829 million in respect of operating lease
rentals in 1998 and 1997 respectively.
Note 33 Litigation, including Holocaust
Four Class Actions, in relation to what is
known as the Holocaust affair, have been
brought against the bank (as legal successor to
SBC and UBS) in the US District Court for the
Eastern District of New York (Brooklyn). A fur-
ther Swiss bank has been designated as a defen-
dant alongside the bank. On 12 August 1998,
however, a settlement was reached between the
parties which will put an end to all the litigation
involved in this matter. This settlement provides
for a payment by the defendant banks to the
plaintiffs, under certain terms and conditions, of
an aggregate amount of USD 1.25 billion. The
bank’s share, USD 610 million or CHF 840 mil-
lion, has been fully provided for in 1998.
In addition, UBS AG and other companies
within the UBS Group are subject to various
claims, disputes and legal proceedings, as part of
the normal course of business. The Group makes
provision for such matters when, in the opinion
of management and its professional advisors, it is
probable that a payment will be made by the
Group, and the amount can be reasonably esti-
mated. All litigation provisions are included
within Other Business Risks in the accompanying
Group Balance Sheet.
In respect of the further claims asserted
against the Group of which management is aware
(which, according to the principles outlined
above, have not been provided for), it is the opin-
ion of management that such claims are either
without merit, can be successfully defended or
will result in exposure to the Group which is
immaterial to both financial position and results
of operations.
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position
Overall risk position
The Group manages risk in a number of ways,
principally using a value-at-risk model combined
with a system of trading limits. The Group’s
approach to risk management is discussed more
fully in the Review of Risk Management and
Control.
This section presents information about the
results of the Group’s management of the risks
associated with the use of financial instruments.
a) Interest rate risk
Interest rate risk is the potential impact of
changes in market interest rates on the fair values
of assets and liabilities on the balance sheet and
on the annual interest income and expense in the
income statement.
Interest rate sensitivity
One commonly used method to present the
potential impact of the market movements is to
show the effect of a one basis point (0.01%)
change in interest rates on the fair values of assets
and liabilities, analyzed by time bands within
which the Group is committed. This type of pres-
entation, described as a sensitivity analysis, is set
out below. Interest rate sensitivity is one of the
inputs to the value-at-risk model used by the
Group to manage its overall market risk, of which
interest rate risk is a part.
The table below sets out the extent to which
the Group was exposed to interest rate risk at 31
December 1998. The table shows the potential
impact of a one basis point (0.01%) increase in
market interest rates which would influence the
fair values of both assets and liabilities that are
subject to fixed interest rates. The impact of such
an increase in rates depends on the net asset or net
liability position of the Group in each category,
currency and time band in the table. A negative
amount in the table reflects a potential loss to the
Group due to the changes in fair values as a result
of an increase in interest rates. A positive amount
reflects a potential gain as a result of an increase
in interest rates. Both primary and derivative
instruments in trading and non-trading activities,
as well as off-balance-sheet commitments are
included in the table.
Interest rate sensitivity position
Interest sensitivity by time bands
CHF thousand
per basis point
within 1
month
1 to 3
months
3 to 12
months
CHF
USD
EUR
GBP
JPY
Others
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
189
(23 )
(28 )
1
(34 )
0
10
0
(32 )
0
11
0
(672 )
6
93
(21 )
(22 )
(8 )
(214 )
2
(698 )
3
(98 )
0
450
(350 )
8
7
(158 )
0
560
(18 )
(402 )
(5 )
47
0
1 to 5
years
(322 )
(7,522 )
(575 )
72
(559 )
48
(919 )
130
1,002
6
(158 )
0
over 5
years
(464 )
(546 )
1,254
1,502
339
256
491
876
263
146
(152 )
0
Total
(819)
(8,435)
752
1,561
(434)
296
(72)
990
133
150
(350)
0
89
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position (continued)
a) Interest rate risk (continued)
Trading
The major part of the trading related interest
rate risk is generated in fixed income securities
trading, fixed income derivatives trading, trading
in currency forward contracts and money market
trading and is being managed within the value-at-
risk model. Interest rate sensitivity arising from
trading activities is quite sizeable in USD and
Euro as these are still the predominantly traded
currencies in the global interest rate markets. It
should be noted that it is management’s view that
an interest sensitivity analysis at a particular
point in time has limited relevance on trading
positions, which can vary significantly on a daily
basis. Further discussion on how the interest rate
risk related to the trading portfolio is managed
can be found in the “Warburg Dillon Read” sec-
tion of this report.
Non-trading
The interest rate risk related to client business
with undefined maturities and non-interest bear-
ing business including the strategic management
of overall balance sheet interest rate exposure is
managed by the Corporate Center. Significant
contributors to the overall USD and GBP interest
rate sensitivity were strategic long-term subordi-
intentionally
issues which are
nated notes
unswapped since they are regarded as constitut-
ing a part of the Group’s equity for asset and lia-
bility management purposes. At 31 December
1998 the Group’s equity was invested in a port-
folio of fixed rate CHF deposits with an average
duration of 1.9 years. As this equity investment is
the most significant component of the CHF book,
this results in the entire book having an interest
rate sensitivity of CHF – 8.4 million, which is
reflected in the table above. This is in line with the
duration and sensitivity targets set by the Group
Executive Board. Investing in shorter-term or
variable rate instruments would mean exposing
the earnings stream (interest income) to higher
fluctuations. For further information about the
management of the non-trading interest rate risk,
please refer to Review of Asset and Liability
Management.
b) Credit risk
Credit risk is the risk of loss from the default by
an obligor or counterparty. This risk is managed
primarily based on reviews of the financial status
of each specific counterparty. Credit risk is greater
when counterparties are concentrated in a single
industry or geographical region. This is because a
group of otherwise unrelated counterparties could
be adversely affected in their ability to repay their
obligations because of economic developments
affecting their common industry or region.
Concentrations of credit risk exist if a number
of clients are engaged in similar activities, or are
located in the same geographic region or have
comparable economic characteristics such that
their ability to meet contractual obligations
would be similarly affected by changes in eco-
nomic, political or other conditions. Concentra-
tions of credit risk indicate the relative sensitivity
of the bank’s performance to developments affect-
ing a particular industry or geographic location.
(b)(i) On-balance sheet assets
As of 31 December 1998, due from banks and
loans to customers amounted to CHF 331 billion.
56.6% of these are with clients domiciled in
Switzerland. Please refer to Note 12 for a break-
down by region.
(b)(ii) Off-balance sheet financial instruments
Credit commitments and
contingent liabilities
Of the CHF 122 billion in credit commitment
and contingent liabilities as at 31 December
1998, 11% relate to clients domiciled in Switzer-
land, 21% in Europe (excl. Switzerland) and
55% in North America.
Derivatives
Credit risk represents the current replacement
value of all outstanding derivative contracts in a
90
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position (continued)
b) Credit risk (continued)
gain position without factoring in the impact of
master netting agreements or the value of any col-
lateral. Positive replacement values amounted to
CHF 169 billion as at 31 December 1998, before
applying any master netting agreements. Based
on the location of the ultimate counterparty, 8%
of this credit risk amount relates to Switzerland,
47% to Europe (excl. Switzerland) and 33% to
North America. 76% of the positive replacement
values are with other banks.
(b)(iii) Credit risk mitigation techniques
Credit risk associated with derivative instru-
ments is mitigated by the use of master netting
agreements. A further method of reducing credit
exposure arising from derivatives transactions is
to use collateralization arrangements.
Master netting agreements eliminate risk to
the extent that liabilities to the same counterpar-
ty are due to be settled after the corresponding
assets are realized. The impact of master netting
agreements as at 31 December 1998 is to mitigate
credit risk on derivative instruments by approxi-
mately CHF 68 billion. The impact can change
substantially over short periods of time, because
the exposure is affected by each transaction sub-
ject to the arrangement.
The Group subjects its derivative-related
credit risks to the same credit approval, limit and
monitoring standards that it uses for managing
other transactions that create credit exposure.
This includes evaluation of counterparties as to
creditworthiness, and managing the size, di-
versification and maturity structure of the port-
folio. Credit utilization for all products is com-
pared with established limits on a continual basis
and is subject to a standard exception reporting
process.
91
Note 34 Financial Instruments Risk Position (continued)
c) Currency risk
The Group views itself as a Swiss entity, with the Swiss franc as its functional currency. Hedging trans-
actions are used to manage risks in other currencies.
Breakdown of assets and liabilities by currencies
CHF billion
Assets
Cash and balances with central banks
Money market paper
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio
Positive replacement values
Loans, net of allowance for credit losses
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Intangible assets and goodwill
Other assets
Total assets
Liabilities
Money market paper issued
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Accrued expenses and deferred income
Long term debt
Other liabilities
Minority interests
Shareholders’ equity
Total liabilities, minority interests
and shareholders’ equity
CHF
2.4
2.2
12.7
0.2
0.2
24.8
17.8
173.5
2.6
1.2
2.6
8.5
0.3
4.9
253.9
1.0
25.4
0.1
10.7
0.2
27.3
138.0
3.3
23.4
14.6
1.0
32.4
1998
USD
0.3
10.3
13.3
74.5
38.3
40.0
20.9
40.0
2.5
1.8
0.0
0.6
1.7
3.1
247.3
38.5
33.6
5.9
74.3
8.1
19.8
80.2
2.6
16.2
6.1
0.7
0.0
Other
CHF
0.6
5.9
42.5
17.0
102.8
97.8
131.2
34.4
1.8
3.6
0.2
0.8
0.2
4.1
442.9
12.0
26.7
13.2
52.6
38.7
158.0
56.7
5.3
10.5
7.0
0.0
0.0
2.9
4.8
14.4
0.0
2.3
31.3
30.7
176.7
3.7
2.5
2.6
9.2
0.2
1.2
282.5
1.4
26.6
0.0
12.1
0.3
34.8
129.9
4.8
29.9
14.3
0.1
30.9
1997
USD
1.3
22.5
23.8
63.4
104.5
64.5
24.8
47.9
5.2
1.8
0.0
0.6
0.8
3.4
364.5
36.1
86.7
4.2
95.0
11.8
24.3
97.9
2.5
15.0
7.2
0.9
0.0
Other
0.4
9.1
28.4
19.3
109.5
115.0
94.0
46.4
3.9
3.4
0.1
1.1
0.4
8.4
439.4
18.1
46.3
10.0
84.7
56.1
111.1
74.7
2.7
9.3
6.7
0.0
0.0
277.4
286.0
380.7
285.1
381.6
419.7
UBS Group Financial Statements
Notes to the Financial Statements
92
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position (continued)
d) Liquidity risk
Contractual maturity analysis of assets and liabilities
CHF billion
On
demand to notice 1
Subject Due within
3 mths
Due
between
3 and
12 mths
Due
between
1 and
5 years
Due
after
5 years
–
–
0.4
–
–
15.7
44.4
91.7
136.8
–
–
2.3
4.8
4.5
–
–
0.4
1.0
–
59.5
86.8
0.4
31.6
0.3
63.8
0.8
–
–
0.2
–
6.2
1.0
2.8
9.9
2.2
375.8
374.9
32.2
55.9
19.2
135.1
43.5
83.6
19.3
5.8
2.5
66.0
79.3
22.3
36.3
0.5
0.2
21.6
1.7
81.8
124.5
8.9
1.1
3.3
Assets
Cash and balances
with central banks
Money market papers
Due from banks
Cash collateral on
securities borrowed
Reverse repurchase agreements
Trading portfolio
Positive replacement values
Loans, net of allowance
for credit losses
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Intangible assets and goodwill
Other assets
Total 1998
Total 1997
Liabilities
Money market paper issued
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Accrued expenses
and deferred income
Long term debt
Other liabilities
Total 1998
Total 1997
3.3
17.7
162.6
169.9
4.4
6.6
12.1
376.6
398.3
47.0
205.1
55.3
11.2
–
27.7
367.9
371.0
59.9
114.0
–
–
83.5
138.5
4.2
5.7
28.1
12.8
371.1
447.1
42.2
41.8
29.7
36.5
16.3
19.6
910.7
1,054.5
Total
3.3
18.4
68.5
91.7
141.3
162.6
169.9
247.9
6.9
6.6
2.8
9.9
2.2
12.1
944.1
1,086.4
51.5
85.7
19.2
137.6
47.0
205.1
274.9
11.2
50.8
27.7
1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given. (Such funds may be withdrawn by the
depositor or repaid by the borrower subject to an agreed period of notice.)
93
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position (continued)
e) Capital adequacy
Risk-weighted assets (BIS)
CHF million
Balance sheet assets
Due from banks
Net positions in securities 1
Positive replacement values
Loans, net of allowance for credit losses
Accrued income and prepaid expenses
Property and equipment 2
Other assets
Off-balance sheet and other positions
Contingent liabilities
Irrevocable commitments
Forward contracts 3
Purchased options
Market risk positions 4
Total risk-weighted assets
1998
Balance
sheet/
nominal
amount
1998
Risk-
weighted
amount
1997
1997
Balance
sheet/
Risk-
nominal weighted
amount
amount
244,246
28,109
169,936
305,155
6,627
9,886
12,092
37,731
82,337
4,037,720
489,005
–
–
10,896
8,316
29,494
164,113
3,190
11,166
7,900
6,015
18,197
7,130
5,861
16,018
288,296
216,492
51,770
149,538
420,018
7,712
10,964
13,114
58,501
76,997
4,263,084
199,732
–
–
13,485
11,859
24,622
191,860
5,848
12,938
7,512
24,863
20,873
12,258
2,199
17,587
345,904
1 Excluding positions in the trading book, these are included in market risk positions. 2 Including CHF 1,280 million (1997: CHF 1,229
million) foreclosed properties and properties held for disposal, which are recorded in the balance sheet under financial investments.
3 The risk-weighted amount corresponds to the security margin (add-on) of the contracts. 4 Value at risk according to the internal
model multiplied by a factor of 12.5 to create the risk-weighted amount of the market risk positions in the trading book.
BIS Capital ratios
BIS capital ratio
Tier 1 capital (share capital and reserves)
1998
Capital
40,385
28,299
BIS %
14.0
9.8
1997
Capital
43,089
28,749
BIS %
12.6
8.3
Among other measures UBS monitors the ade-
quacy of its capital using ratios established by the
Bank for International Settlements (BIS). These
ratios measure capital adequacy by comparing
the Group’s eligible capital with its risk-weighted
positions which include balance sheet assets, net
positions in securities not held in the trading
book, off-balance sheet transactions converted
into their credit equivalents and market risk posi-
tions at a weighted amount to reflect their rela-
tive risk.
The capital adequacy rules require a minimum
amount of capital to cover credit and market risk
exposures. For the calculation of the capital
required for credit risk the balance sheet assets
are weighted according to broad categories of
notional credit risk, being assigned a risk weight-
ing according to the amount of capital deemed to
be necessary to support them. Four categories of
risk weights (0%, 20%, 50%, 100%) are
applied; for example cash, claims collateralized
by cash or claims collateralized by OECD cen-
tral-government securities have a zero risk
weighting which means that no capital is required
to be held in respect of these assets. Uncollateral-
ized loans granted to corporate or private cus-
tomers carry a 100% risk weighting, meaning
that they must be supported by capital equal to
8% of the carrying amount. Other asset cate-
gories have weightings of 20% or 50% which
require 1.6% or 4% capital.
The net positions in securities not held in the
trading book reflect the Group’s exposure to an
issuer of securities arising from its physical hold-
ings and other related transactions in that securi-
ty.
In addition credit equivalents are calculated
for off-balance sheet transactions (contingent lia-
bilities, irrevocable commitments and derivative
financial instruments). The resulting amounts are
94
UBS Group Financial Statements
Notes to the Financial Statements
Note 34 Financial Instruments Risk Position (continued)
e) Capital adequacy (continued)
then weighted for credit risk using the same per-
centage as for balance sheet assets.
In 1998 UBS calculated its capital requirement
for market risk positions, which includes interest-
rate instruments and equity securities in the trad-
ing book as well as positions in foreign exchange
and commodities throughout the Group, using
an internal value-at-risk (VaR) model. This ap-
proach was introduced in the BIS 1996 market
risk amendment to the Basel Accord of July 1988
and incorporated in the Swiss capital adequacy
rules of the Banking Ordinance.
The BIS proposal requires that the regulators
perform tests of the bank internal models before
giving permission for these models to be used to
calculate the market risk capital. Based on exten-
sive checks performed by internal and external
auditors the use of the Group internal models
was accepted on an interim basis by the Swiss
Federal Banking Commission (FBC) in December
1997, provided that a higher multiplication fac-
tor be applied during the interim period. As a
result of the merger the interim permission has
been extended through 1998, and the final
approval by FBC is expected to be granted dur-
ing 1999.
Tier 1 capital consists of permanent share-
holders’ equity and retained earnings less good-
will and investments in unconsolidated sub-
sidiaries. Tier 2 capital includes the Group’s per-
petual cumulative preference shares and subordi-
nated long-term debt.
Note 35 Fair Value of Financial Instruments
The following table presents the fair value of
on- and off-balance sheet financial instruments
based on the following valuation methods and
assumptions. It is presented because not all finan-
cial instruments are reflected in the financial
statements at fair value.
Fair value is the amount for which an asset
could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s-length
transaction. A market price, where an active mar-
ket (such as a recognized stock exchange) exists,
is the best evidence of the fair value of a financial
instrument. However, market prices are not avail-
able for a significant number of the financial
assets and liabilities held and issued by the Group.
Therefore, for financial instruments where no
market price is available, the fair values presented in
the following table have been estimated using
present value or other estimation and valuation
techniques based on market conditions existing at
balance sheet date.
The values derived using these techniques are
significantly affected by underlying assumptions
concerning both the amounts and timing of future
cash flows and the discount rates used. The fol-
lowing methods and assumptions have been used:
(a) trading assets, derivatives and other transac-
tions undertaken for trading purposes, and
securities lent and borrowed are measured at
fair value by reference to quoted market
prices when available. If quoted market
prices are not available, the fair values are
estimated on the basis of pricing models, or
discounted cash flows. Fair value is equal to
the carrying amount for these items;
(b) the fair value of liquid assets and other assets
maturing within 12 months is assumed to
approximate their carrying amount. This
assumption is applied to liquid assets and the
short-term elements of all other financial
assets and financial liabilities;
(c) the fair value of demand deposits and savings
accounts with no specific maturity is assumed
to be the amount payable on demand at the
balance sheet date;
(d) the fair value of variable rate financial instru-
ments is assumed to approximate their carry-
ing amounts;
(e) the fair value of fixed rate loans and mort-
gages is estimated by comparing market
interest rates when the loans were granted
with current market rates offered on similar
95
UBS Group Financial Statements
Notes to the Financial Statements
96
Note 35 Fair Value of Financial Instruments (continued)
loans. Changes in the credit quality of loans
within the portfolio are not taken into
account in determining gross fair values as
the impact of credit risk is recognized sepa-
rately by deducting the amount of the
allowance for credit losses from both book
and fair values.
The assumptions and techniques have been
developed to provide a consistent measurement
of fair value for the Group’s assets and liabilities.
However, because other institutions may use dif-
ferent methods and assumptions, such fair value
disclosures cannot necessarily be compared from
one financial institution to another.
Fair value of financial instruments
CHF billion
Assets
Cash and balances with central banks
Money market paper
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio
Positive replacement values
Loans, net of allowance for credit losses
Financial investments
Liabilities
Money market paper issued
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Long term debt
Fair value effect on income
of hedging derivatives recorded
on the accrual basis
Net difference between
carrying value and fair value
1998
Carrying
value
Fair Unrealized
value gain / (loss)
Carrying
value
3.3
18.4
68.6
91.7
141.3
162.6
169.9
248.3
5.7
51.5
86.1
19.2
137.6
47.0
205.1
275.3
51.0
3.3
18.4
68.7
91.7
141.3
162.6
169.9
250.7
6.5
51.5
86.1
19.2
137.6
47.0
205.1
275.6
53.3
4.6
36.4
66.6
82.6
216.4
210.7
149.5
270.9
11.5
55.6
159.6
14.1
191.8
68.2
170.2
302.5
54.3
0.0
0.0
0.1
0.0
0.0
0.0
0.0
2.4
0.8
0.0
0.0
0.0
0.0
0.0
0.0
0.3
2.3
1.0
1.7
1997
Fair
value
4.6
36.4
66.7
82.6
216.4
210.7
149.5
272.7
12.2
55.6
159.6
14.1
191.8
68.2
170.2
302.6
56.5
Unrealized
gain / (loss)
0.0
0.0
0.1
0.0
0.0
0.0
0.0
1.8
0.7
0.0
0.0
0.0
0.0
0.0
0.0
0.1
2.2
0.7
1.0
Substantially all of the Group’s commitments
to extend credit are at variable rates. According-
ly, the Group has no significant exposure to
fair value fluctuations related to these commit-
ments.
Changes in the fair value of the Group’s fixed
rate loans, long- and medium-term notes and
bonds issued are hedged in part by derivative
instruments, mainly interest rate swaps. These
swaps are carried at fair value and included in
derivative replacement values in the above table,
with gains and losses deferred as other assets and
other liabilities. Such gains and losses are shown
net in the above table as fair value effect on
income of hedging derivatives recorded on an
accrual basis.
The table does not reflect the fair values of
non-financial assets and liabilities such as prop-
erty (including those properties included as finan-
cial investments), equipment, prepayments and
accruals. The interest amounts accrued to date
for respective financial instruments are included
in the carrying value of the instruments.
UBS Group Financial Statements
Notes to the Financial Statements
Note 36 Retirement Benefit Plans and Other Employee Benefits
The Group has established various pension
plans inside and outside of Switzerland. The
major plans are located in Switzerland, Germany,
Japan, UK and US. Independent actuarial valua-
tions are performed for the major plans.
Swiss pension plans
The pension funds of the Group are set up as
trusts, domiciled in Basle and Zurich. All domes-
tic employees are covered. The pension funds are
defined benefit plans. The pension plan benefits
exceed the minimum benefits required under the
Swiss Law.
Contributions are paid for by the Group and
the employees. The employee contributions are
calculated as a percentage of the insured annual
salary and are deducted monthly. The percentages
deducted from the salary are depending on age and
vary between 8% up to 12%. The Group contri-
butions are variable and amount from 125% to
250% of the employees contributions depending
on the financial situation of the pension fund.
The pension plan formula is based on years of
contributions and final covered salary. The bene-
fits covered include retirement benefits, disabili-
ty, death and survivor pension.
CHF million
1998
1997
Swiss pension plans
Defined benefit obligation as of 31 December
Plan assets at fair value as of 31 December
Plan assets in excess of benefit obligation
Unrecognized net actuarial (gains) or losses
Unrecognized assets (limit under art. 58 (b))
Prepaid pension cost
Unfunded accrued pension cost
Additional details to fair value of plan assets
Own financial instruments included in plan assets
Any assets used by the bank included in plan assets
Retirement benefits expense
Current service cost – benefits earned
Interest cost on projected benefit obligation
Expected return on plan assets
Adjustment to limit prepaid pension cost
Amortization of unrecognized prior service costs
Employee contributions
Actuarially determined net periodic pension cost
Actual return on plan assets (%)
Principal actuarial assumptions used (%)
Discount rate
Expected rate of return on assets p.a.
Expected rate of salary increase
Rate of pension increase
(14,944)
17,885
2,941
(385)
(2,556)
0
0
2,761
176
535
726
(856)
148
6
(185)
374
6.7
5.0
5.0
3.5–5.5
2.0
(14,431 )
17,224
2,793
(385 )
(2,408 )
0
0
2,202
176
524
705
(756 )
22
(8 )
(194 )
293
15.5
5.0
5.0
3.5–5.5
2.0
97
UBS Group Financial Statements
Notes to the Financial Statements
Note 36 Retirement Benefit Plans and Other Employee Benefits
(continued)
Foreign pension plans
The foreign locations of UBS operate various
pension schemes in accordance with the local reg-
ulations and practices. Among these schemes are
defined contribution plans as well as defined ben-
efit plans. The locations with defined benefit
plans of a material nature are Germany, Japan,
the UK and the US. These locations together with
Switzerland cover about 90% of the active work-
force. Certain of these schemes permit employees
to make contributions and earn matching or
other contributions from the Group.
The retirement plans provide benefits in the
event of retirement, death, disability or employ-
ment termination. The plans’ retirement benefits
depend on age, contributions and level of com-
pensation. The principal plans are financed in full
by the Group. The funding policy for these plans
is consistent with local government and tax
requirements.
The assumptions used in foreign plans take
into account local economic conditions.
The amounts shown for foreign plans reflect
the net funded positions of all foreign plans.
CHF million
1998
1997
Pension plans abroad
Defined benefit obligation as of 31 December
Plan assets at fair value as of 31 December
Plan assets in excess of benefit obligation
Unrecognized transition amount
Unrecognized past service cost
Unrecognized assets (limit under art. 58 (b))
Prepaid pension cost
Unfunded accrued pension cost
Movement of net liability (or asset) during the period
Prepaid pension cost at 1 January
Less: Net periodic pension cost for the year
Employer contributions
Prepaid pension cost at 31 December
Currency adjustment at 31 December
Prepaid pension cost at 31 December
Retirement benefits expense
Current service cost – benefits earned
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net transition (asset) or liability
Adjustment to limit prepaid pension cost
Immediate recognition of transition assets under IAS 8
Amortization of unrecognized prior service cost
Amortization of unrecognized net (gain) / loss
Effect of any curtailment or settlement
Employee contributions
Actuarially determined net periodic pension cost
Actual return on plan assets (%)
Principal actuarial assumptions used (%)
Discount rate
Expected rate of return on assets p.a.
Expected rate of salary increase (including inflation)
Rate of pension increase
(2,009)
2,173
164
2
(63)
(60)
43
0
36
33
43
46
(3)
43
116
140
(191)
2
2
(23)
7
(3)
(8)
(9)
33
5.2
(1,950 )
2,187
237
(17 )
(160 )
(24 )
36
0
n.a.
n.a.
114
115
(147 )
(85 )
0
0
0
0
0
(6 )
(9 )
21.4
6.50–7.50
8.50–8.75
3.50–9.00
0.00–3.75
6.50–7.50
8.50–8.75
3.50–9.00
0.00–3.75
98
UBS Group Financial Statements
Notes to the Financial Statements
Note 36 Retirement Benefit Plans and Other Employee Benefits
(continued)
Postretirement Medical & Life Plans
UBS UK and USA offer postretirement health
care benefits that contribute to the health care
coverage of the employees after retirement. One
of the plans in the USA is partially funded.
The benefit obligation in excess of plan assets
amounts to CHF 93 million in 1998 (1997: CHF
100 million) and total unfunded accrued postre-
tirement liabilities amount to CHF 62 million in
1998 (1997: CHF 50 million). The actuarially
determined net postretirement cost is CHF 17
million in 1998 (1997: CHF 14 million).
Note 37 Equity Participation Plans
UBS has established various equity participa-
tion plans to further align the long-term interests
of managers, staff and shareholders. In addition,
key personnel are awarded a proportion of their
performance-related compensation in UBS sha-
res, restricted for a minimum number of years.
Employees have the option to invest part or all
of their annual bonus in UBS shares or derivatives
on UBS shares. A certain holding period applies
during which the instruments cannot be sold or
exercised. In addition, participants in the plan
receive a restricted matching contribution of addi-
tional shares or options. Shares required under
the plan are bought or hedged in the market.
Under another plan, employees in Switzerland
are entitled to purchase a specified number of
UBS shares at a predetermined discounted price
each year. The number of shares that can be pur-
chased depends primarily on years of service and
rank. Any such shares purchased must be held for
a specified period of time.
Long-term stock options are granted to key
employees under another plan. Participation is
mandatory. These options are blocked for a cer-
tain period of time during which they cannot be
exercised. One half of each grant is subject to an
acceleration clause after which certain forfeiture
provisions lapse. One option gives the right to
purchase one registered UBS share at the option’s
strike price. Neither fair value nor intrinsic value
of the options granted is recognized as an expense
in the financial statements.
Key employee stock options
Number of
options 1998
Weighted-average
exercise price
(in CHF) 1998
Number of
options 1997
Weighted-average
exercise price
(in CHF) 1997
Options outstanding at 1 January
Granted
Exercised
Lapsed
949,962
2,905,889
11,485
242,973
Options outstanding at 31 December
3,601,393
Options exercisable at 31 December
0
371.43
362.84
354.83
535.08
352.96
0.00
0
949,962
0
0
949,962
0
0.00
371.43
0.00
0.00
371.43
0.00
99
UBS Group Financial Statements
Notes to the Financial Statements
Note 38 Related Parties
Related parties include the Board of Directors,
the Group Executive Board, the Group Managing
Board, close family members and enterprises
which are controlled by these individuals. The
roles and responsibilities of these bodies are
explained in the Corporate Governance section.
Total remuneration recognized in the income
statement during the year amounted to CHF
102.8 million. Total loans and advances receiv-
able were CHF 27.1 million at 31 December
1998. The number of long-term stock options
outstanding from equity plans was 127,500 at
the end of the year. This scheme is further
explained in Note 37 Equity Participation Plans.
Total amount of shares held by members of the
Board of Directors, Group Executive Board and
Group Managing Board were 2,317,902 as of
31 December 1998.
Note 39 Post Balance Sheet Date Events
On 19 February 1999 UBS AG and Swiss
Life/Rentenanstalt announced their plan to ter-
minate the cooperation agreement which has
existed between them since 1995 by mutual con-
sent. In the context of this disengagement, a num-
ber of Swiss and international institutional
investors will acquire the Group’s 25% equity
stake at market conditions. In addition, Swiss
Life/Rentenanstalt will acquire the UBS’s 50%
interest in the UBS Swiss Life joint venture as well
as UBS’s 49% interest in the joint real estate sub-
sidiary Livit. UBS expects a net gain from these
divestments of CHF 1.2–1.4 billion.
100
Note 40 Significant Subsidiaries and Associates
Significant subsidiaries
Company
Private Banking
Armand von Ernst & Cie AG
Baltos Service AG
Bank Ehinger & Cie AG
BDL Banco di Lugano
Cantrade Privatbank AG
Ferrier Lullin & Cie SA
HYPOSWISS, Schweizerische Hypotheken- und Handelsbank
Intrag
Schröder Münchmeyer Hengst AG
UBS Anlage-Service GmbH
UBS (Bahamas) Ltd
UBS Bank (Canada)
UBS (Cayman Islands) Ltd
UBS Fund Holding (Luxembourg) SA
UBS Fund Holding (Switzerland) AG
UBS Fund Management (Japan) Co. Ltd.
UBS Fund Management (Switzerland) AG
UBS Fund Services (Luxembourg) S.A.
UBS Invest Kapitalanlagegesellschaft mbH
UBS (Italia) SpA
UBS (Luxembourg) SA
UBS (Monaco) SA
UBS (Panama) SA
UBS Trust (Canada)
UBS (Trust and Banking) Ltd
Warburg Dillon Read
Brunswick Warburg Limited
NYRE Holding Corp
PT Warburg Dillon Read Indonesia
SG Warburg & Co International BV
SG Warburg Securities SA
UBS (Argentina) S.R.L.
UBS Australia Holdings Ltd
UBS Australia Ltd
UBS Australia Finance Ltd
UBS (Brasil) Limitada
UBS Beteiligungs-GmbH & Co KG
UBS (East Asia) Ltd
UBS Futures & Options Limited
UBS Inc.
UBS Lease Finance LLC
UBS Limited
UBS UK Limited
UBS UK Holding Ltd
UBS (Nederland) BV
UBS Securities (East Asia) Ltd
UBS Securities (Hong Kong) Ltd
UBS Securities Limited
UBS Securities (Pty) Ltd
UBS Securities (Singapore) Pte Ltd
UBS Securities Trading Limited
UBS Services (Japan) Ltd
UBS Services Limited
UBS (Sydney) Limited
UBS (USA), Inc.
Warburg Dillon Read AG
Warburg Dillon Read (Asia) Ltd
1 Share capital and share premium.
Registered
office
Bern
Zurich
Basel
Lugano
Zurich
Geneva
Zurich
Zurich
Hamburg
Frankfurt
Nassau
Toronto
George Town
Luxembourg
Basel
Tokyo
Basel
Luxembourg
Frankfurt
Milan
Luxembourg
Monte Carlo
Panama
Toronto
Tokyo
George Town
Wilmington
Jakarta
Amsterdam
Geneva
Buenos Aires
Sydney
Sydney
Sydney
Sao Paulo
Frankfurt
Singapore
London
New York
New York
London
London
London
Amsterdam
Hong Kong
Hong Kong
London
Johannesburg
Singapore
London
London
London
Sydney
Delaware
Frankfurt
Hong Kong
UBS Group Financial Statements
Notes to the Financial Statements
Share
capital
in m
Equity
interest
accumulated
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
DEM
DEM
USD
CAD
USD
LUF
CHF
JPY
CHF
CHF
DEM
ITL
CHF
FRF
USD
CAD
JPY
USD
USD
IDR
GBP
CHF
USD
AUD
AUD
AUD
USD
DEM
SGD
GBP
USD
USD
GBP
GBP
GBP
NLG
HKD
HKD
GBP
ZAR
SGD
GBP
JPY
GBP
AUD
USD
DEM
HKD
5.0
3.0
6.0
50.0
10.0
30.0
26.0
10.0
180.0
0.3
4.0
50.2 1
5.6
1000.0
18.0
1000.0
1.0
2.5
5.0
43,000.0
150.0
60.0
6.0
10.0
7,500.0
50.0
35.5 1
11,000.0
140.4 1
15.0
–
11.7
15.0
–
–
780.0
50.0
2.0
687.2 1
16.7
396.0
609.0
360.0
24.0
250.0
20.0
10.0
6.0
3.0
24.0
41,358.5
–
12.7
798.3
304.5
20.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
64.0
100.0
100.0
100.0
100.0
100.0
100.0
50.0
100.0
85.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
101
UBS Group Financial Statements
Notes to the Financial Statements
Note 40 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Warburg Dillon Read (Australia) Corporation Pty Limited
Warburg Dillon Read Australia Ltd
Warburg Dillon Read Derivatives Ltd
Warburg Dillon Read (España) SA
Warburg Dillon Read (France) SA
Warburg Dillon Read Futures Inc.
Warburg Dillon Read (Futures + Options) Pte Ltd
Warburg Dillon Read (Hong Kong) Ltd
Warburg Dillon Read (Italia) S.I.M. SpA
Warburg Dillon Read International Limited
Warburg Dillon Read (Japan) Ltd
Warburg Dillon Read LLC
Warburg Dillon Read (Malaysia) Sdn. Bhd.
Warburg Dillon Read Pte. Ltd.
Warburg Dillon Read Securities (South Africa) (Pty) Ltd
Warburg Dillon Read Securities Co. Ltd
Warburg Dillon Read Securities (España) SVB SA
Warburg Dillon Read Securities (India) Private Limited
Warburg Dillon Read Securities Ltd.
Warburg Dillon Read Securities (Philippines) Inc
Warburg Dillon Read (South Africa) (Pty) Ltd
Warburg Dillon Read Swap Inc.
Private and Corporate Clients
Aventic AG
Bank Finalba AG
Factors AG
IL Immobilien-Leasing AG
Solothurner Bank SoBa
Systor AG
UBS Immoleasing AG
UBS Leasing AG
UBS Brinson
Brinson Partners Inc.
Phillips & Drew Fund Management Limited
Phillips & Drew Limited
UBS Brinson Asset Management Co. Ltd
UBS Brinson Inc.
UBS Brinson Limited
UBS Brinson Ltd
UBS Brinson Pte Ltd
UBS Brinson SA
UBS Capital
Crédit Industriel SA
EIBA “Eidgenössische Bank“
Indelec Holding AG
SBC Equity Partners AG
SBC Overseas Holding BV
Thesaurus Continentale Effekten-Gesellschaft Zürich
UBS Capital Asia Limited
UBS Capital Asia (S) Limited
UBS Capital BV
UBS Capital GmbH
UBS Capital II LLC
UBS Capital Latin America LDC
UBS Capital LLC
UBS Capital Partners Ltd
UBS Capital S.p.A.
UBS Investment Management Pte Ltd
1 Share capital and share premium. 2 In billion.
Registered
office
Sydney
Sydney
Hong Kong
Madrid
Paris
Delaware
Singapore
Hong Kong
Milan
London
George Town
New York
Kuala Lumpur
Singapore
Sandton
Bangkok
Madrid
Mumbai
London
Makati
Sandton
Stamford
Zurich
Glattbrugg
Zurich
Opfikon
Solothurn
Zurich
Zurich
Brugg
Chicago
London
London
Tokyo
New York
London
Sydney
Singapore
Paris
Zurich
Zurich
Basel
Opfikon
Amsterdam
Zurich
George Town
Singapore
The Hague
Frankfurt
Delaware
George Town
New York
London
Milan
Singapore
Share
capital
in m
23.5
61.5
20.0
200.0
150.0
12.3 1
5.5
30.0
3,500.0
808.0 1
30.0 2
1,491.4 1
0.5
3.0
2.2
400.0
2,226.0
140.0
140.0
120.0
–
140.1
30.0
40.0
5.0
5.0
50.0
5.0
3.0
10.0
–
1.0
8.0
800.0
0.5
8.8
2.5
4.0
325.1
10.0
14.0
10.0
71.7
40.0 1
30.0
5.0
1.0
220.0 1
0.1
0.1
–
0.1
6.7
50,000.0
0.5
AUD
AUD
HKD
ESP
FRF
USD
SGD
HKD
ITL
GBP
JPY
USD
MYR
SGD
ZAR
THB
ESP
INR
GBP
PHP
ZAR
USD
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
USD
GBP
GBP
JPY
USD
GBP
AUD
SGD
FRF
CHF
CHF
CHF
CHF
NLG
CHF
USD
SGD
NLG
DEM
USD
USD
USD
GBP
ITL
SGD
Equity
interest
accumulated
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
50.0
100.0
100.0
100.0
100.0
100.0
100.0
75.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
60.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
90.0
102
UBS Group Financial Statements
Notes to the Financial Statements
Note 40 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Corporate Center
UBS Finance (Cayman Islands) Limited
UBS Finance (Curaçao) NV
UBS Finance (Delaware) Inc.
UBS Finanzholding AG
UBS International Holdings BV
UBS Investments (C.I.) Ltd
Significant associates
Company
Giubergia Warburg SIM SpA, Milan
Inversiones Ibersuizas S.A., Madrid
Motor Columbus AG, Baden
National Versicherung AG, Basel
Rentenanstalt/Swiss Life AG, Zurich
Telekurs Holding AG, Zurich
Registered
office
George Town
Curaçao
Delaware
Zurich
Amsterdam
George Town
Share
capital
in m
Equity
interest
accumulated
USD
USD
USD
CHF
GBP
USD
0.5
0.1
898.5
10.0
2.4
0.0
100.0
100.0
100.0
100.0
100.0
100.0
Equity interest
Share capital in m
50.0%
28.9%
36.4%
28.5%
25.0%
40.9%
ITL
ESP
CHF
CHF
CHF
CHF
290,000.0
8,224.0
253.0
35.0
578.4
45.0
None of the above investments carry voting rights that are significantly different from the proportion
of shares held.
Consolidated companies: changes in 1998
New companies
Aventic AG, Zurich
UBS Capital (Jersey) Ltd, St. Helier
Deconsolidated companies
Name
Adler & Co. AG
Bank Prokredit AG
BSI-Banca della Svizzera Italiana, Lugano
Cantrade Banca Privata Lugano SA, Lugano
Cantrade Investments Ltd, London
Cantrade Investment Management Ltd, London
UBS SA Holding (Pty) Ltd, Johannesburg
UBS Securities (Pty) Ltd, Johannesburg
Reason for deconsolidation
Sold
Sold
Sold
Sold
Sold
Sold
Deregistered
Deregistered
Note 41 Significant Currency Translation Rates
The following table shows the significant rates used to translate the financial statements of foreign
entities into Swiss francs.
1 USD
1 GBP
100 DEM
100 JPY
Balance sheet rate
31.12.98
31.12.97
Average rate P/L
31.12.98 31.12.97
1.38
2.29
82.19
1.22
1.46
2.41
81.24
1.12
1.45
2.41
82.38
1.11
1.45
2.37
83.89
1.19
103
UBS Group Financial Statements
Notes to the Financial Statements
Note 42 Swiss Banking Law Requirements
The significant differences between Interna-
tional Accounting Standards (IAS), which are the
principles followed by the Group, and the
accounting requirements for banks under Swiss
laws and regulations, are as follows:
Securities borrowing and lending
Under IAS only the cash collateral delivered or
received is recognized in the balance sheet. There
is no recognition or derecognition for the securi-
ties received or delivered. The Swiss requirement
is to recognize the securities received or delivered
in the balance sheet along with any collateral in
respect of those securities for which control is
transferred.
Treasury shares
Treasury shares is the term used to describe the
holding by an enterprise, of its own equity instru-
ments. In accordance with IAS treasury shares
not held for trading are presented in the balance
CHF million
Differences in the balance sheet
Securities borrowing and lending
Assets
Trading portfolio / Money market paper
Due from banks / customers
Liabilities
Due to banks / customers
Other liabilities (short positions settled with borrows)
Treasury shares
Assets
Trading portfolio
Financial investments
sheet as a deduction from equity. No gain or loss
is recognized in the income statement on the sale,
issuance, or cancellation of those shares. Consid-
eration received is presented in the financial state-
ment as a change in equity.
Under Swiss requirements, treasury shares
would be carried in the balance sheet as financial
investments with gains and losses on the sale,
issuance, or cancellation of treasury shares
reflected in the income statement.
Extraordinary income and expense
Under IAS most items of income and expense
arise in the course of ordinary business, and
extraordinary items are expected to be rare.
Under the Swiss requirements, income and
expense items not directly related with the core
business activities of the enterprise (e.g. sale of
fixed assets or bank premises) are recorded as
extraordinary income or expense.
1998
1997
97,907
40,915
154,828
(16,006)
992
490
369
(1,350)
(1,235)
19,675
47,021
134,911
(68,215 )
463
1,519
129
(162 )
(114 )
1,482
1,982
Differences in the income statement
Treasury shares
Reclassification of extraordinary income and expense
Other income, including income from associates
General administrative expenses
Differences in the shareholders’ equity
Treasury shares
104
UBS Group Financial Statements
Notes to the Financial Statements
Note 43 The Year 2000 Challenge
Each of our operating divisions has estab-
lished a programme to address the Year 2000
issue. The programme manager for each division
reports on progress, risks and issues on a month-
ly basis to the Group Year 2000/Euro Risk Com-
mittee, which is headed by the Chief Risk Officer.
Because of the size and complexity of the
Group, and the pervasive impact of the Year
2000 issue on our systems and those of third par-
ties with whom we deal, UBS has chosen to pub-
lish on the Internet (www.ubs.com), under the
section called “Quantitative Self Assessment”,
the progress against milestones associated with
the technical aspects of the Year 2000 project.
This (unaudited) self assessment is consistent
with the suggested reporting standard of the
Global Year 2000 Co-ordinating Group of which
UBS is a founding member.
The self assessment indicates that UBS is well
advanced in its preparation; however the nature
of the Year 2000 issue means that it is not possi-
ble to provide any guarantee that the Group will
be unaffected by Year 2000 related issues.
In view of this, UBS has already initiated con-
tingency planning exercises to minimize these
risks.
105
UBS Group Financial Statements
Report of the Group Auditors
106
UBS AG
(Parent Bank)
UBS AG (Parent Bank)
Table of Contents
Parent Bank Result
Financial Statements
109
110
110
Income statement
Balance sheet
111
Statement of appropriation of retained earnings 111
Notes to the Financial Statements
Additional income statement information
Net trading income
Extraordinary income and expenses
Additional balance sheet information
Value adjustments and provisions
Statement of shareholders’ equity
Share capital
Distribution of registered shares at end of 1998
Off balance sheet and other information
Assets pledged or assigned as security for own
obligations, assets subject to reservation of title
Fiduciary transactions
Due to UBS corporate bodies / related parties
Report of the Statury Auditors
112
113
113
113
113
113
114
114
114
115
115
115
115
116
UBS AG (Parent Bank)
Table of Contents
108
Parent Bank Result
UBS AG (Parent Bank)
Parent Bank Results
Income Statement
Due to the planned merger of Union Bank
of Switzerland and Swiss Bank Corporation, the
extraordinary shareholders’ meetings of both
banks decided that the financial year 1997 of
the respective parent banks should cover the
period until 30 September 1997 only. Thus the
actual financial year of the parent bank UBS AG
covers a 15-month period from 1 October 1997
to 31 December 1998. This should be borne in
mind when comparing the two income state-
ments. The profit of CHF 650 million for 1998
relates to CHF 3,943 million for the nine
months in 1997 and reflects several strategic
decisions and transactions in connection with
the merger:
– Income from investments in associates has
increased to CHF 2,974 million from CHF 484
million in 1997 due to repatriation of capital to
the parent bank.
– Sundry income from ordinary activities amount
to CHF 1,162 million (1997: CHF 360 mil-
lion). This increase is due to harmonization of
methods of calculating service charges to other
companies within the UBS Group, as well as to
an increase in those charges.
– The events that have affected Allowances, pro-
visions and losses are discussed in the com-
ments to the Group Financial Statements. The
amount of CHF 4,849 million (1997: CHF
1,168 million) for the parent bank includes in
addition a provision of CHF 1,924 million for
counterparty risks. This provision had been
established at Group level in 1996 already, but
it was allocated to specific counterparties at
parent bank level only in 1998.
– Extraordinary income of CHF 3,940 million
(1997: CHF 481 million) reflects the disposal
of subsidiaries and the release of provisions
which are not economically necessary. Further
information regarding extraordinary income
and expenses can be found in the Notes to the
Financial Statements.
– Furthermore, the parent bank includes the
restructuring provision of CHF 7,000 million
in the results for the 15-month period ended 31
December 1998, whereas the Group already
reflected this amount in its 1997 Financial
Statements.
In order to pay out a dividend of CHF 10.– per
share or CHF 2,150 million and to allocate CHF
190 million to the general statutory reserve, a
release of CHF 1,690 million from other reserves
is proposed.
Balance Sheet
Total assets grew by CHF 262 billion to CHF
1,041 billion by 31 December 1998. The major
part of this increase is caused by the harmoniza-
tion of the accounting policies of Union Bank of
Switzerland and Swiss Bank Corporation. It is in
particular the consistent recognition of repur-
chase agreements, reverse repurchase agreements
and securities lending and borrowing that led to
an increase in assets and liabilities. Note that
these transactions are presented differently in the
Group Balance Sheet.
109
UBS AG (Parent Bank)
Financial Statements
Financial Statements
Income Statement
CHF million
Interest and discount income
Interest and dividend income from financial assets
Less: Interest expense
Net interest income
Credit-related fees and commissions
Fee and commission income from securities and investment business
Other fee and commission income
Less: Fee and commission expense
Net fee and commission income
Net trading income
Net income from disposal of financial assets
Income from investments in associated companies
Income from real estate holdings
Sundry income from ordinary activities
Less: Sundry ordinary expenses
Other income from ordinary activities
Operating income
Personnel
General administrative
Operating expenses
Operating profit
Depreciation and write-offs on fixed assets
Allowances, provisions and losses
Profit before extraordinary items and taxes
Extraordinary income
Extraordinary expenses
Tax expenses / (benefit)
Profit for the period
1.10.1997–
31.12.1998
33,205
240
25,412
1.1.1997–
30.9.1997
17,714
291
13,363
8,033
766
9,229
687
781
9,901
383
756
2,974
38
1,162
185
4,745
23,062
7,977
6,290
14,267
8,795
815
4,849
3,131
3,940
7,046
( 625)
650
4,642
516
5,128
408
463
5,589
3,490
229
484
30
360
51
1,052
14,773
5,346
3,241
8,587
6,186
981
1,168
4,037
481
96
479
3,943
110
UBS AG (Parent Bank)
Financial Statements
Balance Sheet
CHF million
Assets
Liquid assets
Money market paper
Due from banks
Due from customers
Mortgage loans
Trading balances in securities and precious metals
Financial assets
Investments in associated companies
Tangible fixed assets
Accrued income and prepaid expenses
Positive replacement values
Other assets
Total
Total subordinated assets
Total amounts receivable from Group companies
Liabilities
Money market paper issued
Due to banks
Due to customers on savings and deposit accounts
Other amounts due to customers
Medium term note issues
Bond issues and loans from central mortgage institutions
Accruals and deferred income
Negative replacement values
Other liabilities
Value adjustments and provisions
Reserve for general banking risks
Share capital
General statutory reserve
Reserve for own shares
Other reserves
Profit / (loss) brought forward
Profit for the period
Total
Total subordinated liabilities
Total liabilities to Group companies
31.12.1998
30.9.1997
Change
%
2,876
14,610
303,032
192,429
131,788
191,578
3,010
6,153
6,840
5,293
173,020
10,318
2,819
27,712
182,354
154,318
137,615
126,132
9,349
6,376
6,854
8,012
110,184
7,349
57
(13,102 )
120,678
38,111
(5,827 )
65,446
(6,339 )
(223 )
)
(14
)
(2,719
62,836
2,969
1,040,947
779,074
261,873
1,236
115,140
2,356
122,988
(1,120 )
(7,848 )
30,963
314,258
77,964
295,381
8,303
36,180
9,853
207,410
14,915
15,176
0
4,300
14,295
490
10,806
3
650
32,069
193,514
83,648
230,987
13,339
34,219
7,316
129,531
10,301
11,482
667
5,755
12,515
964
9,266
(443 )
3,944
(1,106 )
120,744
(5,684 )
64,394
(5,036 )
1,961
2,537
77,879
4,614
3,694
(667 )
(1,455 )
1,780
(474 )
1,540
446
(3,294 )
1,040,947
779,074
261,873
12,528
108,666
14,429
73,176
(1,901 )
35,490
2
(47 )
66
25
(4 )
52
(68 )
)
(3
0
(34
57
40
)
34
(48 )
(6 )
(3 )
62
(7 )
28
(38 )
6
35
60
45
32
(100 )
(25 )
14
(49 )
17
(101 )
(84 )
34
(13 )
48
Statement of Appropriation of Retained Earnings
The Board of Directors proposes to the General Meeting of Shareholders the following appropriation:
Profit for the fifteen month period as per the Income Statement
Release of other reserves
Retained earnings from prior years
Available for appropriation
Appropriation to general statutory reserve
Proposed dividends
Retained earnings carried forward
CHF million
650
1,690
3
2,343
190
2,150
3
Dividend distribution
Upon acceptance of this proposal, the dividend for 1998 will amount to CHF 10.– gross per share of CHF 20.– par value.
The dividend will be paid on 27 April 1999, to registered shareholders or to their depository bank by payment order, after
deduction of 35% Swiss withholding tax.
111
UBS AG (Parent Bank)
Notes to the Financial Statements
Notes to the
Financial Statements
Accounting period / Comparative figures
The parent company’s accounting period cov-
ers the 15 months from 1 October 1997 to 31
December 1998; and the comparative figures are
for the shortened business year from 1 January to
30 September 1997. The 1997 comparative fig-
ures are combined pro forma values which were
prepared on the basis of the separate audited
financial statements of the former UBS and SBC
parent companies existing at that time. The
change in the length of the accounting period was
approved by the shareholders at the General
Assembly meetings on 3 February 1998 (former
UBS) and 4 February 1998 (SBC).
Accounting and valuation principles
The parent company’s accounting and valua-
tion policies are in compliance with Swiss federal
banking law. The accounting and valuation poli-
cies are principally the same as outlined for the
Group Financial Statements in Note 1: Signifi-
cant Accounting Policies of the Group Financial
Statements. Major differences between the Swiss
federal banking law requirements and Interna-
tional Accounting Standards are described in
Note 42 to the Group Financial Statements. In
addition, the following principles are applied for
the parent bank:
– Investments
companies
in associated
Investments in associated companies are equi-
ty interests which are held on a long-term basis
for the purpose of the parent company’s busi-
ness activities. They are carried at a value no
higher than their cost price.
– Property and equipment Bank buildings and
other real estate are carried at cost less depre-
ciation at a rate which takes account of the
economic and business situation and which is
permissible for tax purposes. Depreciation of
computer and telecommunication equipment,
as well as other equipment, fixtures and fittings
is recognized on a straight-line basis over the
estimated useful lives of the related assets. A
credit adjustment of CHF 470 million has been
made in order to harmonize the accounting
policies of the merged banks. The useful lives
of Property and Equipment are summarized in
Note 1, Significant Accounting Policies, of the
Group Financial Statements.
– Extraordinary income and expenses Cer-
tain items of income and expense appear as
extraordinary within the Parent Bank Financial
Statements, whereas in the Group Financial
Statements they are considered to be operating
income or expenses and appear within the
appropriate income or expense category. These
are separately identified below.
– Taxation Deferred Tax Assets, except those
relating to Restructuring Provisions, and
Deferred Tax Liabilities, except for a few
immaterial exceptions, are not recognized in
the Parent Bank Financial Statements as it is
not required by Swiss federal banking law to
do so.
112
UBS AG (Parent Bank)
Notes to the Financial Statements
Additional Income Statement Information
Net Trading Income
CHF million
Foreign exchange and bank notes
Bonds and other interest rate instruments
Equities
Precious metals and commodities
Total
1.10.1997–
31.12.1998
1.1.1997–
30.9.1997
2,156
( 1,440)
( 421)
88
383
1,656
1,127
553
154
3,490
Extraordinary Income and Expenses
Extraordinary income contains CHF 1,190
million from the sale of the former subsidiary
Banca della Svizzera Italiana (BSI), CHF 1,336
million from release of provisions which are not
economically necessary, and CHF 667 million from
release of Reserves for General Banking Risks.
Extraordinary expenses consist mainly of
CHF 7,000 million restructuring provision which
were set up in 1997 to cover the costs related to
the merger of Swiss Bank Corporation and Union
Bank of Switzerland.
Additional Balance Sheet Information
Value Adjustments and Provisions
Provisions Recoveries,
doubtful
applied in
interest,
accordance
Balance with their
currency
specified translation
at 1 Oct.
purpose differences
1997
New Provisions
provisions released and
credited
to income
charged
to income
14,433
409
509
1,770
4,375
297
337
4,250
426
99
28
(57)
3,543
2,732
194
7,768
0
0
0
1,336
Balance
at
31 Dec.
1998
14,027
2,943
394
3,895
17,121
9,259
496
14,237
1,336
21,259
5,639
11,482
667
–
–
0
–
–
0
–
–
0
–
–
6,083
15,176
667
0
CHF million
Default risks
(credit and country risk)
Other business risks 1
Capital and income taxes
Other provisions
Total allowance for
general credit losses
and other provisions
Less: Allowances deducted
from assets
Total provisions as
per balance sheet
Reserves for general
banking risks
1 Provisions for litigation, settlement and other business risks.
113
UBS AG (Parent Bank)
Notes to the Financial Statements
Additional Balance Sheet Information (continued)
Statement of Shareholders’ Equity
CHF million
31.12.1998
30.9.1997
Change
%
Shareholders’ equity
Share capital at beginning of the period
General statutory reserves
Reserves for own shares
Other reserves
Reserves for general banking risks
Retained earnings / (accumulated deficit)
Total shareholders’ equity at beginning
of the period (before distribution of profit)
– Reduction of nominal capital
+ Increase in General statutory reserves
+ Capital increase / (decrease)
+ Premium
+ Other allocations
– Allocation / (release) of Reserves for general banking risks
– Prior-year dividend
+ Profit / (loss) for the period
Total shareholders’ equity as of 31 December 1998 /
30 September 1997 (before distribution of profit)
of which:
Share capital
General statutory reserves
Reserves for own shares
Other reserves
Reserves for general banking risks
Retained earnings
5,755
12,515
964
9,266
667
3,501
6,508
12,093
583
11,228
666
(1,133 )
32,668
29,945
(1,467)
1,467
12
82
35
(667)
(2,236)
650
(753 )
330
23
(821 )
3,944
(753 )
422
381
(1,962 )
1
4,634
2,723
(1,467 )
1,467
765
(248 )
12
(667 )
(1,415 )
(3,294 )
(12 )
3
65
(17 )
0
(409 )
9
–
–
(102 )
(75 )
52
–
172
(84 )
30,544
32,668
(2,124 )
(7 )
4,300
14,295
490
10,806
0
653
5,755
12,515
964
9,266
667
3,501
(1,455 )
1,780
(474 )
1,540
(667 )
(2,848 )
(25 )
14
(49 )
17
(100 )
(81 )
Share Capital
Issued and paid up
Conditional share capital
Par value
No. of shares
Capital in CHF
Ranking for dividends
No. of shares Capital in CHF
214,976,306
4,299,526,120
214,449,765 4,288,995,300
999,229
19,984,580
–
–
Distribution of Registered Shares at End of 1998
% of all
registered
shareholders
Number of shares / % of shares held
(1% = 2,149,763)
Number of
shareholders
1–100
101–1,000
1,001–5,000
5,001–10,000
10,001–50,000
50,001–100,000
100,001–2,149,762
1–2%
2–3%
3–4%
4–5%
over 5%
Total
126,457
61,281
5,156
569
551
98
157
3
0
0
1
0
194,273
Number of
shares1
5,244,360
16,524,771
10,156,828
3,954,295
11,432,204
7,082,202
57,467,918
6,753,879
0
0
9,192,491
0
% of all
registered
shares
4.103
12.929
7.947
3.094
8.945
5.542
44.964
5.284
0.000
0.000
7.192
0.000
65.092
31.544
2.654
0.293
0.284
0.050
0.081
0.001
0.000
0.000
0.001
0.000
100.000
127,809,548
100.000
1 13,618,690 registered shares do not carry voting rights. 73,548,068 shares are classified as “non registered”, i.e. not entered in the share
register as of 31 December 1998.
114
UBS AG (Parent Bank)
Notes to the Financial Statements
Off Balance Sheet and Other Information
Assets Pledged or Assigned as Security for Own Obligations,
Assets Subject to Reservation of Title
CHF million
Money market paper
Mortgage loans
Securities
Total
31.12.1998
30.9.1997
Book
value
6,956
2,410
14,852
24,218
Effective
liability
0
1,602
8,883
10,485
Book
value
2,265
1,687
10,778
14,730
Effective
liability
517
1,250
8,924
10,691
Change in %
Book
value
Effective
liability
207
43
38
64
(100 )
28
0
(2 )
Assets are pledged as collateral for securities borrowing and repo transactions, for collateralized cred-
it lines with central banks, loans from mortgage institutions and security deposits relating to stock
exchange memberships.
(2 )
(20 )
(11 )
(3 )
%
33
Fiduciary Transactions
CHF million
Deposits
with other banks
with Group banks
Loans and other financial transactions
Total
31.12.1998
30.9.1997
Change
%
46,180
1,543
479
47,234
1,937
536
(1,054 )
(394 )
(57 )
48,202
49,707
(1,505 )
Due to UBS Corporate Bodies / Related Parties
CHF million
Due to UBS pension funds
Loans to directors, senior executives
and auditing bodies 2
1998
1,250
70
1997 1
Change
313
937
88
(18 )
(20 )
1 Information as of 31.12.1997 2 Loans to directors, senior executives and auditing bodies include loans to members of the Board of
Directors, the Group Managing Board and the Group’s official auditors under Swiss company law. This also includes loans to companies
which are controlled by these natural or legal persons.
115
UBS AG (Parent Bank)
Report of the Statutory Auditors
116
UBS Corporate
Governance
UBS Corporate Governance
Corporate and
Executive Bodies
UBS established its orga-
Corporate Governance Best Practice
nizational structure in the
UBS observes the principles of best practice in
context of the merger
with the aim of meeting
the highest standards of
Corporate Governance.
The Cadbury Committee’s
1992 Code of Best Prac-
tice and the 1998 Ham-
pel Report on Corporate
Governance both played
a significant role in devel-
oping UBS’s Corporate
Governance standards. In
fact, almost all these
standard-setting reports’
recommendations have
been implemented in
UBS’s Articles of Associa-
tion and Organization
Regulations. At the same
time, UBS – as a Swiss
based company – must
also comply with Swiss
legal provisions.
118
the following manner:
The Board of Directors (BoD) consists exclu-
sively of non-executive Directors in accordance
with Swiss Banking Law. The members of the
Board of Directors are elected by the annual gene-
ral meeting for a four-year term. In order to ensure
its independence, the Chief Executive Officer is
not permitted to be a member of the BoD. The
appropriate and timely information on the com-
pany’s affairs to the BoD members is prescribed
by the Articles of Association and the Organi-
zation Regulations. The BoD meets regularly,
together with the Group Executive Board (GEB).
At the time of the merger, there were 10 Direc-
tors, of whom the Chairman and one of the Vice
Chairmen were appointed on a full-time basis.
Chairman Mathis Cabiallavetta resigned on 1
October 1998 after the third-quarter losses from
the US hedge fund Long Term Capital Manage-
ment (LTCM) were announced, as a step towards
restoring confidence in the new UBS. Vice Chair-
man Alex Krauer took over as Chairman. On 27
January 1999, the BoD appointed him Chairman
until 2002.
To support the bank’s important global aspi-
rations, UBS will extend BoD membership to the
international professional community. The max-
imum number of Board members is twelve.
The responsibilities of the BoD
The BoD has ultimate responsibility for the
strategic direction of the business of the UBS
Group and the supervision and control of its
executive management.
The BoD has nominated the following com-
mittees:
The Audit Supervisory Board is responsible
for the supervision of the internal and external
audit. It is chaired by Alberto Togni. Additional
members are Alex Krauer and Markus Kündig.
The Audit Supervisory Board and the Head of
Group Internal Audit meet four times a year to
discuss and approve annual objectives and activ-
ity reports of Group Internal Audit plus other
matters of general policy. Important findings of
Group Internal Audit are submitted to the Audit
Supervisory Board.
The Audit Committee, chaired by Peter Böck-
li with Rolf A. Meyer as Vice Chairman and
Andreas Reinhart, monitors the functional
adequacy of the auditing work and the coopera-
tion between internal and external audit. It
supports the BoD in the supervision of the
year-end closing. It normally meets two to three
times a year with the Head of Group Internal
Audit and representatives of the external audi-
tors. The Chief Financial Officer and other
members of the GEB are periodically invited for
special topics.
A Nomination Committee, with Alex Krauer
as Chairman and Markus Kündig and Andreas
Reinhart as members, has been charged with
preparing nominations for new BoD members as
well as for elections at the GEB level.
The Chairman’s Office (Chairman and Vice
Chairmen) also acts as the Remuneration Com-
mittee. It fixes the remuneration of the BoD’s full-
time members, the members of the GEB and of
the Group Managing Board (GMB) (for details
see below). The BoD decides on the individual
remuneration of the part-time Board members,
based on the proposals of the Remuneration Com-
mittee.The total amount paid to the related parties
(BoD, GEB, GMB) as well as the principles of
remuneration are published in Note 38 to the
Financial Statements.
The Board of Directors’ activities in 1998
The designated Members of the Board of
Directors had started to meet regularly prior to
the legal merger on 29 June 1998. At these pre-
liminary meetings, the BoD took all necessary
preparatory measures to ensure UBS’s efficient
start immediately after 29 June 1998. All impor-
tant decisions were ratified in the first official
meeting of the new BoD. The main issues
addressed by the BoD during the course of 1998
(pre- and post-merger) were:
– the approval of the UBS strategy
– the approval of UBS’s organizational frame-
work and policies
– the approval of the UBS risk policy framework
– the review of quarterly and year-end results, as
well as plans and budgets
– the settlement agreement with the claimants of
the US class action suits regarding dormant
accounts and World War II issues
– the losses stemming from UBS’s exposure to
LTCM and other market risks.
UBS Corporate Governance
In 1998, the BoD held 14 meetings, eleven of
which were with the Group Executive Board. At
a one-day seminar the GEB outlined the detailed
strategy of the Group and its divisions to BoD
members. Joint meetings between the BoD and the
GEB provide the optimal platform for a high-level
and detailed interaction between both Boards. The
particular mandates of the two bodies are defined
in the Articles of Association and, in detail, in the
Organization Regulations.
The Group Executive Board
The Group Executive Board is the most senior
executive body of UBS. It assumes overall respon-
sibility for the development of the Group’s strate-
gies, and the implementation and results thereof.
The GEB comprises eight members, namely the
Group CEO, the Heads of the four divisions and
of the three Corporate Center Functional Areas.
Four members are Swiss citizens, two US, one
Dutch and one Italian. Two divisions have their
head offices in Switzerland, one is in London and
one in Chicago. The GEB normally convenes bi-
weekly.
A dominant concern of the GEB during 1998
was the successful integration of the two merged
banks. Numerous fundamental decisions had to
be taken, the most crucial ones being the appoint-
ment of senior management and the integration
of the technology infrastructures. The GEB feels
comfortable in stating that the essential measures
were executed successfully. The integration con-
tinues to proceed at an extremely rapid pace.
Another crucial concern was the definition of
the risk policy and risk framework of the Group.
Based on changing trends in the financial
industry and a more volatile market environment,
GEB members have regularly discussed strategy
issues. In a special seminar at the beginning of
January 1999, the GEB reassessed the strategy of
the Group. The decisions, approved by the BoD
on 16 January were outlined in detail at the UBS
Investors’ Day on 25 January 1999. They form
the basis of the Shareholders’ Letter and division-
al strategy discussions in this document.
In connection with the Long Term Capital
Management losses (for full details please see
Review of Risk Management and Control, p.
33–34), Felix Fischer, Chief Risk Officer,
resigned. His function was assigned to David
Solo who joined the GEB from the Executive
Board of Warburg Dillon Read. David Solo was
the Co-Chief Operating Officer.
The Group Managing Board
As of December 1998, the Group Managing
Board was made up of the eight GEB members,
18 members who held office in the Divisional
Executive Boards and five members who were in
charge of special functions at the top level of the
organization. The GMB normally meets once a
year to discuss strategic and planning matters.
Group Internal Audit
The Group Internal Audit Department, head-
quartered in Zurich, employs about 220 profes-
sionals worldwide. Special attention was given to
problems arising from the LTCM losses, the risks
involved in equity derivatives transactions and to
the risks inherent in the domestic loan portfolio.
Merger-related audits were performed in various
areas, and a new organization was established in
Group Internal Audit. State-of-the-art audit stan-
dards guarantee professional supervision and
control. The BoD and the GEB are regularly
informed of audit findings. The Head of Group
Internal Audit, Walter Stürzinger, reports to the
Chairman of the Board of Directors. He actively
participates in the Audit Supervisory Board and
the Audit Committee meetings.
Relationship with Shareholders
UBS is committed to fostering a relationship
with its shareholders characterized by openness
and transparency. To meet the different needs of
shareholders better, corporate reporting is split
into two documents. The Annual Review gives an
overview of UBS’s businesses, the strengths and
opportunities of the divisions and their position-
ing in the market, the yearly results and some
additional information about risk management
and control, corporate governance, etc. The
Financial Report contains all the information
required by International Accounting Standards
and Swiss regulations. It is designed to respond to
the needs of large shareholders, institutional
investors and financial analysts.
119
UBS Corporate Governance
In addition to these two reporting documents,
UBS publishes a Report on the Status of the
Integration following the merger which may be
ordered by any shareholder. Quarterly results
are also reported in two formats: a short “Letter
to Shareholders” explaining the relevant results
achieved, and a comprehensive “Quarterly Re-
port” designed for institutional investors.
The Annual General Meeting of Shareholders
is organized in such a way that shareholders have
the opportunity to raise any question regarding
the development of the company and the achieve-
ments of the year under review. The members of
the BoD and GEB as well as the internal and exter-
nal auditors are present to answer these questions.
A system of proxy votes gives shareholders the
chance to express their views on any issue on the
agenda at the Annual General Meeting.
Corporate and Executive Bodies as of 31 December 1998
Board of Directors
Group Executive Board
Alex Krauer (AGM 2000)*
Chairman
Member of the Audit Supervisory Board
Chairman of the Board of Novartis Ltd., Basel
(until April 1999)
Alberto Togni (AGM 2001)
Vice Chairman
Chairman of the Audit Supervisory Board
Markus Kündig (AGM 2002)
Vice Chairman
Member of the Audit Supervisory Board
Owner of Kündig Printers, Zug
Peter Böckli (AGM 1999)
Chairman of the Audit Committee
Partner in the law firm Böckli, Bodmer & Partner, Basel
Rolf A. Meyer (AGM 1999)
Member of the Audit Committee
Chairman of the Board of Ciba Specialty Chemicals Inc.,
Basel
Marcel Ospel
President and Group CEO
Stephan Haeringer
Deputy of the Group CEO and Division Head Private and
Corporate Clients
Rodolfo Bogni
Chief Executive Officer of the Private Banking Division
Gary P. Brinson
Division Head Institutional Asset Management
Johannes Antonie de Gier
Chairman and Chief Executive of
Warburg Dillon Read
David Solo
Chief Risk Officer
(since 2 October 1998)
Pierre de Weck
Chief Credit Officer and Head Private Equity
Hans Peter Ming (AGM 2000)
Delegate of the Board of Directors of Sika Finanz AG, Baar
Peter A. Wuffli
Chief Financial Officer
Andreas Reinhart (AGM 2000)
Member of the Audit Committee
Chairman of Volkart Brothers Holding Ltd., Winterthur
Georges P. Schorderet (AGM 1999)
Chief Financial Officer of SAirGroup,
Zurich-Airport
Manfred Zobl (AGM 2000)
Chairman of the Corporate Executive Board of
Swiss Life / Rentenanstalt, Zurich
Secretary to the Board of Directors:
Gertrud Erismann-Peyer
* Term of office until AGM of the year 2000.
120
UBS Corporate Governance
Group Managing Board
Samuel W. Anderson
Head Administration & Operations, UBS Brinson Division
Luqman Arnold
Chief Operating Officer, Warburg Dillon Read
Peter Brutsche
Head Private Banking Tokyo
Richard C. Capone
Regional Manager for UBS AG’s operations in the
United States, Canada and Latin America;
Chief Executive Officer, Warburg Dillon Read LCC
Crispian Collins
Chief Executive, Phillips & Drew, London
(UBS Brinson Division)
(since 1 September 1998)
Arthur Decurtins
Deputy CEO of the Private Banking Division,
Head Products, Services, Logistics
Jeffrey J. Diermeier
Co-Head Equity Investments, UBS Brinson Division
Henry Doorn, Jr.
Head of Finance and Control, UBS Brinson
Thomas K. Escher
Business Area Head Information Technology,
Private and Corporate Clients Division
George M. Feiger
Business Area Head Domestic Clients,
Private Banking Division
Georges Gagnebin
Business Area Head International Clients Europe,
Middle East & Africa, Private Banking Division
Markus J. Granziol
Global Head Equities and Rates, Warburg Dillon Read
Carlo A. Grigioni
Head Business Area The Americas,
Private Banking Division
Jürg Haller
Business Area Head Corporate Clients,
Private and Corporate Clients Division
Eugen Haltiner
Head Integration,
Private and Corporate Clients Division
Franklin W. Hobbs
Global Head Corporate Finance, Warburg Dillon Read
William W. Johnson
Head Treasury Products, Warburg Dillon Read
Benjamin F. Lenhardt, Jr.
Head of Account Management and
Business Development, UBS Brinson Division
Franz Menotti
Business Area Head Private and Business Clients,
Private and Corporate Clients Division
Urs B. Rinderknecht
Group Mandates
Gian Pietro Rossetti
Business Area Head Domestic Clients /
Swiss Clients, Private Banking Division
Jean Francis Sierro
Business Area Head Resources,
Private and Corporate Clients Division
Stephan Zimmermann
Business Area Head Operations,
Private and Corporate Clients Division
Auditors
External Auditor
ATAG Ernst & Young Auditing Ltd., Basel
Auditors for the Parent Bank and for the Group as
prescribed by Company Law and Swiss Banking Law
(term expires AGM 1999)
Internal Audit
Walter H. Stürzinger,
Head of Internal Audit Department
121
122
UBS Group
Human Resources
UBS Group Human Resources
Personnel at UBS
1998 was a year which
Headcount Movements
put considerable pressure
on our staff. They met
the challenge admirably,
and we wish to take this
opportunity to reiterate
our thanks. We are aware
that the success of the
merger to date has to a
large extent been depend-
ent on the commitment
of our employees.
UBS employed 48,011 staff at end-1998. A
geographical breakdown of employees is shown
in the pie chart.
During 1998, UBS experienced significant
movements in headcount, predominantly as a
result of the merger. The total headcount of full-
time employees at UBS fell by 7,165 during 1998
from 55,176 in 1997, representing the combina-
tion of the workforces of Union Bank of Switzer-
land and Swiss Bank Corporation. 53% of the
total reduction in staff in 1998 took place in
Switzerland. The most significant reduction in
relation to local workforce was in Asia (–24%),
with a 19% decline in Americas and a 16%
decline in Europe (excluding Switzerland).
Of the 3,800 decline in staff numbers in
Switzerland, some 1,500 was attributable to
divestments, primarily BSI. Elsewhere in Europe
the net reduction of 1,250 was largely attributa-
ble to a significant restructuring in London as
part of the merger. This was partially offset by
new hirings and more importantly the acquisition
of Schröder Münchmeyer Hengst in Germany. In
the Americas the reduction of 1,100 was once
again primarily due to the merger. In Asia a re-
focusing of our business in the light of difficult
market conditions also contributed to the decline
of 870 staff. A further discussion of headcount
movements can be found in the divisional re-
ports. For a discussion of personnel expenses,
please see the Financial Review page 53.
top-down evaluation is complemented by evalu-
ations from other sources: in addition to the man-
ager’s evaluation, feedback might be obtained
from internal clients, peers and direct reports of
the evaluatee, who is also required to provide
a self-evaluation. The most important feature of
the process is an intensive feedback discussion
between manager and evaluatee, where results
and implications are reviewed and appropriate
measures as well as objectives for the next evalu-
ation period are agreed upon. Thus, PMM is a
development and evaluation tool and its results
are the basis for a number of processes and deci-
sions, such as training and development, promo-
tion, compensation, position and succession
planning.
Graduate Programs
UBS is keen to attract high caliber staff in all
its divisions and thereby ensure the ongoing
strength, commitment and quality of manage-
ment. Thus, UBS offers graduates two special
entry programs: the Junior Key People (JKP) Pro-
gram (all divisions and Corporate Center except
WDR) and Warburg Dillon Read’s Graduate
Training Program (GTP). After at least one year
of working experience at UBS young and highly
qualified employees can apply for the Interna-
tional Mobility Program (IMP) which provides
the opportunity of an assignment abroad for one
to two years at one of UBS’s world-wide locations.
Regional Split December 1998
Performance Measurement and
Management
UBS Employees by Division
In 1998 a new comprehensive performance
appraisal system was introduced throughout the
bank. PMM which stands for performance meas-
urement and management, measures individual
achievements (contribution) as well as the appli-
cation of knowledge, skills and personal qualities
(competencies). With PMM, the conventional
68%
Warburg Dillon Read
Private Banking
Private and Corporate Clients
UBS Brinson
UBS Capital
Corporate Center
Group total
1998
13,794
7,634
24,043
1,497
122
921
48,011
1997
18,620
7,862 1
25,641 1
1,364
90
1,599
55,176
1 Restated figures due to client segmentation.
6%
2%
10%
14%
Switzerland
Rest of Europe
The Americas
Asia
Others
124
Glossary
Glossary
126
A
accrual basis of accounting
The effects of transactions and other
events are recognized when they
occur, not as cash or its equivalent is
received or paid, and they are record-
ed in the accounting records and
reported in the financial statements
of the periods to which they relate.
ACRA reserve
Actuarial Credit Risk Accounting ACRA:
methodology used by UBS for calcu-
lating the expected loss on a credit
or derivatives portfolio based on the
statistical loss experience of rating
agencies and to build up a credit pro-
vision to provide for such future losses.
allowance for credit losses
An allowance, which in management’s
estimate is adequate to provide for
the credit losses inherent in the loan
portfolio. The allowance for credit
losses is deducted from the related
asset category on the balance sheet.
B
Basle capital ratio
A measure of the equity resources
underpinning the operations of inter-
nationally active banks, as set by
the Basle Committee on Banking
Supervision which meets at the Bank
for International Settlements (BIS).
Capital is broken down into core capi-
tal (or Tier 1 capital) and supplemen-
tary capital (Tier 2 capital). The bank’s
assets are weighted from 0% to
100%. The ratio of the capital to the
bank’s risk-weighted assets is the BIS
capital ratio.
C
compliance risk
The risk that the bank’s conduct of
business does not comply with the
applicable laws, internal or external
regulations or restrictions. This includes
the risk of loss resulting from the
inability of the bank to meet regulatory
requirements, including breaching of
existing capital requirements.
concentration risk
The risk of loss due to creating exces-
sive exposure to a particular risk
or a group of risks or to a particular
country, industry, currency or coun-
terparty group.
contract volume
The contract volume corresponds to
the receivable side of derivative
instruments; it can be expressed in
terms of the notional / nominal
amount of underlying instruments or
the value of the underlying asset
on which the derivative instrument is
based. Only derivative instruments
outstanding at the balance sheet date
are taken into account.
defined benefit plan
Amounts paid by the enterprise to
such post-employment benefit plans
may be determined, among others,
by the employees’ remuneration and /
or years of service. Actuarial risk (that
benefits will cost more than expected)
and investment risk (that the asset
invested will be insufficient to meet
expected benefits) fall in substance on
the enterprise.
country risk
Country risk concerns potential losses
on foreign creditors’ and investors’
claims that would arise from sovereign
default or other restrictions on cross-
border transfers of funds. Country risk
also concerns the potential for losses
by foreign creditors and investors
arising from systemic country develop-
ments such as exchange rate or asset
price reductions.
credit risk
Risk of loss to the bank due to a
counterparty unable or not willing to
perform its payment obligations or
other terms of contract agreed upon
when business was concluded. (Note
that credit risk includes e.g. transfer
risk.)
currency risk
The risk of loss or gain due to changes
in the underlying exchange rates.
D
deferred tax asset
The amounts of income taxes recover-
able in future periods in respect of:
(a) deductible temporary differences
between reported net income and net
income for tax declaration purposes;
(b) the carry forward of unused
tax losses; and (c) the carry forward
of unused tax credits.
deferred tax liability
The amounts of income taxes payable
in future periods in respect of taxable
temporary differences between re-
ported net income and net income for
tax declaration purposes.
defined contribution plan
Post-employment benefit plans under
which an enterprise pays fixed con-
tributions into a separate entity
(a fund). The enterprise’s obligation is
limited to the amount that it agrees
to contribute.
derivative financial instruments
Financial instruments, such as financial
options, futures, forwards, interest
rate swaps and currency swaps, which
create rights and obligations that
have the effect of transferring between
the parties to the instrument one or
more of the financial risks inherent
in an underlying primary financial
instrument. Derivative instruments do
not result in a transfer of the under-
lying primary financial instrument on
inception of the contract and such
a transfer does not necessarily take
place on maturity of the contract.
E
earnings per share (EPS)
The amount of net profit for the period
that is attributable to ordinary share-
holders divided by the weighted
average number of ordinary shares
outstanding during the period.
equity method
The method to account for invest-
ments, in which we have a significant
influence. The investment is initially
recorded at cost and adjusted there-
after for the post acquisition change
in the investors’ share of net assets.
exchange traded
Refers to standardized options and
futures listed and traded on an
organized exchange.
expected loss
Expected loss is the average predicted
cost of UBS’s exposure to a particular
risk factor during a given reporting
period.
exposure
Any status (be it monetarily expressed
or not) that is subject to a potential
change.
Glossary
F
fair value
The amount for which an asset could
be exchanged, or a liability settled,
between knowledgeable, willing par-
ties in an arm’s length transaction.
finance lease
A lease that transfers substantially all
the risks and rewards incident to
ownership of an asset. Title may or
may not eventually be transferred.
financial intermediaries
Companies such as banks, securities
or brokerage firms, investment com-
panies, pension and mutual funds
and insurance companies which
facilitate the flow of funds between
borrowers and lenders in the economy.
forwards and futures
Forwards and futures are contractual
obligations to buy or sell a financial
instrument on a future date at a
specified price. Forward contracts are
effectively tailor-made agreements
that are transacted between counter-
parties in the over-the-counter market,
whereas futures are standardized
contracts that are transacted on regu-
lated exchanges.
funding risk
The risk of being unable to obtain
funding for a portfolio of assets at
appropriate market rates or of being
unable to liquidate assets at appro-
priate market prices.
G
Global Equity Derivatives (GED)
Structured equity derivatives business
at UBS.
goodwill
Any excess of the cost of the acquisi-
tion over the acquirer’s interest in
the fair value of the identifiable assets
and liabilities acquired as at the
date of the exchange transaction.
group
A parent and all its subsidiaries.
H
hedging
An action which reduces risk, usually
at the expense of potential reward, by
use of a financial instrument or a
combination of several instruments.
historical simulation
A methodology for calculating value
at risk which revalues the reference
portfolio using historically observed
market prices over a predefined time
period.
I
information technology risk
The risk of loss due to inappropriate
information technology.
interest rate risk
The risk that the value of a financial
instrument will fluctuate due to
changes in the underlying interest
rates.
International Accounting
Standards (IAS)
Accounting standards issued by the
International Accounting Standards
Committee (IASC). The objective
of these standards is to improve and
harmonize the accounting standards
relating to the presentation of financial
statements.
investment funds
(in the US: mutual funds)
A company or financial product
whose sole object is to invest its capi-
tal in the shares of a wide range of
companies. Under Swiss law the
investment fund is an entity in which
investors pool their capital for joint
investment. The assets are managed
by the fund’s management for the
account of the investors according to
the risk distribution principle.
Depending on the type of investment
fund, the assets may be invested in
securities, money market instruments
or in real estate; investments can also
be made in special fund products and
asset allocation funds. Swiss invest-
ment funds must be invested in vari-
able capital and are obliged to
redeem units whenever requested.
Securities funds, money market funds,
real estate funds, country funds,
regional funds, sector funds.
Differentiation within UBS:
– UBS mutual funds can be broken
down into Brinson, WDR and PB
funds.
– UBS Investment Funds is the label
for the Private Banking Division’s
core range of public open-end
mutual funds.
K
key personnel risk
The risk of loss in knowledge, manage-
ment capacity, experience or leader-
ship due to the resignation, illness,
disability or death of the bank’s key
personnel.
L
legal risk
Legal risk is the risk of loss because a
contract cannot be enforced. This
includes risks arising from insufficient
documentation, insufficient capacity
or authority of a counterparty (ultra
vires, “capacity risk”), uncertain
legality, and unenforceability in bank-
ruptcy or insolvency. Also called Legal
Enforcement Risk.
liability risk
The risk of loss due to the bank being
held responsible for a contractual
or legal claim, debt or action based,
e.g., on the breach or default of a
contract, commitment of a tort, viola-
tion of criminal law, infringement of
trade marks or antitrust action.
logistics functions
Separately constituted operational
functions including financial control,
operational and IT which excercise an
essential control function when pro-
cessing the transactions entered into
by the divisions.
loss severity
Also referred to as loss given default
– the amount that the bank would
lose in the event that a counterparty
defaults on its obligations.
M
margin
A deposit of cash or securities taken
from a client or counterparty as securi-
ty against a loan or other obligation.
market risk
Market risk is the uncertainty to which
future earnings are exposed as a
result of changes in the value of port-
folios of financial instruments. This
risk is a consequence of the trading
and investing activities in the interest
rate, foreign exchange, equity and
commodity markets.
master netting agreement
An arrangement providing for an
enterprise that undertakes a number
of financial instrument transactions
with a single counterparty to make a
single net settlement of all financial
instruments covered by the agreement
in the event of default on, or termina-
tion of, any one contract.
minority interest
That part of the net results of opera-
tions and of net assets of a subsidiary
attributable to interests which are not
owned, directly or indirectly through
subsidiaries, by the parent.
mutual funds
Please see investment funds.
N
negative replacement value
Negative replacement value is the
cost to the Group’s conterparties
of replacing all the Group’s transac-
tions in a loss position if the Group
were to default.
netting
Setting off between counterparties,
on the basis of bilateral or multilateral
contracts, of mutual payment obli-
gations on expiry date, or in the case
of default of a counterparty of un-
realized profits and unrealized losses.
notional amount
The reference amount of the under-
lying asset or index which is used as
the basis for calculating the value of
derivative contracts. Notional values
provide an indication of the volume of
derivatives business transacted by UBS
but do not provide any measure of
risk.
O
operating lease
A lease other than a finance lease.
operational risk
The risk that deficiencies in informa-
tion systems or internal controls will
result in unexpected loss. This risk is
associated with human error, system
failures and inadequate procedures
and controls. At UBS the particular
elements of operational risk are oper-
ations risk, legal risk, compliance risk,
liability risk, information technology
risk, key personnel risk and physical
and crime risk.
127
Glossary
128
operations risk
(otherwise referred to as transaction
processing risk)
The risk that the deficiencies in trans-
action processing systems and the
associated internal controls will result
in unexpected financial loss. This risk
is associated with human error, system
failures and inadequate procedures /
controls in the trade / transaction pro-
cessing.
options
Options are contractual agreements
under which the seller (writer) grants
the purchaser the right, but not the
obligation, either to buy (call option)
or sell (put option) by or at a set date,
a specified amount of a financial
instrument at a predetermined price.
The seller receives a premium from
the purchaser for this right.
over-the-counter (OTC)
instruments
Refers to financial instruments that
are not traded on an organized
exchange or a market that is not part
of an organized exchange. OTC
instruments can be created with any
provisions allowed by law and accept-
able to counterparties.
P
parent
An enterprise that has one or more
subsidiaries.
physical and crime risk
The risk of loss to the bank due to,
e.g., accidents, crime, sabotage,
natural catastrophes, war, riots or
elementary damage (water, fire).
positive replacement value
Positive replacement value represents
the cost to the Group of replacing
all transactions in a gain position if all
the Group’s counterparties were to
default. This measure is the industry
standard for the calculation of current
credit exposure.
settlement risk
The risk of loss to the bank making
a payment or delivery in “exchange-
for-value” transactions without
receiving the associated payment or
delivery from the counterparty.
statistical loss
The loss which can be predicted with
a given statistical probability.
stress scenario loss
The possible – although improbable
and unusual – extreme scenarios which
the bank should be able to absorb
in the normal course of its business.
subsidiary
An enterprise that is controlled by
another enterprise (known as the par-
ent).
swaps
Swaps are transactions in which two
parties exchange cash flows on a
specified notional amount for a pre-
determined period.
Interest rate swap contracts generally
represent the contractual exchange
of fixed and floating rate payments of
a single currency, based on a notional
amount and an interest reference rate.
Cross-currency interest rate swaps
generally involve the exchange of pay-
ments which are based on the interest
reference rates available at the incep-
tion of the contract on two different
currency principal balances that are
exchanged. The principal balances are
re-exchanged at an agreed upon rate
at a specified future date.
V
value at risk
Value at risk is a measure of the maxi-
mum loss which would be expected
to occur in a given portfolio with
a given level of statistical probability
(e.g. 97%).
Note: Value at risk does not provide
an estimate of the size of loss that
could occur in the remaining cases
which fall outside the predefined
probability.
R
Rates business area
The fixed income business area of
Warburg Dillon Read.
repurchase agreement
A repurchase agreement (repo) is an
agreement whereby the holder of a
security sells the security to a buyer /
lender, with a simultaneous agree-
ment to repurchase the security at a
fixed future date at a stipulated price.
reverse repurchase agreement
A reverse repurchase agreement
(reverse repo) is the purchase of a
security at a specified price with an
agreement to resell the same security
at a specified price on a specified
future date.
risk appetite
Amount of risk which the bank is pre-
pared to accept in the normal course
of business in order to deliver satis-
factory long-term growth and return
on equity.
risk-bearing capacity
Potential of the bank to absorb stress
losses taking into account UBS’s
overall earnings capacity. It is set to
protect the Group from unacceptable
damage to annual earnings, dividend-
paying ability, business viability and
the reputation of the bank.
risk policy framework
Entirety of organizational principles,
methods and measures (policies,
structures, processes) to manage and
control risks.
ROE – return on equity
Net result of a reporting period divided
by the average equity during the same
period.
S
securities borrowing / lending
The loan of securities on an unsecured
or secured basis for which the
borrower pays a fee to the lender.
The borrower may re-lend the secu-
rities, or use them as collateral, or
to settle short sales or repos. The lender
retains the beneficial ownership,
and is therefore entitled to receive all
coupons or dividends from the
borrower during the term of the trade.
UBS Share
Information
UBS Share Information
The UBS Share in 1998
UBS Share Data
Year-end registered shares in 1000 units
Total shares outstanding
Total shares ranking for dividend
Treasury shares (average)
Weighted average shares (for basic EPS calculation)
Weighted average shares (for diluted EPS calculation)
Per share data (basic) (CHF)
Gross operating profit
Group profit before taxes
Net profit / loss
Dividend
Book value
Per share data (diluted) (CHF)
Gross operating profit
Group profit before taxes
Net profit / loss
Book value
Stock exchange prices 2
Year-end 1998 (CHF)
High / low 1998 (29 June first trading day) (CHF)
Price/net earnings (P / E) (basic)
Price/book value (P / BV) (basic)
Dividend yield, gross (high / low) (in percent)
Total return (for full-year 1998)
Total return Swiss Market Index (SMI)
Total return Swiss Performance Index (SPI)
Market capitalization (CHF billion) 4
Year-end
% change year-on-year
In % of the Swiss Market Index (SMI)
In % of the Swiss Performance Index (SPI)
High (20 July)
Low (30 September)
Trading volumes (SWX only) (CHF million) 2
Total
Daily average
Trading volumes (SWX only) (1000 units) 2
Total
Daily average
1998
1
214,976
214,450
3,058
211,797
212,941
105.43
19.22
14.31
10.00
152.95
104.86
19.12
14.23
152.13
422
657 / 270
29.5
2.8
3
3.7 / 1.5
2.6
15.7
16.8
90.7
1.17 5
11.8
9.6
140.0
57.9
67,198
517
6
153,078
1,178
6
1 Difference between shares outstanding and shares ranking for dividend are reserved shares. 2 Trading period of UBS registered shares
was 29 June until 31 December 1998. 3 Return from dividend and price changes. 4 1998 figures for new UBS shares only. 5 1997 figures
on a pro forma basis. 6 Trading period 29 June until 31 December 1998 equals 150 trading days.
There was a marked difference in the performance
of the Swiss stock market between the first and
second halves of the year. The first half saw a conti-
nuation of the bull market which had been in place
for over two years. In the ensuing six months, the
stock market environment then deteriorated
sharply as the economic crises in Asia and Russia
grew suddenly acute and took their toll. This peri-
od was marked by extreme volatility and increased
uncertainty which at times precipitated sharp price
corrections.
The merger between UBS and SBC announced
in early December 1997 was very favorably
received by the market. The UBS share price,
which had been rising continuously, gained fur-
ther momentum at the end of June when the
merger was legally formalized and the CHF 20
single-class share introduced. The price reached
its high for the year on 20 July 1998 at CHF 657,
equivalent to a market capitalization of CHF 140
billion. After fluctuating sharply in the second
half as a result of the general market uncertainty
130
UBS Share Information
and the losses sustained on the bank’s LTCM
exposure, the share price reached a low of CHF
270 on 30 September 1998. By year-end, it had
climbed back to CHF 422, equivalent to a market
value of CHF 91 billion.
With a daily trading volume of over 1 million
shares, the UBS share is one of the three most
actively traded Swiss stocks. In terms of market
capitalization, UBS is one of the top five financial
institutions in the world.
UBS Share Price Chart
100% = 1 December 1997
UBS Market Capitalization
190%
175%
160%
145%
130%
115%
100%
85%
70%
12.97
2.98
4.98
6.98
8.98
10.98
12.98
145
135
125
115
105
95
85
75
65
55
Pressure for Holocaust settlement (16.4.98)
Russian/Emerging market crisis
UBS profit warning
(24.9.98)
Start trading of new UBS shares (29.6.98)
Announcement of UBS merger (8.12.97)
Recovery
of markets
7
9
.
2
1
.
1
0
8
9
.
1
0
.
3
2
8
9
.
3
0
.
3
1
8
9
.
5
0
.
6
0
8
9
.
6
0
.
6
2
8
9
.
8
0
.
4
1
8
9
.
0
1
.
2
0
8
9
.
1
1
.
0
2
UBS registered (up to 29 June 1998 old UBS registered)
SPI Swiss Performance Index
Market capitalization in CHF billion
Distribution of UBS shares registered as of 31 December 1998
Number of registered shares
(1% = 1,278,095 shares)
1–100
101–1,000
1,001–5,000
5,001–10,000
10,001–50,000
50,001–100,000
>100001
Total
0–1%
1–2%
2–3%
3–4%
4–5%
over 5%
Total
Number of
shareholders
% of all
registered
shareholders
Number of % of all
registered registered
shares
shares
126,457
61,281
5,156
569
551
98
161
65.092
31.544
2.654
0.293
0.284
0.050
0.083
5,244,360
16,524,771
10,156,828
3,954,295
11,432,204
7,082,802
73,414,288
4.10
12.93
7.95
3.09
8.94
5.54
57.45
194,273
100.000 127,809,548
100.00
194,269
3
0
0
1
0
99.997 111,863,178
6,753,879
0
0
9,192,491
0
0.002
0.000
0.000
0.001
0.000
87.53
5.28
0.00
0.00
7.19
0.00
194,273
100.000 127,809,548
100.00
As of December 31, 1998 no identified investor was holding 5% or more of the total 214 million UBS shares outstanding.
Individual shareholders
Legal entities
Nominees, fiduciaries
Total
Switzerland
Europe
North America
Other countries
Total
UBS employees were holding 2.8% of the shares registered.
184,917
8,649
707
194,273
181,738
9,325
960
2,250
194,273
95.19
31,023,286
4.45 65,225,537
0.36 31,560,725
24.27
51.04
24.69
100.00 127,809,548
100.00
93.55 99,135,341
4.80 19,424,727
2,894,597
0.49
6,354,883
1.16
77.57
15.20
2.26
4.97
100.00 127,809,548
100.00
131
UBS Share Information
Information for Shareholders
UBS Registered Shares (Par Value CHF 20), ISIN Number CH0008470921
Ticker symbols
Stock exchange listings
SWX (Swiss exchange)
Tokyo
London (Stock exchange automatic quotation SEAQ)
Bloomberg
UBSN SW
1264Z JP
Reuters
UBSZn.S
UBS.T
UBSZq.L
Telekurs
UBSN, 004
N16631, 106
847092, 182
Sponsored American Depository Receipt
(ADR) program in the USA
Ratio
Exchange
Symbol
CUSIP
20 ADR’s = 1 UBS Share
OTC (over the counter)
UBBSY
# 90261R105
Financial calendar
General Meeting of Shareholders Thursday, 22 April 1999
Dividend payment date
Tuesday, 27 April 1999
Publication first-quarter
results 1999
Publication first-half
results 1999
Thursday, 27 May 1999
Tuesday, 24 August 1999
For information contact
Change of address
UBS AG
Shareholders’ Register
P.O. Box
CH-8098 Zurich, Switzerland
Phone +41 1 235 62 02
Fax +41 1 235 31 54
UBS AG
Investor Relations
Bahnhofstrasse 45
CH-8098 Zurich, Switzerland
Phone +41 1 234 87 78
Phone +41 1 234 26 02
Fax +41 1 234 34 15
100 Liverpool Street
London EC2M 2RH, UK
Phone +44 171 568 5207
Fax +44 171 568 5204
132
Imprint
Publisher / Editing: UBS AG, Investor Relations Department
Concept / Production: UBS AG, Group Management Support
Languages: English, German; Copyright: UBS AG, Switzerland
SAP-R / 3 80531E; CIF-Pub-Nr. 012/04601
ab
UBS AG
P.O. Box, CH-8098 Zurich, Switzerland
P.O. Box, CH-4002 Basel, Switzerland
www.ubs.com